** **

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

** **

**FORM 10-Q**

 
| **ý**                                        | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934.**  |
|---------------------------------------------------|-------------------------------------------------------------------------------------------------|
| ** **                                        | ** **                                                                                      |
| **For the quarterly period ended June  30, 2005** |
|                                              |                                                                                            |
| **o**                                             | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934.** |

 

**For the Transition Period from                  to                  .**

 

**Commissionfile number: 1-15831**

 

**MCF CORPORATION**

(Exact Name of Registrant as Specified in itsCharter)

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

 

**(415)248-5600**

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes  ý    No  o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2).  Yes  ý    No  o

 

The number of shares of Registrant’s common stock outstanding as of August9, 2005 was 70,972,991.

 

 

----

 

**Form10-Q**

**For the SixMonths Ended June 30, 2005**

 
| PART I  FINANCIAL INFORMATION                                                                                      |   |
|--------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                               |   |
| ITEM  1. Financial Statements (unaudited)                                                                          |   |
|                                                                                                               |   |
| Condensed  Consolidated Statements of Operations For the Three Months and Six Months  Ended June 30, 2005 and 2004 |   |
|                                                                                                               |   |
| Condensed  Consolidated Statements of Financial Condition as of June 30, 2005 and  December 31, 2004               |   |
|                                                                                                               |   |
| Condensed  Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2005  and 2004                  |   |
|                                                                                                               |   |
| Notes  to Condensed Consolidated Financial Statements                                                              |   |
|                                                                                                               |   |
| ITEM  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations               |   |
|                                                                                                               |   |
| ITEM  3. Quantitative and Qualitative Disclosures About Market Risk                                                |   |
|                                                                                                               |   |
| ITEM  4. Controls and Procedures                                                                                   |   |
|                                                                                                               |   |
| PART II  OTHER INFORMATION                                                                                         |   |
|                                                                                                               |   |
| ITEM 1.  Legal Proceedings                                                                                         |   |
|                                                                                                               |   |
| ITEM 2. Recent Sales of Unregistered Securities                                                                    |   |
|                                                                                                               |   |
| ITEM  6. Exhibits and Reports on Form 8-K                                                                          |   |
|                                                                                                               |   |
| Signatures                                                                                                         |   |
|                                                                                                               |   |
| Certifications                                                                                                     |   |

 

1

----

 

**PART I.FINANCIAL INFORMATION**

**Item 1.Financial Statements (unaudited)**

 

**MCFCORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited)**

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                   | ** ** | **June 30,  2005**     | ** ** | **June 30,  2004**   | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** |
| Revenue:                                     |       |                   |       |                 |       |   |   |   |   |
| Commissions                                  |       | $                      | 7,299,732  |                 | $          | 5,059,181 |   | $ | 13,321,695 |   | $ | 10,965,245 |   |
| Principal  transactions                      |       | (149,592               | )          | 484,042              |       | (522,734 | ) | 1,108,520 |   |
| Investment  banking                          |       | 1,950,289              |       | 3,449,563            |       | 8,709,099 |   | 8,137,257 |   |
| Other                                        |       | 190,728                |       | 17,932               |       | 256,213 |   | 21,972 |   |
|                                         |       |                   |       |                 |       |   |   |   |   |
| Total revenue                                |       | 9,291,157              |       | 9,010,718            |       | 21,764,273 |   | 20,232,994 |   |
|                                         |       |                   |       |                 |       |   |   |   |   |
| Operating  expenses:                         |       |                   |       |                 |       |   |   |   |   |
| Compensation and  benefits                   |       | 7,166,581              |       | 6,182,080            |       | 16,368,546 |   | 13,783,260 |   |
| Brokerage and  clearing fees                 |       | 565,559                |       | 582,106              |       | 1,087,277 |   | 1,299,655 |   |
| Professional  services                       |       | 475,404                |       | 378,549              |       | 746,830 |   | 633,047 |   |
| Occupancy and  equipment                     |       | 383,239                |       | 224,601              |       | 733,198 |   | 376,872 |   |
| Communications  and technology               |       | 442,929                |       | 336,479              |       | 866,353 |   | 601,759 |   |
| Depreciation and  amortization               |       | 129,363                |       | 33,921               |       | 235,112 |   | 57,861 |   |
| Other                                        |       | 1,197,536              |       | 720,594              |       | 1,920,652 |   | 1,238,629 |   |
|                                         |       |                   |       |                 |       |   |   |   |   |
| Total operating  expenses                    |       | 10,360,611             |       | 8,458,330            |       | 21,957,968 |   | 17,991,083 |   |
|                                         |       |                   |       |                 |       |   |   |   |   |
| Operating income  (loss)                     |       | (1,069,454             | )          | 552,388              |       | (193,695 | ) | 2,241,911 |   |
| Interest income                              |       | 115,264                |       | 25,695               |       | 190,091 |   | 35,717 |   |
| Interest expense                             |       | (16,526                | )          | (18,521              | )          | (33,713 | ) | (77,197 | ) |
|                                         |       |                   |       |                 |       |   |   |   |   |
| Income (loss)  before income taxes           |       | (970,716               | )          | 559,562              |       | (37,317 | ) | 2,200,431 |   |
| Income tax  expense (benefit)                |       | 244,380                |       | (66,897              | )          | (40,594 | ) | (463,345 | ) |
|                                         |       |                   |       |                 |       |   |   |   |   |
| Net income  (loss)                           |       | $                      | (726,336   | )                    | $          | 492,665 |   | $ | (77,911 | ) | $ | 1,737,086 |   |
|                                         |       |                   |       |                 |       |   |   |   |   |
| Earnings (loss)  per share:                  |       |                   |       |                 |       |   |   |   |   |
| Basic                                        |       | $                      | (0.01      | )                    | $          | 0.01 |   | $ | 0.00 |   | $ | 0.03 |   |
| Diluted                                      |       | $                      | (0.01      | )                    | $          | 0.01 |   | $ | 0.00 |   | $ | 0.02 |   |
|                                         |       |                   |       |                 |       |   |   |   |   |
| Weighted average  common shares outstanding: |       |                   |       |                 |       |   |   |   |   |
| Basic                                        |       | 66,210,026             |       | 56,787,188           |       | 65,880,961 |   | 55,666,436 |   |
| Diluted                                      |       | 66,210,026             |       | 79,940,980           |       | 65,880,961 |   | 78,682,847 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

2

----

 

**MCFCORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF FINANCIAL CONDITION**

**(unaudited)**

 
| ** **                                                                                                                                                                                                             | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ASSETS                                                                                                                                                                                                                 |       |               |       |                   |       |
| Cash and cash  equivalents                                                                                                                                                                                             |       | $                  | 16,197,609 |                   | $          | 17,459,113 |   |
| Securities  owned:                                                                                                                                                                                                     |       |               |       |                   |       |
| Marketable, at  fair value                                                                                                                                                                                             |       | 3,711,780          |       | 2,342,225              |       |
| Not readily  marketable, at estimated fair value                                                                                                                                                                       |       | 368,831            |       | 259,340                |       |
| Restricted cash                                                                                                                                                                                                        |       | 625,617            |       | 625,000                |       |
| Due from  clearing broker                                                                                                                                                                                              |       | 2,022,775          |       | 787,862                |       |
| Accounts  receivable, net                                                                                                                                                                                              |       | 976,814            |       | 1,579,393              |       |
| Equipment and  fixtures, net                                                                                                                                                                                           |       | 1,163,544          |       | 1,032,797              |       |
| Intangible  assets, net                                                                                                                                                                                                |       | 415,076            |       | —                 |       |
| Prepaid expenses  and other assets                                                                                                                                                                                     |       | 806,013            |       | 922,094                |       |
|                                                                                                                                                                                                                   |       |               |       |                   |       |
| Total assets                                                                                                                                                                                                           |       | $                  | 26,288,059 |                   | $          | 25,007,824 |   |
|                                                                                                                                                                                                                   |       |               |       |                   |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                              |       |               |       |                   |       |
|                                                                                                                                                                                                                   |       |               |       |                   |       |
| Accounts payable                                                                                                                                                                                                       |       | $                  | 347,394    |                   | $          | 431,656 |   |
| Commissions  payable                                                                                                                                                                                                   |       | 2,532,523          |       | 2,840,239              |       |
| Accrued  liabilities                                                                                                                                                                                                   |       | 3,202,760          |       | 2,962,660              |       |
| Due to clearing  and other brokers                                                                                                                                                                                     |       | 104,427            |       | 99,205                 |       |
| Securities sold,  not yet purchased                                                                                                                                                                                    |       | 12,925             |       | —                 |       |
| Capital lease  obligation                                                                                                                                                                                              |       | 449,437            |       | 452,486                |       |
| Convertible  notes payable, net                                                                                                                                                                                        |       | 171,573            |       | 166,404                |       |
| Notes payable                                                                                                                                                                                                          |       | 1,276,995          |       | 1,321,324              |       |
|                                                                                                                                                                                                                   |       |               |       |                   |       |
| Total  liabilities                                                                                                                                                                                                     |       | 8,098,034          |       | 8,273,974              |       |
|                                                                                                                                                                                                                   |       |               |       |                   |       |
| Commitments and  contingencies                                                                                                                                                                                         |       |               |       |                   |       |
|                                                                                                                                                                                                                   |       |               |       |                   |       |
| Stockholders’  equity:                                                                                                                                                                                            |       |               |       |                   |       |
| Preferred stock,  Series A—$0.0001 par value; 2,000,000 shares authorized; 0 shares issued and  outstanding as of June 30, 2005 and December 31, 2004, respectively;  aggregate liquidation preference of $0      |       | —             |       | —                 |       |
| Preferred stock,  Series B—$0.0001 par value; 12,500,000 shares authorized; 8,750,000 shares  issued and 0 shares outstanding as of June 30, 2005 and December 31, 2004;  aggregate liquidation preference of $0  |       | —             |       | —                 |       |
| Preferred stock,  Series C—$0.0001 par value; 14,200,000 shares authorized; 11,800,000 shares  issued and 0 shares outstanding as of June 30, 2005 and December 31, 2004;  aggregate liquidation preference of $0 |       | —             |       | —                 |       |
| Common stock,  $0.0001 par value; 300,000,000 shares authorized; 71,308,742 and 68,648,627  shares issued and outstanding as of June 30, 2005 and December 31, 2004,  respectively                                     |       | 7,131              |       | 6,865                  |       |
| Additional  paid-in capital                                                                                                                                                                                            |       | 111,831,783        |       | 108,558,892            |       |
| Deferred  compensation                                                                                                                                                                                                 |       | (4,396,509         | )          | (3,163,876             | )          |
| Note receivable -  Ascend                                                                                                                                                                                              |       | (506,438           | )          | —                 |       |
| Accumulated  deficit                                                                                                                                                                                                   |       | (88,745,942        | )          | (88,668,031            | )          |
|                                                                                                                                                                                                                   |       |               |       |                   |       |
| Total  stockholders’ equity                                                                                                                                                                                       |       | 18,190,025         |       | 16,733,850             |       |
|                                                                                                                                                                                                                   |       |               |       |                   |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                       |       | $                  | 26,288,059 |                   | $          | 25,007,824 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

3

----

** **

**MCFCORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited)**

** **
| ** **                                                                                          | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                                     | ** ** | **2004** | ** ** |
| Cash flows from  operating activities:                                                              |       |                                         |       |   |   |
| Net income  (loss)                                                                                  |       | $                                            | (77,911    | ) | $ | 1,737,086 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating activities: |       |                                         |       |   |   |
| Depreciation and  amortization                                                                      |       | 235,112                                      |       | 57,861 |   |
| Restricted  stock, stock options and stock warrants granted or modified                             |       | 1,151,529                                    |       | 495,572 |   |
| Tax benefits  from employee stock options                                                           |       | 5,717                                        |       | — |   |
| Amortization of  discounts on convertible notes payable                                             |       | 5,169                                        |       | 32,478 |   |
| Amortization of  debt issuance costs                                                                |       | —                                       |       | 23,340 |   |
| Gain on  securities                                                                                 |       | (133,680                                     | )          | (215,420 | ) |
| Common stock and  stock warrants received for investment banking services                           |       | —                                       |       | (461,933 | ) |
| Other                                                                                               |       | (6,438                                       | )          | 9,611 |   |
| Changes in  operating assets and liabilities:                                                       |       |                                         |       |   |   |
| Marketable  securities owned                                                                        |       | (1,332,441                                   | )          | (193,503 | ) |
| Due from  clearing broker                                                                           |       | (1,234,913                                   | )          | (661,418 | ) |
| Accounts  receivable                                                                                |       | 602,579                                      |       | (1,911,438 | ) |
| Prepaid expenses  and other assets                                                                  |       | 134,037                                      |       | (194,106 | ) |
| Accounts payable                                                                                    |       | (85,357                                      | )          | 263,544 |   |
| Commissions  payable                                                                                |       | (307,716                                     | )          | 1,073,282 |   |
| Accrued  liabilities                                                                                |       | 141,197                                      |       | 1,261,143 |   |
| Due to clearing  and other brokers                                                                  |       | 5,222                                        |       | (46,996 | ) |
|                                                                                                |       |                                         |       |   |   |
| Net cash  provided by (used in) operating activities                                                |       | (897,894                                     | )          | 1,269,103 |   |
| Cash flows from  investing activities:                                                              |       |                                         |       |   |   |
| Purchase of  equipment and fixtures                                                                 |       | (261,945                                     | )          | (98,095 | ) |
| Investment in  Catalyst                                                                             |       | (353,882                                     | )          | — |   |
|                                                                                                |       |                                         |       |   |   |
| Net cash used in  investing activities                                                              |       | (615,827                                     | )          | (98,095 | ) |
| Cash flows from  financing activities:                                                              |       |                                         |       |   |   |
| Proceeds from  the exercise of stock options and warrants                                           |       | 58,169                                       |       | 735,558 |   |
| Proceeds from  the issuance of common stock                                                         |       | 325,109                                      |       | 455,788 |   |
| Debt service  payments                                                                              |       | (131,061                                     | )          | (53,086 | ) |
|                                                                                                |       |                                         |       |   |   |
| Net cash  provided by financing activities                                                          |       | 252,217                                      |       | 1,138,260 |   |
|                                                                                                |       |                                         |       |   |   |
| Increase  (decrease) in cash and cash equivalents                                                   |       | (1,261,504                                   | )          | 2,309,268 |   |
| Cash and cash  equivalents at beginning of period                                                   |       | 17,459,113                                   |       | 6,142,958 |   |
|                                                                                                |       |                                         |       |   |   |
| Cash and cash  equivalents at end of period                                                         |       | $                                            | 16,197,609 |   | $ | 8,452,226 |   |
|                                                                                                |       |                                         |       |   |   |
| Supplementary  disclosure of cash flow information:                                                 |       |                                         |       |   |   |
| Cash paid during  the period:                                                                       |       |                                         |       |   |   |
| Interest                                                                                            |       | $                                            | 31,443     |   | $ | 42,076 |   |
| Income taxes                                                                                        |       | $                                            | 10,700     |   | $ | 191,928 |   |
| Non-cash  investing and financing activities:                                                       |       |                                         |       |   |   |
| Preferred stock  dividends                                                                          |       | $                                            | —     |   | $ | 13,196 |   |
| Issuance of  restricted stock                                                                       |       | $                                            | 2,384,162  |   | $ | 1,413,173 |   |
| Issuance of  stock options accounted for at intrinsic value                                         |       | $                                            | —     |   | $ | 123,250 |   |
| Conversion of  notes payable to common stock                                                        |       | $                                            | —     |   | $ | 150,000 |   |
| Purchase of  equipment and fixtures on capital lease                                                |       | $                                            | 80,168     |   | $ | 138,890 |   |
| Acquisition of  Catalyst                                                                            |       | $                                            | 74,940     |   | $ | — |   |
| Issuance of common  stock to Ascend                                                                 |       | $                                            | 500,000    |   | $ | — |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

4

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** **

**MCFCORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

**1. Significant Accounting Policies**

 

*Basis of Presentation*

 

The interim financial statements included herein for MCF Corporation,or the Company, have been prepared, without audit, pursuant to the rules andregulations of the Securities and Exchange Commission. In the opinion ofmanagement, the financial statements included in this report reflect all normalrecurring adjustments that the Company considers necessary for the fairpresentation of the results of operations for the interim periods covered andthe financial position of the Company at the date of the interim statement offinancial condition. Certain information and footnote disclosures normallyincluded in annual financial statements prepared in accordance with accountingprinciples generally accepted in the United States have been condensed oromitted pursuant to such rules and regulations. However, the Company believesthat the disclosures are adequate to understand the information presented. Theoperating results for interim periods are not necessarily indicative of theoperating results for the entire year. These financial statements should beread in conjunction with the Company’s 2004 audited consolidated financialstatements and notes thereto included in the Company’s Annual Report on Form10-K for the year ended December 31, 2004.

 

*Commission and Principal TransactionRevenue*

 

Commission revenue includes revenue resulting from executing stockexchange-listed securities, over-the counter securities and other transactionsas agent for the Company’s clients. Principal transactions consist of a portionof dealer spreads attributed to the Company’s securities trading activities asprincipal in NASDAQ-listed and other securities, and include transactionsderived from activities as a market-maker. Additionally, principal transactionsinclude gains and losses resulting from market price fluctuations that occurwhile holding positions in trading security inventory. Revenue generated fromtrading activities and related expenses are recorded on a tradedate basis.

 

*Investment Banking Revenue*

 

Investment banking revenue consists of fees earned from privateplacements, mergers and acquisitions, management fees for underwrittenofferings, financial restructurings and other advisory services provided toclients. Investment banking fees are recorded as revenue when the relatedservice has been rendered, the client is contractually obligated to pay, andits collection is probable. Certain fees for services rendered are recognizedas revenue over the service period. As co-manager for registered equityunderwriting transactions, management must estimate the Company’s share oftransaction related expenses incurred by the lead manager in order to recognizerevenue. Transaction related expenses are deducted from the underwriting feeand therefore reduces the revenue that is recognized as co-manager. Suchamounts are adjusted to reflect actual expenses in the period in which theCompany receives the final settlement, typically 90 days following the closingof the transaction.

 

*Stock-Based Compensation*

 

The Company uses the intrinsic value-based method in accordance withAccounting Principles Board, or APB, Opinion No. 25,*Accounting for Stock Issued to Employees*, to account foremployee stock-based compensation. Accordingly, compensation cost is recordedon the date of grant to the extent the fair value of the underlying share ofcommon stock exceeds the exercise price for a stock option or the purchaseprice for a share of common stock. Such compensation cost is amortized on astraight-line basis over the vesting period of the individual award. Pursuantto 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.123 and Issue No. 96-18 of the Emerging Issues Task Force. The associatedexpense is measured and recognized by the Company over the period the servicesare performed by the nonemployee.

 

In December 2004, the FASB issued its final standard on accountingfor share-based payments, SFAS 123R,*Share-Based Payment*, which addresses the accounting for share-basedpayment transactions in which an enterprise receives employee services inexchange for equity instruments of the enterprise or liabilities that are basedon the fair value of the enterprise’s equity instruments or that may be settledby the issuance of such equity instruments. The statement eliminates theability to account for share-based compensation transactions using APB OpinionNo. 25 and requires instead that such transactions be accounted for usinga fair-value-based method. The effective date of SFAS 123R is the beginning ofthe first annual reporting period that begins after June 15, 2005. Earlyadoption of SFAS 123R is allowed.

 

The Company has elected to continue to account for its stock-basedcompensation in accordance with the provisions of APB Opinion No. 25 asinterpreted by FASB Interpretation No. 44,*Accounting for Certain Transactions Involving Stock Compensation*,and will implement SFAS 123R effective January 1, 2006. The Company expects theadoption of SFAS123R will have a material impact on the Company’s financialposition and results of operations.

 

5

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If the Company was to recognize compensation expense over the relevantservice period under the fair value method with respect to stock optionsgranted for the three months and six months ended June 30, 2005 and all priorperiods, net income (loss) would have changed, resulting in pro forma netincome (loss) and pro forma net income (loss) per share as presented below:

 
| ** **                                                                                          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                                            | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss), as  reported                                                                     |       | $                                                   | (726,336   | )                             | $          | 492,665 |   | $ | (77,911 | ) | $ | 1,737,086 |   |
| Add: Stock-based  employee compensation expense included in the reported net income (loss)          |       | 19,203                                              |       | 17,823                        |       | 38,406 |   | 54,672 |   |
| Less:  Stock-based employee compensation expense determined under fair value method  for all awards |       | (359,366                                            | )          | (344,001                      | )          | (690,210 | ) | (747,128 | ) |
|                                                                                                |       |                                                |       |                          |       |   |   |   |   |
| Pro forma net  income (loss)                                                                        |       | $                                                   | (1,066,499 | )                             | $          | 166,487 |   | $ | (729,715 | ) | $ | 1,044,630 |   |
|                                                                                                |       |                                                |       |                          |       |   |   |   |   |
| Net income  (loss) per share, as reported:                                                          |       |                                                |       |                          |       |   |   |   |   |
| Basic                                                                                               |       | $                                                   | (0.01      | )                             | $          | 0.01 |   | $ | 0.00 |   | $ | 0.03 |   |
|                                                                                                |       |                                                |       |                          |       |   |   |   |   |
| Diluted                                                                                             |       | $                                                   | (0.01      | )                             | $          | 0.01 |   | $ | 0.00 |   | $ | 0.02 |   |
|                                                                                                |       |                                                |       |                          |       |   |   |   |   |
| Net income  (loss) per share, pro forma:                                                            |       |                                                |       |                          |       |   |   |   |   |
| Basic                                                                                               |       | $                                                   | (0.01      | )                             | $          | 0.00 |   | $ | (0.01 | ) | $ | 0.02 |   |
|                                                                                                |       |                                                |       |                          |       |   |   |   |   |
| Diluted                                                                                             |       | $                                                   | (0.01      | )                             | $          | 0.00 |   | $ | (0.01 | ) | $ | 0.01 |   |

 

The above pro forma disclosures are not necessarily representative ofthe effects on reported net income or loss for future years.

 

*Reclassification*

 

Certain prior year amounts have been reclassified to conform to currentyear consolidated financial statement presentation.

 

6

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**2. Net Income (Loss) per Share**

 

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

 
| ** **                                                                    | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                                                    | ** ** | **2005**                        | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income  (loss)                                                            |       | $                               | (726,336   | )                             | $          | 492,665 |   | $ | (77,911 | ) | $ | 1,737,086 |   |
| Preferred stock  dividends                                                    |       | —                          |       | (2,211                        | )          | — |   | (13,196 | ) |
|                                                                          |       |                            |       |                          |       |   |   |   |   |
| Net income  (loss) available to common stockholders – basic              |       | (726,336                        | )          | 490,454                       |       | (77,911 | ) | 1,723,890 |   |
| Interest and  dividends on dilutive common shares                             |       | —                          |       | 10,211                        |       | — |   | 29,932 |   |
|                                                                          |       |                            |       |                          |       |   |   |   |   |
| Net income  available to common stockholders - diluted                        |       | $                               | (726,336   | )                             | $          | 500,665 |   | $ | (77,911 | ) | $ | 1,753,822 |   |
|                                                                          |       |                            |       |                          |       |   |   |   |   |
| Weighted-average  number of common shares – basic                        |       | 66,210,026                      |       | 56,787,188                    |       | 65,880,961 |   | 55,666,436 |   |
| Exercise or  conversion of all potentially dilutive common shares outstanding |       | —                          |       | 23,153,792                    |       | — |   | 23,016,411 |   |
|                                                                          |       |                            |       |                          |       |   |   |   |   |
| Weighted-average  number of common shares – diluted                      |       | 66,210,026                      |       | 79,940,980                    |       | 65,880,961 |   | 78,682,847 |   |
|                                                                          |       |                            |       |                          |       |   |   |   |   |
| Basic net income  (loss) per common share                                     |       | $                               | (0.01      | )                             | $          | 0.01 |   | $ | 0.00 |   | $ | 0.03 |   |
|                                                                          |       |                            |       |                          |       |   |   |   |   |
| Diluted net  income (loss) per common share                                   |       | $                               | (0.01      | )                             | $          | 0.01 |   | $ | 0.00 |   | $ | 0.02 |   |

 

Basic earnings per share is computed by dividing net income (loss),less dividends on preferred stock, by the weighted average number of commonshares outstanding, excluding unvested restricted stock. Diluted earnings pershare is calculated by dividing net income, less dividends on preferred stockplus interest and dividends on dilutive securities, by the weighted averagenumber of common shares used in the basic earnings per share calculation plusthe number of common shares that would be issued assuming exercise orconversion of all potentially dilutive common shares outstanding, includingunvested restricted stock. Diluted loss per share is unchanged from basic lossper share for the three months and six months ended June 30, 2005 because theaddition of common shares that would be issued assuming exercise or conversionwould be anti-dilutive.

 

Shares used in the diluted net income per share computation in theabove table include the dilutive impact of the Company’s stock options andwarrants. The impact of the Company’s stock options and warrants on shares usedfor the diluted earnings per share computation is calculated based on the averageshare price of the Company’s common stock for each period using the treasurystock method. Under the treasury stock method, the tax-effected proceeds thatwould be hypothetically received from the exercise of all stock options andwarrants with exercise prices below the average share price of the Company’scommon stock are assumed to be used to repurchase shares of the Company’scommon stock. The dilutive impact of the Company’s stock options and warrants wascalculated using an average price of the Company’s common stock of $2.37 and$2.05 per share for the three months and six months ended June 30, 2004,respectively.  Because the Companyreported a net loss during three months and six months ended June 30, 2005, theCompany excluded the impact of all stock options and warrants in thecomputation of dilutive earnings per share, as their effect would beanti-dilutive.

 

7

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The Company excludes all potentially dilutive securities from itsdiluted net income (loss) per share computation when their effect would beanti-dilutive. The following common stock equivalents were excluded from theearnings per share computation, as their inclusion would have beenanti-dilutive:

 
| ** **                                                                                                                                                                                       | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                                                                                       | ** ** | **2005**                                            | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Stock options  and warrants excluded due to the exercise price exceeding the average fair  value of the Company’s common stock during the period                                            |       | 8,677,049                                           |       | 5,972,735                     |       | 7,862,314 |   | 5,933,528 |   |
| 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 |       | 17,856,840                                          |       | —                        |       | 18,392,641 |   | — |   |
| Weighted average  shares issuable upon conversion of the convertible notes payable                                                                                                               |       | 1,000,000                                           |       | —                        |       | 1,000,000 |   | 48,264 |   |
| Weighted average  shares issuable upon conversion of the convertible preferred stock                                                                                                             |       |                                                |       | 53,722                        |       |   |   | 18,587 |   |
| Weighted average  shares contingently issuable                                                                                                                                                   |       | 1,057,031                                           |       | —                        |       | 629,591 |   | — |   |
|                                                                                                                                                                                             |       |                                                |       |                          |       |   |   |   |   |
| Total common  stock equivalents excluded from diluted net income per share                                                                                                                       |       | 28,590,920                                          |       | 6,026,457                     |       | 27,884,546 |   | 6,000,379 |   |

 

**3. Regulatory Requirements**

 

Merriman Curhan Ford & Co. is a broker-dealer subject to Rule15c3-1 of the Securities and Exchange Commission, which specifies uniformminimum net capital requirements, as defined, for their registrants. As of June30, 2005, Merriman Curhan Ford & Co. had regulatory net capital, asdefined, of $12,442,000 exceeded the amount required by $11,953,000. MerrimanCurhan Ford & Co. is exempt from Rules 15c3-3 and 17a-13 under theSecurities Exchange Act of 1934 because it does not carry customer accounts,nor does it hold customer securities or cash.

 

**4. Acquisition of Catalyst FinancialPlanning and Investment Management, Inc.**

 

On February 28, 2005, the Company acquired Catalyst Financial Planning& Investment Management, Inc., or Catalyst, a registered investment advisorwith over $100 million in assets under management. This is the Company’s firstacquisition of a registered investment advisor as the Company executes on itsplan to build a fee-based, recurring revenue business. The Company plans tointroduce new potential clients to Catalyst from the corporate and ventureservices group as well as the investment banking department.

 

The purchase consideration for Catalyst consists of both cash andcommon stock that will be paid over a three year period. The Company paid tothe sole shareholder of Catalyst, or Catalyst Shareholder, $330,433 as initialconsideration at the closing. The Company has also agreed to issue to theCatalyst Shareholder up to 925,325 shares of common stock over three yearsbased upon the amount of revenue growth for Catalyst. The payment of theseshares is subject to specified conditions. Such additional amounts will berecorded as compensation expense, if any, when such amounts become due which arecontingent upon the continued employment of the Catalyst Shareholder. TheCompany acquired 100% of the voting stock in Catalyst. The results ofoperations for Catalyst are included in the Company’s consolidated financialstatements beginning March 1, 2005.

 

8

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**5. Ascend Services Ltd.**

 

On May 4, 2005, MCF Corporation entered into a strategic alliance withAscend Services Ltd., or Ascend. In conjunction with this alliance, Ascend hasentered into a stock purchase agreement with the Company. Ascend has alsoengaged the Company as an investment advisor for its short-term high credit-qualityfixed income portfolio. The Company issued 1,078,749 shares of its common stockand Ascend has issued an unsecured promissory note payable to the Company inthe amount of $1.5 million. The shares will be held initially in escrow. UponAscend achieving specified milestones, the 1,078,749 shares of common stockwill be released from escrow in three installments of 359,583 shares 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.

 

On May 15, 2005, the Company released the first installment of 359,583shares of common stock to Ascend while the related promissory note with a facevalue of $500,000 became effective. The Company recorded the promissory note asa reduction of stockholders’ equity until Ascend repays the note. Interestincome from the note amounted to $6,000 during the three months ended June 30,2005.

 

**6. Income Taxes**

 

The income tax expense for the six months ended June 30, 2005 representedalternative minimum tax while the income tax expense for 2004 reflected taxescalculated for federal and state tax purposes. The income tax expense for 2005and 2004 reflects the utilization of some of the Company’s net operating losscarryforwards.

 

9

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**ITEM 2.****  Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

This Quarterly Report on Form 10-Q, including this Management’sDiscussion and Analysis of Financial Condition and Results of Operationscontains forward-looking statements regarding future events and our futureresults that are based on current expectations, estimates, forecasts, andprojections about the industries in which we operate and the beliefs andassumptions of our management. Words such as “may,” “will,” “should,” “expects,”“anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,”“estimates,” “predicts,” “potential” or “continue,” variations of such words,and similar expressions are intended to identify such forward-lookingstatements. In addition, any statements that refer to projections of our futurefinancial performance, our anticipated growth and trends in our businesses, andother characterizations of future events or circumstances, are forward-lookingstatements. Readers are cautioned that these forward-looking statements areonly predictions and are subject to risks, uncertainties, and assumptions thatare difficult to predict. Therefore, actual results may differ materially andadversely from those expressed in any forward-looking statements. Readers arereferred to risks and uncertainties identified under**“**Risk Factors” beginning on Page 14 and elsewhere herein. Weundertake no obligation to revise or update publicly any forward-lookingstatements for any reason.

 

**Company Overview**

 

MCF Corporation is a financial services holding company that providesinvestment research, capital markets services, corporate and venture services,investment banking, asset management, and wealth management through itsoperating subsidiaries, Merriman Curhan Ford & Co., MCF Asset Management,LLC, and MCF Wealth Management, LLC. MCF Asset Management, LLC and MCF WealthManagement, LLC are two recently formed businesses that are predicated onfee-based, recurring revenue models.

 

Merriman Curhan Ford & Co. is a securities broker-dealer andinvestment bank focused on fast-growing companies and growth-orientedinstitutional investors. It provides investment research, brokerage and tradingservices primarily to institutions, as well as advisory and investment bankingservices to corporate clients. Its mission is to become a leader in theresearching, advising, financing and trading of fast growing companies.Merriman Curhan 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 Investors Protection Corporation.

 

**Business Environment**

 

The second quarter of 2005 has been more favorable for investors inboth the U.S. stock and bond markets relative to the first quarter 2005. Largeand mid capitalization equities fared the best during this period. The FederalReserve board continued its strategy of raising the overnight discount rate(for the ninth time in as many months) to keep inflation in check. The ConsumerConfidence index rose in June to its highest rating since June 2002. Foreigninvestors are also recognizing the improving U.S. economy with marked increasesof investments in U.S. currency with the dollar gaining 12.5% against the Euroand 7.3% against the Yen since the beginning of the year. Investors continuedto face risks when considering the current volatile oil market, continuedissues with Iraq, U.S. trade deficit concerns and the well publicized realestate markets exuberance that has caused significant appreciation in realestate values. Second quarter equity capital markets activity was very light asinvestor appetite for risk waned following the overall market decline inthe first quarter of 2005.

 

Our securities broker-dealer and investment banking activities arelinked to the capital markets. In addition, our business activities are focusedin the consumer growth, healthcare, specialty growth and technology sectors. Bytheir nature, our business activities are highly competitive and are not onlysubject to general market conditions, volatile trading markets and fluctuationsin the volume of market activity, but also to the conditions affecting thecompanies and markets in our areas of focus.

 

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

 

10

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**Executive Overview**

 

Revenue recognized in the second quarter 2005 was $9,291,000, anincrease of 3% over the second quarter of 2004. Commission revenue grew by 44%over 2004 while investment banking revenue declined by 43% from the prior year.Our investment banking practice was impacted by the challenging capital marketsenvironment for the fast growing companies that we serve, as well as a seniormanagement transition in the investment banking department that was completedat the beginning of the third quarter with the hiring of a new head ofinvestment banking. We incurred a net loss of $0.01 per diluted share for thethree months ended June 30, 2005, compared to net income of $0.01 per share duringthe three months ended June 30, 2004. Our profitability was negatively impactedby the decline in our investment banking revenue as well as lower net gainsfrom our investment portfolio compared to the prior year. We continued to hireexperienced professionals during the second quarter across our variousdepartments, including sales and trading, research, investment banking andrevenue support. Additionally, we are continuing our business developmentsactivities related to our asset management and wealth management businesses.

 

**Results of Operations**

 

The following table sets forth a summary of financial highlights forthe three months ended June 30, 2005 and 2004:

 
| ** **                                | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------|------------|
| ** **                                | ** ** | **2005**                                            | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue                                   |       | $                                                   | 9,291,157  |                          | $          | 9,010,718 |   | $ | 21,764,273 |   | $ | 20,232,994 |   |
| Operating  expenses                       |       | 10,360,611                                          |       | 8,458,330                     |       | 21,957,968 |   | 17,991,083 |   |
| Operating income  (loss)                  |       | (1,069,454                                          | )          | 552,388                       |       | (193,695 | ) | 2,241,911 |   |
| Net income  (loss)                        |       | (726,336                                            | )          | 492,665                       |       | (77,911 | ) | 1,737,086 |   |
|                                      |       |                                                |       |                          |       |   |   |   |   |
| EBITDA                                    |       | $                                                   | (314,232   | )                             | $          | 903,017 |   | $ | 1,192,946 |   | $ | 2,785,495 |   |
| Adjustments:                              |       |                                                |       |                          |       |   |   |   |   |
| Interest income                           |       | 115,264                                             |       | 25,695                        |       | 190,091 |   | 35,717 |   |
| Interest expense                          |       | (16,526                                             | )          | (18,521                       | )          | (33,713 | ) | (77,197 | ) |
| Income tax  expense                       |       | 244,380                                             |       | (66,897                       | )          | (40,594 | ) | (463,345 | ) |
| Depreciation and  amortization            |       | (129,363                                            | )          | (33,921                       | )          | (235,112 | ) | (57,861 | ) |
| Amortization of  stock-based compensation |       | (625,859                                            | )          | (316,708                      | )          | (1,151,529 | ) | (485,723 | ) |
|                                      |       |                                                |       |                          |       |   |   |   |   |
| Net income  (loss)                        |       | $                                                   | (726,336   | )                             | $          | 492,665 |   | $ | (77,911 | ) | $ | 1,737,086 |   |

 

Our revenue during the second quarter 2005 increased $280,000 or 3%,from the corresponding period in 2004 reflecting the continued growth of oursales and trading activities, partially offset by lower investment banking revenueduring the period. We incurred a net loss of $726,000 during the second quarter2005 as compared to net income of $493,000 during the second quarter 2004. Ourearnings before interest, taxes, depreciation and amortization, or EBITDA, forthe second quarter of 2005 were ($314,000) as compared to $903,000 in 2004. Thedecline in profitability during the second quarter of 2005 as compared to thesecond quarter of 2004 resulted from (i) the drop in our investment bankingrevenue which produces higher operating margins compared to sales and tradingrevenue, (ii) lower net gains from our investment portfolio compared to theprior year and (iii) higher compensation and benefits expense that was due tothe increase in our headcount in anticipation for the continued growth in ourrevenue.

 

EBITDA (earnings before interest, taxes, depreciation and amortization)is a key metric we use in evaluating our financial performance. EBITDA isconsidered a non-GAAP financial measure as defined by Regulation G promulgatedby the SEC pursuant to the Securities Act of 1933, as amended. We considerEBITDA an important measure of our ability to generate cash flows to service debt,fund capital expenditures and fund other corporate investing and financingactivities. EBITDA eliminates the non-cash effect of tangible and intangible assetdepreciation and stock-based amortization. EBITDA should be considered inaddition to, rather than as a substitute for, pre-tax income, net income andcash flows from operating activities.

 

11

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***Commissions andPrincipal Transactions Revenue***

 

Our broker-dealer activity includes the following:

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

 

The following table sets forth our revenue and several operatingmetrics which we utilize in measuring and evaluating performance and theresults of our sales and trading activity operations:

 
| ** **                                                              | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                              | ** ** | **2005**                                            | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenue:**                                                            |       |                                                |       |                          |       |   |   |   |   |
| Commissions                                                             |       | $                                                   | 7,299,732  |                          | $          | 5,059,181 |   | $ | 13,321,695 |   | $ | 10,965,245 |   |
| Principal  transactions:                                                |       |                                                |       |                          |       |   |   |   |   |
| Customer  principal transactions, proprietary trading and market making |       | (235,529                                            | )          | (212,877                      | )          | (766,248 | ) | 285,300 |   |
| Investment  portfolio                                                   |       | 85,937                                              |       | 696,919                       |       | 243,514 |   | 823,220 |   |
| Total principal  transactions revenue                                   |       | $                                                   | (149,592   | )                             | $          | 484,042 |   | $ | (522,734 | ) | $ | 1,108,520 |   |
|                                                                    |       |                                                |       |                          |       |   |   |   |   |
| **Transaction  Volumes:**                                               |       |                                                |       |                          |       |   |   |   |   |
|                                                                    |       |                                                |       |                          |       |   |   |   |   |
| Number of shares  traded                                                |       | 242,964,000                                         |       | 234,043,000                   |       | 463,914,000 |   | 443,770,000 |   |
| Number of active  clients                                               |       | 396                                                 |       | 355                           |       | 478 |   | 454 |   |

 

Agency commission revenue increased by $2,241,000, or 44%, during thesecond quarter of 2005 as compared to the second quarter of 2004. This growthis primarily attributed to the hiring of additional sales and researchprofessionals that resulted in the increase in the number of active clientaccounts and the deeper penetration of these accounts during 2005 as comparedto 2004. During the three months ended June 30, 2005 and 2004, no single salesand trading customer accounted for more than 10% of our revenue.

 

Principal transaction losses, including market making and proprietarytrading for our own account, amounted to $150,000 during the three months endedJune 30, 2005, as compared to $484,000 in principal transaction gains duringthe three months ended June 30, 2004. During the second quarter of 2005, weincurred losses related to our market making activities which were partiallyoffset by proprietary trading gains during the period. Market making trading isintended to facilitate customer order flow and is an important component to ouroverall capital markets strategy. Additionally, our investment portfolio, whichprimarily consists of stock warrants and restricted common stock that we earnin connection with our investment banking activity, increased in value during thesecond quarter of 2005 but by a lower amount than in the second quarter of 2004.

 

***Investment BankingRevenue***

 

Our investment banking activity includes the following:

 
| **•** | Capital Raising - Capital raising includes private  placements of equity and debt instruments and underwritten public offerings.                           |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                       |   |
| •     | Financial Advisory. Financial advisory includes  advisory assignments with respect to mergers and acquisitions, divestures,  restructurings and spin-offs. |
|            |                                                                                                                                                            |  |

 

12

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The following table sets forth our revenue and transaction volumes fromour investment banking activities during the three months and six months ended June30, 2005 and 2004:

 
| ** **                        | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------|------------|-------------------------------|------------|
| ** **                        | ** ** | **2005**                                            | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenue:**                      |       |                                                |       |                          |       |   |   |   |   |
|                              |       |                                                |       |                          |       |   |   |   |   |
| Capital raising                   |       | $                                                   | 1,910,289  |                          | $          | 3,364,739 |   | $ | 8,503,974 |   | $ | 7,563,797 |   |
| Financial  advisory               |       | 40,000                                              |       | 84,824                        |       | 205,125 |   | 573,460 |   |
| Total investment  banking revenue |       | $                                                   | 1,950,289  |                          | $          | 3,449,563 |   | $ | 8,709,099 |   | $ | 8,137,257 |   |
|                              |       |                                                |       |                          |       |   |   |   |   |
| **Transaction  Volumes:**         |       |                                                |       |                          |       |   |   |   |   |
|                              |       |                                                |       |                          |       |   |   |   |   |
| Public  offerings:                |       |                                                |       |                          |       |   |   |   |   |
| Capital  underwritten             |       | $                                                   | 75,000,000 |                          | $          | 182,171,500 |   | $ | 141,225,000 |   | $ | 225,181,500 |   |
| Number of  transactions           |       | 1                                                   |       | 4                             |       | 3 |   | 5 |   |
| Private  placements:              |       |                                                |       |                          |       |   |   |   |   |
| Capital raised                    |       | $                                                   | 33,425,000 |                          | $          | 50,050,000 |   | $ | 217,419,000 |   | $ | 124,450,000 |   |
| Number of  transactions           |       | 3                                                   |       | 5                             |       | 9 |   | 10 |   |

 

Investment banking revenue decreased by $1,499,000, or 43%, during thesecond quarter of 2005 as compared to the second quarter of 2004. This declinereflected the challenging market environment for the small and mid-capcompanies that we serve, as well as a senior management transition in theinvestment banking department that was completed at the beginning of the thirdquarter with the hiring of a new head of investment banking. We closed oneequity underwritten transaction and three private placement transactions duringthe second quarter of 2005, compared to four underwritten and five privateplacement transactions during the second quarter 2004. During the three monthsended June 30, 2005, one investment banking customer accounted for 12% of ourrevenue, while one investment banking customer accounted for 11% of our revenuefor the three months ended June 30, 2004.

 

***Compensation andBenefits Expenses***

 

Compensation and benefits expense represents the majority of ouroperating expenses and includes incentive compensation paid to sales andtrading and investment banking professionals, as well as discretionary bonuses,salaries and wages, and stock-based compensation. Incentive compensation variesprimarily based on revenue production. Discretionary bonuses paid to researchanalysts also vary with commission revenue production but includes otherqualitative factors as well. Salaries, payroll taxes and employee benefits arerelatively fixed in nature.

 

The following table sets forth the major components of our compensationand benefits for the three months and six months ended June 30, 2005 and 2004:

 
| ** **                                                  | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                  | ** ** | **2005**                                            | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Incentive  compensation and discretionary bonuses           |       | $                                                   | 3,574,161  |                          | $          | 3,924,489 |   | $ | 9,394,458 |   | $ | 9,554,349 |   |
| Salaries and  wages                                         |       | 2,297,774                                           |       | 1,425,294                     |       | 4,287,750 |   | 2,628,338 |   |
| Stock-based  compensation                                   |       | 625,859                                             |       | 326,556                       |       | 1,151,529 |   | 485,721 |   |
| Payroll taxes,  benefits and other                          |       | 668,787                                             |       | 505,741                       |       | 1,534,809 |   | 1,114,852 |   |
| Total  compensation and benefits                            |       | $                                                   | 7,166,581  |                          | $          | 6,182,080 |   | $ | 16,368,546 |   | $ | 13,783,260 |   |
| Total  compensation and benefits as a percentage of revenue |       | 77                                                  | %          | 69                            | %          | 75 | % | 68 | % |
| Cash  compensation and benefits as a percentage of revenue  |       | 70                                                  | %          | 65                            | %          | 70 | % | 66 | % |

 

The amount of compensation and benefits that we incur during a givenperiod is largely dependent upon the level of revenue recognized during thatperiod, since most of our employees are paid based on a percentage of therevenue attributed to their efforts. During the three months and six monthsended June 30, 2005, compensation and benefits expense increased by $985,000,or 16%, and $2,585,000, or 19%, as compared to the corresponding period in2004, respectively. Cash compensation and benefits expense as a percentage ofrevenue increased to 70% during the first six months of 2005 as compared to 66%during the first six months of 2004. 

 

13

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This increase in cash compensation and benefits expense as a percentageof revenue is due in part to principal transaction losses in 2005 compared toprincipal transaction gains in 2004, as well as to higher salaries and wagesrelated to additional employees. Principal transaction losses decrease revenuebut do not impact compensation and benefits expense thereby increasing thepercentage of compensation and benefits expense to revenue.

 

We have grown our headcount at a rapid but structured pace during 2004and 2005. Our headcount has increased from 104 at June 30, 2004 to****144 at June 30, 2005. The increase instock-based compensation during 2005 reflects our decision to grant restrictedstock to new and existing employees.

 

***Other OperatingExpenses***

 

Brokerage and clearing fees include trade processing expenses that wepay to our clearing broker and execution fees that we pay to floor brokers andelectronic communication networks. Merriman Curhan Ford & Co. is afully-disclosed broker-dealer, which has engaged a third party clearing brokerto perform all of the clearance functions. The clearing broker-dealer processesand settles the customer transactions for Merriman Curhan Ford & Co. andmaintains the detailed customer records. Additionally, security trades areexecuted by third-party broker-dealers and electronic trading systems. Theseexpenses are almost entirely variable with commission revenue and the volume ofbrokerage transactions. Despite an increase in commission revenue during thethree months and six months ended June 30, 2005 as compared to thecorresponding periods in 2004, brokerage and clearing fees decreased by $17,000,or 3%, from the second quarter of 2004 and $212,000, or 16%, from the first sixmonths of  2004. This reflected the costsavings that we achieved by negotiating lower fees with our new clearing brokerduring the fourth quarter 2004.

 

Professional services expense includes legal fees, accounting fees,expenses related to investment banking transactions and various consultingfees. Many of these expenses, such as legal and accounting fees, are to a largeextent fixed in nature.  During the threemonths and six months ended June 30, 2005, professional services expenseincreased by $97,000, or 26%, and $114,000, or 18%, as compared to thecorresponding periods in 2004, respectively. This increase in professionalservices expense primarily reflected higher legal costs related to variouscorporate and investment banking activities.

 

Occupancy and equipment includes rental costs for our office facilitiesand equipment, as well as equipment, software and leasehold improvementexpenses. These expenses are largely fixed in nature and tend to increase as wehire additional employees. During the three months and six months ended June30, 2005, occupancy and equipment expense increased by $159,000, or 71%, and $356,000,or 95%, as compared to the corresponding periods in 2004, respectively. Theincrease in occupancy and equipment expense resulted mostly from higher officerents. During 2004, we moved into larger office spaces in San Francisco, NewYork, Boston, Los Angeles and Portland to accommodate our growth in businessand headcount.

 

Communications and technology expense includes voice, data and Internetservice fees, and data processing costs. Historically, these costs haveincreased as we hire additional employees. During the three months and sixmonths ended June 30, 2005, communications and technology expense increased by$106,000, or 32%, and $264,000, or 44%, as compared to the corresponding periodsin 2004, respectively. The increase in communications and technology expense wasdue to higher telephone and data service fees incurred in our sales and tradingoperations. The higher telephone and data service charges are the result ofincreased headcount and the expansion of our offices, as well as higher coststo upgrade our information technology infrastructure.

 

Depreciation and amortization expense primarily relate to thedepreciation of our computer equipment and leasehold improvements. Depreciationand amortization is mostly fixed in nature. During the three months and sixmonths ended June 30, 2005, depreciation and amortization expense increased by$95,000, or 281%, and $177,000, or 306%, as compared to the correspondingperiods in 2004, respectively. The increase in depreciation and amortizationexpense was due to increased capital expenditures, including leaseholdimprovements to our San Francisco and New York offices during 2004, tofacilitate our growth and expansion.

 

Other operating expense includes professional liability and propertyinsurance, recruiting, investor conferences, travel and entertainment, printingand copying, business licenses and taxes, office supplies and othermiscellaneous office expenses. During the three months and six months endedJune 30, 2005, other operating expense increased by $477,000, or 66%, and $682,000,or 55%, as compared to the corresponding period in 2004, respectively. Theincrease in other operating expense was attributed to higher recruiting costs, additionalinvestor conferences, higher travel expenses, and various business taxes.

 

***Income Tax Expense***

 

The income tax expense for the six months ended June 30, 2005represented alternative minimum tax while the income tax expense for 2004reflected taxes calculated for federal and state tax purposes. The income taxexpense for 2005 and 2004 reflects the utilization of some of the Company’s netoperating loss carryforwards.

 

**Off-Balance Sheet Arrangements**

 

We were not a party to any off-balance sheet arrangements during the sixmonths ended June 30, 2005. In particular, we do not have any interest inso-called limited purpose entities, which include special purpose entities andstructured finance entities.

 

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**Critical Accounting Policies andEstimates**

 

The consolidated financial statements are prepared in accordance withaccounting principles generally accepted in the United States, which require usto make estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. On an on-going basis, we evaluate our estimates, includingthose related to the valuation of securities owned and deferred tax assets. Webase our estimates on historical experience and on various other assumptionsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Actualresults could differ from those estimates. We believe the following criticalaccounting policies affect our more significant judgments and estimates used inthe preparation of our consolidated financial statements.

 

*Valuation of Securities Owned*

 

Securities owned that are not readily marketable are carried at fairvalue, with the accompanying gains and losses reflected in our results ofoperations. The fair value of securities, for which a quoted market or dealerprice is not available, is based on management’s estimates. Among the factorsconsidered by management in determining the fair value of securities are thecost of the securities, terms and liquidity, developments since the acquisitionof the securities, the sales price of recently issued securities, the financialcondition and operating results of the issuer, earnings trends and consistencyof operating cash flows, the long-term business potential of the issuer, the quotedmarket price of securities with similar quality and yield that are publiclytraded, and other factors generally pertinent to the valuation of securities.The fair value of these securities is subject to a high degree of volatilityand may be susceptible to significant fluctuation in the near term. Whereavailable, we use prices from independent sources such as listed market pricesor dealer quotations.

 

*Revenue Recognition*

 

We recognize brokerage revenue once the trade is consummated and theearnings process is complete. Investment banking revenue consists of feesearned from private placements, mergers and acquisitions, management fees forunderwritten offerings, financial restructurings and other advisory servicesprovided to clients. Investment banking fees are recorded as revenue when therelated service has been rendered, the client is contractually obligated topay, and its collection is probable. Certain fees received in advance ofservices rendered are recognized as revenue over the service period.Transaction-related expenses to date have been expensed as incurred. Asco-manager for registered equity underwriting transactions, we must estimatethe 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 we will recognize 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-Based Compensation*

 

As part of our compensation of employees, we may use stock-basedcompensation, including stock options, restricted stock and other stock-basedawards. Compensation related to restricted stock and other stock-based awardsis amortized over the vesting period of the award, which is generally three tofour years, and is included in our results of operations as compensation.Accounting principles generally accepted in the United States allow alternativemethods of accounting for stock options, including an “intrinsic value” methodand a “fair value” method. The intrinsic value method is intended to reflectthe impact of stock options on stockholders based on the appreciation in thestock option over time, generally driven by financial performance. The fairvalue method requires an estimate of the value of stock options to berecognized as compensation over the vesting period of the awards. Currently, weuse the intrinsic value method and do not recognize the impact of these awardsas compensation expense. Accordingly, we provide disclosure of the impact ofthe estimated fair value of the stock options on our compensation and reportedincome in the notes to the consolidated financial statements. In determiningthe estimated fair value of stock options, we use the Black-Scholesoption-pricing model, which requires judgment regarding certain assumptions,including the expected life of the options granted, dividend yields and stockvolatility.

 

*Deferred Tax Valuation Allowance*

 

We account for income taxes in accordance with the provision of SFASNo. 109,*Accounting for Income Taxes*,which requires the recognition of deferred tax assets and liabilities at taxrates expected to be in effect when these balances reverse. Future tax benefitsattributable to temporary differences are recognized to the extent that therealization of such benefits is more likely than not. We have concluded that itis more likely than not that our deferred tax assets as of June 30, 2005 and2004 will not be realized based on the scheduling of deferred tax liabilitiesand 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, anadjustment to the deferred tax asset will be recorded in the period suchdetermination is made.

 

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**Liquidity and Capital Resources**

 

Historically, we have satisfied our liquidity and regulatory capitalneeds through the issuance of equity and debt securities. As of June 30, 2005,our short-term and long-term debt amounted to $1,898,000, while ourstockholders’ equity was $18,190,000. Our principal assets consist of cash andcash equivalents, marketable securities held for trading purposes, restrictedcash, receivables and equipment and fixtures. As of June 30, 2005, liquidassets consisted primarily of cash and cash equivalents of $16,198,000 andmarketable securities of $3,712,000, for a total of $19,909,000. MerrimanCurhan Ford & Co., as a broker-dealer, is subject to Rule 15c3-1 of theSecurities Exchange Act of 1934, which specifies uniform minimum net capitalrequirements, as defined, for their registrants. As of June 30, 2005, MerrimanCurhan Ford & Co. had regulatory net capital, as defined, of $12,442,000**,** which exceeded the amount required by $11,953,000.

 

During the six months ended June 30, 2005, our earnings beforeinterest, taxes, depreciation and amortization, or EBITDA, were $1,193,000. Weconsider EBITDA an important measure of our ability to generate cash flows toservice debt, fund capital expenditures and fund other corporate investing andfinancing activities. EBITDA eliminates the non-cash effect of tangible andintangible asset depreciation and stock-based amortization. EBITDA should beconsidered in addition to, rather than as a substitute for, pre-tax income, netincome and cash flows from operating activities. Cash flow used in ouroperating activities during the first six months of 2005 was $898,000 andincludes the increase in operating assets, such as marketable securities anddue from clearing broker, by $1,831,000 and the reduction of operatingliabilities, such as commissions payable and accrued liabilities, by $247,000.

 

Cash used in investing activities during the six months ended 2005 was$616,000, reflecting the acquisition of Catalyst and the purchase of equipmentand fixtures. Cash provided by financing activities was $252,000 during the firstsix months of 2005 due primarily to the proceeds from the issuance of commonstock for the Employee Stock Purchase Plan and exercises of stock options andstock warrants.

 

We believe that our existing cash balances and investments will besufficient to meet our liquidity and capital spending requirements, both forthe next twelve months as well as for the long-term. However, we have mostlyincurred operating losses since inception and, to date, we have generated onlylimited revenue. Furthermore, we may require additional capital investment tofund our working capital if we incur future operating losses. We cannot becertain that additional debt or equity financing will be available whenrequired or, if available, that we can secure it on terms satisfactory to us.

 

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**Risk Factors**

 

Investing in our securities involves a high degree of risk. In additionto the other information contained in this quarterly report, including reportswe incorporate by reference, you should consider the following factors beforeinvesting in our securities.

 

*It is difficult to evaluate ourbusiness and prospects because we have a limited operating history.*

 

We began actively engaging in providing securities brokerage andinvestment banking services in January 2002. This was an entirely new businessfor us, and was a complete break with our previous business, the bandwidthbrokerage business. Accordingly, we have a limited operating history on whichto base an evaluation of our business and prospects. Our prospects must beconsidered in light of the risks, expenses and difficulties frequentlyencountered by fast growing companies in their early stage of development. Wecannot assure you that we will be successful in addressing these risks and ourfailure to do so could have a material adverse effect on our business andresults of operations.

 

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

 

Our ability to maintain a positive cash flow and profitability dependson our ability to generate and maintain greater revenue while incurring reasonableexpenses. 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 sustain or increase apositive cash flow and profitability on a quarterly or annual basis in thefuture. Our inability to maintain profitability or positive cash flow couldresult in disappointing financial results, impede implementation of our growthstrategy 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 makes ourability to successfully implement our business plan uncertain.

 

Because we are a developing company, the factors upon which we are ableto base our estimates as to the gross revenue and the number of participatingclients that will be required for us to maintain a positive cash flow and anyadditional financing that may be needed for this purpose are unpredictable. Forthese and other reasons, we cannot assure you that we will not require highergross revenue, and an increased number of clients, securities brokerage andinvestment banking transactions, and/or more time in order for us to completethe development of our business that we believe we need to be able to cover ouroperating expenses, or obtain the funds necessary to finance this development.It is more likely than not that our estimates will prove to be inaccuratebecause actual events more often than not differ from anticipated events.Furthermore, in the event that financing is needed in addition to the amountthat is required for this development, we cannot assure you that such financingwill be available on acceptable terms, if at all.

 

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

 

We are engaged in the highly competitive financial services andinvestment industries. We compete with large Wall Street securities firms,securities subsidiaries of major commercial bank holding companies, U.S.subsidiaries of large foreign institutions, major regional firms, smaller nicheplayers, and those offering competitive services via the Internet. Manycompetitors have greater personnel and financial resources than we do. Largercompetitors are able to advertise their products and services on a national orregional basis and may have a greater number and variety of distributionoutlets for their products, including retail distribution. Discount andInternet brokerage firms market their services through aggressive pricing andpromotional efforts. In addition, some competitors have much more extensiveinvestment banking activities than we do and therefore, may possess a relativeadvantage with regard to access to deal flow and capital.

 

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

 

*We may experience reduced revenuedue to declining market volume, securities prices and liquidity, which can alsocause counterparties to fail to perform.*

 

Our revenue may decrease in the event of a decline in the market volumeof securities transactions, prices or liquidity. Declines in the volume ofsecurities transactions and in market liquidity generally result in lowerrevenue from trading activities and commissions. Lower price levels ofsecurities may also result in a reduction in our revenue from corporate financefees, as well as losses from declines in the market value of securities held byus in trading. Sudden sharp declines in market values of securities can resultin illiquid markets and the failure of counterparties to perform theirobligations, as well as increases in claims and litigation, includingarbitration claims from customers. In such markets, we may incur reducedrevenue or losses in our principal trading, market-making, investment banking, andadvisory services activities.

 

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

 

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

 

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

 

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

 

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

 

•     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 a capital marketsadvisory transaction only when we have rendered the services, the client iscontractually obligated to pay and collection is probable; generally, most ofthe fee is earned only upon the closing of a transaction. Accordingly, thetiming of our recognition of revenue from a significant transaction canmaterially affect our quarterly operating results.

 

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

 

Because we have registered Merriman Curhan Ford & Co. with theSecurities and Exchange Commission, or SEC, and the National Association ofSecurities Dealers, Inc., or NASD, as a securities broker-dealer, we aresubject to extensive regulation under federal and state laws, as well asself-regulatory organizations. The principal purpose of regulation anddiscipline of broker-dealers is the protection of customers and the securitiesmarkets rather than protection of creditors and stockholders of broker-dealers.The Securities and Exchange Commission is the federal agency charged withadministration of the federal securities laws. Much of the regulation ofbroker-dealers, however, has been delegated to self-regulatory organizations,such as the NASD and national securities exchanges. The NASD is our primaryself-regulatory organization. These self-regulatory organizations adopt rules,which are subject to SEC approval, that govern the industry and conductperiodic examinations of member broker-dealers. Broker-dealers are also subjectto regulation by state securities commissions in the states in which they areregistered. The regulations to which broker-dealers are subject cover allaspects of the securities business, including net capital requirements, salesmethods, trading practices among broker-dealers, capital structure ofsecurities 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 rulesand regulations, our business may be materially and adversely affected.

 

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The regulatory environment in which we operate is also subject tochange. Our business may be adversely affected as a result of new or revisedlegislation or regulations imposed by the SEC, other United States or foreigngovernmental regulatory authorities or the NASD. We also may be adverselyaffected by changes in the interpretation or enforcement of existing laws andrules by these governmental authorities and the NASD.

 

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

 

We depend on the continued services and performance of D. JonathanMerriman, our Chairman and Chief Executive Officer, for our future success. Wecurrently have an employment agreement with Mr. Merriman, which ends onJanuary 1, 2007, but can be terminated by either party on 60 days’ notice. Theagreement contains provisions that obligate us to make certain payments toMr. Merriman and substantially reduce vesting periods of options grantedto him if we should terminate him without cause or certain events resulting ina change of control of our Board were to occur.

 

In addition to Mr. Merriman, we are currently managed by a smallnumber of key management and operating personnel. We do not maintain “key man”insurance on any employee. Our future success depends, in part, on thecontinued service of our key executive, management and technical personnel, andour ability to attract highly skilled employees. Our business could be harmedif any key officer or employee were unable or unwilling to continue in his orher current position. From time to time we have experienced, and we expect tocontinue to experience, difficulty in hiring and retaining highly skilledemployees. Competition for employees in our industry is significant. If we areunable to retain our key employees or attract, integrate or retain other highlyqualified employees in the future, such failure may have a material adverseeffect on our business and results of operations.

 

*Our business is dependent on theservices of skilled professionals, and may suffer if we can not recruit orretain such skilled professionals.*

 

During the six months ended June 30, 2005, one sales professionalaccounted for 13% of our revenue. We have a number of revenue producersemployed by our securities brokerage and investment banking subsidiary. We donot have employment contracts with these employees. The loss of one or more ofthese employees could adversely affect our business and results of operations.

 

*Our compensation structure maynegatively impact our financial condition if we are not able to effectivelymanage our expenses and cash flows.*

 

We are able to recruit and retain investment banking, research andsales and trading professionals, in part because our business model providesthat we pay our revenue producing employees a percentage of their earnedrevenue. Compensation and benefits is our largest expenditure and this variablecompensation component represents a significant proportion of this expense.Compensation for our employees is derived as a percentage of our revenueregardless of the profitability of the Company. Therefore, we may continue topay individual revenue producers a significant amount of cash compensation asthe overall business experiences negative cash flows and/or net losses. We maynot be able to recruit or retain revenue producing employees if we modify oreliminate the variable compensation component from our business model.

 

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

 

During the six months ended June 30, 2005, one investment bankingcustomer accounted for 12% of our revenue. We cannot assure you that we willnot become dependent on one customer, or on a small number of customers, for alarge percentage of our revenue in the future. If we do become dependent on asingle customer or small group of customers, the loss of one or more largecustomers could materially adversely affect our business and results ofoperations.

 

*We may suffer losses through ourinvestments in securities purchased in secondary market transactions or privateplacements.*

 

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

 

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*We may be unable to successfullyintegrate acquired businesses into our existing business and operations.*

 

On February 28, 2005, the Company acquired Catalyst Financial Planning& Investment Management, Inc., a registered investment advisor with over$100 million in assets under management. We may experience difficultyintegrating the operations of Catalyst into our existing business andoperations including our accounting, finance, compensation, informationtechnology and management systems. We may not be able to retain the services ofCatalyst employees. These factors could result in higher than anticipated costsassociated with the Catalyst acquisition. Additionally, they may cause revenuefrom the Catalyst acquisition to be lower than forecast. If costs are higher orrevenue lower than we expect, our business and results of operations could bematerially adversely affected. Although we have no specific plans to do so atthis time, we may buy one or more other businesses in the future. If we areunable to successfully integrate such businesses into our existing business andoperations in the future, our business and results of operations could bematerially adversely affected

 

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

 

We plan to expand our operations. Our growth, if it occurs, will imposesignificant demands on our management, financial, technical and otherresources. We must adapt to changing business conditions and improve existingsystems or implement new systems for our financial and management controls,reporting systems and procedures and expand, train and manage a growingemployee base in order to manage our future growth. We may not be able toimplement improvements to our internal reporting systems in an efficient andtimely manner and may discover deficiencies in existing systems and controls.We believe that future growth will require implementation of new and enhancedcommunications and information systems and training of our personnel to operatesuch systems. Furthermore, we may acquire existing companies or enter intostrategic alliances with third parties, in order to achieve rapid growth. Forus to succeed, we must make our existing business and systems work effectivelywith those of any strategic partners without undue expense, managementdistraction or other disruptions to our business. We may be unable to implementour business plan if we fail to manage any of the above growth challengessuccessfully. Our financial results may suffer and we could be materially andadversely affected if that occurs.

 

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

 

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

 

*We are highly dependent onproprietary and third-party systems; therefore, system failures couldsignificantly disrupt our business.*

 

Our business is highly dependent on communications and informationsystems, including systems provided by our clearing brokers. Any failure orinterruption of our systems, the systems of our clearing broker or third partytrading systems could cause delays or other problems in our securities tradingactivities, which could have a material adverse effect on our operatingresults.

 

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

 

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

 

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

 

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•             sales ofcommon stock, conversion of securities convertible into common stock, exerciseof options and warrants to purchase common stock or termination of stocktransfer 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 one of the factorsnoted herein could have an adverse effect on the value of our common stock.

 

In addition, the stock market in recent years has experiencedsignificant price and volume fluctuations that have particularly affected themarket prices of equity securities of many companies and that often have beenunrelated to the operating performance of such companies. These marketfluctuations have adversely impacted the price of our common stock in the pastand may do so in the future.

 

*We could be sued in a securitiesclass action lawsuit.*

 

In the past, following periods of volatility in the market price of acompany’s securities, securities class action litigation often has beeninstituted against that company. Such litigation is expensive and divertsmanagement’s attention and resources. We can not assure you that we will not besubject to such litigation. If we are subject to such litigation, even if weultimately prevail, our business and financial condition may be adverselyaffected.

 

*Your ability to sell your shares maybe restricted because there is a limited trading market for ourcommon stock.*

 

Although our common stock is currently traded on the American StockExchange, a trading market in our stock has been sporadic. Accordingly, you maynot be able to sell your shares when you want or at the price you want.

 

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

 

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

 

*Because our Board of Directors canissue common stock without stockholder approval, you could experiencesubstantial dilution.*

 

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

 

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

 

Our Articles of Incorporation authorize our Board of Directors to issueup to an additional 37,293,000 shares of preferred stock, without approval fromour stockholders. If you hold our common stock, this means that our Board ofDirectors has the right, without your approval as a common stockholder, to fixthe relative rights and preferences of the preferred stock. This would affectyour rights as a common stockholder regarding, among other things, dividendsand liquidation. We could also use the preferred stock to deter or delay a changein control of our Company that may be opposed by our management even if thetransaction might be favorable to you as a common stockholder.

 

*Our officers and directors exercisesignificant control over our affairs, which could result in their taking actionsof which other stockholders do not approve.*

 

Our executive officers and directors, and entities affiliated withthem, currently control approximately 23% of our outstanding common stockincluding exercise of their options and warrants. These stockholders, if theyact together, will be able to exercise substantial influence over all mattersrequiring approval by our stockholders, including the election of directors andapproval of significant corporate transactions. This concentration of ownershipmay also have the effect of delaying or preventing a change in control of usand might affect the market price of our common stock.

 

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

 

We have a significant number of outstanding stock options and warrants.During the six months ended June 30, 2005, shares issuable upon the exercise ofthese options and warrants, at prices ranging currently from approximately$0.18 to $1.46 per share, represent approximately 16%** **of our total outstanding stock on a fully diluted basisusing the treasury stock method.

 

The exercise of the outstanding options and warrants would dilute thethen-existing stockholders’ percentage ownership of our common stock. Any salesresulting from the exercise of options and warrants in the public market couldadversely affect prevailing market prices for our common stock. Moreover, ourability to obtain additional equity capital could be adversely affected sincethe holders of outstanding options and warrants may exercise them at a timewhen we would also wish to enter the market to obtain capital on terms morefavorable than those provided by such options and warrants. We lack controlover the timing of any exercise or the number of shares issued or sold ifexercises occur.

 

**Item  3.****      Quantitative and Qualitative Disclosures AboutMarket Risk**

 

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

 

*Equity Price Risk*

 

The potential for changes in the market value of our trading positionsis referred to as “market risk.” Our trading positions result from proprietarytrading activities. 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.

 

*Interest Rate Risk*

 

Our exposure to market risk resulting from changes in interest ratesrelates primarily to our investment portfolio and long term debt obligations.Our interest income and cash flows may be impacted by changes in the generallevel of U.S. interest rates. We do not hedge this exposure because we believethat we are not subject to any material market risk exposure due to theshort-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 debt obligations bear interest at a fixed rate.Accordingly, an immediate 10% increase or decrease in current interest rateswould not have an impact on our interest expense or cash flows. The fair marketvalue of our long term fixed interest rate debt is subject to interest raterisk. Generally, the fair market value of fixed interest rate debt willincrease as interest rates fall and decrease as interest rates rise. We wouldnot expect an immediate 10% increase or decrease in current interest rates tohave a material impact on the fair market value of our long term debtobligations.

 

*Foreign Currency Risk*

 

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

 

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**Item  4.****      Controls and Procedures**

 

**Evaluation of Disclosure Controls andProcedures** - We have established disclosure controls andprocedures to ensure that material information relating to the Company,including its consolidated subsidiaries, is made known to the officers whocertify the Company’s financial reports and to other members of seniormanagement and the Board of Directors.

 

Based on their evaluation of the Company’s disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934), the Principal Executive Officer and PrincipalFinancial Officer of the Company have concluded that the disclosure controlsand procedures are effective as of June 30, 2005.

 

**Changes in internal controls -**During the first quarter 2005, the Company upgraded its accounting system fromQuickBooks to MAS 500, an enterprise management system. This system representsthe core accounting platform for the Company and integrates with other businessapplications used by the Company. Appropriate testing of the system wasperformed by the Company prior to adding MAS 500 into operation. Aside from thechange just described, there was no other change in the Company’s internalcontrol over financial reporting (as defined in Rules 13a-15(d) and 15d-15(d)of the Exchange Act) that occurred during the six months ended June 30, 2005,that materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**Item  1.****      Legal Proceedings**

 

**Merriman Curhan Ford & Co. v. TheSeidler Companies, Inc. — NASD Arbitration**

 

During 2004, our broker-dealer subsidiary hired a research analyst.Prior to employment with Merriman Curhan Ford & Co. the analyst wasemployed by The Seidler Companies, Inc., or Seidler, in a similar capacity. Theanalyst was employed under an employment contract that included terms whichgeneral counsel and outside counsel believe unlawfully restrict the analyst’semployment activities.

 

In March 2004, we acted as a co-agents for a small private placementfor a client. The client was introduced to one of our investment bankingmanaging directors. At the time of introduction, Seidler had been trying to winthe investment banking business, but had failed to obtain a signed engagementletter with the client. We subsequently received a signed engagement letterfrom the client that named Merriman Curhan Ford & Co. as co-placementagent. The investment banking transaction was completed.

 

Thereafter, in March 2004 we received a cease and desist letter fromattorneys representing Seidler. Seidler claims that our analyst usedproprietary information in violation of his employment agreement when introducingMerriman Curhan Ford & Co. to the client. Seidler further claims that weused unfair business tactics to win the business. In response to the claims,Merriman Curhan Ford & Co. and our analyst filed a claim in arbitrationwith the NASD in June 2004. It is our belief that as members of the NASD,Merriman Curhan Ford & Co. and Seidler must resolve their disputes beforethe NASD arbitration board. We allege unfair business practice and seek adeclaration that our analyst’s prior employment contract is unenforceable.

 

On July 16, 2004, we were served with a complaint from Seidler filed inthe Los Angeles County Superior Court. Plaintiffs are seeking unspecifieddamages. We have successfully moved to stay the legal action. An arbitrationpanel has been selected and a hearing is scheduled for October 2005.  Based upon the facts as we know them to date,we do not believe that the outcome will have a material effect on the Company.

 

**Westerman v. Western CapitalFinancial Group – NASD Arbitration**

 

In May 2005, our broker-dealer subsidiary Merriman Curhan Ford &Co. was served with a claim in NASD Arbitration by Ms. Westerman.  The claim names Western Capital FinancialGroup as one of several defendants. Western Capital Financial Group is the predecessor name of MerrimanCurhan 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 purchase of a variable annuityproduct in January 1990 from a predecessor of our broker-dealersubsidiary.  MCF Corporation acquiredMerriman 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 theory of predecessor liability against MerrimanCurhan Ford & Co.  Claimant prays formonetary damages in excess of $300,000 against the eleven named respondents.  We do not believe that Ms. Westerman’s claimsagainst Merriman Curhan Ford & Co. are meritorious.  We are in the early pleading stages of thematter and a hearing date has not been assigned.  Based upon the facts as we know them to date,we do not believe that the outcome will have a material effect on the Company.

 

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

 

**Item 2.    RecentSales of Unregistered Securities**

 

On May 4, 2005, MCF Corporation entered into a strategic alliance withAscend Services Ltd., or Ascend.  Inconjunction with this alliance, Ascend has entered into a stock purchaseagreement with the Company.  Ascend hasalso engaged the Company as an investment advisor for its short-term high credit-qualityportfolio.  The Company issued 1,078,749shares of its common stock and Ascend has issued an unsecured promissory notepayable to the Company in the amount of $1.5 million.  The shares will be held initially inescrow.  Upon Ascend achieving specifiedmilestones, the 1,078,749 shares of common stock will be released from escrowin three installments of 359,583 shares and provided to Ascend.  Upon satisfaction of the conditions specifiedin the escrow agreement and simultaneous with the release of the related stockcertificates, the related amount of the promissory note shall become effectiveand start accruing interest.  Thepromissory note accrues interest at 10% per annum and matures on February 28,2006.  The securities described in thisparagraph: (i) were issued to a private investor without the involvement ofunderwriters; (ii) were issued in reliance on the exemption from registrationrequirements contained in Section 4(2) of the Securities Act of 1933; and (iii)carried certain registration rights.

 

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**Item  6.****      Exhibits and Reports on Form 8-K**

 
| (a)    |   | Exhibits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   | 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.*

 

10.44 Promissory Note issued by Ascend Services Ltd  dated April 29, 2005.*

 

10.45 Employment Agreement between MCF Corporation  and Gregory S. Curhan, dated January 1, 2005.

 

10.46 Employment Agreement between MCF Corporation  and Robert E. Ford, dated January 1, 2005.

 

31.1 Certification of Chief Executive Officer  Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as  Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2 Certification of Chief Financial Officer  Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as  Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1 Certification of Chief Executive Officer and  Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.

  |
|   |
|   |   | * Incorporated by reference to the registrant’s  Report on Form 10-Q for the quarter ended March 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (b)    |   | Reports on Form 8-K                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   | Current Report on Form 8-K dated April 13, 2005,  reporting the announcement that Merriman Curhan Ford & Co. was ranked the  number one placement agent for PIPE transactions for the first quarter 2005  according to year-to-date league table as of April 1, 2005 prepared by  PlacementTracker, a service of Sagient Research Systems, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   | Current Report on Form 8-K dated May 5, 2005,  reporting the announcement of earnings for the first quarter of 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

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**SIGNATURES**

 

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

 
|           | MCF CORPORATION |
|----------------|-----------------|
|           |            |
| August 9, 2005 | By:             | /s/    D. JONATHAN MERRIMAN |   |
|           |            | D. Jonathan Merriman, |
|           |            | Chairman of the Board and Chief Executive  Officer |
|           |            | (Principal Executive Officer) |
|           |            |   |
|           |            |   |
| August 9, 2005 | By:             | /s/    JOHN D. HIESTAND |   |
|           |            | John D. Hiestand |
|           |            | Chief Financial Officer |
|           |            | (Principal Financial Officer) |

 

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