**SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC 20549**

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**FORM 10-K**

**x**                               ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**For the Fiscal Year ended December 31, 2005**

**o**                                  TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**For the Transition Period from                    to                    **

**Commission File Number 001-15831**

**MCFCORPORATION**

(ExactName 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)

SecuritiesRegistered Pursuant to Section 12(b) of the Act:**Common Stock, $0.0001 per share**

SecuritiesRegistered Pursuant to Section 12(g) of the Act:**None**

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

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

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes  o    No  x

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct.
| Large accelerated  filer  o |   | Accelerated  filer  x |   | Non-accelerated  filer  o |
|---------------------------------------|--------|---------------------------------|--------|-------------------------------------|

 

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

Theaggregate market value of the 66,890,503 shares of common stock of theRegistrant issued and outstanding as of June 30, 2005, the last businessday of the registrant’s most recently completed second fiscal quarter,excluding 4,418,239 shares of common stock held by affiliates of the Registrantwas $80,937,509. This amount is based on the closing price of the common stockon the American Stock Exchange of $1.21 per share on June 30, 2005.

Thenumber of shares of Registrant’s common stock outstanding as of February 15,2006 was 71,547,178.

**DOCUMENTS INCORPORATED BY REFERENCE**

Part IIIof this Form 10-K incorporates by reference certain portions of theRegistrant’s proxy statement for its 2006 annual meeting of stockholders to befiled with the Commission not later than 120 days after the end of the fiscalyear covered by this report.

 

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**TABLE OF CONTENTS**
| **PART I**   |   |                                                                                              |
|-------------------|--------|---------------------------------------------------------------------------------------------------|
| Item 1.      |   | Business                                                                                          |   | 1 |
| Item 1A.     |   | Risk Factors                                                                                      |   | 10 |
| Item 1B.     |   | Unresolved  Staff Comments                                                                        |   | 17 |
| Item 2.      |   | Properties                                                                                        |   | 17 |
| Item 3.      |   | Legal Proceedings                                                                                 |   | 17 |
| Item 4.      |   | Submission of Matters to a  Vote of Stockholders                                                  |   | 18 |
| **PART II**  |   |                                                                                              |
| Item 5.      |   | Market for Registrant’s  Common Stock and Related Stockholder Matters                        |   | 19 |
| Item 6.      |   | Selected Consolidated  Financial Data                                                             |   | 20 |
| Item 7.      |   | Management’s Discussion and  Analysis of Financial Condition and Results of Operations  |   | 21 |
| Item 7A.     |   | Quantitative and Qualitative  Disclosures about Market Risk                                       |   | 32 |
| Item 8.      |   | Financial Statements and  Supplementary Data                                                      |   | 34 |
| Item 9.      |   | Changes in and Disagreements  with Accountants on Accounting and Financial Disclosure        |   | 63 |
| Item 9A.     |   | Controls and Procedures                                                                           |   | 63 |
| Item 9B.     |   | Other Information                                                                                 |   | 63 |
| **PART III** |   |                                                                                              |
| Item 10.          |   | Directors and Executive  Officers of the Registrant                                               |   | 65 |
| Item 11.     |   | Executive Compensation                                                                       |   | 69 |
| Item 12.     |   | Security Ownership of  Certain Beneficial Owners and Management                              |   | 69 |
| Item 13.     |   | Certain Relationships and  Related Transactions                                                   |   | 69 |
| Item 14.     |   | Principal Accounting Fees And Services                                        |   | 69 |
| **PART IV**  |   |                                                                                              |
| Item 15.     |   | Exhibits, Financial  Statement Schedules, and Reports on Form 8-K                            |   | 70 |

 

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*This Form 10-K and the information incorporatedby reference in this Form 10-K include forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended. Some of the forward-lookingstatements 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 comparableterminology. Forward-looking statements involve risks and uncertainties. Youshould be aware that a number of important factors could cause our actualresults to differ materially from those in the forward-lookingstatements. We will not necessarily update the information presented orincorporated by reference in this Form 10-K if any of theseforward-looking statements turn out to be inaccurate. Risks affecting ourbusiness are described throughout this Form 10-K and especially in thesection “Risk Factors.” This entire Form 10-K, including the consolidatedfinancial statements and the notes and any other documents incorporated byreference into this Form 10-K should be read for a complete understandingof our business and the risks associated with that business.*

**PART I**

**ITEM 1.**                BUSINESS

**General**

MCF Corporation is afinancial services holding company that provides investment research, capitalmarkets services, corporate and venture services, investment banking, assetmanagement and wealth management through its operating subsidiaries, MerrimanCurhan Ford & Co., MCF Asset Management, LLC and MCF WealthManagement, LLC. We are focused on providing a full range of specialized andintegrated services to institutional investors and corporate clients.

**Merriman Curhan Ford & Co.**

Merriman CurhanFord & Co. is a securities broker-dealer and investment bank focusedon fast growing companies and institutional investors. Our mission is to becomea leader in the researching, advising, financing and trading of fast growingcompanies under $2 billion in market capitalization. We provide investmentresearch, brokerage and trading services primarily to institutions, as well asadvisory and investment banking services to corporate clients. We are focusedon providing a full range of specialized and integrated services, including:

·       EquityResearch

·       Salesand Trading

·       SpecializedTrade Execution

·       MarketMaking

·       EquityCapital Markets

·       Corporateand Venture Services

·       PublicOfferings

·       PrivatePlacements

·       DebtFinancing

·       Mergersand Acquisitions

·       StrategicAdvisory Services

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Merriman Curhan Ford & Co. is registered withthe Securities and Exchange Commission as a broker-dealer and is a member ofthe National Association of Securities Dealers, Inc. and the SecuritiesInvestors Protection Corporation.

By the end of the 1990’s,many of the investment banks that previously served this niche were acquired bylarge commercial banks and subsequently refocused to serve larger clients andlarger transactions. We are gaining market share by originating differentiatedresearch for our institutional investor clients and providing specializedservices for our fast-growing corporate clients.

**CustomerBase**

The customer base of our brokerage business isprimarily institutional, including mutual funds and hedge funds, as well assmaller, private investment firms and certain high net worth individuals. Webelieve this group of clients and potential clients to number over 4,000. Wegrew our business during 2005 by adding new, and increasing the penetration ofexisting institutional customers that use our equity research and tradingservices in their investment process. During 2005, we transacted brokeragebusiness with 614 institutional customers, up from 599 in 2004, and the numberof active institutional accounts increased sequentially each quarter during theyear. During 2005, no single brokerage customer accounted for more than 10% ofour revenue. We believe the number of active institutional accounts willcontinue to grow in 2006 based upon the expansion of our research coverage.

The customer base of ourinvestment banking business consists of both private and publicly tradedgrowth-oriented companies in selected market sectors. We estimate that thereare over 5,000 publicly traded companies with market capitalization under $1billion. Many of the investment banks that previously served these clients haveeither been acquired by larger institutions and are focusing primarily onlarger clients, or have disappeared altogether. During 2005, no singleinvestment banking customer accounted for more than 10% of our revenue.

**CapitalMarkets**

We have derived themajority of our revenue from our capital markets activities. Our capitalmarkets activities include institutional sales and trading, research andinvestment banking.

*Institutional Sales and Trading*

Merriman Curhan Ford & Co. focuses onproviding research and sales and trading services to institutional investors inthe United States. We execute securities transactions for institutionalinvestors such as money managers, mutual funds, hedge funds, insurancecompanies, and pension and profit-sharing plans. Institutional investorsnormally purchase and sell securities in large quantities, which require themarketing and trading expertise that we provide.

We provide integrated research and trading solutionsto try and help our institutional clients invest profitably, grow theirportfolios and ultimately their businesses. We understand the importance ofbuilding long-term relationships with our clients who we believe look to us forthe professional resources and relevant expertise to provide answers for theirspecific situations. We believe it is important for us to be involved withpublic companies early in their corporate life cycles and with privatecompanies as they begin to reach their later stages prior to going public. Westrive to provide unique investment opportunities in fast growing companies andto help our clients execute trades rapidly, efficiently and accurately.

Our sales professionals focus on communicatinginvestment ideas to our clients and executing trades in securities of companiesin our target growth sectors. By actively trading in these securities, weendeavor to couple the capital market information flow with the fundamentalinformation flow provided by our analysts to get our clients favorableexecution of investment strategies. Sales professionals work closely 

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with our research analyststo provide up-to-date information to our institutional clients. We interfaceactively with our clients and plan to be involved with our clients over thelong term.

Our trading professionalsfacilitate liquidity discovery in equity securities. We make markets in NASDAQand other securities, trade listed securities and service the trading desks ofinstitutions in the United States. Our trading professionals have direct accessto the major stock exchanges, including the New York Stock Exchange and theAmerican Stock Exchange. We currently make markets in approximately 485securities and were recently authorized to make markets in 900 over-the-countersecurities.

*Research*

A key part of our strategy is to originate specializedand in-depth research. Our analysts cover a universe of approximately 150companies in our focus industry sectors. We leverage the ideas generated by ourresearch teams, using them to attract and retain institutional brokerageclients.

Supported by the firm’s capital markets and tradingcapabilities, our analysts deliver timely recommendations to clients oninnovative investment opportunities. In an effort to make money for ourinvestor clients, our analysts are driven to find undiscovered opportunities infast growing companies that are not widely held and that we believe areundervalued. Given the contrarian nature of many of our research ideas, we, asa firm, specialize in serving sophisticated, aggressive institutionalinvestors.

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

Our objective is to build long lasting relationshipswith our clients by providing investment recommendations that directly equateto enhanced performance of their portfolios. Further, given our approach andfocus on quality service, we believe our research analysts are in a uniqueposition to maintain close, ongoing communication with both our corporate andinstitutional clients. The industry sectors covered by our research analystsinclude:

Consumer

·       BrandedConsumer/Consumer Media

·       Gaming

·       Restaurants

·       Retailand Apparel

·       SpecialtyRetail

Energy andIndustrial Technology

·       Next-GenerationEnergy

Health Care

·       Biotechnology

·       LifeSciences

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Technology

·       ComputerHardware and Networking

·       Cyberand Homeland Security

·       DigitalConsumer Semiconductors

·       InternetApplications and Services

·       Semiconductorsand Semiconductor Capital Equipment

·       SemiconductorAssembly and Test Outsourcing

Telecommunications

·       CommunicationsTechnology

·       WirelessTechnology

We believe these sectors represent some of the fastestgrowing and most dynamically evolving industry and company opportunities in themarket. We also believe there will be increasing demand for the products andservices we offer and that this in turn will provide diversificationopportunities for our business.

After initiating coverageon a company, our analysts seek to effectively communicate new developments toour sales force, trading department and institutional investors. We producefull-length research reports, notes and earnings estimates on the companies wecover. We also produce comprehensive industry sector reports. In addition, ouranalysts distribute written updates on these issuers both internally and to ourclients through the use of daily morning meeting notes, real-time electronicmail and other forms of immediate communication. Our clients can also receiveanalyst comments through electronic media, and our sales force receivesintra-day updates at meetings and through regular announcements ofdevelopments. All of the above is also available through a password protectedsearchable database of our daily and historical research archives, found on ourWebsite at www.merrimanco.com/research.

*Investment Banking*

Our focus is to provide fast growing companies withthe capital necessary to drive them to the next level of growth. This capitalis generally used for new product development, sales expansion, strategicacquisitions, or for working capital purposes.

Merriman Curhan Ford & Co. provides a fullrange of investment banking services. We combine our capital markets expertise witha focus on client service, providing what we believe is sound financial andstrategic advice. We are typically focused on fast growing companies, helpingto finance and advise them at the appropriate point in their business cycles.Additionally, we draw upon our contacts throughout the financial and corporateworld, expanding the options available for our corporate clients.

We offer a varietyof financing structures to meet the individual needs of our clients. Our teamtailors each transaction to meet the specific needs of our clients at aspecific point in their growth cycle. Our commitment to long-term relationshipsand our ability to meet the needs of a diverse range of clients has made us areliable source of investment banking and advisory services for small-capitalizationcompanies. We provide the following services to our investment banking clients:

·       PublicOfferings

·       PrivatePlacements

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·       LeveragedFinancing

·       Mergersand Acquisitions

·       Strategic Advisory

*Corporate and Venture Services*

Merriman Curhan Ford &Co. offers brokerage services to corporations including corporate cashmanagement, stock repurchase programs, corporate retirement plans, and deferredcompensation plans. We also serve the needs of venture capital investors andcompany executives with restricted stock transactions pursuant to Rules 144,145 and 701 of the Securities Act of 1933, cashless exercise of options,hedging and diversification strategies, and liquidity strategies.

*Institutional Cash Distributors*

Institutional CashDistributors, or ICD, is a broker of money market funds serving the short-terminvesting needs of corporate finance departments at companies throughout theUnited States and Europe. Companies using ICD’s services receive access to over40 fund families through ICD’s one-stop process that includes one application,one wire and one statement that consolidates reporting regardless of the numberof funds utilized. As of December 31, 2005, ICD clients have investednearly $8 billion in money market funds from which ICD earns brokerage fees.ICD is a division of Merriman Curhan Ford & Co.

**MCF Asset Management, LLC**

MCF Asset Management, LLC, or MCFAM, creates investmentproducts for both institutional and high-net worth clients. Through thecorporate and professional resources of MCF Corporation, MCFAM has developed aninstitutional-standard investment management platform.

The 1990's were a decadeof broad stock market appreciation.  Investors were handsomely rewardedfor buying exposure to the stock market by investing in either long only mutualfunds, market indices or individual stocks.  So far this decade, equityreturns have not been as strong or as consistent as throughout the1990's.  As a result, interest in alternative investment strategies, suchas long/short equity, market neutral, convertible arbitrage, currency arbitrageand real estate, have grown in popularity. Investing in alternativeinvestment strategies will ideally produce absolute returns that are notcorrelated with broad stock market indices and represent a diversification ofrisk for investors.

**Moreimportantly, we believe both institutions and wealthy individuals have reachedthat same conclusion and will continue to shift more of their investmentdollars into alternative asset class strategies. It is our intent to help ourclients in their investment process by offering access to alternativeinvestment strategies, as well as certain niche based long-only strategies.  We plan to establish our own alternativeinvestment products and evaluate opportunities to acquire and partner withmanagers of alternative asset investments. We are on track to launch our firstproducts in early 2006.**

**MCF WealthManagement, LLC**

We create liquidity for our founders and executives ofour corporate clients through open market sales and through the privateplacement and underwriting of equity securities through our Merriman CurhanFord & Co. subsidiary. We offer personalized financial planning and wealthmanagement to these clients through our MCF Wealth Management, LLC subsidiary. InFebruary 2005, we acquired Catalyst Financial Planning &Investment Management, Inc., or Catalyst. Catalyst is a RegisteredInvestment Advisor, or RIA, registered with the SEC. Catalyst provides investmentadvice to clients that have invested approximately $130 million of assets.Catalyst’s clients include individuals, trusts, and charitable 

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foundations. Catalysttypically charges a flat percentage of assets fee for rendering this advice. Priorto acquisition, Catalyst has operated as an independent firm and plans tocontinue to grow its client and asset base through its own referral network. Weplan to introduce new potential clients to Catalyst from our corporate andventure services group as well as our investment banking department. Inaddition, we plan to evaluate the acquisition of other independent, fee-basedfinancial planning and RIA firms to offer a broad array of wealth managementadvisory choices for potential clients.

**Accounting,Administration and Operations**

Our accounting,administration and operations personnel are responsible for financial controls,internal and external financial reporting, human resources and personnelservices, office operations, information technology and telecommunicationssystems, the processing of securities transactions, and corporatecommunications. With the exception of payroll processing, which is performed byan outside service bureau, and customer account processing, which is performedby our clearing broker, most data processing functions are performedinternally. We believe that future growth will require implementation of newand enhanced communications and information systems and training of ourpersonnel to operate such systems.

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

Our compliance, legal andrisk management personnel (together with other appropriate personnel) areresponsible for our compliance with the legal and regulatory requirements ofour investment banking, asset management and wealth management businesses and ourexposure to market, credit, operations, liquidity, compliance, legal andreputational risk. In addition, our compliance personnel test and audit forcompliance with our internal policies and procedures. Our general counsel alsoprovides legal service throughout our company, including advice on managinglegal risk. The supervisory personnel in these areas have direct access tosenior management and to the Audit Committee of our Board of Directors toensure their independence in performing these functions. In addition to ourinternal compliance, legal, and risk management personnel, we retain outsideconsultants and attorneys for their particular functional expertise.

**Competition**

We are engaged in the highly competitive financialservices and investment industries. We compete directly with large Wall Streetsecurities firms, securities subsidiaries of major commercial bank holdingcompanies, U.S. subsidiaries of large foreign institutions, major regionalfirms, smaller niche players, and those offering competitive services via theInternet.

In addition to competing for customers andinvestments, we compete with other companies in the financial services andinvestment industries to attract and retain experienced and productiveinvestment professionals. See “Management’s Discussion and Analysis—Risk Factors—Ourbusiness is dependent on the services of skilled professionals...” and—“Ourbusiness may suffer if we lose the services...”

Many competitors have greater personnel and financialresources than we do. Larger competitors are able to advertise their productsand services on a national or regional basis and may have a greater number andvariety of distribution outlets for their products, including retaildistribution. Discount and Internet brokerage firms market their servicesthrough aggressive pricing and promotional efforts. In addition, somecompetitors have much more extensive investment banking activities than we doand therefore, may possess a relative advantage with regard to access to dealflow and capital.

Recent rapid advancements in computing andcommunications technology, particularly the Internet, are substantiallychanging the means by which financial services and information are delivered.These changes are providing consumers with more direct access to a wide varietyof financial and investment 

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services, including marketinformation and on-line trading and account information. Advances in technologyalso create demand for more sophisticated levels of client services. We arecommitted to using technological advancements to provide a high level of clientservice to our target markets. Provision of these services may entailconsiderable cost without an offsetting source of revenue.

For a further discussionof the competitive factors affecting our business, see “Management’s Discussionand Analysis—Risk Factors—The markets for securities brokerage and investmentbanking services are highly competitive.”

**Risk Management**

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

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

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

*Operations risk* isthe risk of loss resulting from systems failure, inadequate controls, humanerror, fraud or unforeseen catastrophes.

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

*Compliance risk* isthe risk of loss, including fines, penalties and suspension or revocation oflicenses by self-regulatory organizations, or from failing to comply withfederal, state or local laws pertaining to financial services activities.

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

*Reputational risk*is the potential that negative publicity regarding our practices whetherfactually correct or not will cause a decline in our customer base, costlylitigation, or revenue reductions.

We have a riskmanagement program that sets forth various risk management policies, providesfor 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;

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

·       Monitoringand reporting on adherence with risk policies and limits;

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

·       Approvingnew product developments or business initiatives.

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

For a further discussionof the risks affecting our business, see “Management’s Discussion and Analysis—RiskFactors.”

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**Regulation**

As a result of federal and state registration andself-regulatory organization, or SRO, memberships, we are subject tooverlapping layers of regulation that cover all aspects of our securitiesbusiness. Such regulations cover matters including capital requirements, usesand safe-keeping of clients’ funds, conduct of directors, officers andemployees, record-keeping and reporting requirements, supervisory andorganizational procedures intended to assure compliance with securities lawsand to prevent improper trading on material nonpublic information,employee-related matters, including qualification and licensing of supervisoryand sales personnel, limitations on extensions of credit in securitiestransactions, requirements for the registration, underwriting, sale anddistribution of securities, and rules of the SROs designed to promote highstandards of commercial honor and just and equitable principles of trade. Aparticular focus of the applicable regulations concerns the relationshipbetween broker-dealers and their customers. As a result, many aspects of thebroker-dealer customer relationship are subject to regulation including, insome instances, “suitability” determinations as to certain customertransactions, limitations on the amounts that may be charged to customers,timing of proprietary trading in relation to customers’ trades and disclosuresto customers.

As a broker-dealer registered with the Securities andExchange Commission, or SEC, and as a member firm of the National Associationof Securities Dealers, Inc., or NASD, we are subject to the net capitalrequirements of the SEC and the NASD. These capital requirements specifyminimum levels of capital, computed in accordance with regulatory requirementsthat each firm is required to maintain and also limit the amount of leveragethat 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 generallyaccepted in the United States), plus qualifying subordinated borrowings, lessthe value of all of a broker-dealer’s assets that are not readily convertibleinto cash (such as furniture, prepaid expenses and unsecured receivables), andfurther reduced by certain percentages (commonly called “haircuts”) of themarket value of a broker-dealer’s positions in securities and other financialinstruments. The amount of net capital in excess of the regulatory minimum isreferred to as “excess net capital.”

The SEC’s capital rules also (i) requirethat broker-dealers notify it, in writing, two business days prior to makingwithdrawals or other distributions of equity capital or lending money tocertain related persons if those withdrawals would exceed, in any 30-dayperiod, 30% of the broker-dealer’s excess net capital, and that they providesuch notice within two business days after any such withdrawal or loan thatwould exceed, in any 30-day period, 20% of the broker-dealer’s excess netcapital, (ii) prohibit a broker-dealer from withdrawing or otherwisedistributing equity capital or making related party loans if, after suchdistribution or loan, the broker-dealer would have net capital of less than$300,000 or if the aggregate indebtedness of the broker-dealer’s consolidatedentities would exceed 1,000% of the broker-dealer’s net capital in certainother circumstances, and (iii) provide that the SEC may, by order,prohibit withdrawals of capital from a broker-dealer for a period of up to 20business days, if the withdrawals would exceed, in any 30-day period, 30% ofthe broker-dealer’s excess net capital and if the SEC believes such withdrawalswould be detrimental to the financial integrity of the firm or would undulyjeopardize the broker-dealer’s ability to pay its customer claims or otherliabilities.

Compliance with regulatory net capital requirementscould limit those operations that require the intensive use of capital, such asunderwriting and trading activities, and also could restrict our ability towithdraw capital from our broker-dealer, which in turn could limit our abilityto pay interest, repay debt and redeem or repurchase shares of our outstandingcapital stock.

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

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

We are also subject to “Risk Assessment Rules” imposedby the SEC which require, among other things, that certain broker-dealersmaintain and preserve certain information, describe risk management policiesand procedures and report on the financial condition of certain affiliateswhose financial and securities activities are reasonably likely to have amaterial impact on the financial and operational condition of thebroker-dealers. Certain “Material Associated Persons” (as defined in the RiskAssessment Rules) of the broker-dealers and the activities conducted by suchMaterial Associated Persons may also be subject to regulation by the SEC. Inaddition, the possibility exists that, on the basis of the information itobtains under the Risk Assessment Rules, the SEC could seek authority over ourunregulated subsidiary either directly or through its existing authority overour regulated subsidiary.

In the event of non-compliance by us or one of oursubsidiaries with an applicable regulation, governmental regulators and one ormore of the SROs may institute administrative or judicial proceedings that mayresult in censure, fine, civil penalties (including treble damages in the caseof insider trading violations), the issuance of cease-and-desist orders, thederegistration or suspension of the non-compliant broker-dealer, the suspensionor disqualification of officers or employees or other adverse consequences. Theimposition of any such penalties or orders on us or our personnel could have amaterial adverse effect on our operating results and financial condition.

Additional legislation andregulations, 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 theinterpretation or enforcement of existing laws and rules may adverselyaffect our manner of operation and our profitability. Our businesses may bematerially affected not only by regulations applicable to us as a financialmarket intermediary, but also by regulations of general application.

**Employees**

MCF Corporation and itssubsidiaries employed 155 persons as of December 31, 2005.

**Geographic Area**

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

**Available Information**

Our website address is www.merrimanco.com. You may obtain free electroniccopies 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 “InvestorRelations” portion of our website, under the heading “SEC Filings.” Thesereports are available on our website as soon as reasonably practicable after weelectronically file them with the Securities and Exchange Commission. We areproviding the address to our Internet site solely for the information ofinvestors. We do not intend the address to be an active link or to otherwiseincorporate the contents of the website into this report.

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**ITEM 1A.**        RISKFACTORS

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

***It is difficult toevaluate our business and prospects because we have a limited operatinghistory.***

We began actively engagingin providing securities brokerage and investment banking services in January 2002.This was an entirely new business for us, and was a complete break with ourprevious business, the bandwidth brokerage business. Accordingly, we have alimited operating history on which to base an evaluation of our business andprospects. Our prospects must be considered in light of the risks, expenses anddifficulties frequently encountered by fast growing companies in their earlystage of development. We cannot assure you that we will be successful inaddressing these risks and our failure to do so could have a material adverse effecton our business and results of operations.

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

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

·       establish,maintain and increase our client base;

·       managethe quality of our services;

·       competeeffectively with existing and potential competitors;

·       furtherdevelop our business activities;

·       manageexpanding operations; and

·       attractand retain qualified personnel.

We cannot be certain that we will be able to sustainor increase a positive cash flow and profitability on a quarterly or annualbasis in the future. Our inability to maintain profitability or positive cashflow could result in disappointing financial results, impede implementation ofour 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 cashflow and profits necessary to sustain our business expectations, which makesour ability to successfully implement our business plan uncertain.

Because we are adeveloping company, the factors upon which we are able to base our estimates asto the gross revenue and the number of participating clients that will berequired for us to maintain a positive cash flow and any additional financingthat may be needed for this purpose are unpredictable. For these and otherreasons, we cannot assure you that we will not require higher gross revenue,and an increased number of clients, securities brokerage and investment bankingtransactions, and/or more time in order for us to complete the development ofour business that we believe we need to be able to cover our operatingexpenses, or obtain the funds necessary to finance this development. It is morelikely than not that our estimates will prove to be inaccurate because actualevents more often than not differ from anticipated events. Furthermore, in theevent that financing is needed in addition to the amount that is required forthis development, we cannot assure you that such financing will be available onacceptable terms, if at all.

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***The markets forsecurities brokerage and investment banking services are highly competitive. Ifwe 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 financialservices and investment industries. We compete with large Wall Streetsecurities firms, securities subsidiaries of major commercial bank holdingcompanies, U.S. subsidiaries of large foreign institutions, major regionalfirms, smaller niche players, and those offering competitive services via theInternet. Many competitors have greater personnel and financial resources thanwe do. Larger competitors are able to advertise their products and services ona national or regional basis and may have a greater number and variety ofdistribution outlets for their products, including retail distribution.Discount and Internet brokerage firms market their services through aggressivepricing and promotional efforts. In addition, some competitors have much moreextensive investment banking activities than we do and therefore, may possess arelative advantage with regard to access to deal flow and capital.

Increased pressure createdby any current or future competitors, or by our competitors collectively, couldmaterially 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, wemay from time to time make certain pricing, service or marketing decisions oracquisitions that also could materially and adversely affect our business andresults of operations. We cannot assure you that we will be able to competesuccessfully against current and future competitors. In addition, newtechnologies and the expansion of existing technologies may increase thecompetitive pressures on us.

***We may experiencereduced revenue due to declining market volume, securities prices andliquidity, which can also cause counterparties to fail to perform.***

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

***We may experiencesignificant losses if the value of our marketable security positionsdeteriorates.***

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

***We may experiencesignificant fluctuations in our quarterly operating results due to the natureof our business and therefore may fail to meet profitability expectations.***

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

·       thelevel of institutional brokerage transactions and the level of commissions wereceive from those transactions;

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·       thevaluations of our principal investments;

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

·       variationsin expenditures for personnel, consulting and legal expenses, and expenses ofestablishing new business units, including marketing and technology expenses.

We record revenue from acapital 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 significanttransaction can materially affect our quarterly operating results.

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

Because we have registered Merriman Curhan Ford &Co. with the Securities and Exchange Commission, or SEC, and the NationalAssociation of Securities Dealers, Inc., or NASD, as a securitiesbroker-dealer, we are subject to extensive regulation under federal and statelaws, as well as self-regulatory organizations. The principal purpose ofregulation and discipline of broker-dealers is the protection of customers andthe securities markets rather than protection of creditors and stockholders ofbroker-dealers. The Securities and Exchange Commission is the federal agencycharged with administration of the federal securities laws. Much of theregulation of broker-dealers, however, has been delegated to self-regulatoryorganizations, such as the NASD and national securities exchanges. The NASD isour primary self-regulatory organization. These self-regulatory organizationsadopt rules, which are subject to SEC approval, that govern the industry andconduct periodic examinations of member broker-dealers. Broker-dealers are alsosubject to regulation by state securities commissions in the states in whichthey are registered. The regulations to which broker-dealers are subject coverall aspects of the securities business, including net capital requirements,sales methods, trading practices among broker-dealers, capital structureof securities firms, record keeping and the conduct of directors, officers andemployees. The SEC and the self-regulatory bodies may conduct administrativeproceedings, which can result in censure, fine, suspension or expulsion of abroker-dealer, its officers or employees. If we fail to comply with these rules andregulations, our business may be materially and adversely affected.

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

***Our business maysuffer if we lose the services of our executive officers or operatingpersonnel.***

We depend on the continued services and performance ofD. Jonathan Merriman, our Chairman and Chief Executive Officer, for our futuresuccess. We currently have an employment agreement with Mr. Merriman,which ends on January 1, 2007, but can be terminated by either party on 60days’ notice. The agreement contains provisions that obligate us to makecertain payments to Mr. Merriman and substantially reduce vesting periodsof options granted to him if we should terminate him without cause or certainevents resulting in a change of control of our Board were to occur.

In addition to Mr. Merriman,we are currently managed by a small number of key management and operatingpersonnel. Our future success depends, in part, on the continued service of ourkey executive, management and technical personnel, and our ability to attracthighly skilled employees. Our business could be harmed if any key officer oremployee were unable or unwilling to continue in his or her current 

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position.From time to time we have experienced, and we expect to continue to experience,difficulty in hiring and retaining highly skilled employees. Competition foremployees in our industry is significant. If we are unable to retain our keyemployees or attract, integrate or retain other highly qualified employees in thefuture, such failure may have a material adverse effect on our business andresults of operations.

***Our business isdependent on the services of skilled professionals, and may suffer if we cannot recruit or retain such skilled professionals.***

During 2005, one salesprofessional accounted for 12% of our revenue. We have a number of revenueproducers employed by our securities brokerage and investment bankingsubsidiary. We do not have employment contracts with these employees. The lossof one or more of these employees could adversely affect our business andresults of operations.

***Our compensationstructure may negatively impact our financial condition if we are not able toeffectively manage our expenses and cash flows.***

We are able to recruit andretain investment banking, research and sales and trading professionals, inpart because our business model provides that we pay our revenue producingemployees a percentage of their earned revenue. Compensation and benefits isour largest expenditure and this variable compensation component represents asignificant proportion of this expense. Compensation for our employees isderived as a percentage of our revenue regardless of our profitability.Therefore, we may continue to pay individual revenue producers a significantamount of cash compensation as the overall business experiences negative cashflows and/or net losses. We may not be able to recruit or retain revenueproducing employees if we modify or eliminate the variable compensationcomponent from our business model.

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

During 2005, no singlecustomer accounted for more than 10% of our revenue. However, we have beendependent on one customer, or on a small number of customers, for a largepercentage of our revenue at some times in the past and we cannot assure youthat we will not become so dependent again in the future. If we do becomedependent on a single customer or small group of customers, the loss of one ormore large customers could materially adversely affect our business and resultsof operations.

***We may sufferlosses through our investments in securities purchased in secondary markettransactions or private placements.***

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

***We may be unable tosuccessfully integrate acquired businesses into our existing business andoperations.***

On February 28, 2005,we acquired Catalyst Financial Planning & Investment Management, Inc.,a registered investment advisor with over $100 million in assets undermanagement at the time of acquisition. We may experience difficulty integratingthe operations of Catalyst into our existing business and operations includingour accounting, finance, compensation, information technology and management 

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systems.We may not be able to retain the services of Catalyst employees. These factorscould result in higher than anticipated costs associated with the Catalystacquisition. Additionally, they may cause revenue from the Catalyst acquisitionto be lower than forecast. If costs are higher or revenue lower than we expect,our business and results of operations could be materially adversely affected.Although we have no specific plans to do so at this time, we may buy one ormore other businesses in the future. If we are unable to successfully integratesuch businesses into our existing business and operations in the future, ourbusiness and results of operations could be materially adversely affected

***We may be unable toeffectively manage rapid growth that we may experience, which could place acontinuous strain on our resources and, accordingly, adversely affect ourbusiness.***

We plan to expand ouroperations. Our growth, if it occurs, will impose significant demands on ourmanagement, financial, technical and other resources. We must adapt to changingbusiness conditions and improve existing systems or implement new systems forour financial and management controls, reporting systems and procedures andexpand, train and manage a growing employee base in order to manage our futuregrowth. We may not be able to implement improvements to our internal reportingsystems in an efficient and timely manner and may discover deficiencies inexisting systems and controls. We believe that future growth will require implementationof new and enhanced communications and information systems and training of ourpersonnel to operate such systems. Furthermore, we may acquire existingcompanies or enter into strategic alliances with third parties, in order toachieve rapid growth. For us to succeed, we must make our existing business andsystems work effectively with those of any strategic partners without undueexpense, management distraction or other disruptions to our business. We may beunable to implement our business plan if we fail to manage any of the abovegrowth challenges successfully. Our financial results may suffer and we couldbe materially and adversely affected if that occurs.

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

Our success, in particularour ability to successfully facilitate securities brokerage transactions andprovide high-quality customer service, largely depends on the efficient anduninterrupted operation of our computer and communications systems. Our systemsand operations are vulnerable to damage or interruption from fire, flood, powerloss, telecommunication failures, break-ins, earthquake and similar events.Despite the implementation of network security measures, redundant networksystems and a disaster recovery plan, our servers are vulnerable to computerviruses, physical or electronic break-ins and similar disruptions, which couldlead to interruptions, delays, loss of data or the inability to accept andfulfill customer orders. Additionally, computer viruses may cause our systemsto incur delays or other service interruptions, which may cause us to incuradditional operating expenses to correct problems we may experience. Any of theforegoing problems could materially adversely affect our business or future resultsof operations.

***We are highlydependent on proprietary and third-party systems; therefore, system failurescould significantly disrupt our business.***

Our business is highly dependent on communications andinformation systems, including systems provided by our clearing brokers. Anyfailure or interruption of our systems, the systems of our clearing broker orthird party trading systems could cause delays or other problems in oursecurities trading activities, which could have a material adverse effect on ouroperating results.

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

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

The market price ofour 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 tofluctuate significantly, including:

·       variationsin quarterly operating results;

·       ourannouncements of significant contracts, milestones, acquisitions;

·       ourrelationships with other companies;

·       ourability to obtain needed capital commitments;

·       additionsor departures of key personnel;

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

·       generaleconomic conditions, including conditions in the securities brokerage andinvestment banking markets;

·       changesin financial estimates by securities analysts; and

·       fluctuationin stock market price and volume.

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

In addition, the stockmarket in recent years has experienced significant price and volumefluctuations that have particularly affected the market prices of equitysecurities of many companies and that often have been unrelated to theoperating performance of such companies. These market fluctuations haveadversely impacted the price of our common stock in the past and may do so inthe future.

***Our risk managementpolicies and procedures may leave us exposed to unidentified or unanticipatedrisk.***

Our risk management strategies and techniques may notbe fully effective in mitigating our risk exposure in all market environmentsor against all types of risk.

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

***We could be sued ina securities class action lawsuit.***

In the past, followingperiods of volatility in the market price of a company’s securities, securitiesclass action litigation often has been instituted against that company. Suchlitigation is expensive and diverts management’s attention and resources. Wecan not assure you that we will not be subject to such litigation. 

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If weare subject to such litigation, even if we ultimately prevail, our business andfinancial condition may be adversely affected.

***Your ability tosell your shares may be restricted because there is a limited trading marketfor our common stock.***

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

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

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

***Because our Boardof Directors can issue common stock without stockholder approval, you couldexperience substantial dilution.***

Our Board of Directors hasthe authority to issue up to 300,000,000 shares of common stock and to issueoptions and warrants to purchase shares of our common stock without stockholderapproval in certain circumstances. Future issuance of additional shares of ourcommon stock could be at values substantially below the price at which you maypurchase our stock and, therefore, could represent substantial dilution. Inaddition, our Board of Directors could issue large blocks of our common stockto fend off unwanted tender offers or hostile takeovers without furtherstockholder approval.

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

Our Articles ofIncorporation authorize our Board of Directors to issue up to an additional27,450,000 shares of preferred stock, without approval from our stockholders.If you hold our common stock, this means that our Board of Directors has theright, without your approval as a common stockholder, to fix the relativerights and preferences of the preferred stock. This would affect your rights asa common stockholder regarding, among other things, dividends and liquidation.We could also use the preferred stock to deter or delay a change in control ofour company that may be opposed by our management even if the transaction mightbe favorable to you as a common stockholder.

***Our officers anddirectors exercise significant control over our affairs, which could result intheir taking actions of which other stockholders do not approve.***

Our executive officers anddirectors, and entities affiliated with them, currently control approximately23% of our outstanding common stock including exercise of their options andwarrants. These stockholders, if they act together, will be able to exercisesubstantial influence over all matters requiring approval by our stockholders,including the election of directors and approval of significant corporatetransactions. This concentration of ownership may also have the effect ofdelaying or preventing a change in control of us and might affect the marketprice of our common stock.

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

We have a significant number of outstanding stockoptions and warrants. During 2005, shares issuable upon the exercise of theseoptions and warrants, at prices ranging currently from approximately $0.05 to$1.24 per share, represent approximately 15%** **ofour total outstanding stock on a fully diluted basis using the treasury stockmethod.

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

**ITEM 1B.**       UNRESOLVEDSTAFF COMMENTS

There are no unresolvedstaff comments as of the date of this filing.

**ITEM 2.**                PROPERTIES

As of December 31,2005, all of our properties are leased. Our principal executive offices arelocated in San Francisco, California. We lease four additional offices tosupport our various investment banking and broker-dealer related activities.These offices are located in New York, Boston, Los Angeles and Portland. Webelieve the facilities we are now using are adequate and suitable for businessrequirements.

**ITEM 3.**                LEGALPROCEEDINGS

**MerrimanCurhan Ford & Co. v. The Seidler Companies, Inc.—NASD Arbitration**

During 2004, our broker-dealer subsidiary hired aresearch analyst. Prior to employment with Merriman Curhan Ford & Co.the analyst was employed by The Seidler Companies, Inc., or Seidler, in asimilar capacity. The analyst was employed under an employment contract thatincluded terms which general counsel and outside counsel believe unlawfullyrestrict the analyst’s employment activities.

In March 2004, we acted as co-agent for a smallprivate placement for a client. The client was introduced to one of our investmentbanking managing directors. At the time of introduction, Seidler had beentrying to win the investment banking business, but had failed to obtain asigned engagement letter with the client. We subsequently received a signedengagement letter from the client that named Merriman Curhan Ford &Co. as co-placement agent. The investment banking transaction was completed.

Thereafter, in March 2004we received a cease and desist letter from attorneys representing Seidler.Seidler claims that our analyst used proprietary information in violation ofhis employment agreement when introducing Merriman Curhan Ford & Co.to the client. Seidler further claims that we used unfair business tactics towin the business. In response to the claims, Merriman Curhan Ford & Co.and our analyst filed a claim in arbitration with the NASD in June 2004.In September 2005, this matter was settled. We received a release of allclaims from Seidler in exchange for a payment in the amount of $25,000.

**Westermanv. Western Capital Financial Group—NASD Arbitration**

In May 2005, our broker-dealer subsidiaryMerriman Curhan Ford & Co. was served with a claim in NASD Arbitrationby Ms. Westerman. The claim names Western Capital Financial Group as oneof several defendants. Western Capital Financial Group is the predecessor nameof 

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Merriman Curhan Ford &Co., the California corporation. The Western Capital Financial Group name waseffective from June 26, 1986 to July 14, 1998.

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

Claimant alleges a theoryof predecessor liability against Merriman Curhan Ford & Co. Claimantprays for monetary damages in excess of $300,000 against the eleven namedrespondents. We do not believe that Ms. Westerman’s claims againstMerriman Curhan Ford & Co. are meritorious. We are in the earlypleading stages of the matter and a hearing date has been scheduled forSeptember 2006. We believe that we have meritorious defenses and intend tocontest 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 theoutcome will have a material effect on our financial position, financialresults or cashflows.

**In reOdimo Incorporated Securities Litigation*.***

Merriman Curhan Ford &Co. is a defendant in an alleged class action suit brought in connection with aregistered offering involving Odimo Incorporated in which we served asco-manager for the company. The complaint, filed in the 17th Judical Circuit Court for Broward County inFlorida on September 30, 2005, alleges violations of federal securitieslaws against Odimo and certain of its officers as well as the company’sunderwriters, including us, based on alleged misstatements and omissions in theregistration statement. We believe we have meritorious defenses to the actionsand intend to vigorously defend against such claims as they apply to our firm.Based upon the facts as we know them to date, we believe that the likelihoodthat we not prevail is remote. Further, we are indemnified by the issuerdefendant.

**Other Matters**

Additionally, from time totime, we are involved in ordinary routine litigation incidental to ourbusiness.

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

No matters were submitted to a vote of stockholdersduring the fourth quarter of 2005.

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**PART II**

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

Ourcommon stock trades on the American Stock Exchange under the symbol “MEM.” Thefollowing table sets forth the range of the high and low sales prices per shareof our common stock for the fiscal quarters indicated.

| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| **2005**       |       |     |       |    |       |
| Fourth Quarter |       | $        | 1.19       |    | $          | 1.01 |   |
| Third Quarter  |       | 1.26     |       | 0.95    |       |
| Second Quarter |       | 1.53     |       | 1.14    |       |
| First Quarter  |       | 1.99     |       | 1.33    |       |
| **2004**       |       |     |       |    |       |
| Fourth Quarter |       | $        | 2.05       |    | $          | 1.10 |   |
| Third Quarter  |       | 2.22     |       | 1.24    |       |
| Second Quarter |       | 2.85     |       | 1.90    |       |
| First Quarter  |       | 3.10     |       | 0.88    |       |

 

The closing sale price for our common stock on February 15,2006 was $1.16. The market price of our common stock has fluctuatedsignificantly and may be subject to significant fluctuations in the future. SeeItem 7. “Management’s Discussion and Analysis of Financial Condition andResults of Operations.”

According to the records of our transfer agent, we hadapproximately 304 stockholders of record as of February 15, 2006. Becausemany shares are held by brokers and other institutions on behalf ofstockholders, we are unable to estimate the total number of beneficialstockholders represented by these record holders.

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

**RecentSale of Unregistered Securities**

On February 28, 2005, we acquired CatalystFinancial Planning & Investment Management, Inc., or Catalyst, aregistered investment advisor with over $100 million in assets under management.The purchase consideration for Catalyst consists of both cash and common stockthat will be paid over a three year period. We paid to the sole shareholder ofCatalyst, or Catalyst Shareholder, $330,433 as initial consideration at theclosing. We have also agreed to issue to the Catalyst Shareholder up to 925,325shares of common stock over three years based upon amount of revenue growth forCatalyst. The payment of these shares is subject to specified conditions. Inexchange for its cash and shares, we acquired 100% of the voting stock inCatalyst. This transaction was exempt from the registration requirements of theSecurities Act of 1933, as amended, pursuant to the exemption provided for in Section 4(2) ofsuch Act. 

On May 4, 2005, weentered into a stock purchase agreement with Ascend Services Ltd., or Ascend. Weissued 1,078,749 shares of our common stock and Ascend has issued an unsecuredpromissory note payable to us in the amount of $1.5 million. The shares areheld initially in escrow. Upon Ascend achieving specified milestones, the1,078,749 shares of common stock will be released from escrow in threeinstallments of 359,583 shares and provided to Ascend. Upon satisfaction of theconditions specified in the escrow agreement and simultaneous with the releaseof the related stock certificates, the related amount of the promissory noteshall become effective and start accruing interest. The promissory note accruesinterest at 10% per annum and matures on February 28, 2006. In May 2005, we released the first 

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installment of 359,583 shares of common stock to Ascendwhile the related promissory note with a face amount of $500,000 becameeffective. We do not expect Ascend will achieve any further milestones and weexpect the remaining 719,166 shares of common stock will be returned to theCompany from escrow on February 28, 2006. The securitiesdescribed in this paragraph: (i) were issued to a private investorwithout the involvement of underwriters; (ii) were issued in reliance onthe exemption from registration requirements contained in Section 4(2) ofthe Securities Act of 1933; and (iii) carried certain registration rights.

**ITEM 6.**                SELECTEDCONSOLIDATED FINANCIAL DATA

Thefollowing selected consolidated financial data should be read in conjunctionwith Item 7. “Management’s Discussion and Analysis of Financial Condition andResults of Operations” and the consolidated financial statements and the notesthereto included in Item 8. “Financial Statements and Supplementary Data.”

| ** **                                         | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** | **2001**    | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-------------|------------|
| **Statement of operations data:**                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** |
| Revenue                                            |       | $          | 43,838,720 |       | $          | 38,368,310 |       | $          | 18,306,011 |        | $          | 6,469,494 |   | $ | 205,502 |   |
| Operating  expenses                                |       | 45,582,232 |       | 36,194,924 |       | 16,832,676 |       | 8,291,735  |       | 29,490,451  |       |
| Operating income  (loss)                           |       | (1,743,512 | )          | 2,173,386  |       | 1,473,335  |       | (1,822,241 | )          | (29,284,949 | )          |
| Gain on  retirement of convertible note payable(1) |       | —     |       | —     |       | 3,088,230  |       | —     |       | —      |       |
| Interest income                                    |       | 447,828    |       | 120,431    |       | 39,483     |       | 45,345     |       | 324,677     |       |
| Interest expense(2)                                |       | (76,334    | )          | (169,787   | )          | (1,554,901 | )          | (1,364,903 | )          | (339,213    | )          |
| Income tax  expense                                |       | (142,425   | )          | (249,744   | )          | (74,884    | )          | —     |       | —      |       |
| Income (loss)  from continuing operations          |       | (1,514,443 | )          | 1,874,286  |       | 2,971,263  |       | (3,141,799 | )          | (29,299,485 | )          |
| Loss from  discontinued operations                 |       | —     |       | —     |       | —     |       | (262,843   | )          | (772,691    | )          |
| Net income (loss)                                  |       | $          | (1,514,443 | )          | $          | 1,874,286  |       | $          | 2,971,263  |        | $          | (3,404,642 | ) | $ | (30,072,176 | ) |
| Diluted net  income (loss) per common share        |       | $          | (0.02      | )          | $          | 0.02       |       | $          | 0.06       |        | $          | (0.18 | ) | $ | (1.66 | ) |
| **Financial condition data:**                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** |
| Cash and cash  equivalents                         |       | $          | 11,138,923 |       | $          | 17,459,113 |       | $          | 6,142,958  |        | $          | 1,402,627 |   | $ | 4,358,091 |   |
| Marketable  securities owned                       |       | 8,627,543  |       | 2,342,225  |       | 608,665    |       | 764,421    |       | —      |       |
| Total assets                                       |       | 27,694,413 |       | 25,007,824 |       | 9,703,946  |       | 3,769,127  |       | 7,506,781   |       |
| Capital lease  obligations                         |       | 883,993    |       | 452,993    |       | 24,401     |       | —     |       | —      |       |
| Notes payable,  net                                |       | 408,513    |       | 1,487,728  |       | 1,927,982  |       | 8,455,085  |       | 8,141,704   |       |
| Stockholders’ equity  (deficit)               |       | $          | 18,403,001 |       | $          | 16,733,850 |       | $          | 5,261,210  |        | $          | (5,529,354 | ) | $ | (3,441,733 | ) |

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(1)          InApril 2003, we exercised our right to cancel the convertible promissorynote held by Forsythe with the principal sum of $5,949,042. The fair value ofthe consideration provided to Forsythe was less than the carrying amount of theconvertible note payable. The difference between the fair value of theconsideration provided to Forsythe and the carrying amount of the note payable,or $3,088,230, was recorded as a gain in condensed consolidated statements ofoperations.

(2)          Interestexpense for 2003 included $1,291,000 in amortization of discounts and debtissuance costs, while the 2004 amount included $119,000 for amortization ofdiscounts and debt issuance costs. The higher amortization expense in 2003 wasdue to the accelerated amortization that occurred as the notes payable wereretired or converted to equity instruments during 2003. The total amount ofdiscounts that will be amortized in future periods was $23,000 as of December 31,2005.

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

The following discussionand analysis should be read in conjunction with “Selected ConsolidatedFinancial Data” and our consolidated financial statements and notes theretoincluded elsewhere in the Annual Report on Form 10-K.

**Introduction**

MCF Corporation is afinancial services holding company that provides investment research, capitalmarkets services, corporate and venture services, investment banking, assetmanagement and wealth management through its operating subsidiaries, MerrimanCurhan Ford & Co., MCF Asset Management, LLC and MCF WealthManagement, LLC. We are focused on providing a full range of specialized andintegrated services to institutional investors and corporate clients.

**Merriman Curhan Ford & Co.**

Merriman CurhanFord & Co. is a securities broker-dealer and investment bank focusedon fast growing companies and institutional investors. Our mission is to becomea leader in the researching, advising, financing and trading of fast growingcompanies under $2 billion in market capitalization. We provide investmentresearch, brokerage and trading services primarily to institutions, as well asadvisory and investment banking services to corporate clients. We are focusedon providing a full range of specialized and integrated services, including:

·       EquityResearch

·       Salesand Trading

·       SpecializedTrade Execution

·       MarketMaking

·       EquityCapital Markets

·       Corporateand Venture Services

·       PublicOfferings

·       PrivatePlacements

·       Mergersand Acquisitions

·       StrategicAdvisory Services

By the end of the 1990’s,many of the investment banks that previously served this niche were acquired bylarge commercial banks and subsequently refocused to serve larger clients andlarger transactions. We are gaining market share by originating differentiatedresearch for our institutional investor clients and providing specializedservices for our fast-growing corporate clients.

**MCF Asset Management, LLC**

MCF Asset Management, LLC creates investment productsfor both institutional and high-net worth clients. Through the corporate andprofessional resources of MCF Corporation, MCFAM has developed aninstitutional-standard investment management platform. We are on track tolaunch our first products in early 2006.

We believe both institutions and wealthyindividuals will continue to shift more of their investment dollars intoalternative asset class strategies. It is our intent to help our clientsin their investment process 

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by offering access to alternative investmentstrategies, as well as certain niche based long-only strategies.  We planto establish our own alternative investment products and evaluate opportunitiesto acquire and partner with managers of alternative asset investments.

**MCF Wealth Management, LLC**

MCF Wealth Management, LLCcontinues to evaluate acquisitions of existing wealth managementbusinesses, as well as organically grow assets under management throughclient referrals and Merriman Curhan Ford & Co.’s client base. In March 2005,Catalyst Financial Planning and Investment Management was the first registeredinvestment advisor to be acquired by MCF Wealth Management. Today, Catalystcounsels more than 70 clients and manages $130 million in assets. MCF WealthManagement’s mission is to provide a tailored, integrated offering of personalfinancial services to help corporate executives and high-net-worth clientsachieve their financial goals through a diverse network of fee-only investmentadvisory firms like Catalyst.

**Executive Overview**

Our company has grown since we launched MerrimanCurhan Ford & Co., our investment bank and broker-dealer business, atthe beginning of 2002. Our revenue, operating expenses and headcount haveincreased sequentially since 2002. Revenue increased to $43,839,000 during 2005which represents 14% growth over 2004 and is a record for us. While we wereprofitable during 2004 and 2003, we incurred a net loss of $0.02 per dilutedshare in 2005. Our profitability was negatively impacted by the decline ingrowth in our investment banking revenue and increased costs associated withmarketing, recruiting and other operating expenses. We continued to invest inrecruiting new employees and marketing through our conferences, investor eventsand business development activities, which resulted in higher operatingexpenses in 2005. Despite these investments in growth, the Company remains cashflow positive during 2005, as measured by Earnings Before Interest, Taxes,Depreciation and Amortization Expense.

Our plan is to continue togrow the investment banking and broker-dealer business while we extend ourposition as trusted financial advisor to managing corporate assets andindividual wealth. During 2005 we created MCF Wealth Management, LLC andacquired Catalyst, our first registered investment advisor. Our assetmanagement and wealth management activities produce fee-based, recurringrevenue streams that have begun to complement the cyclical nature of ourexisting business. Going forward, we plan to acquire existing asset managementand wealth management businesses, partner with high quality asset managers, andgrow our proprietary product and service offerings.

**Business Environment**

The business environment during 2005 was somewhat volatiledue to a combination of factors including an expanding U.S. economy, increasingcommodity costs, continued low interest rates and low inflation. Favorable jobreports and an active housing market provided ongoing support to economicactivity. The unemployment rate dropped to its lowest level since August 2001.Oil prices, however, soared during the year raising concerns about the effecton overall economic activity. The Federal Reserve Board continued its measuredpace of interest rate increases, raising the federal funds rate to 4.25% byyear-end 2005. The small-cap growth equity indices applicable to the companiesthat we serve were mostly flat during 2005.

Our securities broker-dealer and investment bankingactivities are linked to the capital markets. In addition, our businessactivities are focused in the technology, consumer, energy and industrialtechnology, health care and telecommunications sectors. By their nature, ourbusiness activities are highly competitive and are not only subject to generalmarket conditions, volatile trading markets and fluctuations in the 

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volume of market activity,but also to the conditions affecting the companies and markets in our areas offocus.

Fluctuations in revenue also occur due to the overalllevel of market activity, which, among other things, affects the flow ofinvestment dollars and the size, number and timing of investment bankingtransactions. In addition, a downturn in the level of market activity can leadto a decrease in brokerage commissions. Therefore, revenue in any particularperiod may vary significantly from year to year.

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

**Results of Operations**

Thefollowing table sets forth a summary of financial highlights for the threeyears ended December 31, 2005:

| ** **                                              | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Total revenue                                           |       | $          | 43,838,720 |       | $          | 38,368,310 |       | $ | 18,306,011 |   |
| Total operating  expenses                               |       | 45,582,232 |       | 36,194,924 |       | 16,832,676 |       |
| Operating income  (loss)                                |       | (1,743,512 | )          | 2,173,386  |       | 1,473,335  |       |
| Net income (loss)                                       |       | (1,514,443 | )          | 1,874,286  |       | 2,971,263  |       |
| EBITDA                                                  |       | 743,855    |       | 3,677,264  |       | 2,048,863  |       |
| Add:                                                    |       |       |       |       |       |       |       |
| Gain on retirement of convertible note payable          |       | —     |       | —     |       | 3,088,230  |       |
| Interest income                                         |       | 447,828    |       | 120,431    |       | 39,483     |       |
| Less:                                                   |       |       |       |       |       |       |       |
| Interest expense                                        |       | (65,997    | )          | (50,654    | )          | (263,156   | )          |
| Income tax expense                                      |       | (142,425   | )          | (249,744   | )          | (74,884    | )          |
| Depreciation and amortization                           |       | (528,038   | )          | (162,318   | )          | (77,918    | )          |
| Common stock issued for services                        |       | —     |       | (215,800   | )          | (121,449   | )          |
| Amortization of stock-based compensation                |       | (1,959,329 | )          | (1,125,760 | )          | (376,161   | )          |
| Amortization of discounts on convertible notes  payable |       | (10,337    | )          | (95,793    | )          | (702,412   | )          |
| Amortization of debt issuance costs                     |       | —     |       | (23,340    | )          | (589,333   | )          |
| Net income (loss)                                       |       | $          | (1,514,443 | )          | $          | 1,874,286  |       | $ | 2,971,263 |   |

 

Earnings before interest, taxes, depreciation andamortization, or EBITDA, is a key metric we use in evaluating our financialperformance. EBITDA is considered a non-GAAP financial measure as defined byRegulation G promulgated by the SEC pursuant to the Securities Act of 1933, asamended. We consider EBITDA an important measure of our ability to generatecash flows to service debt, fund capital expenditures and fund other corporateinvesting and financing activities. EBITDA eliminates the non-cash effect oftangible asset depreciation and amortization of intangible assets andstock-based compensation. EBITDA should be considered in addition to, ratherthan as a substitute for, pre-tax income, net income and cash flows fromoperating activities.

Our revenue during 2005increased $5,470,000 or 14%, from 2004 reflecting the continued growth of oursales and trading activities. We incurred a net loss of $1,514,000 during 2005as compared to net income of $1,874,000 during 2004. Our EBITDA was $744,000 in2005 and $3,677,000 in 2004. The decline in profitability during 2005 ascompared to 2004 resulted from the drop in our investment banking revenue 

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whichproduces higher operating margins compared to commissions revenue, and highermarketing, recruiting and other operating expenses. Additionally, we recorded anon-cash expense for the $500,000 note receivable from Ascend that we deemed tobe uncollectible as of December 31, 2005.

*Commissionsand Principal Transactions Revenue*

Our broker-dealeractivity includes the following:

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

·       PrincipalTransactions—Principal transactions consist of a portion of dealerspreads attributed to our securities trading activities as principal inNASDAQ-listed and other securities, and include transactions derived from ouractivities as a market-maker. Additionally, principal transactions includegains and losses resulting from market price fluctuations that occur whileholding positions in our trading security inventory.

Thefollowing table sets forth our revenue and several operating metrics which weutilize in measuring and evaluating performance and the results of our tradingactivity operations:

| ** **                                                              | ** ** | **2005**    | ** ** | **2004**    | ** ** | **2003**    | ** ** |
|-------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Revenue:**                                                            |       |        |       |        |       |        |       |
| Commissions                                                             |       | $           | 26,992,427 |        | $          | 21,826,628  |       | $ | 9,547,061 |   |
| Principal transactions:                                                 |       |        |       |        |       |        |       |
| Customer principal transactions, proprietary trading  and market making |       | $           | 308,764    |        | $          | 1,758,119   |       | $ | 1,173,813 |   |
| Investment portfolio                                                    |       | 1,058,174   |       | 1,030,001   |       | 177,073     |       |
| Total principal transactions revenue                                    |       | $           | 1,366,938  |        | $          | 2,788,120   |       | $ | 1,350,886 |   |
| **Transaction  Volumes:**                                               |       |        |       |        |       |        |       |
| Number of shares traded                                                 |       | 983,755,070 |       | 919,112,079 |       | 370,845,147 |       |
| Number of active clients                                                |       | 614         |       | 599         |       | 367         |       |

 

Commissions amounted to $26,992,000, or 62%, of ourrevenue during 2005, representing a 24% increase over $21,827,000 recognizedduring 2004. The higher commissions were primarily attributed to the hiring ofadditional sales and research professionals and an increase in the penetration ofactive client accounts during 2005 as compared to 2004. During 2005 and 2003,no single brokerage customer accounted for more than 10% of our revenue, whileone brokerage customer accounted for 10% of our revenue during 2004.

Principal transactions revenue, including marketmaking and proprietary trading for our own account, amounted to $1,367,000, or3%, of our revenue during 2005, representing a 51% decrease compared to$2,788,000 recognized during 2004. Returns from market making and proprietarytrading activities tend to be more volatile than acting as agent or principalfor customers. We increased our market making activity during 2005 and 2004 andintend to continue to expand the number of stocks in which we make markets. Additionally,the number of securities held in our investment portfolio, which primarilyconsists of stock warrants and restricted common stock, increased in 2004 and2005. The value of this portfolio has increased in each of the three yearsended December 31, 2005.

During 2005, we refined ourestimation process for valuing the securities owned that are not readilymarketable. The most significant change impacted the carrying value of ourstock warrant portfolio. Beginning in the fourth quarter of 2005, we carrystock warrants at a discount to fair value as determined by using theBlack-Scholes Option Pricing model. Previously, the stock warrants were carriedat a discount 

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tointrinsic value, if any. This change in estimate resulted in an unrealized gainof $424,000 and a decrease in our net loss of $229,000 during the fourthquarter of 2005.

*InvestmentBanking Revenue*

Our investmentbanking activity includes the following:

·       CapitalRaising—Capital raising includes private placements of equity and debtinstruments and underwritten public offerings.

·       FinancialAdvisory—Financial advisory includes advisory assignments with respect tomergers and acquisitions, divestures, restructurings and spin-offs.

Thefollowing table sets forth our revenue and transaction volumes from ourinvestment banking activities during the three years ended December 31,2005:

| ** **                       | ** ** | **2005**  | ** **  | **2004**  | ** ** | **2003**    | ** ** |
|----------------------------------|------------|-----------|-------------|-----------|------------|-------------|------------|
| **Revenue:**                     |       |      |        |      |       |        |       |
| Capital raising                  |       | $         | 13,396,781  |      | $          | 11,845,148  |       | $ | 6,657,836 |   |
| Financial  advisory              |       | 1,420,033 |        | 1,883,408 |       | 720,972     |       |
| Total investment banking revenue |       | $         | 14,816,814  |      | $          | 13,728,556  |       | $ | 7,378,808 |   |
| **Transaction  Volumes:**        |       |      |        |      |       |        |       |
| Public offerings:                |       |      |        |      |       |        |       |
| Capital underwritten             |       | $         | 343,223,000 |      | $          | 507,952,000 |       | $ | 152,168,000 |   |
| Number of transactions           |       | 8         |        | 10        |       | 1           |       |
| Private placements:              |       |      |        |      |       |        |       |
| Capital raised                   |       | $         | 253,939,000 |      | $          | 176,822,000 |       | $ | 96,082,000 |   |
| Number of transactions           |       | 14        |        | 13        |       | 12          |       |
| Financial advisory:              |       |      |        |      |       |        |       |
| Transaction amounts              |       | $         | 21,321,000  |      | $          | 32,800,000  |       | $ | 4,750,000 |   |
| Number of  transactions          |       | 1         |        | 2         |       | 1           |       |

 

Our investment bankingrevenue amounted to $14,817,000, or 34% of our revenue during 2005,representing a 8% increase compared to $13,729,000 recognized in 2004. Theincrease in our investment banking revenue during 2005 can be primarily attributedto the increased awareness of our brand in the market place and anaccommodative business environment during 2005. We believe that the increase inrevenue was partially offset by a senior management transition in theinvestment banking department. This transition was completed at the beginningof the third quarter 2005 with the hiring of a new head of investment banking.During the three years ended December 31, 2005, no single investmentbanking customer accounted for more than 10% of our revenue.

*Compensationand Benefits Expenses*

Compensation and benefits expense represents themajority of our operating expenses and includes incentive compensation paid tosales, trading and investment banking professionals, as well as discretionarybonuses, salaries and wages, and stock-based compensation. Incentivecompensation varies primarily based on revenue production. Discretionarybonuses paid to research analysts also vary with commissions revenue productionbut includes other qualitative factors as well. Salaries, payroll taxes andemployee benefits are relatively fixed in nature.

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Thefollowing table sets forth the major components of our compensation andbenefits for the three years ended December 31, 2005:

| ** **                                                  | ** ** | **2005**  | ** ** | **2004**  | ** ** | **2003**   | ** ** |
|-------------------------------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Incentive  compensation and discretionary bonuses      |       | $         | 18,001,940 |      | $          | 17,694,420 |       | $ | 7,316,958 |   |
| Salaries and  wages                                         |       | 9,397,509 |       | 5,801,390 |       | 2,728,519  |       |
| Stock-based  compensation                                   |       | 1,959,329 |       | 1,115,909 |       | 362,280    |       |
| Payroll taxes,  benefits and other                          |       | 2,763,430 |       | 2,153,546 |       | 1,275,110  |       |
| Total compensation and benefits                             |       | $         | 32,122,208 |      | $          | 26,765,265 |       | $ | 11,682,867 |   |
| Total compensation and benefits as a percentage of  revenue |       | 73        | %          | 70        | %          | 64         | %          |
| Cash compensation  and benefits as a percentage of revenue  |       | 69        | %          | 67        | %          | 62         | %          |

 

The increase in compensation and benefits expense of$5,357,000, or 20%, from 2004 to 2005 and $15,082,000, or 129%, from 2003 to2004 was due primarily to higher incentive compensation which is directlycorrelated to revenue production.

Cash compensation and benefits expense as a percentageof revenue increased to 69% during 2005 as compared to 67% in 2004. Thisincrease is due in part to higher salaries and wages resulting from increasedheadcount in anticipation of our revenue growth. We have grown our headcount ata measured pace during 2004 and 2005. Our headcount has increased from 80 at December 31,2003 to 116 at December 31, 2004 to 155 as of December 31, 2005. Theincrease in stock-based compensation during 2005 and 2004 reflects our decisionto grant restricted stock to new and existing employees beginning in the secondhalf of 2003. Prior to 2003, we only granted stock options to employees whichare accounted for under the intrinsic value method, in accordance with APB No. 25.During the three years ended December 31, 2005, one sales professionalaccounted for 12%, 15% and 13% of our revenue, respectively.

The amount of compensationand benefits expense that we incur during a given period is largely dependentupon the level of revenue recognized during that period, since most of ouremployees are paid based on a percentage of the revenue attributed to theirefforts. We anticipate compensation and benefits expense for 2006 will increasesequentially over 2005 due to our forecast for higher revenue in 2006.Additionally, we will begin to expense stock options granted to employees in2006. We expect, however, cash compensation and benefits expense as apercentage of revenue to decrease in 2006 relative to 2005 due to modificationsthat we have made to incentive compensation arrangements at the beginning of2006.

*OtherOperating Expenses*

Brokerage and clearing fees include trade processingexpenses that we pay to our clearing broker and execution fees that we pay tofloor brokers and electronic communication networks. Merriman Curhan Ford &Co. is a fully-disclosed broker-dealer, which has engaged a third party clearingbroker to perform all of the clearance functions. The clearing broker-dealerprocesses and settles the customer transactions for Merriman Curhan Ford &Co. and maintains the detailed customer records. Additionally, security tradesare executed by third-party broker-dealers and electronic trading systems.These expenses are almost entirely variable with commissions revenue and thevolume of brokerage transactions. The decrease in brokerage and clearing feesof $71,000, or 3% from 2004 to 2005 while increasing the correspondingcommissions revenue during the same period reflects the cost savings that weachieved by negotiating lower fees with our new clearing broker during thefourth quarter 2004. We anticipate brokerage and 

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clearing fees for 2006 willincrease sequentially over 2005 as we are forecasting a higher level ofcommissions revenue for 2006.

Professional services expense includes legal fees,accounting fees, expenses related to investment banking transactions andvarious consulting fees. Many of these expenses, such as legal and accountingfees, are to a large extent fixed in nature. The increase of $698,000 or 54%,from 2004 to 2005 primarily reflected higher legal costs related to variouscorporate and investment banking activities. The increase of $613,000 or 89%,from 2003 to 2004 was primarily attributed to increased accounting and auditcosts, legal expense in connection with pending litigation involving ourcompany, and consulting fees in connection with our compliance with Section 404of the Sarbanes-Oxley Act of 2002. We anticipate professional services expensefor 2006 will increase sequentially as compared to 2005.

Occupancy and equipment includes rental costs for ourfacilities and equipment, as well as equipment, software and leaseholdimprovement expenses. These expenses are largely fixed in nature and tend toincrease as we hire additional employees. The increase of $625,000, or 65%,from 2004 to 2005 and $577,000, or 151%, from 2003 to 2004 resulted mostly fromexpansion of our offices and computer equipment purchases resulting from thehiring of additional sales, trading and investment banking professionals.During 2004, we moved into larger office spaces in San Francisco, New York,Boston, Los Angeles and Portland. We anticipate occupancy and equipment expensefor 2006 will increase sequentially over 2005.

Communications and technology expense includes voice,data and Internet service fees, and data processing costs. Historically, thesecosts have increased as we hire additional employees. The increase of $525,000,or 37%, from 2004 to 2005 and $576,000, or 70%, from 2003 to 2004 was due to highertelephone and data service fees incurred in our sales and trading operations.The higher telephone and data service charges are the result of increasedheadcount and the expansion of our offices, as well as higher costs to upgradeour information technology infrastructure. We anticipate communications andtechnology expense for 2006 will increase sequentially over 2005.

Depreciation and amortization expense primarily relateto the depreciation of our computer equipment and leasehold improvements.Depreciation and amortization is mostly fixed in nature. The increase of$366,000, or 225%, from 2004 to 2005 and $84,000, or 108%, from 2003 to 2004was due to increased capital expenditures, including leasehold improvements toour San Francisco and New York offices during 2004, to facilitate our growthand expansion. We anticipate depreciation and amortization expense for 2006will increase sequentially over 2005.

Other operating expenseincludes professional liability and property insurance, recruiting, investorconferences, travel and entertainment, printing and copying, business licensesand taxes, office supplies and other miscellaneous office expenses. The increase of approximately $1,887,000, or59%, from 2004 to 2005 was attributed to higher costs associated withour annual investor conference, recruiting costs, higher travel expenses, andvarious business taxes. The 2005 expense also includes the write-off of the$500,000 note receivable from Ascend. The increase of approximately $1,647,000, or 105%, from 2003 to 2004 wasattributed to expenses associated with our first investor conference, highertravel expenses, business development costs, and recruiting expenses. Weanticipate other operating expense for 2006 will increase sequentially over2005.

*Gainon Retirement of Convertible Note Payable*

In April 2003, weexercised our right to cancel the convertible promissory note held by Forsythewith the principal sum of $5,949,042. The fair value of the considerationprovided to Forsythe was less than the carrying amount of the convertible notepayable. The difference between the fair value of the consideration provided toForsythe and the carrying amount of the note payable was recorded as a gain incondensed consolidated statements of operations.

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*InterestIncome*

Interest income representsinterest earned on our cash balances maintained at financial institutions. Theincrease of approximately $327,000, or 272%, from 2004 to 2005 and $81,000, or205% from 2003 to 2004 was due to higher average interest earning assets andhigher average interest rates during these periods.

*InterestExpense*

Interest expense for 2005included $66,000 for interest expense and $10,000 for amortization of discountsand debt issuance costs, while the 2004 amount included $51,000 for interestexpense and $119,000 for amortization of discounts and debt issuance costs. Theslight increase in interest expense in 2005 resulted from capital leases whichhave grown during 2004 and 2005. The lower amortization of discounts and debtissuance costs in 2005 was due to the accelerated amortization that occurred asthe notes payable were retired or converted to equity instruments during 2004.No accelerated amortization occurred during 2005.

*IncomeTax Expense*

Income tax expensereflected taxes calculated for federal and state tax purposes. Realization ofour deferred tax assets depends upon us generating sufficient taxable income infuture years from the reversal of temporary differences and from net operatingloss carryforwards. Due to the uncertainty of the timing and amount of suchrealization, we concluded that a full valuation allowance of $30,987,000 wasrequired as of December 31, 2005.

**CriticalAccounting Policies and Estimates**

The consolidated financialstatements are prepared in accordance with accounting principles generallyaccepted in the United States, which require us to make estimates and judgmentsthat affect the reported amounts of assets, liabilities, revenues and expenses,and related disclosure of contingent assets and liabilities. On an on-goingbasis, we evaluate our estimates, including those related to the valuation ofsecurities owned and deferred tax assets. We base our estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results could differ from thoseestimates. We believe the following critical accounting policies affect ourmore significant judgments and estimates used in the preparation of our consolidatedfinancial statements.

***Valuation ofSecurities Owned***

“Securities owned” and “Securities sold, but not yetpurchased” in our consolidated statements of financial condition consist offinancial instruments carried at fair value or amounts that approximate fairvalue, with related unrealized gains or losses recognized in our results ofoperations. The use of fair value to measure these financial instruments, withrelated unrealized gains and losses recognized immediately in our results ofoperations, is fundamental to our financial statements and is one of our mostcritical accounting policies. The fair value of a financial instrument is theamount at which the instrument could be exchanged in a current transactionbetween willing parties, other than in a forced or liquidation sale.

Fair values of our financial instruments are generallyobtained from quoted market prices in active markets, broker or dealer pricequotations, or alternative pricing sources with reasonable levels of pricetransparency. To the extent certain financial instruments trade infrequently orare non-marketable securities and, therefore, have little or no pricetransparency, we value these instruments based on management’s estimates. Thefair value of these securities is subject to a high degree of volatility andmay 

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be susceptible tosignificant fluctuation in the near term. Securities that contain restrictionsare stated at a discount to the value of readily marketable securities.

During 2005, we refinedour estimation process for valuing the securities owned that are not readilymarketable. The most significant change impacted the carrying value of ourstock warrant portfolio. Beginning in the fourth quarter of 2005, we carrystock warrants at a discount to fair value as determined by using theBlack-Scholes Option Pricing model. Previously, the stock warrants were carriedat a discount to intrinsic value, if any. This change in estimate resulted inan unrealized gain of $424,000 and a decrease in our net loss of $229,000during the fourth quarter of 2005.

***Revenue Recognition***

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

Investment banking revenue includes underwriting andprivate placement agency fees earned through our participation in publicofferings and private placements of equity and convertible debt securities andfees earned as financial advisor in mergers and acquisitions and similartransactions. Underwriting revenue is earned in securities offerings in whichwe act as an underwriter and includes management fees, selling concessions andunderwriting fees. Management fees are recorded on the offering date, sellingconcessions on settlement date, and underwriting fees at the time theunderwriting is completed and the related income is reasonably determinable.Syndicate expenses related to securities offerings in which the Company acts asunderwriter or agent are deferred until the related revenue is recognized.Merger and acquisition fees and other advisory service revenue are generallyearned and recognized only upon successful completion of the engagement.Underwriting revenue is presented net of related expenses. Unreimbursedexpenses associated with private placement and advisory transactions arerecorded as expenses as incurred.

As co-manager forregistered equity underwriting transactions, management must estimate our shareof transaction related expenses incurred by the lead manager in order torecognize revenue. Transaction related expenses are deducted from theunderwriting fee and therefore reduces the revenue that is recognized asco-manager. Such amounts are adjusted to reflect actual expenses in the periodin which we receive the final settlement, typically 90 days following theclosing of the transaction.

***Stock-BasedCompensation***

We use stock-basedcompensation as part of our compensation of employees, including stock options,restricted stock and other stock-based awards. Compensation related torestricted stock and other stock-based awards is amortized over the vestingperiod of the award, which is generally three to four years, and is included inour results of operations as compensation and benefits expense. We use theintrinsic value-based method in accordance with Accounting Principles Board, orAPB, Opinion No. 25,*Accounting forStock Issued to Employees*, to account for employee stock-basedcompensation. Accordingly, compensation cost is recorded on the date of grantto the extent the fair value of the underlying share of common stock exceedsthe exercise price for a stock option or the purchase price for a share ofcommon stock. Such compensation cost is amortized on a straight-line basis overthe vesting period of the individual award. Pursuant to Statement of FinancialAccounting Standards, or SFAS, No. 123,*Accounting for Stock-Based Compensation*, we disclose the pro formaeffect of using the fair value method of accounting for employee stock-basedcompensation. In determining the estimated fair value of stock options, we usethe Black-Scholes option-pricing model, which requires judgment regardingcertain assumptions, including the expected life of the options granted,dividend yields and stock volatility.

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***Deferred Tax ValuationAllowance***

We account for incometaxes in accordance with the provision of SFAS No. 109,*Accounting for Income Taxes*, whichrequires the recognition of deferred tax assets and liabilities at tax ratesexpected to be in effect when these temporary differences reverse. Future taxbenefits attributable to temporary differences are recognized to the extentthat the realization of such benefits is more likely than not. We have notconcluded that it is more likely than not that our deferred tax assets as of December 31,2005 and 2004 will be realized based on the scheduling of temporary differencesand projected taxable income. The amount of the deferred tax assets actuallyrealized, however, could vary if there are differences in the timing or amountof future reversals of existing deferred tax liabilities or changes in theactual amounts of future taxable income. Should we determine that we will beable to realize all or part of the deferred tax asset in the future, an adjustmentto the deferred tax asset will be recorded in the period such determination is made.

**Liquidity and Capital Resources**

Historically, we have satisfied our liquidity andregulatory capital needs through the issuance of equity and debt securities. Asof December 31, 2005, liquid assets consisted primarily of cash and cashequivalents of $11,139,000 and marketable securities of $8,628,000, for a totalof $19,767,000. Liquid assets were nearly unchanged from December 31, 2004when they amounted to $19,801,000. In addition, we fully repaid the $1 millionnote payable to Forsythe during the fourth quarter of 2005.

Merriman Curhan Ford & Co., as abroker-dealer, is subject to Rule 15c3-1 of the Securities ExchangeAct of 1934, which specifies uniform minimum net capital requirements, asdefined, for their registrants. As of December 31, 2005, Merriman CurhanFord & Co. had regulatory net capital, as defined, of $7,660,000,which exceeded the amount required by $6,995,000.

Cash and cash equivalents decreased by $6,320,000during 2005. Cash used in our operating activities for 2005 was $5,194,000which primarily represents the increase in our marketable securities. Cash usedin investing activities amounted to $558,000 during 2005 which included ouracquisition of Catalyst and our purchase of equipment and fixtures. Cash usedin our financing activities was $569,000. Our financing activities included ourrepayment of the $1 million note payable to Forsythe, partially offset by theissuance of common stock in connection with our Employee Stock Purchase Plan.

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

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Thefollowing is a table summarizing our significant commitments as of December 31,2005, consisting of debt payments related to convertible non-convertible notespayable and capital leases and future minimum lease payments under allnon-cancelable operating leases with initial or remaining terms in excess ofone year.

| ** **        | ** ** | **Notes  Payable** | ** ** | **Operating  Leases** | ** ** | **Capital  Leases** | ** ** |
|-------------------|------------|--------------------|------------|-----------------------|------------|---------------------|------------|
| 2006              |       | $                  | 106,775    |                  | $          | 1,478,839           |       | $ | 427,962 |   |
| 2007              |       | 106,775            |       | 1,164,157             |       | 349,129             |       |
| 2008              |       | 243,990            |       | 769,476               |       | 194,346             |       |
| 2009              |       | —             |       | 552,409               |       | —              |       |
| 2010              |       | —             |       | 586,380               |       | —              |       |
| Thereafter        |       | —             |       | 537,515               |       | —              |       |
| Total commitments |       | $                  | 457,540    |                  | $          | 5,088,776           |       | $ | 971,437 |   |

 

**Off-Balance Sheet Arrangements**

We were not a party to anyoff-balance sheet arrangements during the three years ended December 31,2005. In particular, we do not have any interest in so-called limited purposeentities, which include special purpose entities and structured financeentities.

**Newly Issued Accounting Standards**

In December 2004, the FASB issued SFAS No. 123-R,*Share-Based Payment*, a revisionto SFAS No. 123, “Accounting for Stock-Based Compensation,” SFAS No. 123-Rfocuses primarily on transactions in which an entity exchanges its equityinstruments for employee services and generally establishes standards for theaccounting for transactions in which an entity obtains goods or services inshare-based payment transactions. Generally, SFAS No. 123-R requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the statement of operations based on their fairvalues. Pro forma disclosure is no longer an alternative upon adopting SFAS No. 123-R.We must adopt SFAS No. 123-R by no later than January 1, 2006.We intend to use the modified prospective transition method for implementingSFAS 123R. Based on a high level analysis, we expect that the adoption of SFAS123R will increase compensation and benefits expense beginning in the firstquarter of 2006. However, the specific amount of this increase cannot bepredicted at this time because it will depend on the level of share-basedpayments granted in the future.

In June 2005, theEmerging Issues Task Force, or EITF, reached a consensus on EITF 04-5,*Determining whether a General Partner, or theGeneral Partners as a Group, Controls a Limited Partnership or Similar EntityWhen the Limited Partners Have Certain Rights.* This consensusapplies to entities not within the scope of FIN 46R, in which the investoris the general partner in a limited partnership. The consensus requires the generalpartner to consolidate the limited partnership unless it overcomes thepresumption of control. The general partner may overcome this presumption andnot consolidate the limited partnership if the limited partners have: (a) theability to liquidate the limited partnership or otherwise remove the generalpartner through substantive “kick-out rights” that can be exercised withouthaving to demonstrate cause; or (b) substantive participating rights inmanaging the partnership. This consensus became effective on June 29, 2005for all newly formed limited partnerships and for existing limited partnershipsfor which the partnership agreements have been modified. For all other generalpartnerships, the consensus is effective no later than the beginning of thefirst reporting period beginning after December 15, 2005. Our assetmanagement subsidiary is forming a number of private equity limitedpartnerships as general partners. We are currently evaluating the requirementsunder EITF 04-5 and believe that the adoption will 

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not havea material impact on our results of operations and cash flows. It could,however, increase our consolidated assets and liabilities.

**Quarterly Financial Data**

Thetable below sets forth the operating results represented by certain items inour statements of operations for each of the eight quarters in the period endedDecember 31, 2005. This information is unaudited, but in our opinionreflects all adjustments (consisting only of normal recurring adjustments) thatwe consider necessary for a fair presentation of such information in accordancewith generally accepted accounting principles. The results for any quarter arenot necessarily indicative of results for any future period.

| ** **                                  | ** ** | **2005**   | ** ** |
|---------------------------------------------|------------|------------|------------|
| ** **                                  | ** ** | **1st**    | ** ** | **2nd** | ** ** | **3rd** | ** ** | **4th** | ** ** |
| Revenue                                     |       | $          | 12,473,116 |   | $ | 9,291,157 |   | $ | 9,113,200 |   | $ | 12,961,247 |   |
| Operating  expenses                         |       | 11,597,357 |       | 10,360,611 |   | 10,618,691 |   | 13,005,573 |   |
| Operating income  (loss)                    |       | 875,759    |       | (1,069,454 | ) | (1,505,491 | ) | (44,326 | ) |
| Net income (loss)                           |       | 648,425    |       | (726,336 | ) | (1,492,744 | ) | 56,212 |   |
| Basic net income  (loss) per common share   |       | $          | 0.01       |   | $ | (0.01 | ) | $ | (0.02 | ) | $ | 0.00 |   |
| Diluted net  income (loss) per common share |       | $          | 0.01       |   | $ | (0.01 | ) | $ | (0.02 | ) | $ | 0.00 |   |

 

| ** **                                  | ** ** | **2004**  | ** ** |
|---------------------------------------------|------------|-----------|------------|
| ** **                                  | ** ** | **1st**   | ** ** | **2nd** | ** ** | **3rd** | ** ** | **4th** | ** ** |
| Revenue                                     |       | $         | 11,222,276 |   | $ | 9,010,718 |   | $ | 6,303,347 |   | $ | 11,831,969 |   |
| Operating expenses                          |       | 9,532,753 |       | 8,458,330 |   | 7,761,801 |   | 10,442,040 |   |
| Operating income  (loss)                    |       | 1,689,523 |       | 552,388 |   | (1,458,454 | ) | 1,389,929 |   |
| Net income (loss)                           |       | 1,244,421 |       | 492,665 |   | (1,028,847 | ) | 1,166,047 |   |
| Basic net income  (loss) per common share   |       | 0.02      |       | $ | 0.01 |   | $ | (0.02 | ) | $ | 0.02 |   |
| Diluted net income  (loss) per common share |       | $         | 0.02       |   | $ | 0.01 |   | $ | (0.02 | ) | $ | 0.01 |   |

 

**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discussionabout market risk disclosures involves forward-looking statements. Actualresults could differ materially from those projected in the forward-lookingstatements. We may be exposed to market risks related to changes in equityprices, interest rates and foreign currency exchange rates. We do not usederivative financial instruments for speculative, trading or any other purpose.

***Equity Price Risk***

The potential for changesin the market value of our trading positions is referred to as “market risk.”Our trading positions result from proprietary trading activities. These tradingpositions in individual equities and equity indices may be either long or shortat any given time. Equity price risks result from exposures to changes inprices and volatilities of individual equities and equity indices. We seek tomanage this risk exposure through diversification and limiting the size ofindividual positions within the portfolio. The effect on earnings and cashflows of an immediate 10% increase or decrease in equity prices generally isnot ascertainable and could be positive or negative, depending on the positionswe hold at the time. We do not establish hedges in related securities orderivatives. From time to time, we also hold equity securities received ascompensation for our services in investment banking transactions. These equity 

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positionsare always long. However, as the prices of individual equity securities do notnecessarily move in tandem with the direction of the general equity market, theeffect on earnings and cash flows of an immediate 10% increase or decrease inequity prices generally is not ascertainable.

***Interest Rate Risk***

Our exposure to market risk resulting from changes ininterest rates relates primarily to our investment portfolio and long term debtobligations. Our interest income and cash flows may be impacted by changes inthe general level of U.S. interest rates. We do not hedge this exposure becausewe believe that we are not subject to any material market risk exposure due tothe 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 thefair market value of our investment portfolio.

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

***Foreign CurrencyRisk***

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

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**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

The followingfinancial statements are included in this report:

·       Reportof Independent Registered Public Accounting Firm

·       ConsolidatedStatements of Operations

·       ConsolidatedStatements of Financial Condition

·       ConsolidatedStatements of Stockholders’ Equity

·       ConsolidatedStatements of Cash Flows

·       Notesto Consolidated Financial Statements

Schedules other than those listed above are omittedbecause of the absence of conditions under which they are required or becausethe required information is presented in the financial statements or notesthereto.

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**Report of Independent Registered Public AccountingFirm**

The Board of Directors and Stockholders ofMCF Corporation and subsidiaries

We have audited the accompanying consolidatedstatements of financial condition of MCF Corporation and subsidiaries (the “Company”)as of December 31, 2005 and 2004, and the related consolidated statementsof operations, stockholders’ equity, and cash flows for each of the three yearsin the period ended December 31, 2005. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 toabove present fairly, in all material respects, the consolidated financialcondition of MCF Corporation and subsidiaries at December 31, 2005 and2004, and the consolidated results of their operations and their cash flows foreach of the three years in the period ended December 31, 2005, inconformity with U.S. generally accepted accounting principles.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2005, based on criteria establishedin Internal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated February 15,2006, expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

San Francisco, California

February 15, 2006

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**MCF CORPORATIONCONSOLIDATED STATEMENTSOF OPERATIONS**

| ** **                                      | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                      | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue:                                        |       |                                       |       |   |   |   |   |
| Commissions                                     |       | $                                          | 26,992,427 |   | $ | 21,826,628 |   | $ | 9,547,061 |   |
| Principal transactions                          |       | 1,366,938                                  |       | 2,788,120 |   | 1,350,886 |   |
| Investment banking                              |       | 14,816,814                                 |       | 13,728,556 |   | 7,378,808 |   |
| Other                                           |       | 662,541                                    |       | 25,006 |   | 29,256 |   |
| Total revenue                                   |       | 43,838,720                                 |       | 38,368,310 |   | 18,306,011 |   |
| Operating  expenses:                            |       |                                       |       |   |   |   |   |
| Compensation and benefits                       |       | 32,122,208                                 |       | 26,765,265 |   | 11,682,867 |   |
| Brokerage and clearing fees                     |       | 2,312,616                                  |       | 2,383,831 |   | 1,602,200 |   |
| Professional services                           |       | 1,998,039                                  |       | 1,299,540 |   | 686,190 |   |
| Occupancy and equipment                         |       | 1,586,132                                  |       | 960,849 |   | 383,457 |   |
| Communications and technology                   |       | 1,929,787                                  |       | 1,404,702 |   | 828,512 |   |
| Depreciation and amortization                   |       | 528,038                                    |       | 162,318 |   | 77,918 |   |
| Other                                           |       | 5,105,412                                  |       | 3,218,419 |   | 1,571,532 |   |
| Total operating expenses                        |       | 45,582,232                                 |       | 36,194,924 |   | 16,832,676 |   |
| Operating income (loss)                         |       | (1,743,512                                 | )          | 2,173,386 |   | 1,473,335 |   |
| Gain on  retirement of convertible note payable |       | —                                     |       | — |   | 3,088,230 |   |
| Interest income                                 |       | 447,828                                    |       | 120,431 |   | 39,483 |   |
| Interest expense                                |       | (76,334                                    | )          | (169,787 | ) | (1,554,901 | ) |
| Income (loss) before income taxes               |       | (1,372,018                                 | )          | 2,124,030 |   | 3,046,147 |   |
| Income tax  expense                             |       | (142,425                                   | )          | (249,744 | ) | (74,884 | ) |
| Net income (loss)                               |       | $                                          | (1,514,443 | ) | $ | 1,874,286 |   | $ | 2,971,263 |   |
| Basic net income (loss) per share               |       | $                                          | (0.02      | ) | $ | 0.03 |   | $ | 0.07 |   |
| Diluted net income (loss) per share             |       | $                                          | (0.02      | ) | $ | 0.02 |   | $ | 0.06 |   |
| Weighted average  number of common shares:      |       |                                       |       |   |   |   |   |
| Basic                                           |       | 66,505,233                                 |       | 58,578,048 |   | 32,501,831 |   |
| Diluted                                         |       | 66,505,233                                 |       | 78,175,121 |   | 45,430,392 |   |

 

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

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**MCF CORPORATIONCONSOLIDATED STATEMENTSOF FINANCIAL CONDITION**

| ** **                                                                                                                                                                                                                          | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                          | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **ASSETS**                                                                                                                                                                                                                          |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                          |       | $                     | 11,138,923 |   | $ | 17,459,113 |   |
| Securities owned:                                                                                                                                                                                                                   |       |                  |       |   |   |
| Marketable, at fair  value                                                                                                                                                                                                          |       | 8,627,543             |       | 2,342,225 |   |
| Not readily marketable,  at estimated fair value                                                                                                                                                                                    |       | 1,065,743             |       | 259,340 |   |
| Restricted cash                                                                                                                                                                                                                     |       | 627,606               |       | 625,000 |   |
| Due from clearing broker                                                                                                                                                                                                            |       | 973,138               |       | 787,862 |   |
| Accounts receivable, net                                                                                                                                                                                                            |       | 2,073,195             |       | 1,579,393 |   |
| Equipment and fixtures,  net                                                                                                                                                                                                        |       | 1,378,235             |       | 1,032,797 |   |
| Prepaid expenses and  other assets                                                                                                                                                                                                  |       | 1,810,030             |       | 922,094 |   |
| Total assets                                                                                                                                                                                                                        |       | $                     | 27,694,413 |   | $ | 25,007,824 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                      |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                                                                    |       | $                     | 901,138    |   | $ | 431,656 |   |
| Commissions  and bonus payable                                                                                                                                                                                                 |       | 4,735,892             |       | 4,678,195 |   |
| Accrued expenses                                                                                                                                                                                                                    |       | 2,201,499             |       | 1,124,704 |   |
| Due to clearing and  other brokers                                                                                                                                                                                                  |       | 118,798               |       | 99,205 |   |
| Securities sold, not yet  purchased                                                                                                                                                                                                 |       | 41,579                |       | — |   |
| Capital lease obligation                                                                                                                                                                                                            |       | 883,993               |       | 452,486 |   |
| Convertible notes  payable, net                                                                                                                                                                                                     |       | 176,741               |       | 166,404 |   |
| Notes payable                                                                                                                                                                                                                       |       | 231,772               |       | 1,321,324 |   |
| Total liabilities                                                                                                                                                                                                                   |       | 9,291,412             |       | 8,273,974 |   |
| Commitments and contingencies                                                                                                                                                                                                       |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                                                                                                          |       |                  |       |   |   |
| Convertible Preferred  stock, Series A—$0.0001 par value; 2,000,000 shares authorized; 0 shares  issued and outstanding as of December 31, 2005 and 2004, respectively;  aggregate liquidation preference of $0 |       | —                |       | — |   |
| Convertible Preferred  stock, Series B—$0.0001 par value; 12,500,000 shares authorized;  8,750,000 shares issued and 0 shares outstanding as of December 31, 2005  and 2004; aggregate liquidation preference of $0  |       | —                |       | — |   |
| Convertible Preferred  stock, Series C—$0.0001 par value; 14,200,000 shares authorized;  11,800,000 shares issued and 0 shares outstanding as of December 31,  2005 and 2004; aggregate liquidation preference of $0 |       | —                |       | — |   |
| Common stock, $0.0001  par value; 300,000,000 shares authorized; 71,467,118 and 68,648,627 shares  issued and outstanding as of December 31, 2005 and 2004, respectively                                                       |       | 7,147                 |       | 6,865 |   |
| Additional paid-in  capital                                                                                                                                                                                                         |       | 111,725,167           |       | 108,558,892 |   |
| Deferred compensation                                                                                                                                                                                                               |       | (3,146,839            | )          | (3,163,876 | ) |
| Accumulated deficit                                                                                                                                                                                                                 |       | (90,182,474           | )          | (88,668,031 | ) |
| Total stockholders’  equity                                                                                                                                                                                                    |       | 18,403,001            |       | 16,733,850 |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                                     |       | $                     | 27,694,413 |   | $ | 25,007,824 |   |

 

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

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**MCF CORPORATIONCONSOLIDATED STATEMENTSOF 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, 2002                    |       | 499,999                  |       |                  | $          | 50                      |       |                    | 23,601,580 |         |       | $               | 2,360      |        |       | (80,000 | ) | $ | (363,653 | ) | $ | 86,156,658 |   |   | $ | — |   |   |   | $ | (91,324,769 | ) |   | $ | (5,529,354 | ) |
| Net income                                            |       | —                   |       |                  | —     |                    |       | —                  |       |         | —     |            |       | —      |       | — |   | — |   |   | — |   |   |   | 2,971,263 |   |   | 2,971,263 |   |
| Issuance of  preferred stock                          |       | 20,550,000               |       |                  | 2,055      |                    |       | —                  |       |         | —     |            |       | —      |       | — |   | 5,003,746 |   |   | — |   |   |   | (305,801 | ) |   | 4,700,000 |   |
| Issuance of common  stock                             |       | —                   |       |                  | —     |                    |       | 5,031,506               |       |         | 503        |            |       | —      |       | — |   | 1,384,457 |   |   | — |   |   |   | — |   |   | 1,384,960 |   |
| Issuance of  restricted common stock                  |       | —                   |       |                  | —     |                    |       | 2,511,833               |       |         | 251        |            |       | —      |       | — |   | 1,313,519 |   |   | (1,313,770 | ) |   |   | — |   |   | — |   |
| Issuance  convertible note                            |       | —                   |       |                  | —     |                    |       | —                  |       |         | —     |            |       | —      |       | — |   | 129,215 |   |   | — |   |   |   | — |   |   | 129,215 |   |
| Issuance of stock  warrants                           |       | —                   |       |                  | —     |                    |       | —                  |       |         | —     |            |       | —      |       | — |   | 374,897 |   |   | — |   |   |   | (231,801 | ) |   | 143,096 |   |
| Conversion of  preferred stock to common   stock      |       | (20,550,000              | )          |                  | (2,055     | )                       |       | 20,550,000              |       |         | 2,055      |            |       | —      |       | — |   | — |   |   | — |   |   |   | — |   |   | — |   |
| Conversion of debt  to common stock                   |       | —                   |       |                  | —     |                    |       | 4,256,756               |       |         | 426        |            |       | —      |       | — |   | 1,149,574 |   |   | — |   |   |   | — |   |   | 1,150,000 |   |
| Preferred stock  dividend                             |       | 157,202                  |       |                  | 16         |                    |       | —                  |       |         | —     |            |       | —      |       | — |   | 64,934 |   |   | — |   |   |   | (115,200 | ) |   | (50,250 | ) |
| Options  w/intrinsic value to employees               |       | —                   |       |                  | —     |                    |       | —                  |       |         | —     |            |       | —      |       | — |   | 293,000 |   |   | (168,000 | ) |   |   | — |   |   | 125,000 |   |
| Amortization of  deferred compensation                |       | —                   |       |                  | —     |                    |       | —                  |       |         | —     |            |       | —      |       | — |   | — |   |   | 237,280 |   |   |   | — |   |   | 237,280 |   |
| Balance at  December 31, 2003                    |       | 657,201                  |       |                  | $          | 66                      |       |                    | 55,951,675 |         |       | $               | 5,595      |        |       | (80,000 | ) | $ | (363,653 | ) | $ | 95,870,000 |   |   | $ | (1,244,490 | ) |   |   | $ | (89,006,308 | ) |   | $ | 5,261,210 |   |
| Net income                                            |       | —                   |       |                  | —     |                    |       | —                  |       |         | —     |            |       | —      |       | — |   | — |   |   | — |   |   |   | 1,874,286 |   |   | 1,874,286 |   |
| Issuance of common  stock                             |       | —                   |       |                  | —     |                    |       | 8,528,236               |       |         | 853        |            |       | —      |       | — |   | 7,681,682 |   |   | — |   |   |   | — |   |   | 7,682,535 |   |
| Issuance of  restricted common stock                  |       | —                   |       |                  | —     |                    |       | 1,406,110               |       |         | 140        |            |       | —      |       | — |   | 2,875,071 |   |   | (2,875,211 | ) |   |   | — |   |   | — |   |
| Issuance of  treasury stock                           |       | —                   |       |                  | —     |                    |       | —                  |       |         | —     |            |       | 80,000      |       | 363,653 |   | — |   |   | — |   |   |   | (230,853 | ) |   | 132,800 |   |
| Issuance of stock  warrants                           |       | —                   |       |                  | —     |                    |       | —                  |       |         | —     |            |       | —      |       | — |   | 1,222,250 |   |   | — |   |   |   | (1,212,399 | ) |   | 9,851 |   |
| Conversion of  preferred stock to common   stock      |       | (857,200                 | )          |                  | (86        | )                       |       | 857,200                 |       |         | 86         |            |       | —      |       | — |   | — |   |   | — |   |   |   | — |   |   | — |   |
| Conversion of debt  to common stock                   |       | —                   |       |                  | —     |                    |       | 1,905,406               |       |         | 191        |            |       | —      |       | — |   | 449,809 |   |   | — |   |   |   | — |   |   | 450,000 |   |
| Preferred stock  dividend                             |       | 199,999                  |       |                  | 20         |                    |       | —                  |       |         | —     |            |       | —      |       | — |   | 92,737 |   |   | — |   |   |   | (92,757 | ) |   | — |   |
| Options w/  intrinsic value to employees              |       | —                   |       |                  | —     |                    |       | —                  |       |         | —     |            |       | —      |       | — |   | 160,084 |   |   | (139,250 | ) |   |   | — |   |   | 20,834 |   |
| Amortization of  deferred compensation                |       | —                   |       |                  | —     |                    |       | —                  |       |         | —     |            |       | —      |       | — |   | — |   |   | 1,095,075 |   |   |   | — |   |   | 1,095,075 |   |
| Tax benefits from  employee stock option  plans       |       | —                   |       |                  | —     |                    |       | —                  |       |         | —     |            |       | —      |       | — |   | 207,259 |   |   | — |   |   |   | — |   |   | 207,259 |   |
| Balance at  December 31, 2004                    |       | —                   |       |                  | $          | —                  |       |                    | 68,648,627 |         |       | $               | 6,865      |        |       | — |   | $ | — |   | $ | 108,558,892 |   |   | $ | (3,163,876 | ) |   |   | $ | (88,668,031 | ) |   | $ | 16,733,850 |   |
| Balance at  December 31, 2004                    |       | —                   |       |                  | $          | —                  |       |                    | 68,648,627 |         |       | $               | 6,865      |        |       | — |   | $ | — |   | $ | 108,558,892 |   |   | $ | (3,163,876 | ) |   |   | $ | (88,668,031 | ) |   | $ | 16,733,850 |   |
| Net loss                                              |       | —                   |       |                  | —     |                    |       | —                  |       |         | —     |            |       | —      |       | — |   | — |   |   | — |   |   |   | (1,514,443 | ) |   | (1,514,443 | ) |
| Issuance of common  stock                             |       | —                   |       |                  | —     |                    |       | 1,546,290               |       |         | 155        |            |       | —      |       | — |   | 1,217,713 |   |   | — |   |   |   | — |   |   | 1,217,868 |   |
| Issuance of  restricted common stock                  |       | —                   |       |                  | —     |                    |       | 1,272,201               |       |         | 127        |            |       | —      |       | — |   | 1,954,165 |   |   | (1,954,292 | ) |   |   | — |   |   | — |   |
| Options w/  intrinsic value to employees              |       | —                   |       |                  | —     |                    |       | —                  |       |         | —     |            |       | —      |       | — |   | (12,000 | ) |   | 12,000 |   |   |   | — |   |   | — |   |
| Amortization of  deferred compensation                |       | —                   |       |                  | —     |                    |       | —                  |       |         | —     |            |       | —      |       | — |   | — |   |   | 1,959,329 |   |   |   | — |   |   | 1,959,329 |   |
| Tax benefits from  employee stock option   plans |       | —                   |       |                  | —     |                    |       | —                  |       |         | —     |            |       | —      |       | — |   | 6,397 |   |   | — |   |   |   | — |   |   | 6,397 |   |
| Balance at  December 31, 2005                    |       | —                   |       |                  | $          | —                  |       |                    | 71,467,118 |         |       | $               | 7,147      |        |       | — |   | $ | — |   | $ | 111,725,167 |   |   | $ | (3,146,839 | ) |   |   | $ | (90,182,474 | ) |   | $ | 18,403,001 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

38

 

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**MCF CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                                                | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                                                     |       |                                       |       |   |   |   |   |
| Net income (loss)                                                                                         |       | $                                          | (1,514,443 | ) | $ | 1,874,286 |   | $ | 2,971,263 |   |
| Adjustments to reconcile  net income (loss) to net cash provided by (used in) operating  activities: |       |                                       |       |   |   |   |   |
| Depreciation and  amortization                                                                            |       | 528,038                                    |       | 162,318 |   | 77,918 |   |
| Common stock  issued for services                                                                         |       | —                                     |       | 215,800 |   | 121,449 |   |
| Stock-based  compensation                                                                                 |       | 1,959,329                                  |       | 1,125,760 |   | 376,161 |   |
| Tax benefits from  employee stock option plans                                                            |       | 6,397                                      |       | 207,259 |   | — |   |
| Amortization of  discounts on convertible notes payable                                                   |       | 10,335                                     |       | 95,793 |   | 702,412 |   |
| Amortization of  debt issuance costs                                                                      |       | —                                     |       | 23,340 |   | 589,333 |   |
| Gain on retirement  of convertible note payable                                                           |       | —                                     |       | — |   | (3,088,230 | ) |
| Write-off of  receivable from common stock issued to Ascend                                               |       | 556,493                                    |       | — |   | — |   |
| Equipment and  fixtures expense                                                                           |       | —                                     |       | 30,398 |   | 3,252 |   |
| Provision for  doubtful accounts                                                                          |       | —                                     |       | 21,100 |   | — |   |
| Common stock  received for services                                                                       |       | —                                     |       | (461,933 | ) | (73,210 | ) |
| Unrealized (gain)  loss on securities                                                                     |       | (1,491,688                                 | )          | 29,571 |   | (198,561 | ) |
| Changes in operating  assets and liabilities:                                                             |       |                                       |       |   |   |   |   |
| Marketable  securities owned                                                                              |       | (5,558,454                                 | )          | (923,230 | ) | (193,714 | ) |
| Restricted cash                                                                                           |       | (2,606                                     | )          | (125,000 | ) | 110,240 |   |
| Due from clearing  broker                                                                                 |       | (185,276                                   | )          | (12,165 | ) | (651,644 | ) |
| Accounts receivable                                                                                       |       | (550,295                                   | )          | (1,102,257 | ) | (470,575 | ) |
| Prepaid expenses  and other assets                                                                        |       | (474,907                                   | )          | (596,998 | ) | (198,152 | ) |
| Accounts payable                                                                                          |       | 468,387                                    |       | 252,036 |   | 67,579 |   |
| Commissions  payable                                                                                      |       | 78,657                                     |       | 1,834,047 |   | 680,841 |   |
| Accrued  liabilities                                                                                      |       | 956,932                                    |       | 1,813,339 |   | 757,867 |   |
| Due to clearing  and other brokers                                                                        |       | 19,593                                     |       | (55,790 | ) | 91,445 |   |
| Net cash provided  by (used in) operating activities                                                      |       | (5,193,508                                 | )          | 4,407,674 |   | 1,675,674 |   |
| Cash flows from investing activities:                                                                     |       |                                       |       |   |   |   |   |
| Purchase of  equipment and fixtures                                                                       |       | (203,665                                   | )          | (546,899 | ) | (199,274 | ) |
| Acquisition of  Catalyst                                                                                  |       | (353,882                                   | )          | — |   | — |   |
| Proceeds from sale  of equipment and fixtures                                                             |       | —                                     |       | 2,000 |   | — |   |
| Net cash used in  investing activities                                                                    |       | (557,547                                   | )          | (544,899 | ) | (199,274 | ) |
| Cash flows from financing activities:                                                                     |       |                                       |       |   |   |   |   |
| Proceeds from the  issuance of common stock                                                               |       | 591,648                                    |       | 6,579,377 |   | 17,885 |   |
| Proceeds from the  issuance of Series B preferred stock                                              |       | —                                     |       | — |   | 1,750,000 |   |
| Proceeds from the  issuance of Series C preferred stock                                              |       | —                                     |       | — |   | 250,000 |   |
| Proceeds from the  issuance of notes payable                                                              |       | —                                     |       | — |   | 1,000,000 |   |
| Cash used to  retire notes payable                                                                        |       | —                                     |       | — |   | (500,000 | ) |
| Proceeds from the  exercise of stock options and warrants                                                 |       | 126,220                                    |       | 1,020,158 |   | 845,626 |   |
| Debt service  principal payments                                                                          |       | (1,287,003                                 | )          | (146,155 | ) | (49,330 | ) |
| Series A  preferred stock dividends                                                                  |       | —                                     |       | — |   | (50,250 | ) |
| Net cash provided  by (used in) financing activities                                                      |       | (569,135                                   | )          | 7,453,380 |   | 3,263,931 |   |
| Increase  (decrease) in cash and cash equivalents                                                         |       | (6,320,190                                 | )          | 11,316,155 |   | 4,740,331 |   |
| Cash and cash  equivalents at beginning of year                                                           |       | 17,459,113                                 |       | 6,142,958 |   | 1,402,627 |   |
| Cash and cash  equivalents at end of year                                                                 |       | $                                          | 11,138,923 |   | $ | 17,459,113 |   | $ | 6,142,958 |   |

 

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

39

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

 

| ** **                                                     | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Supplementary disclosure  of cash flow information:            |       |                                       |       |   |   |   |   |
| Cash  paid during the year:                                    |       |                                       |       |   |   |   |   |
| Interest                                                       |       | $                                          | 99,442     |   | $ | 101,613 |   | $ | 360,406 |   |
| Income taxes                                                   |       | $                                          | 179,147    |   | $ | 311,928 |   | $ | 4,800 |   |
| Non-cash investing and  financing activities:                  |       |                                       |       |   |   |   |   |
| Conversion of notes payable to common stock                    |       | $                                          | —     |   | $ | 450,000 |   | $ | 3,850,000 |   |
| Common stock issued to retire note payable                     |       | $                                          | —     |   | $ | — |   | $ | 400,000 |   |
| Issuance of restricted stock                                   |       | $                                          | 1,954,292  |   | $ | 2,875,211 |   | $ | 1,313,770 |   |
| Issuance of treasury stock                                     |       | $                                          | —     |   | $ | 230,853 |   | $ | — |   |
| Stock warrants issued to note payable investor                 |       | $                                          | —     |   | $ | — |   | $ | 129,215 |   |
| Stock warrants issued to investors                             |       | $                                          | —     |   | $ | 1,212,399 |   | $ | 231,800 |   |
| Capitalization of interest related to debt  restructuring      |       | $                                          | —     |   | $ | — |   | $ | 161,000 |   |
| Issuance (cancellation) of stock options with  intrinsic value |       | $                                          | (12,000    | ) | $ | 139,250 |   | $ | 168,000 |   |
| Preferred stock dividends                                      |       | $                                          | —     |   | $ | 92,757 |   | $ | 64,951 |   |
| Purchase of equipment and fixtures with capital lease          |       | $                                          | 625,445    |   | $ | 488,193 |   | $ | 25,101 |   |
| Conversion of  preferred stock to common stock                 |       | $                                          | —     |   | $ | 86 |   | $ | — |   |
| Acquisition of  Catalyst                                       |       | $                                          | 74,940     |   | $ | — |   | $ | — |   |

 

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

40

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**MCF CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.      Description of Business**

MCF Corporation is a financial services holdingcompany that provides capital markets services, including institutional salesand trading, research and investment banking, as well as asset management,wealth management and corporate and venture services through its operatingsubsidiaries, Merriman Curhan Ford & Co., MCF Asset Management, LLCand MCF Wealth Management, LLC. Merriman Curhan Ford & Co. is asecurities broker-dealer and investment bank focused on fast growing companiesand growth-oriented institutional investors. MCF Asset Management, LLC and MCFWealth Management, LLC are two recently formed businesses that produce feebased, recurring revenue streams to complement the cyclical nature of theinvestment banking and institutional sales and trading revenue businesses. MerrimanCurhan Ford & Co. is registered with the Securities and ExchangeCommission as a broker-dealer and is a member of the National Association ofSecurities 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 andcurrently trades under the symbol “MEM.” The Company’s corporate office islocated in San Francisco, California.

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

In December 2001, theCompany acquired Instream Securities, Inc. and later changed the name ofthe entity to RTX Securities Corporation, then to Merriman Curhan Ford &Co. The Company formed MCF Asset Management, LLC in January 2004 and MCFWealth Management, LLC in January 2005 as wholly owned subsidiaries.

**2.      Summary of Significant Accounting Policies**

***Principles ofConsolidation***

As of December 31,2005, MCF Corporation had four wholly owned U.S. subsidiaries that have beenconsolidated in the accompanying financial statements. The subsidiaries includeMerriman Curhan Ford & Co., MCF Asset Management, LLC, MCF WealthManagement, LLC and Ratexchange 1, Inc. All significant inter-companyaccounts and transactions have been eliminated.

***Cash and CashEquivalents***

The Company considers allhighly liquid investments purchased with original maturities of ninety days orless to be cash equivalents.

***Securities Owned***

“Securities owned” and “Securities sold, but not yetpurchased” in the consolidated statements of financial condition consist offinancial instruments carried at fair value or amounts that approximate fairvalue, with related unrealized gains or losses recognized in the results ofoperations. The fair value of a 

41

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**MCF CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

financial instrument isthe amount at which the instrument could be exchanged in a current transactionbetween willing parties, other than in a forced or liquidation sale.

Fair values of the financial instruments are generallyobtained from quoted market prices in active markets, broker or dealer price quotations,or alternative pricing sources with reasonable levels of price transparency. Tothe extent certain financial instruments trade infrequently or arenon-marketable securities and, therefore, have little or no price transparency,the Company values these instruments based on management’s estimates. The fairvalue of these securities is subject to a high degree of volatility and may besusceptible to significant fluctuation in the near term. Securities thatcontain restrictions are stated at a discount to the value of readilymarketable securities.

During 2005, the Companyrefined its estimation process for valuing the securities owned that are notreadily marketable. The most significant change impacted the carrying value ofthe Company’s stock warrant portfolio. Beginning in the fourth quarter of 2005,the Company carries stock warrants at a discount to fair value as determined byusing the Black-Scholes Option Pricing model. Previously, the stock warrantswere carried at a discount to intrinsic value, if any.

***Equipment andFixtures***

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

***Long-Lived Assets***

The Company evaluates itslong-lived assets for impairment whenever events or changes in circumstancesindicate 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 thecarrying amount of an asset to future net cash flows expected to be generatedby the asset. When assets are considered to be impaired, the impairment to berecognized is measured as the amount by which the carrying amount of the assetsexceeds the fair value of the assets. Assets to be disposed of are reported atthe lower of the carrying amount or fair value less costs to sell.

***Commissions andPrincipal Transactions Revenue***

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

Commissions revenue andrelated clearing expenses are recorded on a trade-date basis as securitytransactions occur. Principal transactions in regular-way trades are recordedon the trade date, as if they had settled. Profit and loss arising from allsecurities and commodities transactions entered into for the account and riskof the Company are recorded on a trade-date basis.

42

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**MCF CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

***Investment BankingRevenue***

Investment banking revenue include underwriting andprivate placement agency fees earned through the Company’s participation inpublic offerings and private placements of equity and convertible debtsecurities and fees earned as financial advisor in mergers and acquisitions andsimilar transactions. Underwriting revenue is earned in securities offerings inwhich the Company acts as an underwriter and includes management fees, sellingconcessions and underwriting fees. Management fees are recorded on the offeringdate, selling concessions on settlement date, and underwriting fees at the timethe underwriting is completed and the related income is reasonablydeterminable. Syndicate expenses related to securities offerings in which theCompany acts as underwriter or agent are deferred until the related revenue isrecognized. Merger and acquisition fees and other advisory service revenue aregenerally earned and recognized only upon successful completion of theengagement. Underwriting revenue is presented net of related expenses.Unreimbursed expenses associated with private placement and advisorytransactions are recorded as expenses as incurred.

As co-manager forregistered equity underwriting transactions, management must estimate theCompany’s share of transaction related expenses incurred by the lead manager inorder to recognize revenue. Transaction related expenses are deducted from theunderwriting fee and therefore reduces the revenue that is recognized asco-manager. Such amounts are adjusted to reflect actual expenses in the periodin which the Company receives the final settlement, typically 90 days followingthe closing of the transaction.

***Stock-BasedCompensation***

The Company uses the intrinsic value-based method inaccordance with Accounting Principles Board, or APB, Opinion No. 25,*Accounting for Stock Issued to Employees*,to account for employee stock-based compensation. Accordingly, compensationcost is recorded on the date of grant to the extent the fair value of theunderlying share of common stock exceeds the exercise price for a stock optionor the purchase price for a share of common stock. Such compensation cost isamortized on a straight-line basis over the vesting period of the individualaward. Pursuant to Statement of Financial Accounting Standards, or SFAS, No. 123,*Accounting for Stock-Based Compensation*,the Company discloses the pro forma effect of using the fair value method ofaccounting for employee stock-based compensation. Stock-based awards granted tononemployees are accounted for pursuant to the fair value method in SFAS No. 123and Issue No. 96-18 of the Emerging Issues Task Force. Theassociated expense is measured and recognized by the Company over the serviceperiod.

In December 2002, the Financial AccountingStandards Board, or FASB, issued SFAS No. 148,*Accounting for Stock-Based Compensation-Transition and Disclosure*.SFAS 148 amends SFAS 123 to provide alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation. In addition, SFAS 148 amends the disclosure requirementsof SFAS 123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the method used on reported results. The Companyadopted SFAS No. 148 during 2002.

The Company has elected to continue to account for itsstock-based compensation in accordance with the provisions of APB 25 andpresent the pro forma disclosures required by SFAS 123 as amended by SFAS 148.Stock-based employee compensation for the three years ended December 31,2005 was 

43

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**MCF CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

accounted for under theintrinsic value method and, therefore, no compensation expense was recognizedfor those stock options that had no intrinsic value at the date of grant.

If theCompany was to recognize compensation expense over the relevant service periodunder the fair value method with respect to stock options granted for the threeyears ended December 31, 2005 and all prior periods, net income (loss)would have changed, resulting in pro forma net income (loss) and pro forma netincome (loss) per share as presented below:

| ** **                                                                                          | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Net income (loss),  as reported                                                                     |       | $          | (1,514,443 | )          | $          | 1,874,286  |       | $ | 2,971,263 |   |
| Add: Stock-based  employee compensation expense included in the reported net income (loss)          |       | 74,812     |       | 93,078     |       | 139,000    |       |
| Less: Stock-based  employee compensation expense determined under fair value method for all  awards |       | (1,604,418 | )          | (1,838,982 | )          | (3,426,880 | )          |
| Pro forma net income (loss)                                                                         |       | $          | (3,044,049 | )          | $          | 128,382    |       | $ | (316,617 | ) |
| Net income (loss)  per share, as reported:                                                          |       |       |       |       |       |       |       |
| Basic                                                                                               |       | $          | (0.02      | )          | $          | 0.03       |       | $ | 0.07 |   |
| Diluted                                                                                             |       | $          | (0.02      | )          | $          | 0.02       |       | $ | 0.06 |   |
| Net income (loss) per  share, pro forma:                                                            |       |       |       |       |       |       |       |
| Basic                                                                                               |       | $          | (0.05      | )          | $          | 0.00       |       | $ | (0.03 | ) |
| Diluted                                                                                             |       | $          | (0.05      | )          | $          | 0.00       |       | $ | (0.03 | ) |

 

The above pro formadisclosures are not necessarily representative of the effects on reported netincome or loss for future years.

***Income Taxes***

The Company uses the assetand liability method of accounting for income taxes. Deferred tax assets andliabilities are recognized for the estimated future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases. Deferred taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences areexpected to be recovered or settled. A valuation allowance is recorded toreduce deferred tax assets to an amount whose realization is more likely thannot. The effect on deferred tax assets and liabilities of a change in tax ratesis recognized in the consolidated statements of operations in the period thatincludes the enactment date.

***Earnings (Loss) PerShare***

Basic earnings (loss) pershare is computed by dividing net income (loss), less dividends on preferredstock, by the weighted average number of common shares outstanding. Dilutedearnings per share is calculated for the years ended December 31, 2004 and2003 by dividing net income less dividends on preferred stock, by the weightedaverage number of common shares used in the basic earnings per sharecalculation plus the number of common shares that would be issued assumingexercise or conversion of all potentially dilutive common shares outstanding.Diluted loss per share is unchanged from basic loss per 

44

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**MCF CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

sharefor the year ended December 31, 2005, because the addition of commonshares that would be issued assuming exercise or conversion would beanti-dilutive.

***Concentrations***

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

During 2005, 2004 and2003, one sales professional accounted for 12%, 15% and 13% of revenue,respectively. During 2005 and 2003, no single customer accounted for more than10% of revenue while one customer accounted for 10% of revenue during 2004.

***Fair Value ofFinancial Instruments***

The carrying amounts ofthe Company’s financial instruments, which include securities owned, cashdeposited with the Company’s clearing organization, receivables, accountspayable, and other accrued expenses, approximate their fair values due to theirshort maturities. The fair value of the Company’s long-term notes payable isestimated based on the current rates offered to the Company for debt of thesame remaining maturities.

***Segment Reporting***

The Company has adoptedthe provisions of SFAS No. 131,*Disclosures about Segments of an Enterprise and Related Information*.SFAS No. 131 establishes annual and interim reporting standards foroperating segments of a company. It also requires entity-wide disclosures aboutthe products and services an entity provides, the material countries in whichit holds assets and reports revenue, and its major customers. During 2005, theCompany reorganized its operations into three operating segments for thepurpose of making operating decisions or assessing performance. These operatingsegments are organized along operating subsidiaries, Merriman Curhan Ford &Co., MCF Asset Management, LLC and MCF Wealth Management, LLC. Accordingly, theCompany operates in three reportable operating segments in the United States.However, only Merriman Curhan Ford & Co. produced financial resultsthat were material to the Company during 2005. Prior to 2005, the Company wasnot organized into multiple operating segments.

***Use of Estimates***

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

***Newly Issued AccountingStandards***

In December 2004, the FASB issued SFAS No. 123-R,*Share-Based Payment*, a revisionto SFAS No. 123, “Accounting for Stock-Based Compensation,” SFAS No. 123-Rfocuses primarily on transactions in which an entity exchanges its equity instrumentsfor employee services and generally establishes standards for the accountingfor transactions in which an entity obtains goods or services in share-based 

45

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**MCF CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

payment transactions.Generally, SFAS No. 123-R requires all share-based payments toemployees, including grants of employee stock options, to be recognized in thestatement of operations based on their fair values. Pro forma disclosure is nolonger an alternative upon adopting SFAS No. 123-R. SFAS No. 123-Rmust be adopted by the Company no later than January 1, 2006. The Companyintends to use the modified prospective transition method for implementing SFAS123R. Based on a high level analysis, the Company expects that the adoption ofSFAS 123R will increase compensation and benefits expense beginning in thefirst quarter of 2006. However, the specific amount of this increase cannot bepredicted at this time because it will depend on the level of share-basedpayments granted in the future.

In June 2005, theEmerging Issues Task Force, or EITF, reached a consensus on EITF 04-5,*Determining whether a General Partner, or theGeneral Partners as a Group, Controls a Limited Partnership or Similar EntityWhen the Limited Partners Have Certain Rights*. This consensusapplies to entities not within the scope of FIN 46R, in which the investoris the general partner in a limited partnership. The consensus requires thegeneral partner to consolidate the limited partnership unless it overcomes thepresumption of control. The general partner may overcome this presumption andnot consolidate the limited partnership if the limited partners have: (a) theability to liquidate the limited partnership or otherwise remove the generalpartner through substantive “kick-out rights” that can be exercised withouthaving to demonstrate cause; or (b) substantive participating rights inmanaging the partnership. This consensus became effective on June 29, 2005for all newly formed limited partnerships and for existing limited partnershipsfor which the partnership agreements have been modified. For all other generalpartnerships, the consensus is effective no later than the beginning of thefirst reporting period beginning after December 15, 2005. The Company’sasset management subsidiary is forming a number of private equity limitedpartnerships as general partner. The Company is currently evaluating therequirements under EITF 04-5 and believes that the adoption will nothave a material impact on its results of operations and cash flows. It could,however, increase the Company’s consolidated assets and liabilities.

**3.      Securities Owned**

The Company trades equity and debt securities forclients in a broker or dealer capacity. While trading activities are primarilygenerated by client order flow, the Company also takes selective proprietarypositions based on expectations of future market movements and conditions. Asof December 31, 2005 and 2004, fair value of marketable equity securitiesowned by the Company was approximately $8,628,000 and $2,342,000, respectively.

Securities owned that are not readily marketableconsisted of notes receivable, convertible notes receivable, unregisteredcommon stock and stock warrants. As of December 31, 2005 and 2004, thediscounted fair value of the securities owned that are not readily marketablewas approximately $1,066,000 and $259,000, respectively, based on managementestimates. Effective for the fourth quarter of 2005, the Company refined itsestimation process for valuing the securities owned that are not readilymarketable. The most significant change impacted the carrying value of theCompany’s stock warrant portfolio. As of December 31, 2005, the Companycarries stock warrants at a discount to fair value as determined by using theBlack-Scholes Option Pricing model. Previously, the stock warrants were carriedat a discount to intrinsic value, if any. This change in accounting estimateresulted in an unrealized gain of $424,000 and a decrease in the Company’s netloss of $229,000 during the fourth quarter of 2005.

46

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**MCF CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**4.**                 Equipmentand Fixtures

Equipmentand fixtures consisted of the following:

| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Computer  equipment            |       | $                     | 597,470    |   | $ | 409,135 |   |
| Furniture and  equipment       |       | 729,675               |       | 277,680 |   |
| Software                       |       | 151,821               |       | 85,579 |   |
| Leasehold  improvements        |       | 621,270               |       | 488,733 |   |
|                           |       | 2,100,236             |       | 1,261,127 |   |
| Less accumulated  depreciation |       | (722,001              | )          | (228,330 | ) |
|                           |       | $                     | 1,378,235  |   | $ | 1,032,797 |   |

 

**Equipment and fixtures purchasedwith capital lease financing during 2005 and 2004 were $625,000 and $488,000,respectively.**

**5.**                 NotesPayable and Convertible Notes Payable

Notespayable and convertible notes payable outstanding at December 31, 2005 and2004 consisted of the following amounts, presented net of certain discounts:

| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Convertible notes  payable issues in 2003 |       | $                     | 176,741    |   | $ | 166,404 |   |
| Notes payable:                            |       |                  |       |   |   |
| Notes issued to Forsythe                  |       | $                     | —     |   | $ | 1,000,000 |   |
| Notes issued to Donald Sledge             |       | 231,772               |       | 321,324 |   |
|                                      |       | $                     | 231,772    |   | $ | 1,321,324 |   |

 

***Convertible NotesPayable Issued in 2003***

In April 2003, theCompany completed a private placement financing that included convertible notespayable with aggregate principal of $1,000,000, due April 2008. The notesbear interest at 3% per annum payable quarterly on January 1, April 1,July 1 and October 1 beginning July 1, 2003. The notes can beconverted to common stock at a rate of $0.20 per share. In connection with theprivate placement, the Company issued warrants to purchase 1,250,000 shares ofcommon stock with an exercise price of $0.30 per share and a five-year term.The convertible notes were recorded in the statements of financial conditionnet of discounts resulting from the relative fair value of the stock warrantsand beneficial conversion feature totaling $258,000. The discount is beingamortized over the five-year term. In October 2003, notes payable with aface amount of $500,000 were converted under their original terms into2,500,000 shares of common stock resulting in the accelerated amortization ofdiscounts in the amount of $118,000. In December 2004, notes payable witha face amount of $300,000 were converted under their original terms into1,500,000 shares of common stock resulting in the accelerated amortization ofdiscounts in the amount of $50,000. Amortization of discounts during 2005 wasapproximately $10,000. The remaining unamortized discount as of December 31,2005 was $23,000.

47

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**MCF CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

***Convertible NotesPayable Issued in 2001***

In November and December 2001, the Companycompleted private offerings of convertible notes, in an aggregate principalamount of $3.5 million, due December 31, 2011. The notes bear interest at12% per annum payable quarterly on January 1, April 1, July 1and October 1 beginning April 1, 2002. The notes may be convertedinto shares of the Company’s common stock at the election of the holder anytimebefore their maturity or their prior redemption or repurchase by the Company.The conversion rate is 2,703 shares of the Company’s common stock per each$1,000 principal amount of notes. The Company has the option to redeem all or aportion of the notes that have not been previously converted subsequent to (i) theregistration under the Securities Act of 1933 of the common stock underlyingthe notes and (ii) the common stock achieving a closing price at or above$1.59 for 20 consecutive trading days.

In June 2003, the stockholders of the Companyapproved the offer to exchange the current convertible notes for Series Cconvertible preferred stock. During 2003, investors elected to exchange theirnotes with a principal amount of $2.7 million for 10,800,000 shares of Series Cpreferred stock. The Series C convertible preferred stock is convertibleon demand of the holder into common stock at a ratio of 1:1. The holders of theSeries C preferred stock receive an annual dividend at the rate of 3.0% perannum, paid in cash and registration rights for the underlying common stock.During 2003, certain investors with a principal amount of $650,000 that did notexchange their convertible notes for preferred stock converted their notes intocommon stock. During 2004, investors with the remaining principal amount of$150,000 that did not exchange their convertible notes for preferred stockconverted their notes into 405,406 shares of common stock. As of December 31,2005 and 2004, the convertible notes are no longer outstanding.

In connection with theinitial financing transaction, the Company granted to the convertible noteinvestors warrants to purchase a total of 1,000,000 shares of common stock at$0.37 per share. The convertible notes were recorded in the statements offinancial condition net of discounts resulting from the relative fair value ofthe stock warrants and beneficial conversion feature in the amount of $242,000and $333,000, respectively. The discounts were being amortized over theten-year term using the effective interest method. Amortization of discountsduring 2004 and 2003 was approximately $20,000 and $494,000, respectively. Thediscounts were fully amortized by December 31, 2004. Debt issuance costsamounting to $664,000, includes the fair value of warrants issued to theplacement agent to purchase a combination of the Company’s convertible notes orcommon stock, plus stock warrants. The debt issuance costs were being amortizedover a ten-year term using the straight-line method. Amortization of debtissuance costs during 2004 and 2003 was approximately $23,000 and $589,000,respectively. Debt issuance costs were fully amortized as of December 31,2004.

***Note Payable Heldby Forsythe***

In September 2001, Forsythe McArthur &Associates, or Forsythe, agreed to forego all amounts owed by the Company undera lease obligation in exchange for a convertible note payable and stockwarrants. The convertible note payable issued for $5.9 million accrued interestat 9% per annum and was due August 31, 2006. The interest was payable incash, the Company’s common stock or a combination of both at the discretion ofthe Company. The note was convertible into shares of common stock on electionof Forsythe at August 31, 2006 with a conversion price equal to 80% of theclosing market price of the common stock.

In connection with the convertible note, the Companygranted to Forsythe a warrant to purchase 520,833 shares of common stock at$0.48 per share. The convertible note was presented in the statements 

48

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**MCF CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

of financial condition netof discounts resulting from the relative fair value of the stock warrant andbeneficial conversion feature. The discounts were being amortized over thefive-year term using the effective interest method. Amortization of discountsduring 2003 was approximately $60,000.

In November 2002, the Company acquired fromForsythe the right to retire the convertible promissory note payable at asignificant discount. The Company purchased a call option from Forsythe inexchange for 500,000 shares of the Company’s common stock. In April 2003,the Company exercised its right to cancel the convertible promissory note heldby Forsythe.

Forsythe receivedthe following restructured consideration in full and complete satisfaction ofall obligations owed to it by the Company:

a.                 $500,000 in cash;

b.                2,000,000 sharesof the Company’s common stock, including demand registration rights; and

c.                 a new promissorynote of principal sum equal to $1,000,000 bearing interest at 3.5% per annumpayable quarterly in cash, maturing on December 31, 2005.

The fair value of the 2,000,000 shares of common stockissued was $400,000. The new promissory note was recorded at face value whilethe sum of gross future contractual interest payments amounting to $105,000 wasrecorded as interest payable. The total value of the consideration provided toForsythe to retire the convertible note was $2,005,000. The carrying value ofthe convertible note at the time of retirement, net of certain discounts, was$5,093,000. The Company recorded a gain in the amount of $3,088,000 as a resultthis transaction.

The Company repaid the $1million note payable to Forsythe in December 2005.

***Note Payable HeldBy Donald Sledge***

During 2001, the Company renegotiated the severanceterms included in its employment agreement with Donald Sledge, the formerChairman 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 aggregateprincipal amount of $400,000, due May 2003. Interest was payable at thematurity of the two-year term. In May 2003, the Company and Mr. Sledgeagreed to convert the principal and interest due at maturity into a fullyamortizing note payable over five years using an effective interest rate of4.0%. As of December 31, 2005 and 2004, the remaining principal amount ofthe note payable was $232,000 and $321,000, respectively. Mr. Sledge is amember of the Company’s Board of Directors.

Interest payable inconnection with the notes described above is included with accrued liabilitiesbalance in the statements of financial condition. As of December 31, 2005and 2004, interest payable amounted to $2,000 and $35,000, respectively.

**6.**                 Stockholders’Equity

***Convertible PreferredStock, Series A***

In April 2001, theCompany issued 2,000,000 shares of Series A convertible preferred stock ata price of $2.19 per share in connection with the purchase of Xpit.com, Inc.The preferred stock was convertible by the holders at a ratio of 1:1 into theCompany’s common stock. The holders of the Series A preferred stockreceive preferred stock dividends at a rate of 6% per annum. The holders of theSeries A preferred 

49

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**MCF CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

stockhad a liquidation preference of $2.75 per share, plus all declared but unpaiddividends. During 2002, holders of the Series A preferred stock converted1,500,001 shares into common stock. During 2003, the Company issued a stockdividend totaling 157,202 shares of Series A preferred stock. During 2004,the Company issued a preferred stock dividend totaling 35,135 shares of Series Apreferred stock. The Company offered to certain of the holders of the Series Apreferred stock an additional 26,863 shares of common stock to induce theconversion of the remaining shares of Series A preferred stock to commonstock. During 2004, holders of the Series A preferred stock converted theremaining 692,336 shares into 719,199 shares of common stock. Additionallyduring 2004, the Company issued 138,001 shares of its common stock to certainformer holders of the Series A convertible preferred stock pursuant toanti-dilution provisions in the Certificate of Designation of the Series Apreferred stock.

***Convertible PreferredStock, Series B***

In April 2003, the Company completed a privateplacement financing that included the issuance of 8,750,000 shares of Series Bconvertible preferred stock at a purchase price of $0.20 per share. Thepreferred stock was convertible by the holders at a ratio of 1:1 into theCompany’s common stock. The holders of the Series B preferred stockreceived cash dividends at the rate of 3.0% per annum and registration rightsfor the underlying common stock. In connection with the private placement, theCompany also issued warrants to purchase 2,188,000 shares of common stock withan exercise price of $0.30 per share and a three-year term. The transactionincluded officers of MCF Corporation, institutions and accredited investors.

The Series Bconvertible preferred stock included a term that allowed the Company to induceconversion into common stock subsequent to the Company’s stock price closing ator above $0.60 for ten consecutive days. The stock price milestone was achievedduring September 2003. In October 2003, the 8,750,000 shares of Series Bpreferred stock were converted into common stock. Additionally, the Series Bstock warrants included a term requiring investors to exercise the stockwarrants within 30 days of the Company’s stock price closing at or above $0.90for ten consecutive days. The stock price milestone was achieved during September 2003and stock warrants to purchase 1,562,500 shares issued with the Series Bpreferred stock were exercised during the fourth quarter of 2003.

***Convertible PreferredStock, Series C***

In April 2003, the Company completed a privateplacement financing that included the issuance of 1,000,000 shares of Series Cconvertible preferred stock at a purchase price of $0.25 per share. Thepreferred stock was convertible by the holders at a ratio of 1:1 into theCompany’s common stock. The holders of the Series C preferred stockreceive cash dividends at the rate of 3.0% per annum and registration rightsfor the underlying common stock. In connection with the private placement, theCompany also issued warrants to purchase 250,000 shares of common stock with anexercise price of $0.30 per share and a three-year term.

In June 2003, the stockholders of the Companyapproved the offer to exchange the convertible notes payable with an aggregateprincipal amount of $3.5 million issued in 2001 for Series C convertiblepreferred stock. Certain investors elected to exchange their notes with aprincipal amount of $2.7 million for 10,800,000 shares of Series Cpreferred stock. Other investors, with a principal amount of $650,000 that didnot exchange their convertible notes for Series C preferred stock,converted their notes into common stock. As of December 31, 2003, theremaining convertible notes with an aggregate principal amount of $150,000 wereoutstanding.

50

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**MCF CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

The Series C convertible preferred stock includeda term that allowed the Company to induce conversion into common stocksubsequent to the Company’s stock price closing at or above $0.75 for tenconsecutive days.

The stock price milestonewas achieved during September 2003. In October 2003, the 11,800,000shares of Series C preferred stock were converted into common stock.Additionally, the 250,000 warrants issued in connection with the Series Cconvertible preferred stock included a term requiring investors to exercise thestock warrants within 30 days of the Company’s stock price closing at or above$0.90 for ten consecutive days. The stock price milestone was achieved during September 2003and the stock warrants were exercised during the fourth quarter of 2003.

***Common Stock***

In May 2005, MCF Corporation entered into a stockpurchase agreement with Ascend Services Ltd., or Ascend. The Company issued1,078,749 shares of its common stock and Ascend has issued an unsecuredpromissory note payable to the Company in the amount of $1.5 million. Theshares are initially being held in escrow. Upon Ascend achieving specifiedmilestones related to its credit standing, the 1,078,749 shares of common stockwould be released from escrow in three installments of 359,583 shares each andprovided to Ascend. Upon satisfaction of the conditions specified in the escrowagreement and simultaneous with the release of the related stock certificates,the related amount of the promissory note shall become effective and startaccruing interest. The promissory note accrues interest at 10% per annum andmatures on February 28, 2006.

Ascend is attempting to raise capital financing inorder to enter the reinsurance business. In May 2005, the Company releasedthe first installment of 359,583 shares of common stock to Ascend while therelated promissory note with a face value of $500,000 became effective. In December 2005,the Company learned that Ascend has not been able to execute on their businessplan and will not have the financial resources to repay the Company’s $500,000note receivable at maturity. As a result, the Company recorded a charge toother operating expense in 2005 to write-off the $500,000 note receivablebalance. The remaining 719,166 shares of common stock will be returned to theCompany from escrow on February 28, 2006.

In August 2004, London Merchant Securities plc,or LMS, made a private investment of $6,000,000 in MCF Corporation. The Companyissued 4,615,385 shares of common stock to LMS at $1.30 per share. The $1.30value attributed to the 4,615,385 shares of common stock issued to LMS wasbased upon a negotiated discount to the fair market value of MCF Corporation’squoted stock price over a specified time period. The discount was allowed inorder induce LMS to purchase the unregistered shares in view of their lack ofliquidity. LMS was also issued warrants to purchase an additional 1,384,616shares of common stock at a price of $1.48 per share. The value attributed tothe stock warrant was $1,212,399. The stock warrants are immediatelyexercisable from the issue date and have a four year exercise period. TheCompany registered these shares with the Securities and Exchange Commission in October 2004.

During 2004, investors of the Company’s convertiblenotes payable issued in 2001 and 2003 converted notes payable into 405,406 and1,500,000 shares of common stock, respectively (see Note 5). Investors alsoconverted shares of Series A preferred stock into 719,199 shares of commonstock. Additionally, the Company issued 138,001 shares of its common stock tocertain former holders of the Series A convertible preferred stock pursuantto anti-dilution provisions in the Certificate of Designation of the Series Apreferred stock. Common stock issued in connection with the exercise of stockoptions and stock warrants 

51

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**MCF CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

during 2004 amounted to3,300,941. Finally, the Company issued 1,406,100 shares of restricted commonstock to employees and members of the Company’s Board of Directors, 50,000shares to settle the Glen, Lukrich, Reichard v. MCF Corporation lawsuit and561,910 shares in connection with the Company’s Employee Stock Purchase Plan.

As of December 31, 2003, the Company held 80,000shares of treasury stock with a basis of $363,661. During 2004, the 80,000shares were issued out of treasury in connection with the settlement of theGlen, Lukrich, Reichard v. MCF Corporation lawsuit. The Company recorded acharge to accumulated deficit in the amount of $231,000 for the differencebetween the fair value of the 80,000 shares on the date of issuance and thebasis in the treasury stock.

During 2003, investorsconverted notes payable, Series B preferred stock and Series Cpreferred stock into 4,257,000, 8,750,000 and 11,800,000 shares of commonstock, respectively. Common stock issued in connection with the exercise ofstock options and stock warrants during 2003 amounted to 2,685,000. Additionally,the Company issued 2,512,000 shares of restricted common stock to employees,2,000,000 shares to Forsythe, 251,000 shares to various consultants forservices rendered and 96,000 shares in connection with the Company’s EmployeeStock Purchase Plan.

**7.**                 Acquisitionof Catalyst

In February 2005, the Company acquired CatalystFinancial Planning & Investment Management, Inc., or Catalyst, aregistered investment advisor with over $100 million in assets under managementat the time of acquisition. This is the Company’s first acquisition of aregistered investment advisor. The Company plans to introduce new potentialclients to Catalyst from the corporate and venture services group as well asthe investment banking group.

The purchase consideration for Catalyst consists ofboth cash and common stock that will be paid over a three year period. TheCompany paid to the sole shareholder of Catalyst, or Catalyst Shareholder,$330,000 as initial consideration at the closing. The Company has also agreedto issue to the Catalyst Shareholder up to 925,325 shares of common stock overthree years based upon the amount of revenue growth for Catalyst. The paymentof these shares is subject to specified conditions. Such additional amountswill be recorded as compensation expense, if any, when such amounts become duebecause they are contingent upon the continued employment of the CatalystShareholder. The Company acquired 100% of the voting stock in Catalyst. Theresults of operations for Catalyst are included in the Company’s consolidatedfinancial statements beginning March 1, 2005.

The Company considered many factors in determining thepurchase price for Catalyst, including estimated future cash flows that couldpotentially be generated by the assets over their estimated remaining lives andthe current market value for registered investment advisors. The value of thepurchase price paid for Catalyst relative to the net assets acquired reflectsexisting customer relationships and the Catalyst trade name. The Company believesthat it can build a wealth management business from these assets.

The intangible assets acquired consisted of customerrelationships and a trade name. The total amount of the purchase considerationto be allocated to the intangible net assets acquired is $413,000. Thisconsists of the cash consideration of $330,000, $24,000 in legal and dealrelated costs and net liabilities assumed of $59,000. The Company allocated thepurchase consideration among the purchased intangible assets based on an appraisalprovided by a third party valuation consultant. As of the purchase date, therewas no amount allocated to goodwill.

52

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**MCF CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

The customer relationshipsof the existing wealth management business are being accounted for as amortizedintangible assets that are being amortized on a straight-line basis over 96months, while the trade name is accounted for as an unamortized intangibleasset. The gross carrying amount of the customer relationships and trade nameis $330,000 and $99,000 respectively. Accumulated amortization of the customerrelationships as of December 31, 2005 is $34,000. Amortization of thecustomer relationships intangible asset over the next five years is projectedto be $41,000 per year.

An impairment loss will berecognized if the carrying****amountof the intangible assets is not recoverable and exceeds their fair value. Thecarrying amount of the intangible assets is not recoverable if it exceeds thesum of the undiscounted cash flows expected to result from the existingcustomer relationships and trade name. An impairment loss will be measured asthe amount by which the carrying amount of the intangible assets exceeds theirfair value.

**8.**                 Stock-BasedCompensation

***Stock Options***

The 1999 Stock OptionPlan, 2000 Stock Option and Incentive Plan, 2001 Stock Option and IncentivePlan, 2003 Stock Option and Incentive Plan and 2004 Non-Qualified Stock Optionand Inducement Plan, collectively the Option Plans, permit the Company to grantemployees, outside directors, and consultants incentive stock options,nonqualified stock options or stock purchase rights to purchase shares of theCompany’s common stock. The Option Plans do not permit the exercise ofnon-vested stock options, and therefore as of December 31, 2005 and 2004there were no shares subject to repurchase.

As of December 31,2005, there were 32,600,000 shares authorized for issuance under the OptionPlans, and 4,290,000 shares authorized for issuance outside of the OptionPlans. As of December 31, 2005, 2,735,443 shares were available for futureoption grants under the Option Plans. There were no shares available for futureoption grants outside of the Options Plans.

The Company uses theintrinsic-value method in accounting for its stock-based compensationarrangements for employees, whereby compensation cost is measured to the extentthat the fair value of the underlying common stock exceeds the exercise priceof the stock options at the date of grant. During 2005, 2004 and 2003, theCompany granted to employees stock options to purchase 0, 825,000 and 525,000shares with intrinsic value, respectively. These amounts are being amortized ona straight-line basis over the vesting period, generally four years.Compensation expense resulting from option grants with intrinsic value amountedto $75,000, $93,000 and $139,000 in 2005, 2004 and 2003, respectively. As of December 31,2005, the unamortized expense attributed to option grants with intrinsic valuewas $134,000.

A summary of stock optionactivity is as follows:

| ** **                            | ** ** | **2005**   | ** ** | **2004**                     | ** ** | **2003**   | ** ** |
|---------------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|
| ** **                            | ** ** | **Shares** | ** ** | **Wtd-Avg  Exercise  Price** | ** ** | **Shares** | ** ** | **Wtd-Avg  Exercise  Price** | ** ** | **Shares** | ** ** | **Wtd-Avg  Exercise  Price** | ** ** |
| Outstanding at beginning of year |       | 21,545,762 |       |                         | $          | 0.89       |       |   | 21,946,262 |   |   | $ | 0.88 |   |   | 12,662,889 |   |   | $ | 2.04 |   |   |
| Granted                               |       | 3,223,500  |       |                         | 1.25       |       |       | 1,857,500 |   |   | 1.66 |   |   | 12,515,000 |   |   | 0.44 |   |   |
| Exercised                             |       | (237,555   | )          |                         | 0.40       |       |       | (859,662 | ) |   | 0.52 |   |   | (462,149 | ) |   | 0.35 |   |   |
| Canceled                              |       | (1,261,661 | )          |                         | 1.94       |       |       | (1,398,338 | ) |   | 1.91 |   |   | (2,769,478 | ) |   | 4.32 |   |   |
| Outstanding at end of year            |       | 23,270,046 |       |                         | $          | 0.89       |       |   | 21,545,762 |   |   | $ | 0.89 |   |   | 21,946,262 |   |   | $ | 0.88 |   |   |
| Exercisable at end of year            |       | 18,745,626 |       |                         | $          | 0.86       |       |   | 17,192,706 |   |   | $ | 0.88 |   |   | 14,063,894 |   |   | $ | 0.99 |   |   |

 

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**MCF CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

***Restricted StockGrants***

During 2005, 2004 and2003, the Company granted 1,272,201, 1,406,110 and 2,511,833 shares ofrestricted stock, respectively. At the date of grant, the recipient has most ofthe rights of a stockholder other than voting rights, subject to certainrestrictions on transferability and a risk of forfeiture. Restricted sharestypically vest over a three to four year period beginning on the date of grant.The Company records unearned compensation in stockholders’ equity equal to themarket value of the restricted shares on the date of grant and charges theunearned compensation to expense over the vesting period. Amortization expensefor restricted stock during 2005, 2004 and 2003 was $1,885,000, $1,023,000 and $223,000,respectively. As of December 31, 2005, the amount of deferred compensationresulting from restricted stock granted to employees that will be expensed asnon-cash stock-based compensation in future periods was $3,013,000. Theweighted average fair value of restricted stock granted in 2005, 2004 and 2003was $1.47, $1.79 and $0.53, respectively.

***Stock Warrants***

From time to time, the Company issues stock warrantsto third-party service providers and in connection with capital financingtransactions. Stock-based awards granted to nonemployees are accounted forpursuant to the fair value method in SFAS No. 123 and EITF Issue No. 96-18.The associated expense is measured and recognized by the Company over theperiod the services are performed by the nonemployee. During 2005, 2004 and2003, the expense resulting from the issuance of these stock warrants was $0,$10,000 and $14,000, respectively.

As discussed in Note 5 and Note 6, the Company alsoissued stock warrants to investors in connection with the issuance ofconvertible notes payable and convertible preferred stock. Such amounts werecharged to expense as described in Note 5 and Note 6.

Asummary of stock warrant activity is as follows:

| ** **                        | ** ** | **2005**   | ** ** | **2004**                     | ** ** | **2003**   | ** ** |
|-----------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|
| ** **                        | ** ** | **Shares** | ** ** | **Wtd-Avg  Exercise  Price** | ** ** | **Shares** | ** ** | **Wtd-Avg  Exercise  Price** | ** ** | **Shares** | ** ** | **Wtd-Avg  Exercise  Price** | ** ** |
| Outstanding at beginning  of year |       | 6,548,986  |       |                         | $          | 3.16       |       |   | 7,554,203 |   |   | $ | 2.82 |   |   | 7,770,626 |   |   | $ | 5.82 |   |   |
| Granted                           |       | —     |       |                         | —     |       |       | 1,419,616 |   |   | 1.47 |   |   | 3,904,250 |   |   | 0.29 |   |   |
| Exercised                         |       | (204,250   | )          |                         | 0.38       |       |       | (1,839,833 | ) |   | 0.57 |   |   | (2,222,500 | ) |   | 0.31 |   |   |
| Canceled                          |       | (2,770,120 | )          |                         | 6.30       |       |       | (585,000 | ) |   | 2.77 |   |   | (1,898,173 | ) |   | 12,86 |   |   |
| Outstanding at end of year        |       | 3,574,616  |       |                         | $          | 0.88       |       |   | 6,548,986 |   |   | $ | 3.16 |   |   | 7,554,203 |   |   | $ | 2.82 |   |   |
| Exercisable at  end of year       |       | 3,574,616  |       |                         | $          | 0.88       |       |   | 6,548,986 |   |   | $ | 3.16 |   |   | 6,054,203 |   |   | $ | 2.24 |   |   |

 

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**MCF CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

***Stock Options andWarrants Outstanding***

Summaryof the outstanding stock options and warrants issued to employees andnon-employees as of December 31, 2005 were as follows:

| ** **                                  | ** ** | **Outstanding** | ** ** | ** **             | ** ** |
|---------------------------------------------|------------|-----------------|------------|------------------------|------------|
| ** **                                  | ** ** | ** **      | ** ** | ** **             | ** ** | **Weighted** | ** ** | **Exercisable** | ** ** |
| **Range of exercise prices** | ** ** | ** **      | ** ** | **Warrants/  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Average  Remaining  Contractual  Life (years)** | ** ** | **Warrants/  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| **Employees**                               |       |            |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| $0.05-$0.50                                 |       | 14,504,358      |       |                   | $          | 0.42 |   |   |   | 7.1 |   |   | 13,607,201 |   |   | $ | 0.43 |   |   |
| $0.51-$1.00                                 |       | 1,992,020       |       |                   | $          | 0.55 |   |   |   | 6.3 |   |   | 1,746,289 |   |   | $ | 0.55 |   |   |
| $1.01-$2.00                                 |       | 4,288,915       |       |                   | $          | 1.32 |   |   |   | 8.8 |   |   | 962,071 |   |   | $ | 1.52 |   |   |
| $2.01-$4.00                                 |       | 1,799,753       |       |                   | $          | 3.15 |   |   |   | 4.8 |   |   | 1,799,753 |   |   | $ | 3.15 |   |   |
| $4.01-$7.00                                 |       | 300,000         |       |                   | $          | 7.00 |   |   |   | 3.8 |   |   | 300,000 |   |   | $ | 7.00 |   |   |
| Employees                                   |       | 22,885,046      |       |                   |       |   |   |   |   |   |   | 18,415,314 |   |   |   |   |   |
| **Non-employees**                           |       |            |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| $0.05-$0.50                                 |       | 2,375,000       |       |                   | $          | 0.28 |   |   |   | 2.4 |   |   | 2,320,312 |   |   | $ | 0.28 |   |   |
| $0.51-$1.00                                 |       | 10,000          |       |                   | $          | 0.75 |   |   |   | 1.1 |   |   | 10,000 |   |   | $ | 0.75 |   |   |
| $1.01-$2.00                                 |       | 1,394,616       |       |                   | $          | 1.48 |   |   |   | 2.6 |   |   | 1,394,616 |   |   | $ | 1.48 |   |   |
| $2.01-$4.00                                 |       | 180,000         |       |                   | $          | 2.83 |   |   |   | 0.1 |   |   | 180,000 |   |   | $ | 2.83 |   |   |
| Non-employees                               |       | 3,959,616       |       |                   |       |   |   |   |   |   |   | 3,904,928 |   |   |   |   |   |
| Total                                       |       | 26,844,662      |       |                   |       |   |   |   |   |   |   | 22,320,242 |   |   |   |   |   |
|                                             |            |                 |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The weighted average fair value of stock optionsgranted in 2005 was $0.79. Theweighted average fair value of stock options and warrants granted in 2004 was$0.94 and $1.10, respectively. The weighted average fair value of stock optionsand warrants granted in 2003 was $0.28 and $0.13, respectively.

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option pricing model with the following weighted averageassumptions for 2005, 2004 and 2003:

| ** **                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Risk-free  interest rate       |       | 3.85     | %          | 2.40     | %          | 1.64     | %          |
| Dividend yield                 |       | —   |       | —   |       | —   |       |
| Volatility                     |       | 94       | %          | 100      | %          | 100      | %          |
| Average expected term  (years) |       | 3.7      |       | 2.0      |       | 2.0      |       |

 

The Black-Scholes optionpricing model was developed for use in estimating the fair value of tradedoptions that have no vesting restrictions and are fully transferable. Inaddition, option pricing models require the input of highly subjectiveassumptions including the expected stock price volatility. The Company usesprojected volatility rates, which are based upon historical volatility ratestrended into future years. The Company’s employee stock options havecharacteristics significantly different from those of traded options, andchanges in the subjective input assumptions can materially affect the fairvalue estimates.

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**MCF CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**9.**                 EmployeeBenefit Plans

The Company has a 401(k) defined contributionplan. The 401(k) plan allows eligible employees to contribute up to 15% oftheir compensation, subject to a statutory prescribed annual limit. Employeecontributions and earnings thereon vest immediately. Although the Company maymake discretionary contributions to the 401(k) plan, none were made during2005, 2004 and 2003.

The Company offers anEmployee Stock Purchase Plan, or ESPP, to its employees. Eligible employees maypurchase a limited number of shares of the Company’s stock at 85% of the marketvalue at certain plan-defined dates. During 2005, 2004 and 2003, there were778,750, 561,910 and 96,000 shares of common stock issued under the ESPP,respectively. As of December 31, 2005, there are 2,113,464 additionalshares of common stock that have been reserved for issuance under the ESPP.

**10.**          IncomeTaxes

Incometax expense consisted of the following for the three years ended December 31,2005:

| ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Current:   |       |     |       |     |       |     |       |
| Federal    |       | $        | —     |     | $          | 213,165  |       | $ | 13,816 |   |
| State      |       | 142,425  |       | 36,579   |       | 61,068   |       |
| Total      |       | $        | 142,425    |     | $          | 249,744  |       | $ | 74,884 |   |

 

Thefollowing table reconciles the federal statutory rate to the effective tax rateof the provision for income taxes for the three years ended December 31,2005:

| ** **                                       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal statutory  income tax rate (benefit)     |       |     | (34        | )%       |       |     | 34         | % |   |   | 34 | % |   |   |
| State income  taxes                              |       |     | 3          |     |       |     | 2          |   |   |   | 2 |   |   |   |
| Gain on  retirement of convertible note payable  |       |     | —     |     |       |     | —     |   |   |   | (34 | ) |   |   |
| Permanent  differences                           |       |     | 10         |     |       |     | 6          |   |   |   | 8 |   |   |   |
| Losses for which  no benefit has been recognized |       |     | 31         |     |       |     | (30        | ) |   |   | (8 | ) |   |   |
| Effective tax  rate                              |       |     | 10         | %        |       |     | 12         | % |   |   | 2 | % |   |   |

 

Thetax effect of temporary differences that give rise to significant portions ofthe deferred tax assets as of December 31, 2005 and 2004 are presented asfollows:

| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **Deferred tax assets:**                 |       |                  |       |   |   |
| Net operating  loss carryforwards        |       | $                     | 19,266,395 |   | $ | 20,154,588 |   |
| Stock options and  warrants for services |       | 11,741,067            |       | 11,333,120 |   |
| Other                                    |       | (20,759               | )          | (193,005 | ) |
| Total deferred tax assets                |       | 30,986,703            |       | 31,294,703 |   |
| Valuation  allowance                     |       | (30,986,703           | )          | (31,294,703 | ) |
| Net deferred tax  assets                 |       | $                     | —     |   | $ | — |   |

 

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**MCF CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

The net change in the valuation allowance for the yearended December 31, 2005 was a decrease of $308,000. The Company hasestablished a valuation allowance against that portion of deferred tax assetswhere management was not able to determine that it is more likely than not thatthe asset will be realized.

As of December 31, 2005, the Company had federaland state operating loss carryforwards of approximately $53,935,000 and $15,913,000,respectively. If not earlier utilized, the federal net operating losscarryforward will expire between 2019 and 2022 and the state loss carryforwardwill expire between 2006 and 2013.

Utilization of the netoperating loss carry-forwards and credits is subject to an annual limitationdue to the ownership change limitations provided by the Internal Revenue Codeof 1986, as amended, and similar state provisions. The annual limitation willresult in the expiration of a portion of net operating loss carryforwardsbefore utilization.

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

Thefollowing is a reconciliation of the basic and diluted net income (loss)available to common stockholders and the number of shares used in the basic anddiluted net income (loss) per common share computations for the periodspresented:

| ** **                                                                            | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Net income (loss)                                                                     |       | $          | (1,514,443 | )          | $          | 1,874,286  |       | $ | 2,971,263 |   |
| Deemed dividend  for issuance of preferred stock                                      |       | —     |       | —     |       | (537,602   | )          |
| Preferred stock  dividends                                                            |       | —     |       | (92,757    | )          | (115,200   | )          |
| Net income (loss)  available to common stockholders—basic                        |       | (1,514,443 | )          | 1,781,529  |       | 2,318,461  |       |
| Interest and  dividends on dilutive common shares                                     |       | —     |       | —     |       | 234,377    |       |
| Net income (loss)  available to common stockholders—diluted                      |       | $          | (1,514,443 | )          | $          | 1,781,529  |       | $ | 2,552,838 |   |
| Weighted-average  number of common shares—  basic                                |       | 66,505,233 |       | 58,578,048 |       | 32,501,831 |       |
| Assumed exercise  or conversion of all potentially dilutive common shares outstanding |       | —     |       | 19,597,073 |       | 12,928,561 |       |
| Weighted-average  number of common shares—diluted                           |       | 66,505,233 |       | 78,175,121 |       | 45,430,392 |       |
| Basic net income  (loss) per share                                                    |       | $          | (0.02      | )          | $          | 0.03       |       | $ | 0.07 |   |
| Diluted net income  (loss) per share                                                  |       | $          | (0.02      | )          | $          | 0.02       |       | $ | 0.06 |   |

 

During 2003, the investors in the Company’s Series Band Series C convertible preferred stock received detachable stockwarrants. Deemed dividend for issuance of preferred stock represents therelative fair value assigned to the stock warrants together with the relativefair value of the beneficial conversion feature inherent with the convertiblepreferred stock. These amounts were charged to accumulated deficit during 2003.All preferred stock dividends, including the deemed dividend described above,are deducted from net income (loss) to arrive at net income (loss) available tocommon stockholders.

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**MCF CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Basic earnings (loss) per share is computed bydividing net income (loss), less dividends on preferred stock, by the weightedaverage number of common shares outstanding, excluding unvested restrictedstock. Diluted earnings per share is calculated for 2004 and 2003 by dividingnet income, less dividends on preferred stock, by the weighted average numberof common shares used in the basic earnings per share calculation plus thenumber of common shares that would be issued assuming exercise or conversion ofall potentially dilutive common shares outstanding, including unvestedrestricted stock. Diluted loss per share is unchanged from basic loss per sharefor 2005 because the addition of common shares that would be issued assuming exerciseor conversion would be anti-dilutive.

Shares used in the diluted net income (loss) per sharecomputation in the above table include the dilutive impact of the Company’sstock options and warrants. The impact of the Company’s stock options and warrantson shares used for the diluted earnings per share computation is calculatedbased on the average share price of the Company’s common stock for each periodusing the treasury stock method. Under the treasury stock method, thetax-effected proceeds that would be hypothetically received from the exerciseof all stock options and warrants with exercise prices below the average shareprice of the Company’s common stock are assumed to be used to repurchase sharesof the Company’s common stock. The dilutive impact of the Company’s stockoptions was calculated using an average price of the Company’s common stock of$1.24, $1.82 and $0.55 per share for 2005, 2004 and 2003, respectively. 

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

| ** **                                                                                                                                                                                       | ** ** | **2005**   | ** ** | **2004**  | ** ** | **2003**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------|------------|------------|------------|
| Stock options and  warrants excluded due to the exercise price exceeding the average fair value  of the Company’s common stock during the period                                            |       | 8,051,667  |       | 5,385,455 |       | 7,690,997  |       |
| Weighted 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 |       | 17,154,107 |       | —    |       | —     |       |
| Weighted average  shares issuable upon conversion of the convertible notes payable                                                                                                          |       | 1,000,000  |       | 2,523,999 |       | 5,679,056  |       |
| Weighted average  shares issuable upon conversion of the convertible preferred stock                                                                                                        |       | —     |       | 179,074   |       | 4,959,040  |       |
| Weighted average  shares contingently issuable                                                                                                                                                   |       | 954,626    |       | —    |       | —     |       |
| Total common  stock equivalents excluded from diluted net income (loss) per share                                                                                                                |       | 27,160,400 |       | 8,088,528 |       | 18,329,093 |       |

 

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**MCF CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**12.**          Commitmentsand Contingencies

Thefollowing is a table summarizing significant commitments as of December 31,2005, consisting of debt service payments related to convertible andnon-convertible notes payable and future minimum lease payments under allnon-cancelable operating leases with initial or remaining terms in excess ofone year.

| ** **        | ** ** | **Notes  Payable** | ** ** | **Operating  Leases** | ** ** | **Capital  Leases** | ** ** |
|-------------------|------------|--------------------|------------|-----------------------|------------|---------------------|------------|
| 2006              |       | $                  | 106,775    |                  | $          | 1,478,839           |       | $ | 427,962 |   |
| 2007              |       | 106,775            |       | 1,164,157             |       | 349,129             |       |
| 2008              |       | 243,990            |       | 769,476               |       | 194,346             |       |
| 2009              |       | —             |       | 552,409               |       | —              |       |
| 2010              |       | —             |       | 586,380               |       | —              |       |
| Thereafter        |       | —             |       | 537,515               |       | —              |       |
| Total commitments |       | $                  | 457,540    |                  | $          | 5,088,776           |       | $ | 971,437 |   |

 

The Company leases its SanFrancisco corporate office under a noncancelable operating lease which expiresin August 2011. Future annual minimum lease payments related to itsvarious operating leases are included in the table above. Rent expense wasapproximately $1,046,000, $753,000 and $253,000 in 2005, 2004 and 2003,respectively.

***Legal Proceedings***

**MerrimanCurhan Ford & Co. v. The Seidler Companies, Inc.—NASD Arbitration**

During 2004, the Company’s broker-dealer subsidiaryhired a research analyst. Prior to employment with Merriman Curhan Ford &Co. the analyst was employed by The Seidler Companies, Inc., or Seidler,in a similar capacity. The analyst was employed under an employment contractthat included terms which general counsel and outside counsel believeunlawfully restrict the analyst’s employment activities.

In March 2004, we acted as co-agent for a smallprivate placement for a client. The client was introduced to one of ourinvestment banking managing directors. At the time of introduction, Seidler hadbeen trying to win the investment banking business, but had failed to obtain asigned engagement letter with the client. We subsequently received a signedengagement letter from the client that named Merriman Curhan Ford &Co. as co-placement agent. The investment banking transaction was completed.

Thereafter, in March 2004we received a cease and desist letter from attorneys representing Seidler.Seidler claims that our analyst used proprietary information in violation ofhis employment agreement when introducing Merriman Curhan Ford & Co.to the client. Seidler further claims that we used unfair business tactics towin the business. In response to the claims, Merriman Curhan Ford &Co. and our analyst filed a claim in arbitration with the NASD in June 2004.In September 2005, this matter was settled. We received a release of allclaims from Seidler in exchange for a payment in the amount of $25,000.

**Westermanv. 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 claimnames Western Capital Financial Group as one of several defendants. WesternCapital Financial Group is the predecessor name of Merriman Curhan Ford &Co., the California corporation. The Western Capital Financial Group name waseffective from June 26, 1986 to July 14, 1998.

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**MCF CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

This claim arises from Ms. Westerman’s purchaseof a variable annuity product in January 1990 from a predecessor of theCompany’s dealer subsidiary. MCF Corporation acquired Merriman Curhan Ford &Co. in December 2001. The Claimant alleges that a registeredrepresentative improperly recommended that she move her investment to differentproducts on two occasions.

Claimant alleges a theoryof predecessor liability against Merriman Curhan Ford & Co. Claimantprays for monetary damages in excess of $300,000 against the eleven namedrespondents. We do not believe that Ms. Westerman’s claims againstMerriman Curhan Ford & Co. are meritorious. We are in the earlypleading stages of the matter and a hearing date has been scheduled forSeptember 2006. The Company has meritorious defenses and intends to contestthese claims vigorously. However, in the event that we did not prevail, basedupon the facts as we know them to date, we do not believe that the outcome willhave a material effect on the Company’s financial condition, financial resultsor cashflows.

**In reOdimo Incorporated Securities Litigation.**

Merriman Curhan Ford &Co. is a defendant in an alleged class action suit brought in connection with aregistered offering involving Odimo Incorporated in which we served asco-manager for the company. The complaint, filed in the 17th Judical Circuit Court for Broward County inFlorida on September 30, 2005, alleges violations of federal securitieslaws against Odimo and certain of its officers as well as the company’sunderwriters, including us, based on alleged misstatements and omissions in theregistration statement. We believe we have meritorious defenses to the actionsand intend to vigorously defend against such claims as they apply to theCompany. Based upon the facts as we know them to date, we believe that thelikelihood that we not prevail is remote. Further, we are indemnified by theissuer defendant.

**Other Matters**

Additionally, from time totime, the Company is involved as a defendant or plaintiff in various actionsthat arise in the ordinary course of business. The Company believes that theultimate disposition of these matters will not have a material adverse effecton the Company’s business, financial condition or results of operations.

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

***Financial Instruments***

The Company’sbroker-dealer entity trades securities that are primarily traded in UnitedStates markets. As of December 31, 2005 and 2004, the Company had notentered into any transactions involving financial instruments, such asfinancial futures, forward contracts, options, swaps or derivatives that wouldexpose 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 inanticipation of a decline in the fair value of that security (securities sold,not yet purchased). Securities sold, not yet purchased represent obligations ofthe Company to deliver the specified security at the contracted price andthereby create a liability to purchase the security in the market at prevailingprices. These transactions result in off-balance sheet risk as the Company’sultimate obligation to purchase such securities may exceed the amountrecognized in the consolidated statements of financial condition.

Market risk is primarilycaused by movements in market prices of the Company’s trading and investmentaccount securities. The Company’s trading securities and investments are alsosubject to interest rate volatility and possible illiquidity in markets inwhich the Company trades or invests. The 

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**MCF CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Companyseeks to control market risk through monitoring procedures. The Company’sprincipal transactions are primarily long and short equity transactions.

***Off-Balance Sheet Arrangements***

The Company was not aparty to any off-balance sheet arrangements during the three years ended December 31,2005. In particular, the Company does not have any interest in so-calledlimited purpose entities, which include special purpose entities and structuredfinance entities.

***Credit Risk***

The Company’s broker-dealersubsidiary functions as a introducing broker that places and executes customerorders. The orders are then settled by an unrelated clearing organization thatmaintains 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 marketprices in the event a customer fails to settle a trade on its original terms orin the event cash and securities in customer margin accounts are not sufficientto fully cover customer obligations. The Company seeks to control the risksassociated with customer activities through customer screening and selectionprocedures as well as through requirements on customers to maintain margincollateral in compliance with various regulations and clearing organizationpolicies.

The Company is alsoexposed to credit risk as it relates to the collection of receivables fromthird parties, including lead managers in underwriting transactions and theCompany’s corporate clients related to private placements of securities andfinancial advisory services.

**14.**          RegulatoryRequirements

Merriman Curhan Ford &Co. is a broker-dealer subject to Rule 15c3-1 of the Securities andExchange Commission, which specifies uniform minimum net capital requirements,as defined, for their registrants. As of December 31, 2005, MerrimanCurhan Ford & Co. had regulatory net capital, as defined, of $7,660,000,which exceeded the amount required by $6,995,000. Merriman Curhan Ford &Co. is exempt from Rules 15c3-3 and 17a-13 under the Securities ExchangeAct of 1934 because it does not carry customer accounts, nor does it holdcustomer securities or cash.

**15.**          RelatedParty Transactions

As described in Note 5,the Company issued a $400,000 convertible note payable during 2001 to theformer Chairman and CEO of the Company in connection with severance termsincluded in his employment agreement. In May 2003, the Company and Mr. Sledgeagreed to convert the principal and interest due at maturity into a five yearfully amortizing note payable. As of December 31, 2005, the remainingprincipal amount of the note payable was $232,000. Mr. Sledge currentlyserves as a member of the Company’s Board of Directors.

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

In April 2003,officers, directors and employees of the Company participated as investors inthe Series B preferred stock private placement financing.

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

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

During the year ended December 31,2005 and through the date of this Annual Report on Form 10-K, therewere no disagreements with Ernst & Young LLP on any matter ofaccounting principle or practice, financial statement disclosure, or auditingscope or procedure which, if not resolved to Ernst & Young LLP’ssatisfaction, would have caused them to make reference to the subject matter inconnection with their report on our consolidated financial statements; andthere were no reportable events as set forth in applicable SEC regulations.

**ITEM 9A.**        CONTROLSAND PROCEDURES

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

Based on their evaluation as of December 31,2005, the principal executive officer and principal financial officer of theCompany have concluded that the Company’s disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934) are effective.

**Management’sReport on Internal Control Over Financial Reporting—****Our**management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Exchange Act Rules 13a-15(f).Under the supervision and with the participation of our management, includingour principal executive officer and principal financial officer, we conductedan evaluation of the effectiveness of our internal control over financialreporting based on the framework in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on our evaluation under theframework in *Internal Control—IntegratedFramework,*our management concluded that our internal control overfinancial reporting was effective as of December 31, 2005. Our management’sassessment of the effectiveness of our internal control over financialreporting as of December 31, 2005 has been audited by Ernst &Young LLP, an independent registered public accounting firm, as stated in theirreport which is included herein.

**Changes in internalcontrols—****No**change in the Company’sinternal control over financial reporting (as defined in Rules 13a-15(d) and15d-15(d) of the Exchange Act) occurred during the quarter ended December 31,2005, that materially affected, or is reasonably likely to materially affect,the Company’s internal control over financial reporting.

**ITEM 9B.**       OTHERINFORMATION

Not applicable.

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**Reportof Independent Registered Public Accounting Firm**

The Board of Directors andStockholders ofMCF Corporation and subsidiaries

We have audited management’sassessment, included in the accompanying Management’s Report on Internal ControlOver Financial Reporting, that MCF Corporation and subsidiaries (the “Company”)maintained effective internal control over financial reporting as of December 31,2005, based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). TheCompany’s management is responsible for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of theCompany’s internal control over financial reporting based on our audit.

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

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permit preparationof financial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion, management’sassessment that the Company maintained effective internal control overfinancial reporting as of December 31, 2005, is fairly stated, in allmaterial respects, based on the COSO criteria. Also, in our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2005, based on****theCOSO criteria.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated statements offinancial condition of the Company as of December 31, 2005 and 2004, andthe related consolidated statements of operations, stockholders’ equity, and cashflows for each of the three years in the period ended December 31, 2005 ofthe Company and our report dated February 15, 2006 expressed an unqualified opinion thereon.

|                            | /s/ ERNST &  YOUNG LLP |
|----------------------------|--------------------------------------|
| San Francisco,  California |
| February 15,  2006    |

 

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**PART III**

**ITEM 10.**         DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

Thetable below sets forth certain information concerning each of the Directors andexecutive officers of MCF Corporation:

| **Name**               | ** ** | ** ** | ** ** | **Age**                                                         | ** ** | **Position** |
|------------------------|------------|------------|------------|-----------------------------------------------------------------|------------|--------------|
| D. Jonathan Merriman   |       | 45         |       | Chairman of the Board of  Directors and Chief Executive Officer |
| Gregory S. Curhan      |       | 44         |       | Executive Vice President                                        |
| Robert E. Ford         |       | 45         |       | President and Chief  Operating Officer                          |
| John D. Hiestand       |       | 37         |       | Chief Financial Officer                                         |
| Christopher L. Aguilar |       | 43         |       | General Counsel                                                 |
| Patrick H. Arbor       |       | 69         |       | Director                                                        |
| Anthony B. Helfet      |       |       |       | Director                                                        |
| Raymond J. Minehan     |       | 64         |       | Director                                                        |
| Scott Potter           |       | 37         |       | Director                                                        |
| Dennis G. Schmal       |       | 58         |       | Director                                                        |
| Donald H. Sledge       |       | 65         |       | Director                                                        |
| Ronald E. Spears       |       | 57         |       | Director                                                        |
| Steven W. Town         |       | 45         |       | Director                                                        |

 

*D.Jonathan Merriman*has served as our Chairman and ChiefExecutive Officer from February 2002. Prior to that period, Mr. Merrimanwas President and CEO of Ratexchange Corporation, the predecessor company toMCF Corporation. Mr. Merriman and his team engineered the transition ofRatexchange, a software trading platform company, into a full-serviceinstitutional investment bank, MCF Corporation. From June 1998 to October 2000,Mr. Merriman was Managing Director and Head of the Equity Capital MarketsGroup and member of the Board of Directors at First Security Van Kasper. Inthis 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 atThe Seidler Companies in Los Angeles, where he also served on the firm’s Boardof Directors. Before Seidler, Mr. Merriman was Director of Equities forDabney/Resnick/Imperial, LLC. In 1989, Mr. Merriman co-founded the hedgefund company Curhan, Merriman Capital Management, Inc., which managedmoney for high net worth individuals and corporations. Before Curhan, MerrimanCapital Management, Inc., he worked in the Risk Arbitrage Department atBear Stearns & Co. as a trader. Prior to Bear Stearns, Mr. Merrimanworked at Merrill Lynch as a financial analyst and as an institutional equitysalesman. Mr. Merriman received his Bachelor of Arts in Psychology fromDartmouth College and completed coursework at New York University’s GraduateSchool of Business. Mr. Merrimanhas served on the Boards of several organizations, including Ratexchange (thepredecessor of MCF Corporation) Leading Brands, Inc., Fiberstars Inc. andThe San Francisco Art Institute.

*GregoryS. Curhan*has served as our Executive Vice Presidentfrom January 2002 to present and served as Chief Financial Officer from January 2002to January 2004. Previously, he served as Chief Financial Officer ofWorldRes.com from May 1999 through June 2001. Prior to joiningWorldRes.com, Mr. Curhan served as Director of Global Technology ResearchMarketing and Managing Director Specialty Technology Institutional Equity Salesat Merrill Lynch & Co. from May 1998 to May 1999. Prior tojoining Merrill Lynch, Mr. Curhan was a partner in the investment bankingfirm of Volpe Brown Whelan & Co., serving in various capacitiesincluding Internet research analyst and Director of Equities from May 1993to May 1998. Mr. Curhan was a founder and principal of the investmentadvisor Curhan, Merriman Capital Management from July 1988 through December 1992.Prior to founding Curhan, Merriman, Mr. Curhan was a Vice Presidentinstitutional equity sales for Montgomery Securities from June 1985through June 1988. From August 1983 to May 1985, Mr. Curhanwas a financial analyst in the 

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investment banking groupat Merrill Lynch. Mr. Curhan earned his Bachelor of Arts degree fromDartmouth College.

*RobertE. Ford*had served as President and Chief OperatingOfficer for MCF Corporation since February 2001. He brings 20 years ofexecutive and operations experience to the Company. Prior to joining MCFCorporation from February 2000 to February 2001, Mr. Ford was aco-Founder and CEO of Metacat, Inc., a content management ASP thatspecialized in enabling supplier catalogs for Global 2000 private exchanges andeMarketplaces. From June 1996 to December 1999,he was President/COO and on the founding team of JobDirect.com, a leadingresume and job matching service for university students, which was acquired byKorn Ferry International. Previously, Mr. Ford co-founded and managed aneducation content company from September 1994 to 1996. Prior to that, fromMay 1992 to August 1994, he headed up a turnaround and merger asGeneral Manager of a 65 year-old manufacturing and distribution company. Mr. Fordstarted his career as VP of Business Development at Lazar Enterprises, atechnology-consulting firm he helped operate from June 1989 to February 1992.He earned his Masters in International Business and Law from the FletcherSchool of Law and Diplomacy in 1989 at Tufts University and a BA with highdistinction from Dartmouth College in 1982.

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

*ChristopherL. Aguilar*has served as General Counsel of MCFCorporation from March 2000 to present and serves as General Counsel andChief Compliance Officer of Merriman Curhan Ford & Co. He brings 15years of legal and regulatory experience to the Company. From August 1995to March 2000, Mr. Aguilar was a partner at Bradley, Curley &Asiano, a San Francisco law firm, where he represented the interests of publicand private corporations, small businesses and individuals in commerciallitigation. Mr. Aguilar has also worked for the San Francisco CityAttorney and Alameda County District Attorney’s offices. Mr. Aguilarreceived his juris doctorate degree from the University of California, HastingsCollege of the Law. He also attended Oxford University as an undergraduate andreceived his Bachelor of Arts degree from the Integral Program at St. Mary’sCollege of California where he was included in Who’s Who among AmericanColleges and Universities. Mr. Aguilar is presently an adjunct professorat University of California, Hastings College of the Law.

*PatrickH. Arbor*has served as a member of our Board ofDirector since February 2001 and has served as a member of the auditcommittee since April 2001. Mr. Arbor is currently Chairman of UnitedFinancial Holdings Inc., a bank holding company, and is a principal of thetrading firm of Shatkin-Arbor & Co. He is a longtime member of theChicago Board of Trade (CBOT), the world’s oldest derivatives exchange, servingas the organization’s Chairman from 1993 to 1999. During that period, Mr. Arboralso 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 tenyears as a Director. Mr. Arbor’s other exchange memberships include theChicago Board Options Exchange, the Mid-America Commodity Exchange and theChicago Stock Exchange. Mr. Arbor received his undergraduate degree inbusiness and economics from Loyola University.

*AnthonyB. Helfet,* a retired investment banker, has been adirector since February 2004. Mr. Helfet was a Special Advisor to UBSWarburg 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 

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organization, UBS Warburg.Mr. Helfet was also a Managing Director of the Northwest Region of MerrillLynch 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 ofbusiness at Columbia University in 1972. From 1967 until 1970, Mr. Helfetserved as an infantry officer in the United States Marine Corps and served inVietnam in 1968 and 1969. Mr. Helfet serves on the Board of Directors ofLayne Christensen Company and Alliance Imaging Inc.

*RaymondJ. Minehan*has served as a member of our Board ofDirectors and as a member of our audit committee and compensation committeesince August 2003. From February 2001 to February 2002, Mr. Minehanserved as the Chief Financial Officer at Memestreams, Inc., a startupcompany that was developing information management software. From January 1997to August 2000, he served as the Chief Administrative Officer at Sutro &Co. where he was responsible for all administrative functions includingfinance, management information systems, telecommunications, operations, humanresources and facilities. From 1989 to 1997, he served as chief financialofficer at Hambrecht & Quist, Inc. From 1972 to 1989, Mr. Minehanserved as a partner with Arthur Andersen LLP. Mr. Minehan served in theUnited States Air Force as a navigator assigned to the Strategic Air Command asB-52 navigator/electronic warfare officer. He attained the rank ofCaptain. Mr. Minehan received his Bachelor of Arts degree in Finance fromGolden Gate University.

*ScottPotter*became a Director of MCF Corporation in August 2004.He currently serves as a Managing General Partner of San Francisco Equity Partners (SFEP), a private equity firmfocused on expansion stage companies within the information technology, media,consumer, and service industries. Prior to founding SFEP, Mr. Potter served asDirector of LMS Capital, the venture capital arm  of London Merchant Securities plc (LON:LMSO),where Mr. Potter oversaw LMS’ North American Private Equity portfolio. Priorto joining LMS, Mr. Potter held the position of Senior Vice President,Field Operations at Inktomi Corporation where he had responsibility for Inktomi’ssales force, business development, consulting services, and field offices. From1999-2002, Mr. Potter served as President and CEO of Quiver, Inc.,an enterprise software company funded by some of the world’s leading VentureCapital firms. Under Mr. Potter’s leadership, Quiver became a leadingcompany in the Information Management space, and ultimately was acquired byInktomi in August of 2002. Prior to his tenure at Quiver, Mr. Potterwas Executive Vice President in charge of business development and corporatedevelopment at Worldres, Inc., an online travel technology company.Mr. Potter’s career began as an attorney for one of Silicon Valley’sleading law firms, Venture Law Group. A frequent speaker at technology industryconferences and investor forums, Mr. Potter holds a BA in IndustrialPsychology from the University of California at Berkeley and a JD Degree fromUC 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, PenguinComputing, and Rave Motion Pictures.

*DennisG. Schmal*has served as a member of our Board ofDirectors and as a member of our audit committee since August 2003. From February 1972to April 1999, Mr. Schmal served as a partner in the audit practiceat Arthur Andersen LLP. Mr. Schmal now performs a variety of consultingservices for a number of companies. As a senior business advisor with specialfocus in finance, he has extensive knowledge of financial reporting and holdsthe CPA designation. Besides serving on the boards of two private companies, Mr. Schmalalso serves on the Board of Directors for Varian Semiconductor EquipmentAssociates , Inc. (VSEA), a public company. Mr. Schmal attendedCalifornia State University, Fresno where he received a Bachelor of Science inBusiness Administration- Finance and Accounting Option.

*DonaldH. Sledge*has served as a member of our Board ofDirectors from September 1999 to present and Chairman of our Board ofDirectors from February 2000 to June 2001. He has served as a memberof the compensation committee from April 2001 to present. He also servedas Chief Executive Officer from February 2000 to October 2000. From September 1999to February of 2000 he served as President, Chief 

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Executive Officer andChairman of our subsidiary Ratexchange I, Inc. From October 2000 to October 2003,Mr. Sledge was a general partner in Fremont Communications, a venturecapital fund, based in San Francisco. From January 1996 to September 1999,Mr. Sledge was Vice Chairman and Chief Executive Officer of TeleHubCommunications Corporation, a next generation ATM-based telecommunicationscompany. From 1994 to 1995, Mr. Sledge served as President and ChiefOperating Officer of WCT, a $160-million long distance telephone companythat was one of Fortune Magazine’s 25 fastest growing public companies beforeit was acquired by Frontier Corporation. From 1993 to 1994, Mr. Sledge washead of operations for New T&T, a Hong Kong-based start-up. Hewas Chairman and Chief Executive Officer of New Zealand TelecomInternational from 1991 to 1993 and a member of the executive board ofTCNZ, Mr.. Sledge held various other senior positions with TelecomNew Zealand from 1988 until 1993 as was instrumental in leading the IPO ofthe company. Mr. Sledge also served four years as president and ChiefExecutive Officer of Pacific Telesis International. Mr. Sledge is also anowner and Board Member of DataProse, a company providing direct mail andbilling statement solutions. In addition, Mr.. Sledge serves on the Boardof MobilePro (OTCBB:MOBL) and the Board of CasaByte, a private company providingquality of service testing for cellular networks. Mr. Sledge holds aMasters of Business Administration and Bachelor of Arts degree in industrialmanagement from Texas Technological University.

*RonaldE. Spears*has served as a member of our Board of Directorsfrom March 2000 to present and served as a member of the Audit Committeefrom April 2001 to August 2003. Since March 2002, Mr. Spearshas 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 servedin a number of early stage ventures primarily involved in the development andsale of technology solutions to large corporate enterprises . Duringthis time, he served as Chief Operating Officer of e.Spire Communications,an East Coast CLEC; Chief Executive Officer of CMGI Solutions, an InternetProfessional Services firm; and Chief Executive Officer of Vaultus, a wirelesssoftware company. In these roles, he led several successful equity anddebt offerings for these ventures. Mr. Spears also served invarious capacities at MCI Communications from 1979 to 1990; his last positionwas President of MCI’s Midwest Division from 1984 to 1990. A pioneer ofthe competitive long distance industry, Mr. Spears began his careerin telecommunications as a manager at AT&T Long Lines in1978, following eight years as an officer in the United States Army. He is agraduate of the United States Military Academy at West Point, and alsoholds a Master’s Degree in Public Service from Western Kentucky University.

*StevenW. Town*has served as a member of our Board ofDirectors from October 2000 to present and has served as a member of thecompensation committee since April 2001. Mr. Town has served as Co-ChiefExecutive Officer of the Amerex Natural Gas, Amerex Power and Amerex Bandwidth,Ltd. Mr. Town began his commodities career in 1987 in the retail futuresindustry prior to joining the Amerex Group of Companies. He began the Amerexfutures and forwards brokerage group in natural gas in 1990, in WashingtonD.C., and moved this unit of Amerex to Houston in 1992. During Mr. Town’stenure as Co-Chief Executive Officer, the Amerex companies have become theleading brokerage organizations in their respective industries. Amerexcurrently provides energy, power and bandwidth brokerage services to many ofthe energy companies. Mr. Town is a graduate of Oklahoma State University.

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

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

The information set forthunder the caption “Section 16(a) Beneficial Ownership ReportingCompliance” is incorporated by reference to the Company’s definitive 2006 ProxyStatement.

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**Audit Committee Financial Expert**

The board of directors hasdetermined that Dennis G. Schmal and Raymond J. Minehan are “audit committeefinancial experts” and “independent” as defined under applicable SEC andAmerican Stock Exchange rules. The board’s affirmative determination for DennisG. Schmal was based, among other things, upon his 27 years at ArthurAndersen LLP, most of those years as a partner in the audit practice. The board’saffirmative 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 adoptedits “Finance Code of Professional Conduct”, a code of ethics that applies toour Chief Executive Officer, Chief Financial Officer and other financeorganization employees. The finance code of ethics is publicly available on ourwebsite at www.merrimanco.com. If we make any substantive amendments to thefinance code of ethics or grant any waiver, including any implicit waiver, froma provision of the code to our Chief Executive Officer or Chief FinancialOfficer, we will disclose the nature of such amendment or waiver on thatwebsite or in a report on Form 8-K.

**ITEM 11.**         EXECUTIVE COMPENSATION

The information isincorporated by reference to the Company’s definitive 2006 Proxy Statement.

**ITEM 12.**         SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT

The information isincorporated by reference to the Company’s definitive 2006 Proxy Statement.

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

The information isincorporated by reference to the Company’s definitive 2006 Proxy Statement.

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

The information is incorporated by reference to theCompany’s definitive 2006 Proxy Statement.

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**PART IV**

**ITEM 15.**         EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

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

2.                FinancialStatement Schedules

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

3.                Exhibits

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

(b)          Reports on Form 8-K

Current Report on Form 8-K datedNovember 10, 2005, regarding the announcement of MCF Corporation earningsfor the third quarter of 2005.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|                        | **MCF CORPORATION** |
|------------------------|---------------------|
|                   | By:                 | /s/ D.  JONATHAN MERRIMAN |
| ** **             | ** **          | **D.  Jonathan Merriman,*Chairman of the Board and  Chief Executive Officer*** |
| February 15, 2006 | ** **          | ** ** |

 

Pursuantto the requirements of the Securities and Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.
|                          | **Signature** | ** **                 | ** ** | ** **             | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|--------------------------|---------------|----------------------------|------------|------------------------|-----------|------------|------------|------------|----------|------------|
| /s/ D. JONATHAN MERRIMAN |          | Chairman of the  Board and |       | February 15, 2006 |
| **D. Jonathan Merriman** |          | Chief Executive Officer    |       |                   |
| /s/ JOHN D. HIESTAND     |          | Chief Financial  Officer   |       | February 15, 2006 |
| **John D. Hiestand**     |          |                       |       |                   |
| /s/ PATRICK H. ARBOR     |          | Director                   |       | February 15, 2006 |
| **Patrick H. Arbor**     |          |                       |       |                   |
| /s/ ANTHONY B. HELFET    |          | Director                   |       | February 15, 2006 |
| **Anthony B.  Helfet**   |          |                       |       |                   |
| /s/ RAYMOND J. MINEHAN   |          | Director                   |       | February 15, 2006 |
| **Raymond J. Minehan**   |          |                       |       |                   |
| /s/ SCOTT POTTER         |          | Director                   |       | February 15, 2006 |
| **Scott Potter**         |          |                       |       |                   |
| /s/ DENNIS G. SCHMAL     |          | Director                   |       | February 15, 2006 |
| **Dennis G. Schmal**     |          |                       |       |                   |
| /s/ DONALD H. SLEDGE     |          | Director                   |       | February 15, 2006 |
| **Donald H. Sledge**     |          |                       |       |                   |
| /s/ RONALD E. SPEARS     |          | Director                   |       | February 15, 2006 |
| **Ronald E. Spears**     |          |                       |       |                   |
| /s/ STEVEN W. TOWN       |          | Director                   |       | February 15, 2006 |
| **Steven  W. Town**      |          |                       |       |                   |

 

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**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).                                                                                                                                                     |
| 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).                                                                                                                                                                                      |

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| 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.                                                                                               |
| 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.                                                                                                                                                                        |
| 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.                                                                                                                              |
| 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.                                                                                                                                                                                                                                                                                                                                                              |

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| 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. |

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+                Representsmanagement contract or compensatory plan or arrangement.

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