SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549










FORM
10-Q




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





For the
quarterly period ended September 30, 2009




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





For the
Transition Period from ____________ to ____________.





Commission
file number: 1-15831





MERRIMAN
CURHAN FORD GROUP, INC.


(Exact
Name of Registrant as Specified in its Charter)




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 reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.


Yes xNo  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes  ̈No  ̈





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




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





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


Yes  ̈No x





The
number of shares of Registrant’s common stock outstanding as of November 13,
2009 was 12,742,165.














Merriman
Curhan Ford Group, Inc.


Index




Page No.PART
      I FINANCIAL INFORMATIONITEM
      1. Financial Statements (unaudited)Consolidated
      Statements of Operations For the Three Months and Nine Months Ended
      September 30, 2009 and 2008
            
            
            3Consolidated
      Statements of Financial Condition as of September 30, 2009 and December
      31, 2008
            
            
            4Consolidated
      Statements of Cash Flows For the Nine Months Ended September 30, 2009 and
      2008
            
            
            5Notes
      to Consolidated Financial Statements
            
            
            6ITEM
      2. Management's Discussion and Analysis of Financial Condition and Results
      of Operations
            
            
            27ITEM
      3. Quantitative and Qualitative Disclosures About Market
    Risk
            
            
            46ITEM
      4. Controls and Procedures
            
            
            47PART
      II OTHER INFORMATIONITEM
      1. Legal Proceedings
            
            
            48ITEM
      1A. Risk Factors
            
            
            53ITEM
      6. Exhibits
            
            
            54Signatures
            
            
            55Certifications





2





PART
I.  FINANCIAL INFORMATION





ITEM
1.   Financial Statements (unaudited)


MERRIMAN
CURHAN FORD GROUP, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(unaudited)




Three Months Ended
            
            
            Nine Months EndedSeptember 30,
              2009
            
            
            September 30,
              2008
            
            
            September 30,
              2009
            
            
            September 30,
              2008Revenue:Commissions
            
            $
            9,804,718
            
            
            $
            7,992,614
            
            
            $
            28,892,568
            
            
            $
            24,353,696Principal
      transactions
            
            
            (35,522
            )
            
            
            (5,384,303
            )
            
            
            (131,020
            )
            
            
            (5,280,550
            )Investment
      banking
            
            
            3,127,596
            
            
            
            1,600,260
            
            
            
            5,411,463
            
            
            
            9,423,666Advisory
      and other fees
            
            
            411,602
            
            
            
            341,656
            
            
            
            1,618,282
            
            
            
            581,256Total
      revenue
            
            
            13,308,394
            
            
            
            4,550,227
            
            
            
            35,791,293
            
            
            
            29,078,068Operating
      expenses:Compensation
      and benefits
            
            
            10,230,680
            
            
            
            7,876,092
            
            
            
            29,687,486
            
            
            
            31,205,145Brokerage
      and clearing fees
            
            
            208,051
            
            
            
            558,344
            
            
            
            791,407
            
            
            
            2,042,828Professional
      services
            
            
            1,063,883
            
            
            
            3,994,278
            
            
            
            3,096,428
            
            
            
            7,356,228Occupancy
      and equipment
            
            
            551,300
            
            
            
            540,104
            
            
            
            1,617,347
            
            
            
            1,601,104Communications
      and technology
            
            
            881,879
            
            
            
            662,912
            
            
            
            2,442,979
            
            
            
            2,556,652Depreciation
      and amortization
            
            
            109,922
            
            
            
            279,261
            
            
            
            372,913
            
            
            
            537,166Travel
      and entertainment
            
            
            449,108
            
            
            
            634,689
            
            
            
            1,058,840
            
            
            
            2,528,083Litigation
      settlement expenses
            
            
            5,334,926
            
            
            ─
            
            
            
            5,334,926
            
            
            ─Other
      expenses
            
            
            369,581
            
            
            
            1,295,405
            
            
            
            1,631,435
            
            
            
            3,297,102Total
      operating expenses
            
            
            19,199,330
            
            
            
            15,841,085
            
            
            
            46,033,761
            
            
            
            51,124,308Operating
      loss
            
            
            (5,890,936
            )
            
            
            (11,290,858
            )
            
            
            (10,242,468
            )
            
            
            (22,046,240
            )Other
      income
            
            ─
            
            ─
            
            
            
            2,000,000
            
            ─Change
      in fair value of warrant liability
            
            
            (9,628,460
            )
            
            ─
            
            
            
            (9,628,460
            )
            
            ─Interest
      income
            
            
            4,425
            
            
            
            195,283
            
            
            
            13,591
            
            
            
            325,703Interest
      expense
            
            
            (1,289,401
            )
            
            
            (20,236
            )
            
            
            (1,333,569
            )
            
            
            (53,619
            )Loss
      before provision for income tax
            
            
            (16,804,372
            )
            
            
            (11,115,811
            )
            
            
            (19,190,906
            )
            
            
            (21,774,156
            )(Provision
      for) benefit from income tax
            
            
            235,727
            
            
            
            (198,014
            )
            
            
            230,528
            
            
            
            1,640,730Loss
      from continued operations
            
            
            (16,568,645
            )
            
            
            (11,313,825
            )
            
            
            (18,960,378
            )
            
            
            (20,133,426
            )Loss
      from discontinued operations
            
            ─
            
            
            
            (409,513
            )
            
            
            (94,894
            )
            
            
            (3,753,729
            )Net
      loss
            
            
            (16,568,645
            )
            
            
            (11,723,338
            )
            
            
            (19,055,272
            )
            
            
            (23,887,155
            )Preferred
      stock deemed dividend
            
            
            (5,066,702
            )
            
            ─
            
            
            
            (5,066,702
            )
            
            ─Preferred
      stock cash dividend
            
            
            (39,100
            )
            
            ─
            
            
            
            (39,100
            )
            
            ─Net
      loss attributable to common shareholders
            
            $
            (21,674,447
            )
            
            $
            (11,723,338
            )
            
            $
            (24,161,074
            )
            
            $
            (23,887,155
            )Basic
      and diluted loss per share attributable to common shareholders – continued
      operations
            
            
            (1.71
            )
            
            
            (0.89
            )
            
            
            (1.89
            )
            
            
            (1.61
            )Basic
      and diluted loss per share attributable to common shareholders –
      discontinued operations
            
            ─
            
            
            
            (0.04
            )
            
            
            (0.01
            )
            
            
            (0.30
            )Basic
      and diluted net loss per share attributable to common
      shareholders
            
            $
            (1.71
            )
            
            $
            (0.93
            )
            
            $
            (1.90
            )
            
            $
            (1.91
            )Weighted
      average common shares outstanding:Basic
      and Diluted
            
            
            12,668,073
            
            
            
            12,672,598
            
            
            
            12,692,013
            
            
            
            12,498,687





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




3




MERRIMAN
CURHAN FORD GROUP, INC.


CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION


(unaudited)







September 30,
                  2009
                
                
                December 31,
                  2008ASSETSCash
      and cash equivalents
                
                $
                7,525,918
                
                
                $
                6,358,128Securities
      owned:Marketable,
      at fair value
                
                
                4,628,719
                
                
                
                4,622,577Not
      readily marketable, at estimated fair value
                
                
                284,540
                
                
                
                366,061Other
                
                
                138,032
                
                
                
                185,065Restricted
      cash
                
                
                1,072,771
                
                
                
                1,131,182Due
      from clearing broker
                
                
                2,113,303
                
                
                
                1,752,535Accounts
      receivable, net
                
                
                2,045,059
                
                
                
                612,234Prepaid
      expenses and other assets
                
                
                748,412
                
                
                
                619,759Equipment
      and fixtures, net
                
                
                592,720
                
                
                
                1,260,011Assets
      held for sale
                
                
                –
                
                
                
                1,958,038Total
      assets
                
                $
                19,149,474
                
                
                $
                18,865,590LIABILITIES
      AND STOCKHOLDERS' EQUITYAccounts
      payable
                
                $
                774,774
                
                
                $
                712,591Commissions
      and bonus payable
                
                
                3,926,424
                
                
                
                3,182,941Accrued
      expenses
                
                
                1,953,594
                
                
                
                3,637,345Due
      to clearing and other brokers
                
                
                9,177
                
                
                
                28,022Securities
      sold, not yet purchased
                
                
                838,199
                
                
                
                903,217Deferred
      revenue
                
                
                338,648
                
                
                
                709,691Capital
      lease obligation
                
                
                514,184
                
                
                
                923,683Warrant
      liability
                
                
                26,521,711
                
                
                ─Liabilities
      held for sale
                
                
                –
                
                
                
                1,052,899Total
      liabilities
                
                
                34,876,711
                
                
                
                11,150,389Commitments
      and contingenciesStockholders'
      equity:Preferred
      stock, Series A—$0.0001 par value; 2,000,000 shares authorized; 0 shares
      issued and outstanding as of September 30, 2009 and December 31, 2008,;
      aggregate liquidation preference of $0
                
                ─
                
                
                ─Preferred
      stock, Series B—$0.0001 par value; 12,500,000 shares authorized; 1,250,000
      shares issued and 0 shares outstanding as of September 30, 2009 and
      December 31, 2008; aggregate liquidation preference of $0
                
                ─
                
                
                ─Preferred
      stock, Series C—$0.0001 par value; 14,200,000 shares authorized; 1,685,714
      shares issued and 0 shares outstanding as of September 30, 2009 and
      December 31, 2008; aggregate liquidation preference of $0
                
                ─
                
                
                ─Convertible
      Preferred stock, Series D—$0.0001 par value; 24,000,000 shares authorized,
      23,720,916 shares issued and 23,720,916 shares outstanding as of September
      30, 2009; and 0 shares authorized, issued and outstanding as of December
      31, 2008; aggregate liquidation preference of $10,199,994 prior to
      conversion, and pari passu with common stock on
conversion.
                
                
                2,372
                
                
                ─Common
      stock, $0.0001 par value; 300,000,000 shares authorized; 12,915,442 and
      12,756,656 shares issued and 12,713,565 and 12,730,218 shares outstanding
      as of September 30, 2009 and December 31, 2008,
    respectively
                
                
                1,292
                
                
                
                1,278Additional
      paid-in capital
                
                
                122,903,643
                
                
                
                127,193,195Treasury
      stock
                
                
                (225,613
                )
                
                
                (125,613
                )Accumulated
      deficit
                
                
                (138,408,931
                )
                
                
                (119,353,659
                )Total
      stockholders' (deficit) equity
                
                
                (15,727,237
                )
                
                
                7,715,201Total
      liabilities and stockholders' (deficit) equity
                
                $
                19,149,474
                
                
                $
                18,865,590


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




4




MERRIMAN
CURHAN FORD GROUP, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(unaudited)




Nine Months Ended
              September 30,2009
            
            
            2008Cash
      flows from operating activities:Net
      loss
            
            $
            (19,055,272
            )
            
            $
            (23,887,155
            )Adjustments
      to reconcile net loss to cash used in operating
activities:Depreciation
      and amortization
            
            
            383,523
            
            
            
            614,390Gain
      on sale of ICD
            
            
            (2,000,000
            )
            
            
            –Stock-based
      compensation
            
            
            429,986
            
            
            
            1,897,033Amortization
      of discounts on notes payable
            
            
            552,639
            
            
            
            2,584Amortization
      of debt issue costs
            
            
            346,995
            
            
            
            –Amortization
      of beneficial conversion feature
            
            
            180,639
            
            
            
            –Change
      in fair value of warrant liability
            
            
            9,628,460
            
            
            
            –Non-cash
      legal settlement expense
            
            
            1,230,953
            
            
            
            –Non-cash
      professional services
            
            
            35,000
            
            
            
            –Securities
      received for services
            
            
            (290,331
            )
            
            
            (1,713,361)Loss
      on disposal of equipment and fixtures
            
            
            294,378
            
            
            
            –Provision
      for bad debt
            
            
            58,074
            
            
            
            156,300Unrealized
      loss on securities owned
            
            
            480,292
            
            
            
            8,105,058Amortization
      of intangible assets
            
            
            –
            
            
            
            349,607Impairment
      of goodwill
            
            
            –
            
            
            
            2,208,735Impairment
      of intangible assets
            
            
            –
            
            
            
            392,781Changes
      in operating assets and liabilities:Securities
      owned
            
            
            (132,567
            )
            
            
            (1,793,662
            )Restricted
      cash
            
            
            58,411
            
            
            
            (441,875
            )Due
      from clearing broker
            
            
            (360,768
            )
            
            
            (5,102
            )Accounts
      receivable
            
            
            (1,261,782
            )
            
            
            1,981,574Prepaid
      expenses and other assets
            
            
            172,601
            
            
            
            216,664Accounts
      payable
            
            
            (80,174
            )
            
            
            (211,350
            )Commissions
      and bonus payable
            
            
            738,270
            
            
            
            (11,375,042
            )Accrued
      expenses
            
            
            (2,436,032
            )
            
            
            (265,235
            )Due
      to clearing and other brokers
            
            
            (18,845
            )
            
            
            6,368Net
      cash used in operating activities
            
            
            (11,045,550
            )
            
            
            (23,761,688
            )Cash
      flows from investing activities:Purchase
      of equipment and fixtures
            
            
            –
            
            
            
            (202,398
            )Proceeds
      from sale of Panel
            
            
            702,966
            
            
            
            –Proceeds
      from sale of ICD
            
            
            2,000,000
            
            
            
            –Net
      cash provided by (used in) investing activities
            
            
            2,702,966
            
            
            
            (202,398
            )Cash
      flows from financing activities:Proceeds
      from the issuance of Series D Convertible Preferred Stock, net of
      reinvestments of previous bridge financing and expenses
            
            
            8,808,256
            
            
            
            –Proceeds
      from the exercise of stock options and warrants
            
            
            –
            
            
            
            436,225Debt
      service principal payments
            
            
            (520,774
            )
            
            
            (519,585
            )Issuance
      of bridge note
            
            
            500,000
            
            
            
            –Proceeds
      from the issuance of convertible notes payable
            
            
            625,000
            
            
            
            –Payments
      on convertible notes payable
            
            
            (125,000
            )
            
            
            –Proceeds
      from the issuance of unsecured promissory notes payable
            
            
            300,000
            
            
            
            –Payments
      on unsecured promissory notes payable
            
            
            (300,000
            )
            
            
            –Net
      cash provided by (used in) financing activities
            
            
            9,287,482
            
            
            
            (83,260
            )Increase
      (decrease) in cash and cash equivalents
            
            
            944,898
            
            
            
            (24,047,446
            )Cash
      and cash equivalents at beginning of period
            
            
            6,358,128
            
            
            
            31,962,201Cash
      and cash equivalents, assets held for sale
            
            
            222,892
            
            
            
            –Cash
      and cash equivalents at end of period
            
            $
            7,525,918
            
            
            $
            7,914,755Supplementary
      disclosure of cash flow information:Cash
      paid during the period:Interest
            
            $
            252,252
            
            
            $
            59,089Income
      taxes
            
            $
            5,200
            
            
            $
            574,497Supplementary
      non-cash information:Stock
      received as part of sale of Panel
            
            
            100,000
            
            
            
            –Conversion
      of note payable into common stock
            
            
            –
            
            
            
            200,000Conversion
      of note payable and accrued interest into Series D Convertible Preferred
      Stock
            
            
            1,060,717
            
            
            
            –Conversion
      of legal settlement into Series D Convertible Preferred
    Stock
            
            
            296,027Conversion
      of professional services into Series D Convertible Preferred
      Stock
            
            
            35,000Property
      acquired through capitalized leases
            
            
            –
            
            
            
            805,776




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




5




MERRIMAN
CURHAN FORD GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





1.
Significant Accounting Policies





Basis
of Presentation





The
interim unaudited financial statements included herein for Merriman Curhan Ford
Group, Inc. (formerly MCF Corporation), or the Company, have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, the financial statements included in this report
reflect all normal recurring adjustments that the Company considers necessary
for the fair presentation of the results of operations for the interim periods
covered and the financial position of the Company at the date of the interim
statement of financial condition. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations. However, the
Company believes that the disclosures are adequate to understand the information
presented. The operating results for interim periods are not necessarily
indicative of the operating results for the entire year. These financial
statements should be read in conjunction with the Company’s 2008 audited
consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K and on Form 10-K/A for the year ended
December 31, 2008.





Under
Accounting Standards Codification Topic (“ASC”) 855, “Subsequent Events”, the
Company has evaluated all subsequent events through November 16, 2009, the date
these consolidated financial statements were filed with the SEC.





Securities
Owned





“Securities
owned” and “Securities sold, but not yet purchased” in the consolidated
statements of financial condition consist of financial instruments carried at
fair value with related unrealized gains or losses recognized in the
consolidated statement of operations.   The securities owned are
classified into “Marketable”, “Non-marketable” and
“Other”.  Marketable securities are those that can readily be sold,
either through a stock exchange or through a direct sales
arrangement.  Non-marketable securities are typically securities
restricted under Rule 144A or have some restriction on their sale whether or not
a buyer is identified.  Other securities consist of investments
accounted for under the equity method.





Fair
Value of Financial Instruments





Substantially
all of the Company's financial instruments are recorded at fair value or
contract amounts that approximate fair value. Securities owned and securities
sold, not yet purchased are stated at fair value, with any related changes in
unrealized appreciation or depreciation reflected in principal transactions in
the consolidated statements of operations.  The carrying amounts of
the Company’s financial instruments, which include cash and cash equivalents,
restricted cash, securities owned, due from clearing broker, accounts
receivable, assets held for sale, accounts payable, commissions and bonus
payable, accrued expenses, due to clearing and other brokers, liabilities held
for sale and note payable approximate their fair values due to their short term
nature and, where applicable, market interest rates.





The
Company issued debt and equity instruments in the three months ended September
30, 2009, including Convertible Preferred Stock Series D on September 9,
2009.  At September 30, 2009, only the Convertible Preferred Stock
Series D and warrants for the purchase of the Company’s common stock remain
outstanding.  Please refer to Notes 3 and 4 for discussion and
disclosure of the instruments.





Fair
Value Measurement—Definition and Hierarchy





The
Company adopted the provisions of ASC 820, “Fair Value Measurement” and
Disclosures for our financial assets and liabilities. Under ASC 820, fair value
is defined as the price that would be received to sell an asset or paid to
transfer a liability (i.e.,  the “exit
price”) in an orderly transaction between market participants at the measurement
date.





Where
available, fair value is based on observable market prices or parameters or
derived from such prices or parameters. Where observable prices or inputs are
not available, valuation models are applied. These valuation techniques involve
some level of management estimation and judgment, the degree of which is
dependent on the price transparency for the instruments or market and the
instruments’ complexity. Assets and liabilities recorded at fair value in the
consolidated statement of financial condition are categorized based upon the
level of judgment associated with the inputs used to measure their fair value.
Hierarchical levels, defined by ASC 820 and directly related to the amount of
subjectivity associated with the inputs to fair valuation of these assets and
liabilities, are as follows:




6




MERRIMAN
CURHAN FORD GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED


(unaudited)





Level 1 —
Inputs are unadjusted, quoted prices in active markets for identical assets or
liabilities at the measurement date. The types of assets and liabilities carried
at Level 1 fair value generally are G-7 government and agency securities,
equities listed in active markets, investments in publicly traded mutual funds
with quoted market prices and listed derivatives.





Level 2 —
Inputs (other than quoted prices included in Level 1) are either directly or
indirectly observable for the asset or liability through correlation with market
data at the measurement date and for the duration of the instrument’s
anticipated life. Fair valued assets that are generally included in this
category are stock warrants for which there are market-based implied
volatilities, unregistered common stock and thinly traded common
stock.





Level 3 —
Inputs reflect management’s best estimate of what market participants would use
in pricing the asset or liability at the measurement date. Consideration is
given to the risk inherent in the valuation technique and the risk inherent in
the inputs to the model. Generally, assets carried at fair value and included in
this category include stock warrants for which market-based implied volatilities
are not available.





In
certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, for
disclosure purposes the level in the fair value hierarchy within which the fair
value measurement falls in its entirety is determined based on the lowest level
input that is significant to the fair value measurement in its
entirety.





For
further information on financial assets and liabilities that are measured at
fair value on a recurring and nonrecurring basis, and a description of valuation
techniques, see Note 6, Fair Value of Assets and Liabilities.





Investment
Banking Revenue





Investment
banking revenue includes underwriting and private placement agency fees earned
through the Company’s participation in public offerings and private placements
of equity and convertible debt securities and fees earned as financial advisor
in mergers and acquisitions and similar transactions. Underwriting revenue is
earned in securities offerings in which the Company acts as an underwriter and
includes management fees, selling concessions and underwriting fees. Fee revenue
relating to underwriting commitments is recorded when all significant items
relating to the underwriting cycle have been completed and the amount of the
underwriting revenue has been determined. This generally is the point at which
all of the following have occurred: (i) the issuer’s registration statement
has become effective with the SEC, or other offering documents are finalized,
(ii) the Company has made a firm commitment for the purchase of the shares
or debt from the issuer, and (iii) the Company has been informed of the
exact number of shares or the principal amount of debt that it has been
allotted.





Syndicate
expenses related to securities offerings in which the Company acts as
underwriter or agent are deferred until the related revenue is recognized or we
determine that it is more likely than not that the securities offerings will not
ultimately be completed. Underwriting revenue is presented net of related
expenses. As co-manager for registered equity underwriting transactions,
management must estimate the Company’s share of transaction related expenses
incurred by the lead manager in order to recognize revenue. Transaction related
expenses are deducted from the underwriting fee and therefore reduces the
revenue that is recognized as co-manager. Such amounts are adjusted to reflect
actual expenses in the period in which the Company receives the final
settlement, typically 90 days following the closing of the
transaction.





Merger
and acquisition fees and other advisory service revenue are generally earned and
recognized only upon successful completion of the engagement. Unreimbursed
expenses associated with private placement and advisory transactions are
recorded as expenses as incurred.





Commissions
and Principal Transactions Revenue





Commissions
revenue includes revenue resulting from executing trades in stock
exchange-listed securities, over-the counter securities and other transactions
as agent for the Company’s clients. Principal transactions consist of a portion
of dealer spreads attributed to the Company’s securities trading activities as
principal in NASDAQ-listed and other securities, and include transactions
derived from activities as a market-maker. Additionally, principal transactions
include gains and losses resulting from market price fluctuations that occur
while holding positions in trading security inventory. Commissions revenue and
related clearing expenses are recorded on a trade-date basis as security
transactions occur. Principal transactions in regular-way trades are recorded on
the trade date, as if they had settled. Profit and loss arising from all
securities and commodities transactions entered into for the account and risk of
the Company are recorded on a trade-date basis.




7




MERRIMAN
CURHAN FORD GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED


(unaudited)





1.
Significant Accounting Policies - Continued





Share-Based
Compensation Expense





The
Company measures and recognizes compensation expense based on estimated fair
values for all share-based awards made to employees and directors, including
stock options, non-vested stock, and participation in the Company’s employee
stock purchase plan. The Company estimates fair value of share-based awards on
the date of grant using the Black-Scholes option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense in the Company’s consolidated statements of operations over the
requisite service periods. Share-based compensation expense recognized in the
Company’s consolidated statement of operations includes compensation expense for
share-based awards granted (i) prior to, but not yet vested as of
December 31, 2005, based on the grant date fair value, and
(ii) subsequent to December 31, 2005. Compensation expense for all
share-based awards subsequent to December 31, 2005 is recognized using the
straight-line single-option method. Because share-based compensation expense is
based on awards that are ultimately expected to vest, share-based compensation
expense has been reduced to account for estimated forfeitures. Forfeitures are
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates.





To
calculate stock-based compensation resulting from the issuance of options,
restricted common stock, and warrants, the Company uses the Black-Scholes option
pricing model, which is affected by the Company’s stock price as well as
assumptions regarding a number of subjective variables. These variables include,
but are not limited to the Company’s expected stock price volatility over the
term of the awards, and actual and projected employee stock option exercise
behaviors. No tax benefits were attributed to the share-based compensation
expense because a valuation allowance was maintained for all net deferred tax
assets.





Warrant
Liabilities





Stock
warrants issued to our investors and creditors are rights to purchase our common
stock.  Such positions are considered illiquid and do not have readily
determinable fair values, and therefore require significant management judgment
or estimation. For the warrant liabilities, we use the Black-Scholes valuation
methodology or similar techniques. They are classified within Level 3 of the
fair value hierarchy. In accordance with ASC 820, assets measured at fair value
on a recurring basis are categorized based upon the lowest level of significant
input to the valuations.




Income
Taxes





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





Use
of Estimates





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





Segment
Reporting





The
Company has determined that it has only one operating and reportable segment,
Merriman Curhan Ford & Co., for the purpose of making operating decisions
and assessing performance, which comprised more than 90% of the Company’s
consolidated total assets as of September 30, 2009 and consolidated total
revenues for the three and nine month periods ended September 30,
2009.  In the fourth quarter of 2008, Merriman Curhan Ford Group, Inc.
decided to liquidate the funds under management by MCF Asset Management, LLC,
which was no longer considered by management as an operating and reportable
segment.   In January 2009, the Company sold its primary research
business, Panel Intelligence, LLC and has presented its results of operations as
discontinued operations.




8




MERRIMAN
CURHAN FORD GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED


(unaudited)





1.
Significant Accounting Policies - Continued





New
Accounting Pronouncements





On July
1, 2009, the Company adopted the FASB Accounting Standards Codification (“ASC”).
The ASC does not alter current U.S. GAAP, but rather integrated existing
accounting standards with other authoritative guidance. The ASC provides a
single source of authoritative U.S. GAAP for nongovernmental entities and
supersedes all other previously issued non-SEC accounting and reporting
guidance. The adoption of the ASC did not have any effect on our results of
operations or financial position. All prior references to U.S. GAAP have been
revised to conform to the ASC. Updates to the ASC are issued in the form of
Accounting Standards Updates (“ASU”).





In
January 1, 2009, the Company adopted the revisions to U.S. GAAP accounting
standards included in ASC 815, “Derivatives and Hedging”. ASC 815 applies to any
freestanding financial instruments or embedded features that have the
characteristics of a derivative and to any freestanding financial instruments
that are potentially settled in an entity’s own common stock. As a result of
adopting ASC 815, warrants to purchase shares of our common stock previously
treated as equity pursuant to the derivative treatment exemption were no longer
afforded equity treatment. The adoption
of the revised guidance related to derivatives and hedging resulted in
classification of certain warrants issued during the quarter in connection with
financing activities as derivative liabilities with mark to market accounting.
See Note 5 for additional information regarding the accounting for the warrant
liabilities.





In April
2009, the Company adopted the revisions to U.S. GAAP accounting standards
included in ASC  825, “Financial Instruments”, which requires public
companies to include disclosures required for all financial instruments within
the scope of ASC  825 in their interim financial statements. In
addition, this guidance requires disclosure about the method and significant
assumptions to estimate fair value of financial instruments and disclosure of
changes in the methods or significant assumptions, if any, during the period.
The adoption of the revised guidance related to financial statement disclosure
only and did not have any effect on our results of operations or financial
position.





Also in
April 2009, the Company adopted the revisions to U.S. GAAP accounting standards
included in ASC  820, which provides additional guidance in
determining whether a market for a financial asset is not active and a
transaction is not distressed for fair value measurement purposes. This
guidance does not have a significant impact on the Company’s financial position,
results of operations, or cash flows.





In May
2009, the Company adopted the revisions to U.S. GAAP accounting standards
included in ASC  855, “Subsequent Events”, which establishes the
accounting and disclosure of events that occur after the balance sheet date but
before financial statements are issued or are available to be issued. It
requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date. This guidance did not have any
impact on the Company’s financial position, results of operations, or cash
flows.





In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R)
(SFAS 167), which has not yet been codified in the ASC. This guidance is a
revision to pre-existing guidance pertaining to the consolidation and
disclosures of variable interest entities. Specifically, it changes how a
reporting entity determines when an entity that is insufficiently capitalized or
is not controlled through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entity’s purpose and design
and the reporting entity’s ability to direct the activities of the other entity
that most significantly impact the other entity’s economic
performance. This guidance will require a reporting entity to provide
additional disclosures about its involvement with variable interest entities and
any significant changes in risk exposure due to that involvement. A reporting
entity will be required to disclose how its involvement with a variable interest
entity affects the reporting entity’s financial statements. This guidance will
be effective at the start of a reporting entity’s first fiscal year beginning
after November 15, 2009. Early application is not permitted. The Company is
currently evaluating the impact on our financial statements, if any, upon
adoption.




9




MERRIMAN
CURHAN FORD GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED


(unaudited)




2.
Going Concern





These
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern for the foreseeable future and will be able to
realize its assets and discharge its liabilities in the normal course of
operations.





During
the nine months ended September 30, 2009, the Company incurred a net loss of
$19,055,000 and used $11,046,000 in net cash from operating activities, of which
$4,300,000 was for the settlement of certain legal cases against the
Company.  At September 30, 2009, the Company had cash and cash
equivalents of $7,526,000, marketable securities of $4,629,000 and receivables
from clearing broker of $2,113,000.  The Company had liabilities of
$34,877,000, of which $26,522,000 represent warrant liabilities which will not
be settled in cash. The Company’s ability to generate profits is highly
dependent on stock market trading volumes and the general economic environment.
As a result, the ability of the Company to meet its forward obligations and the
ability to continue as a going concern may be in question.





In 2008,
the Company incurred a net loss of over $30 million and used approximately $25
million in cash.





The
Company has largely completed implementing a plan to increase its operating
flexibility and extend its cash reserves. The plan primarily consisted of four
steps which are more fully described below:





1.
            Reduce
      operating costs (on-going)




2.
            Shed
      non-essential operations (mostly completed)3.
            Negotiate
      a settlement of pending litigations (completed for key
    cases)4.
            Raise
      additional capital (completed)




During
2008 and early 2009, the Company implemented significant expense control and
cost reduction programs focused on reducing cash losses and increasing
operational flexibility eliminating more than $10 million in annual operating
expenses. The primary contributor to these savings has been the elimination of
more than 50% of the Company’s workforce, as well as salary reductions. The
Company believes that it has been able to execute these reductions with limited
impact to its ability to generate and execute new business in the current market
environment. With these measures largely complete, the Company believes that it
has increased its ability to meet its obligations during the remainder of 2009
and beyond.





As a part
of the four-step plan mentioned above, in January of 2009, the Company shed
non-essential operations or those requiring substantial cash
infusions.  First, the Company sold Panel Intelligence, LLC on January
30, 2009. This subsidiary required a cash injection of $1,131,000 during 2008
and was projected to reach breakeven only in late 2009. Also in January 2009,
the Company sold its operations known as Institutional Cash Distributors (or
“ICD”) to a group of its employees. While this business was profitable,
management structured a transaction that substantially increased the near-term
flow of capital. The Company expects to finalize the sale of ICD when the buyers
obtain their broker-dealer license, although all the sales proceeds have been
received.





Finally,
the Company is in the process of shutting down MCF Asset Management, another
subsidiary in which the Company had invested considerable resources during 2008.
The result of these actions has been to reduce operating losses and increase
available cash, which will also strengthen its capital position.





The
Company settled seven of the civil litigations resulting from the alleged fraud
by its former customer William Del Biaggio III and its terminated employee Scott
Cacchione.  The total amount of the claims made in the cases amounted
to approximately $43.5 million.  These claims were settled for $4.3
million, the issuance of 5-year warrants to buy 1,538,461 shares of the
Company’s common stock at $0.65 each, and the assignment of rights to collect
certain insurance payments from the Company’s insurers.  The Company
substantially reduced its potential liability in these legal proceedings and the
expenses required to fight the allegations. In addition, it has also freed up
valuable management resources needed to face challenging market and economic
conditions.





10





MERRIMAN
CURHAN FORD GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED


(unaudited)





2.
Going Concern — continued





The
Company completed a strategic transaction in which it issued 23,720,916 shares
Series D Convertible Preferred Stock and the same number of warrants to purchase
the Company’s common stock.  The strategic transaction resulted in the
infusion of $10.2 million of capital prior to the payment of the settlement
amount of $4.3 million.  On May 29, June 30, and July 31, 2009, the
Company issued convertible notes, promissory notes and a secured promissory
note, respectively.  The principal and interest of all prior
financings were either redeemed or reinvested in the Series D Convertible
Preferred Stock.  At September 30, 2009, the Company had no debt
outstanding.  (See Notes 3 and 4.)





The
Company’s ability to meet its going concern obligations is highly dependent on
market and economic conditions.  Even after executing the majority of
its four-step plan, it will not be capable of sustaining losses of the same
magnitude as those incurred in 2008.  However, it is worth noting that
2008 was an unprecedented year both in terms of stock market volatility and
general economic challenges. Furthermore, the large number of civil litigations
and resulting SEC investigation was a massive drain on corporate resources. The
Company believes that its reduced cost structure, lower legal expenses and
shedding of non-core business have increased its operating runway. However, if
operating conditions worsen or if the company receives adverse judgments in its
pending litigations, it may not have the resources to meet its financial
obligations as a going concern.





These
financial statements do not reflect adjustments in the carrying values of assets
and liabilities, the reported revenues and expenses, and the balance sheet
classifications used that would be necessary if the going concern assumption
were not appropriate.  These adjustments could be
material.





As a
result of the completion of a major part of our plan and the issuance of the
Series D Convertible Preferred Stock, management will reassess the
appropriateness of this going concern disclosure at fiscal year
end.  There is no assurance whether or not going concern disclosures
will be required when assessed.





3.
Issuance of Debt





The
Company entered into a series of strategic transactions beginning in May 2009
which culminated in the issuance of Series D Convertible Preferred Stock on
September 8, 2009.  The May 2009 transaction is described in the
Company’s Form 10-Q for the period ending June 30, 2009 and below.





Convertible
Notes





On May
29, 2009, the Company sold and issued $525,000 in principal amount of Secured
Convertible Promissory Notes (each a “Note,” and collectively, the
“Notes”).  On June 1, 2009, the Company issued an additional $100,000
of Notes. The investor group included eight individuals, comprised of
certain officers and employees of the Company as well as an outside
investor.  The Notes were issued in a private placement exempt from
registration requirements.  There were no underwriters, underwriting
discounts or commissions involved in the transactions.  The Notes
carried an interest rate of 11% per annum, payable in cash quarterly, and were
due upon the earlier of two years from issuance or a change in control of the
Company.  As part of this transaction, the Company entered into a
Security Agreement with the investors in the Notes by which the Company pledged
all assets of the Company as security for the Notes.  If the Company
were to liquidate, the investors in the Notes would have to be repaid before any
other obligations of the Company, which would have reduced the amount of assets
available for distribution to the Company’s Stockholders.





The Notes
were convertible into common stock of the Company at a price of $0.50 per share
and came with warrants (the “Warrants”) to purchase additional shares of common
stock of the Company at $0.50 per share for a number of shares of common stock
equal to 75% of the principal amount of the Notes purchased, divided by
$0.50.  The Notes would have been convertible beginning six months
after issuance while the Warrants are exercisable at any time.





11




MERRIMAN
CURHAN FORD GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED


(unaudited)





3.
Issuance of Debt — continued





Both the
Notes and the Warrants have anti-dilution features so that if the Company pays
dividends, splits (forward or reverse) its common shares, or adjusts its shares
outstanding due to a combination, the conversion and exercises prices,
respectively, would also adjust proportionally.  The Notes had a
two-year maturity and the warrants will expire 10 years from the date of the
transaction.





The total
proceeds of $625,000 raised in the transaction described above were accounted
for under generally accepted accounting principles, ASC 470, “Debt”. The Company
has accounted for this transaction as the issuance of convertible debt and a
detachable stock warrant.  The total proceeds of $625,000 have been
allocated to these individual instruments based on their relative fair value as
determined by management.





The
Company estimated the fair value of its convertible debt at the time of
issuance.  As a result, the Notes and the Warrants were carried at
fair values of $419,000 and $206,000, respectively, at inception.  The
Notes had an embedded beneficial conversion option and the $419,000 value could
be bifurcated into a host valued at $239,000 and a beneficial conversion option
valued at $180,000.  The value of the Warrant was recorded as an
increase to additional paid-in capital.





The Notes
were converted into Series D Convertible Preferred Stock (see Note
4).  At September 30, 2009, no Notes remain outstanding.





Unsecured
Promissory Notes





On
June 30, 2009, the Company issued $300,000 in unsecured promissory notes to
three of its employees at an interest rate of 3.25%.  The maturity
date of the notes was October 31, 2009, although they were repayable earlier on
the occurrence of certain events. These notes were paid in full in
cash.  At September 30, 2009, no unsecured promissory notes remain
outstanding.





Bridge
Note





On July
31, 2009, the Company issued Mr. Ronald L. Chez, the lead investor in the Series
D Transaction, a Secured Promissory Note in the amount of $500,000 at an annual
interest rate of 9.00%.  The term of the Note was three years,
redeemable by Mr. Chez upon presentation of written demand.  The Note
was guaranteed personally by Messrs. Jonathan Merriman (CEO) and Peter Coleman
(CFO).  The Company issued 10-year warrants to purchase 1,162,791
shares of the Company’s common stock at an exercise price of $0.65 per share to
Mr. Chez in connection with this transaction. (See Note 5 regarding the
accounting for the warrants.)  Each of the two members of management
was compensated for the guarantee with identical warrants to purchase 581,395
shares of the Company’s common stock.





As
discussed above, the Company issued warrants to purchase 2,325,581 shares of
common stock in conjunction with the issuance of the Bridge Note. These warrants
were assessed in accordance with ASC 815 “Derivatives and Hedging” and it was
determined that the full ratchet provision included in the warrant agreement
triggered derivative liability accounting. As a result, in accordance with the
accounting guidance, the warrants were recorded at fair value and will be marked
to market on each reporting date with the change in fair value recorded in the
Consolidated Statements of Operations. Additionally, the proceeds of the
transaction will be allocated between the Bridge Note and the warrants using the
residual method in which proceeds are first allocated to the warrant liability
and any remaining value is then allocated to the Bridge Note.  The
warrants were valued using the Black-Scholes fair value model. The grant date
fair value of the warrants issued in connection with the Bridge Note to the note
holder and the members of management was $347,000 and $347,000, respectively.
The Company allocated all of the proceeds to the warrant liability and recorded
a full debt discount to be applied against the note using the residual method.
The fair value of the warrants issued to members of management in compensation
for the note guarantee was recorded as a debt issuance cost. Both the debt
discount and the debt issuance cost was to be amortized to interest expense over
the term of the note. (See Note 5 below for more information regarding the
warrant liability.)




12




MERRIMAN
CURHAN FORD GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED


(unaudited)




3.
Issuance of Debt — continued





In
September 2009, the Bridge Note was converted into Series D Convertible
Preferred Stock. At the date of conversion, there was $503,000 of principal and
interest outstanding on the Bridge note which was converted into1,171,000 shares
of Series D Convertible Preferred Stock. Additionally, as of the conversion
date, the entire debt discount and related debt issuance costs were expensed and
no outstanding balance remained at September 30, 2009.





4.  Series
D Convertible Preferred Stock





On
September 8, 2009, the Company issued 23,720,916 shares of Series D Convertible
Preferred Stock along with 5-year warrants to purchase 23,720,916 shares of the
Company’s common stock with an exercise price of $0.65 per share.  The
investor group constituted of 56 individuals and entities including certain
officers, directors and employees of the Company, as well as outside
investors.  All or portions of the principal and accrued interest of
the May 29, 2009 Convertible Notes, the June 30 Unsecured Promissory Note and
the July 31 Bridge Note were converted into the Series D Convertible Preferred
Stock shares.  None of these debt instruments remain outstanding after
September 8, 2009.  The warrants issued in conjunction with the May 29
Convertible Notes and with the July 31 Bridge Note remain outstanding. (See Note
5 regarding the accounting for the warrants issued.)





The
Series D Convertible Preferred Stock was issued in a private placement exempt
from registration requirements pursuant to Regulation D of the Securities Act of
1933, as amended.  Cash consideration was deposited into escrow on or
around August 27, 2009.  Each share of Series D Convertible Preferred
Stock is convertible into one share of Common Stock of the
Company.  The Series D Convertible Preferred Stock carries a dividend
rate of 6% per annum, payable in cash monthly.





Both the
Series D Convertible Preferred Stock and the warrants issued in connection with
the Series D Convertible Preferred Stock have anti-dilution features including a
full ratchet provision so that if the Company pays dividends, splits its common
shares forward or reverse, or adjusts its shares outstanding due to a
combination, the conversion and exercises prices would also adjust
proportionally.  The warrants will expire 5 years from the date of the
transaction.  Holders of the Series D Convertible Preferred Stock may
convert them into shares of the Company’s common stock at any time in amounts no
less than $100,000 unless all of the shares held by the holder are for a lesser
amount.  The Series D Convertible Preferred Stock will automatically
convert at the discretion of the Company upon 10-day notice given when the
average closing price of the Company’s common stock over a 30-day period is at
or above $3.00 per share and when the average trading volume for the immediately
prior four-week period is 30,000 shares or more, provided that the shares have
been effectively registered with the Securities and Exchange Commission or all
of the Series D Convertible Preferred Stock may be sold under Rule 144 of the
1933 Exchange Act.





The total
proceeds of $10.2 million raised in the transaction described above are
accounted for under generally accepted accounting principles, primarily ASC 470,
“Debt”. The Company has accounted for this transaction as the issuance of
convertible preferred stock and a detachable stock warrant.  The total
proceeds of $10.2 million have been allocated to these individual instruments
based on the residual method.





As
discussed above, the Company issued warrants to purchase 23,720,916 shares of
common stock in conjunction with the sale of the Series D Convertible Preferred
Stock. These warrants were assessed in accordance with ASC 815 “Derivatives and
Hedging” and it was determined that the full ratchet provision included in the
warrant agreement triggered derivative liability accounting. As a result, in
accordance with the accounting guidance, the warrants were recorded at fair
value and will be marked to market on each reporting date with the change in
fair value recorded in the Consolidated Statements of Operations. Additionally,
the proceeds of the transaction were allocated between the Series D Convertible
Preferred Stock and the warrants using the residual method in which proceeds are
first allocated to the warrant liability and any remaining value is then
allocated to the preferred stock.  The warrants were valued using the
Black-Scholes fair value model. The grant date fair value of the warrants issued
with the Series D Convertible Preferred Stock was $15,264,000. As the fair value
of the warrants exceeds the proceeds received, the Company allocated all of the
proceeds, with the exception of the par value of the Series D Convertible
Preferred Stock, to the warrant liability. The additional value needed to record
the warrants at fair value was recorded as a charge to additional paid-in
capital (APIC) and shown as deemed dividend on the Consolidated Statements of
Operations. (See Note 5 below for more information regarding the warrant
liability.)





The Series D Convertible Preferred
Stock issued by the Company pays dividends to the holders at an annual rate of
6%, payable monthly in arrears.  As of September 30, 2009, the Company
recorded a cash dividends payable of $39,000 which was included in accrued
liabilities as of September 30, 2009.





13




MERRIMAN
CURHAN FORD GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED


(unaudited)








5.  Accounting
for Warrant Liabilities





The
accounting for the liabilities arising out the issuance of the Company’s
warrants is discussed below under the following sections:





•
            Overview
      of Warrant Liability accounting•
            Series
      D Convertible Preferred Stock Warrant Liabilities•
            July
      31, 2009 Bridge Note Warrant Liabilities•
            Settlement
      Warrant Liabilities•
            Summary
      of effects of warrants on the Consolidated Statements of
      Operations





Overview
of Warrant Liability Accounting




Under ASC
815, “Derivatives and Hedging”, instruments which do not have fixed settlement
provisions are deemed to be derivative instruments. The exercise price of the
detachable warrants issued with the Company’s Series D Convertible Preferred
Stock is not fixed because the exercise prices may be lowered if the Company
issues securities at prices lower than the price on which the exercise price for
the warrant was based. This is also the case with the warrants issued in
connection with the $500,000 Bridge Note issued on July 31, 2009 and the
warrants issued to the litigants in the settlement.  The Company
included the reset provisions in order to protect the warrant holders from
potential dilution associated with future financings. In accordance with ASC
815, the warrants were recognized as a derivative instrument and have been
characterized as warrant liabilities at their fair value. ASC 815 requires that
the fair value of these liabilities be re-measured at the end of every reporting
period, with the change in value reported in the Consolidated Statements of
Operations.




Series
D Convertible Preferred Stock Warrant Liabilities




The
portion of warrant liabilities related to outstanding warrants issued in
connection with the Series D Convertible Preferred Stock was valued using the
Black-Scholes option valuation model.




Inception
      Date / Measurement Date
            
            Sept
      8,
              2009
            
            
            Sept
      30,
              2009Number
      of warrants
            
            
            23,720,916
            
            
            
            23,720,916Fair
      value – warrant liability
            
            $
            15,264,330
            
            
            $
            22,850,737Change
      in value since inception
            
            
            
            
            
            $
            7,586,407





As of
September 30, 2009, the Series D Convertible Preferred Stock warrant liability
had a fair value of $22,851,000. The increase in value of $7,586,000 within the
three months ended September 30, 2009 is included in the Consolidated Statements
of Operations, in accordance with ASC 815.





14




MERRIMAN
CURHAN FORD GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED


(unaudited)





5.  Accounting
for Warrant Liabilities — continued





Bridge
Note Warrant Liabilities




The
portion of warrant liabilities related to outstanding warrants issued in
connection with the July 31, 2009 bridge note was valued using the Black-Scholes
option valuation model.




Inception
      Date / Measurement Date
            
            July
      31, 2009
            
            
            Sept
      30, 2009Number
      of warrants
            
            
            2,325,581
            
            
            
            2,325,581Fair
      value – warrant liability
            
            $
            693,994
            
            
            $
            2,240,261Change
      in value since inception
            
            
            
            
            
            $
            1,546,267





As of
September 30, 2009, the Bridge Note warrant liability had a fair value of
$2,240,000. The increase in value of $1,546,000 within the three months ended
September 30, 2009 is included in the Consolidated Statements of Operations, in
accordance with ASC 815.





Settlement
Warrant Liabilities




As
discussed in Note 13, during the 3 months ended September 30, 2009, the Company
issued 5-year warrants to purchase 1,538,461 shares of common stock at $0.65 in
connection with a legal settlement. The warrants contained the same
anti-dilution provision as the Series D Convertible Preferred Stock warrants and
the Bridge Note warrants.  In accordance with ASC 815 “Derivatives and
Hedging” the Company recorded the fair value of the settlement warrants as a
warrant liability on the date of grant and will mark the warrants to market on
each reporting date with the change in value recorded in the Consolidated
Statements of Operations.




The
portion of warrant liabilities related to outstanding warrants issued in
connection with the settlement of litigation was valued using the Black-Scholes
option valuation model.




Inception
      Date / Measurement Date
            
            Sept
      8, 2009
            
            
            Sept
      30, 2009Number
      of warrants
            
            
            1,538,461
            
            
            
            1,538,461Fair
      value – warrant liability
            
            $
            934,926
            
            
            $
            1,430,712Change
      in value since inception
            
            
            
            
            
            $
            495,786





15




MERRIMAN
CURHAN FORD GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED


(unaudited)





5.  Accounting
for Warrant Liabilities — continued





As of
September 30, 2009, the total settlement warrant liability had a fair value of
$1,431,000. The increase in value of $496,000 within the three months ended
September 30, 2009 is included in the Consolidated Statements of Operations, in
accordance with ASC 815.





Summary
of Effects of Warrants on the Consolidated Statements of Operations





Warrant
              Liabilities
            
            
            Operating
      Expense
            
            
            Non-Operating
      ExpenseSeries
      D Convertible Preferred Stock warrant liability
            
            $
            15,264,330
            
            
            ─
            
            
            ─Bridge
      note warrant liability
            
            
            693,995
            
            
            ─
            
            
            ─Settlement
      warrant liability
            
            
            934,926
            
            
            
            934,926
            
            
            ─Change
      in value - Series D Convertible Preferred Stock warrant
      liability
            
            
            7,586,407
            
            
            ─
            
            
            
            7,586,407Change
      in value - Bridge note warrant liability
            
            
            1,546,267
            
            
            ─
            
            
            
            1,546,267Change
      in value - Settlement warrant liability
            
            
            495,786
            
            
            ─
            
            
            
            495,786Net
      effect of warrant liabilities
            
            $
            26,521,711
            
            
            $
            934,926
            
            
            $
            9,628,460




6.
Fair Value of Assets and Liabilities





Fair
value is defined as the price at which an asset would sell for or an amount paid
to transfer a liability in an orderly transaction between market participants at
the measurement date (the exit price). Where available, fair value is based on
observable market prices or parameters or derived from such prices or
parameters. Where observable prices or parameters are not available, valuation
models are applied. These valuation techniques involve some level of management
estimation and judgment, the degree of which is dependent on the price
transparency for the instruments or the market on which they are primarily
traded, and the instruments’ complexity. Assets and liabilities recorded at fair
value in the Consolidated Statements of Financial Condition are categorized
based upon the level of judgment associated with the inputs used to measure
their fair value.  A description of the valuation techniques applied
to the Company’s major categories of assets and liabilities measured at fair
value on a recurring basis follows.





Securities
Owned





Corporate
Equities





Corporate
equities are comprised primarily of exchange-traded equity securities that the
Company takes selective proprietary positions based on expectations of future
market movements and conditions. They are generally valued based on quoted
prices from the exchange. To the extent these securities are actively traded,
valuation adjustments are not applied and they are categorized in Level 1 of the
fair value hierarchy.




16




MERRIMAN
CURHAN FORD GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED


(unaudited)





6.
Fair Value of Assets and Liabilities — continued





Stock
Warrants





Stock
warrants provide their holders with the right to purchase equity in a publicly
traded company.  Such positions are considered illiquid and do not
have readily determinable fair values, and therefore require significant
management judgment or estimation. For these securities, the Company uses the
Black-Scholes valuation methodology or similar techniques. They are classified
within Level 3 of the fair value hierarchy.





Underwriters’
Purchase Options





Underwriters’
purchase options represent the right to purchase securities of publicly-traded
companies for which the Company acted as an underwriter to account for any
overallotment of these securities in a public offering.  Such
positions are considered illiquid and do not have readily determinable fair
values, and therefore require significant management judgment or estimation. For
these securities, the Company uses the Black-Scholes valuation methodology. They
are classified within Level 3 of the fair value hierarchy.





Preferred
Stock





Preferred
stock represents preferred equity in publicly traded companies.  The
preferred stock owned by the Company is convertible at the Company’s discretion.
For these securities, the Company uses the exchange-quoted price of the common
stock equivalents to value the securities. They are classified within Level 1 of
the fair value hierarchy.





Securities
Sold, Not Yet Purchased





Securities
sold, not yet purchased are comprised primarily of exchange-traded equity
securities that the Company sold short based on expectations of future market
movements and conditions. They are generally valued based on quoted prices from
the exchange. To the extent these securities are actively traded, valuation
adjustments are not applied and they are categorized in Level 1 of the fair
value hierarchy.





Securities
Issued





Warrant
Liabilities





Stock
warrants issued to the Company’s investors and creditors are rights to purchase
equity in the Company.  Such positions are considered illiquid and do
not have readily determinable fair values, and therefore require significant
management judgment or estimation. For the warrant liabilities, the Company uses
the Black-Scholes valuation methodology or similar techniques. They are
classified within Level 3 of the fair value hierarchy. In accordance with ASC
820 “Fair Value Measurements and Disclosures”, assets measured at fair value on
a recurring basis are categorized in the table below based upon the lowest level
of significant input to the valuations.




17




MERRIMAN
CURHAN FORD GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED


(unaudited)





6.
Fair Value of Assets and Liabilities — continued





Summary





Fair Value at September 30, 2009Level 1
            
            Level 2
            
            Level 3
            
            TotalAssets:Securities
      owned:Corporate
      equities
            
            $
            2,955,112
            
            
            $
            —
            
            
            $
            —
            
            
            $
            2,955,112Stock
      warrants
            
            
            —
            
            
            
            —
            
            
            
            1,956,455
            
            
            
            1,956,455Preferred
      stock
            
            
            1,692
            
            
            
            —
            
            
            
            —
            
            
            
            1,692Total
      securities owned
            
            $
            2,956,804
            
            
            $
            —
            
            
            $
            1,956,455
            
            
            $
            4,913,259Liabilities:Warrant
      liabilities
            
            
            —
            
            
            
            —
            
            
            
            26,521,711
            
            
            
            26,521,711Securities
      sold, not yet purchased
            
            $
            838,199
            
            
            $
            —
            
            
            $
            —
            
            
            $
            838,199Total
      fair value liabilities
            
            $
            838,199
            
            
            $
            —
            
            
            $
            26,521,711
            
            
            $
            27,359,910




Fair Value at December 31, 2008Level 1
            
            Level 2
            
            Level 3
            
            TotalAssets:Securities
      owned:Corporate
      equities
            
            $
            3,353,784
            
            
            $
            650
            
            
            $
            695
            
            
            $
            3,355,129Stock
      warrants
            
            
            —
            
            
            
            —
            
            
            
            1,605,451
            
            
            
            1,605,451Underwriters’
      purchase option
            
            
            —
            
            
            
            —
            
            
            
            27,995
            
            
            
            27,995Preferred
      stock
            
            
            63
            
            
            
            —
            
            
            
            —
            
            
            
            63Total
      securities owned
            
            $
            3,353,847
            
            
            $
            650
            
            
            $
            1,634,141
            
            
            $
            4,988,638Liabilities:Warrant
      liabilities
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Securities
      sold, not yet purchased
            
            $
            903,217
            
            
            $
            —
            
            
            $
            —
            
            
            $
            903,217Total
      fair value liabilities
            
            $
            903,217
            
            
            $
            —
            
            
            $
            —
            
            
            $
            903,217





18




MERRIMAN
CURHAN FORD GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED


(unaudited)





6.
Fair Value of Assets and Liabilities — continued





The
following summarizes the change in carrying values associated with Level 3
financial instruments for the nine months ended September 30, 2009:





Corporate
              Equities
            
            
            Stock
              Warrants
            
            
            Underwriters’
              Purchase Option
            
            
            TotalAssets:Balance
      at December 31, 2008
            
            $
            695
            
            
            $
            1,605,451
            
            
            $
            27,995
            
            
            $
            1,634,141Purchases,
      issuances and settlements
            
            
            50,998
            
            
            
            254,298
            
            
            
            —
            
            
            
            305,296Net
      transfers in / (out)
            
            
            (51,693
            )
            
            
            (108,900
            )
            
            
            —
            
            
            
            (160,593
            )Gains
      / (losses)Realized
            
            
            —
            
            
            
            (79,093
            )
            
            
            (91,058
            )
            
            
            (170,151
            )Unrealized
            
            
            —
            
            
            
            284,699
            
            
            
            63,063
            
            
            
            347,762Balance
      at September 30, 2009
            
            $
            —
            
            
            $
            1,956,455
            
            
            $
            —
            
            
            $
            1,956,455Liabilities:Balance
      at December 31, 2008
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Value
      at issuance
            
            
            —
            
            
            
            16,893,251
            
            
            
            —
            
            
            
            16,893,251Change
      in value
            
            
            —
            
            
            
            9,628,460
            
            
            
            —
            
            
            
            9,628,460Balance
      at September 30, 2009
            
            $
            —
            
            
            $
            26,521,711
            
            
            $
            —
            
            
            $
            26,521,711





The
amounts of unrealized losses for the three months ended September 30, 2009
included in the table above are all attributable to those assets held as of
September 30, 2009. Net gains and losses (both realized and unrealized) for
Level 3 financial assets (securities owned by the Company) are a component
of “Principal transactions” in the Consolidated Statements of
Operations.  Changes in value of the warrant liabilities (warrants
issued by the Company) constitute “Change in fair value of warrant liability” in
the Consolidated Statements of Operations.





7.
Share-Based Compensation Expense





Stock
Options and Warrants





As
of September 30, 2009, there were 7,091,430 shares authorized for issuance under
the Option Plans, and 612,858 shares authorized for issuance outside of the
Option Plans. As of September 30, 2009, 282,231 shares were available for future
option grants under the Option Plans. There were no shares available for future
option grants outside of the Option Plans. Compensation expense for stock
options during the three months and nine months ended September 30, 2009 was
$119,000 and $329,000, respectively. Compensation expense for stock options
during the three months and nine months ended September 30, 2008 was $421,000
and $1,204,000, respectively.





The
following table is a summary of the Company’s stock option activity for the nine
months ended September 30, 2009:




Options
              Outstanding
            
            
            Weighted
              Average
              Exercise PriceBalance
      as of December 31, 2008
            
            
            1,167,117
            
            
            $
            5.85Granted
            
            
            4,925,709
            
            
            
            0.53Exercised
            
            
            -
            
            
            
            -Canceled
            
            
            (789,681
            )
            
            
            (3.32
            )Balance
      as of September 30, 2009
            
            
            5,303,145
            
            
            $
            1.28Exercisable
      as of September 30, 2009
            
            
            547,300
            
            
            $
            6.02





As of
September 30, 2009, there were 18,333 warrants outstanding issued as
compensation, issued with a 5-year term and an exercise price of $0.65 per
share.





19




MERRIMAN
CURHAN FORD GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED


(unaudited)





7. Share Based Compensation Expense
(continued)





The
following table summarizes information with respect to stock options vested and
outstanding at September 30, 2009:




Options Outstanding
            
            
            Vested OptionsRange of Exercise Price
            
            
            Number
            
            
            Weighted
              Average
              Remaining
              Contractual
              Life (Years)
            
            
            Weighted
              Average
              Exercise
              Price
            
            
            Aggregate
              Intrinsic
              Value
            
            
            Number
            
            
            Weighted
              Average
              Exercise
              Price
            
            
            Aggregate
              Intrinsic
              Value$
            0.00
      - $  1.00
            
            
            
            3,930,279
            
            
            
            9.60
            
            
            $
            0.42
            
            
            $
            4,229,373
            
            
            
            99,355
            
            
            $
            0.43
            
            
            $
            106,022$
            1.01
      - $  3.50
            
            
            
            894,034
            
            
            
            8.17
            
            
            $
            1.57
            
            
            
            –
            
            
            
            223,180
            
            
            
            2.58
            
            
            
            –$
            3.51
      - $  7.00
            
            
            
            352,133
            
            
            
            7.97
            
            
            $
            4.29
            
            
            
            –
            
            
            
            103,813
            
            
            
            4.86
            
            
            
            –$
            7.01
      - $14.00
            
            
            
            100,551
            
            
            
            4.94
            
            
            $
            9.70
            
            
            
            –
            
            
            
            94,804
            
            
            
            9.82
            
            
            
            –$
            14.01
      - $28.00
            
            
            
            1,147
            
            
            
            1.25
            
            
            $
            15.34
            
            
            
            –
            
            
            
            1,147
            
            
            
            15.34
            
            
            
            –$
            28.01
      - $49.00
            
            
            
            25,001
            
            
            
            0.41
            
            
            $
            49.00
            
            
            
            –
            
            
            
            25,001
            
            
            
            49.00
            
            
            
            –5,303,145
            
            
            
            9.11
            
            
            $
            1.28
            
            
            $
            4,229,373
            
            
            
            547,300
            
            
            $
            6.02
            
            
            $
            106,022





As of
September 30, 2009, total unrecognized compensation expense related to unvested
stock options was $1,556,000. This amount is expected to be recognized as
expense over a weighted-average period of 3.26 years.





The
weighted average fair value of each stock option granted for the three months
and nine months ended September 30, 2009 was $0.79 and $0.34,
respectively. The weighted average fair value of each stock option granted
for the three months and nine months ended September 30, 2008 was $0.64 and
$2.19, respectively. The fair value of each option award is estimated on
the date of grant using the Black-Scholes stock option pricing model, with the
following assumptions for the nine months ended September 30, 2009 and
2008:




Nine
      Months Ended
              September 30,2009
            
            
            2008Expected
      volatility
            
            
            117.67
            %
            
            
            69.54
            %Expected
      life (years)
            
            
            2.35
            
            
            
            6.30Risk-free
      interest rate
            
            
            1.17
            %
            
            
            3.11
            %Expected
      dividend yield
            
            
            0
            %
            
            
            0
            %





20




MERRIMAN
CURHAN FORD GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED


(unaudited)





7. Share Based Compensation Expense
(continued)





Non-Vested
Stock





At the
date of grant, the recipients of non-vested stock have most of the rights of a
stockholder other than voting rights, subject to certain restrictions on
transferability and a risk of forfeiture. Non-vested shares typically vest over
a two to four year period beginning on the date of grant. The fair value of
non-vested stock is equal to the market value of the shares on the date of
grant. The Company recognizes the compensation expense for non-vested stock on a
straight-line basis over the requisite service period. Compensation expense for
non-vested stock during the three months and nine months ended September 30,
2009 was $30,000 and $80,000 respectively. Compensation expense for non-vested
stock during the same periods in 2008 was $160,000 and $693,000,
respectively.





The
following table is a summary of the Company's non-vested stock activity for the
nine months ended September 30, 2009:





Non-Vested
              Stock
              Outstanding
            
            
            Weighted
              Average
              Grant Date
              Fair Value
            
            
            Intrinsic
              Value at
              September 30, 2009Balance
      as of December 31, 2008
            
            
            48,779
            
            
            $
            9.84Granted
            
            
            4,000
            
            
            
            1.50Vested
            
            
            (11,979
            )
            
            
            (5.30
            )Canceled
            
            
            –
            
            
            
            –Balance
      as of September 30, 2009
            
            
            40,800
            
            
            $
            10.35
            
            
            $
            422,297





The
weighted average fair value of the non-vested stock granted under the Company's
stock option plans for the three months and nine months ended September 30, 2009
was $1.50 and $1.50 per share, respectively. The weighted average fair
value of the non-vested stock granted under the Company's stock option plans for
the same periods in 2008 was $1.27 and $2.84 per share, respectively. The fair
value of the non-vested stock award is estimated on the date of grant using the
intrinsic value method.





As of
September 30, 2009, total unrecognized compensation expense related to
non-vested stock was $90,000. This expense is expected to be recognized over a
weighted-average period of 0.54 year.





Warrants
Issued as Compensation





The Company issued warrants to purchase
25,000 shares of the Company’s common stock at $0.65 to the Chairman of the
Strategic Advisory Committee, a committee of the Board of Directors, as
compensation for serving in that capacity.  The expense related to the
warrants for the three months and nine months ended September 30, 2009 was
$21,000 and $21,000, respectively.





8. Income Taxes





At the
end of each interim reporting period, the Company calculates an effective tax
rate based on the Company’s estimate of the tax provision (benefit) that will be
provided for the full year, stated as a percentage of estimated annual pre-tax
income (loss). The tax provision (benefit) for the interim period is determined
using this estimated annual effective tax rate. For the three months and nine
months ended September 30, 2009, the Company recorded a $235,000 and $230,000
income tax benefit, respectively. This relates primarily to a state tax benefit
recorded during the quarter upon filing of the Company’s returns.  For
the three months and nine months ended September 30, 2008, the Company recorded
an income tax expense of $198,000 and a benefit of $1,641,000,
respectively.  The benefit for the nine months ended September 30,
2008 is mainly attributable to the release of the FIN 48 liability due to the
approval of an accounting method change for federal tax purposes.





21




MERRIMAN
CURHAN FORD GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED


(unaudited)





8. Income Taxes—
continued





Historically
and currently, the Company has recorded a valuation allowance on the deferred
tax assets, the significant component of which relates to net operating loss tax
carryforwards. Management continually evaluates the realizability of its
deferred tax assets based upon negative and positive evidence available. Based
on the evidence available at this time, the Company continues to conclude that
it is not “more likely than not” that it will be able to realize the benefit of
its deferred tax assets in the future.





The
Company does not have any material accrued interest or penalties associated with
any unrecognized tax benefits. The Company’s policy is to account for interest,
if any, as interest expense and penalties as income tax expense.





The
Company’s tax years 2006-2008 will remain open for three years for examination
by the Internal Revenue Service from the date the federal corporation tax
returns were filed. The Company’s tax years 2004-2008 will remain open for three
to four years for examination by state tax authorities from the date the state
corporation tax returns were filed. Net operating losses deducted are subject to
review and adjustment for three to four years after the net operating losses are
deducted on the U.S. and state returns filed.





The
company believes that an ownership change within the meaning of Internal Revenue
Code Section 382 may have occurred upon the issuance of Series D Convertible
Preferred Stock on September 8, 2009.  If this is in fact the case, the
usage of Net Operating Losses originating prior to this date will be subject to
annual limitation.  The company intends to complete its analysis of this
issue in the fourth quarter.





9.
Discontinued Operations





On April
17, 2007, the Company acquired 100 percent of the outstanding common shares of
MedPanel Corp. which was subsequently renamed Panel Intelligence LLC (“Panel”)
and made into a subsidiary of the Merriman Curhan Ford Group, Inc. The results
of Panel’s operations had been included in the Company’s consolidated financial
statements since that date. As a result of the acquisition, the Company began
providing independent market data and information to clients in the
biotechnology, pharmaceutical, medical device, and financial industries by
leveraging Panel's proprietary methodology and vast network of medical
experts.





The
Company paid $6.1 million in common stock for Panel. The value of the 1,547,743
shares of common shares issued was determined based on the average market price
of the Company’s common stock over the period including three days before and
after the terms of the acquisition were agreed to and announced. The selling
stockholders were also entitled to additional consideration on the third
anniversary from the closing which is based upon Panel Intelligence achieving
specific revenue and profitability milestones.





In
December 2008, management determined that the sale of Panel would reduce
investments required to develop Panel’s business and generate capital necessary
for the Company’s core business.   The sale of Panel was
completed in January 2009.  Management determined that the plan of
sale criteria in ASC 360, “Property, Plant and Equipment”, had been met. As a
result, the revenue and expenses of Panel have been reclassified and included in
discontinued operations in the Consolidated Statements of
Operations. Accordingly, the carrying value of the Panel assets was
adjusted to their fair value less costs to sell.  As a result, an
impairment loss in the amount of $1,937,000 was recorded and is included in
“Other expenses” for the year ended December 31, 2008.  In January
2009, the Company sold Panel to Panel Intelligence, LLC (Newco) for $1,000,000
and shares of its common stock in the amount of $100,000.





10.  Sale of a Component of
an Entity





On
January 16, 2009, the Company entered into an agreement to sell the assets of
Institutional Cash Distributors (ICD), a division of Merriman Curhan Ford &
Co., to a group of investors who are also its employees in order to raise
capital.  ICD is a broker of money market funds serving the short-term
investing needs of corporate finance departments at companies throughout the
United States and Europe.  The assets being sold include the Company’s
rights in trademark, copyright and other intellectual property used in the
business, customer lists, marketing materials, and books and
records.  The Company determined that the discontinued operations
criteria in ASC 360, “Property, Plant and Equipment”, have not been met. As
such, the revenues and expenses of ICD are still presented as part of continuing
operations.  In accordance with ASC 605, “Revenue Recognition”, the
Company recognized $1.2 million of the sales proceeds in the first quarter 2009
and $800,000 in the second quarter 2009 as Other Income.  All
sales proceeds have been received.




22




MERRIMAN
CURHAN FORD GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED


(unaudited)





11.
Loss per Share





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





Three Months Ended September 30,
            
            
            Nine Months Ended September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Net
      loss attributable to common stock holders – basic and
    diluted
            
            $
            (21,674,447
            )
            
            $
            (11,723,338
            )
            
            $
            (24,161,074
            )
            
            $
            (23,887,155
            )Weighted-average
      number of common shares – basic and diluted
            
            
            12,668,073
            
            
            
            12,672,598
            
            
            
            12,692,013
            
            
            
            12,498,687Basic
      and diluted loss per common share:Loss
      from continuing operations
            
            $
            (1.71
            )
            
            $
            (0.89
            )
            
            $
            (1.89
            )
            
            $
            (1.61
            )Loss
      from discontinued operations
            
            
            –
            
            
            
            (0.04
            )
            
            
            (0.01
            )
            
            
            (0.30
            )Net
      loss attributable to common stockholders
            
            $
            (1.71
            )
            
            $
            (0.93
            )
            
            $
            (1.90
            )
            
            $
            (1.91
            )





Basic
loss per share is computed by dividing net loss by the weighted average number
of common shares outstanding, excluding shares of non-vested stock. Diluted loss
per share is calculated by dividing net loss by the weighted average number of
common shares used in the basic earnings per share calculation plus the number
of common shares that would be issued assuming exercise or conversion of all
potentially dilutive common shares outstanding, including non-vested stock.
Diluted loss per share is unchanged from basic loss per share for the three and
nine months ended September 30, 2009 and 2008 because the addition of common
shares that would be issued assuming exercise or conversion would be
anti-dilutive.  Interest and dividends are also not considered since
including them in the calculation of diluted earnings per share would be
anti-dilutive.





Shares
used in the diluted net loss per share computation include the dilutive impact
of the Company’s stock options and warrants. The impact of the Company’s stock
options and warrants on shares used for the diluted loss per share computation
is calculated based on the average share price of the Company’s common stock for
each period using the treasury stock method. Under the treasury stock method,
the tax-effected proceeds that would be hypothetically received from the
exercise of all stock options and warrants with exercise prices below the
average share price of the Company’s common stock are assumed to be used to
repurchase shares of the Company’s common stock. Because the Company reported a
net loss during the three and nine months ended September 30, 2009 and 2008, the
Company excluded the impact of all Series D Convertible Preferred Stock, stock
options and warrants in the computation of diluted earnings per share, as their
effect would be anti-dilutive.





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




23




MERRIMAN
CURHAN FORD GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED


(unaudited)




11.
Loss per Share (continued)




Three Months Ended September 30,
            
            
            Nine Months Ended September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Weighted
      average common stock equivalents excluded from diluted net loss per
      share
            
            
            10,676,544
            
            
            
            4,652,285
            
            
            
            8,651,052
            
            
            
            4,073,725




12.
Regulatory Requirements





Merriman
Curhan Ford & Co. is a broker-dealer subject to Rule 15c3-1 of the
Securities and Exchange Commission, which specifies uniform minimum net capital
requirements, as defined, for their registrants. As of September 30, 2009,
Merriman Curhan Ford & Co. had regulatory net capital, as defined, of
$1,869,000, which exceeded the amount required by $1,597,000. Merriman Curhan
Ford & Co. is exempt from Rules 15c3-3 and 17a-13 under the Securities
Exchange Act of 1934 because it does not carry customer accounts, nor does it
hold customer securities or cash.





13. Contingencies





A number
of lawsuits have been filed against the Company’s wholly owned subsidiary,
Merriman Curhan Ford & Co. (“MCF”), including at least one which also names
the parent company as the defendant, in connection with the actions of William
Del Biaggio III (“Del Biaggio”), a former customer of MCF and David Scott
Cacchione (“Cacchione”), a former retail broker of MCF. The claims filed against
the Company by DGB Investments, Inc., Craig Leipold, Heritage Bank of Commerce,
Modern Bank, Valley Community Bank, AEG Facilities and the Federal Deposit
Insurance Company (“FDIC”) as receiver for Security Pacific Bank in an aggregate
amount of $43,577,000 were settled as of September 8, 2009.  The amount for
which the claims were settled was $4,300,000, the issuance of 5-year warrants to
buy 1,538,461 shares of the Company’s common stock at $0.65 each, and the
assignment of certain rights to collect potential insurance payments from the
Company’s insurers.  The total amount of damages sought under
remaining lawsuits and arbitrations, whether or not related to the Del
Biaggio/Cacchione matters, is approximately $30,000,000.





The
Company and MCF deny any liability and are vigorously contesting the remaining
lawsuits and arbitrations. At this point, the Company cannot estimate the amount
of damages if they are resolved unfavorably and accordingly, management has not
provided an accrual for these lawsuits and arbitrations. If the Company or MCF
were to be found liable in these lawsuits and arbitrations and the plaintiffs
were to be awarded the damages they seek, it would have a severe impact on the
Company's financial condition and the Company would likely not be able to
continue in business. Even if the Company and MCF ultimately prevail in all of
these lawsuits, they will almost certainly incur significant legal fees which
could also have a severe impact on the Company’s financial
condition.





From time
to time, the Company is also named as a defendant and acts as a plaintiff in the
routine conduct of its business.





24




MERRIMAN
CURHAN FORD GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED


(unaudited)





14.
Related Party Transactions





Unsecured
Promissory Notes





On
June 30, 2009, the Company issued $300,000 in unsecured promissory notes to
three of its employees at an interest rate of 3.25%.  The maturity
date of the notes was October 31, 2009, although they were repayable earlier on
the occurrence of certain events. These notes were paid in full in
cash.  At September 30, 2009, no unsecured promissory notes remain
outstanding.





Bridge
Note





On July
31, 2009, the Company issued Mr. Ronald L. Chez, the lead investor in the Series
D Transaction, a Secured Promissory Note in the amount of $500,000 at an annual
interest rate of 9.00%.  The term of the Note was three years,
redeemable by Mr. Chez upon presentation of written demand.  The Note
was guaranteed personally by Messrs. Jonathan Merriman (CEO) and Peter Coleman
(CFO).  The Company issued 10-year warrants to purchase 1,162,791
shares of the Company’s common stock at $0.65 each share to Mr. Chez in
connection with this transaction.  Identical warrants were issued to
purchase 581,395 shares of the Company’s common stock each to Messrs. Merriman
and Coleman for the guarantee.





The
Bridge Note was converted into the Series D Convertible Preferred Stock on
September 8, 2009.  Subsequent to the Series D Transaction, Mr. Chez
has joined the Company’s Board of Directors.  At September 30, 2009,
the Bridge Note was no longer outstanding.





Series
D Convertible Preferred Stock





On
September 8, 2009, the Company issued 23,720,916 shares of Series D Convertible
Preferred Stock along with 5-year warrants to purchase 23,720,916 shares of the
Company’s common stock at $0.65 each share.  The investor group
constituted of 56 individuals and entities including certain officers, directors
and employees of the Company, as well as outside investors.





The
Series D Convertible Preferred Stock was issued in a private placement exempt
from registration requirements pursuant to Regulation D of the Securities Act of
1933, as amended.  Cash consideration was deposited into escrow on or
around August 27, 2009.  Each share of Series D Convertible Preferred
Stock is convertible into one share of Common Stock of the
Company.  The Series D Convertible Preferred Stock carries a dividend
rate of 6% per annum, payable in cash monthly.





Three of investors in the
Series D Convertible Preferred Stock transaction, Messrs. Andrew Arno, Douglas
Bergeron, and Ronald Chez, have since joined the Company’s Board of
Directors.  In addition, the Company’s CEO and CFO who are also
officers of Merriman Curhan Ford & Co. (“MCF&Co.”), the Company’s
primary operating subsidiary, along with 11 other executives and senior managers
of MCF&Co. were also investors in the Series D Convertible Preferred Stock
transaction.  Finally, all 5 members of the Company’s Board of
Directors prior to the transaction were investors in the Series D Convertible
Preferred Stock transaction.





Secured
Demand Note





On August
12, 2009, the Company obtained a Temporary Secured Demand Note (“Demand Note”)
in the amount of $1,329,000 from the D. Jonathan Merriman Living Trust as a
subordinated loan.  The trustee of the Trust, D. Jonathan Merriman, is
also the Chief Executive Officer of the Company.  The Demand Note was
collateralized by securities held in a brokerage account held at a third party
by the Trust.  The Demand Note was repaid on September 23, 2009 and
the securities were transferred back to the Trust.  The Company
compensated the Trust with total interest and fees in the amount of $179,000,
the majority of which was reinvested in the Series D Convertible Preferred Stock
transaction.





Strategic
Advisory Committee





The Company formed a Strategic Advisory
Committee of the Board of Directors chaired by Mr. Ronald Chez, the lead
investor in the Series D Convertible Preferred Stock strategic
transaction.  During the first year, the Chair of the Committee will
be compensated with warrants to purchase 300,000 shares the Company’s common
stock at $0.65, to be issued pro-rata on a monthly basis.  To date,
Mr. Chez is the sole member of the Committee.  No other compensation
arrangement for service on the Committee has been made.





25




MERRIMAN
CURHAN FORD GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED


(unaudited)





15.
Subsequent Events





Midsummer
Investment, Ltd., v. Merriman Curhan Ford Group, Inc.





On
November 6, 2009, Midsummer Investment, Ltd. (“Midsummer”) filed a complaint in
federal court, Southern District of New York, alleging that Midsummer
was denied an anti-dilution adjustment to a warrant issued by MCF&Co.
to them, and that MCF&Co. refused to honor an exercise of that
warrant.  MCF&Co. believes that Midsummer is not entitled to any
anti-dilution adjustment and its attempted exercise was not accompanied by
proper payment.  We believe that MCF&Co. has meritorious defenses and
it intends to contest this claim vigorously.





Settlement
with the Securities and Exchange Commission





On
November 10, 2009, the Securities and Exchange Commission (“SEC”) issued an
“Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to
Sections 15(b) and 21(c) of the Securities and Exchange Act of 1934, Making
Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order as to
Merriman Curhan Ford & Co., D. Jonathan Merriman, and Christopher
Aguilar.”  The Order was issued in connection with the conduct of a
former retail broker, David “Scott” Cacchione, from approximately March 2006 to
April 2008 for violation of the anti-fraud provisions of the federal securities
laws.  Cacchione was fired in May 2008, shortly after the underlying
facts became known.




The Order
censures and imposes sanctions for the failure of MCF&Co. to reasonably
supervise Cacchione with a view toward preventing future violations arising out
of his disseminating confidential customer information to third parties and
executing unauthorized orders for certain customers.  MCF&Co. will
pay a penalty of $100,000 and will hire an Independent Consultant to review and
make recommendations as needed to MCF&Co.’s written policies and procedures
relating to the supervision of registered representatives.




The Order
also imposes sanctions on Jon Merriman, MCF&Co.’s former CEO and current CEO
of the Company, and Christopher Aguilar, MCF&Co.’s former Chief Compliance
Officer, for failure to adequately supervise Cacchione.  Jon Merriman
must pay a penalty of $75,000 and Chris Aguilar must pay a penalty of
$40,000.  Both individuals are also suspended from acting in a
supervisory capacity for any broker or dealer for a period of twelve months from
the date of the Order.




The Order
makes no finding or allegation of any fraudulent activity involving anyone in
MCF&Co. other than Cacchione.  MCF&Co., Mr. Merriman, and Mr.
Aguilar cooperated fully with the SEC’s investigation and consented to the SEC’s
Order without admitting or denying the findings.




26




ITEM 2
 Management's Discussion and Analysis of Financial Condition and Results of
Operations





This
Quarterly Report on Form 10-Q, including this Management's Discussion and
Analysis of Financial Condition and Results of Operations contains
forward-looking statements regarding future events and our future results that
are based on current expectations, estimates, forecasts, and projections about
the industries in which we operate and the beliefs and assumptions of our
management. Words such as “may,” “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-looking statements. In
addition, any statements that refer to projections of our future financial
performance, our anticipated growth and trends in our businesses, and other
characterizations of future events or circumstances, are forward-looking
statements. Readers are cautioned that these forward-looking statements are only
predictions and are subject to risks, uncertainties, and assumptions that are
difficult to predict. Therefore, actual results may differ materially and
adversely from those expressed in any forward-looking statements. Readers are
referred to risks and uncertainties identified under“Risk Factors” beginning on
Page 53 and elsewhere herein. We undertake no obligation to revise or update
publicly any forward-looking statements for any reason. Numbers expressed herein
may be rounded to thousands of dollars.





Overview





We are a
financial services holding company that provides investment research, capital
markets services, corporate and venture services, and investment banking through
our operating subsidiary, Merriman Curhan Ford & Co.





Merriman
Curhan Ford & Co. is an investment bank and securities broker-dealer
focused on fast growing companies and institutional investors. Our mission is to
become a leader in the researching, advising, financing and trading in fast
growing companies under $1 billion in market capitalization. We provide equity
research, brokerage and trading services primarily to institutions, as well as
investment banking and advisory services to corporate clients. We originate
differentiated research for our institutional investor clients and provide
specialized and integrated financing and advisory services for our corporate
clients.





In
January 2009, we entered into an agreement to sell the assets of Institutional
Cash Distributors (ICD), a division of Merriman Curhan Ford & Co., to a
group of investors who are also its employees in order to raise
capital.  ICD is a broker of money market funds serving the short-term
investing needs of corporate finance departments at companies throughout the
United States and Europe.  Completion of the sale is subject to
regulatory review and approval.  When the sale is completed, we will
no longer include the results of its operations and its financial condition in
our financial statements.





Also in
January 2009, we sold the assets of our subsidiary Panel Intelligence, LLC
(Panel) which provides custom and published primary research to industry clients
and investment professionals through online panel discussions, quantitative
surveys and an extensive research library.  We decided to sell Panel
to reduce our costs and to refocus on our core investment banking and
broker-dealer services.





MCF Asset
Management, LLC, another subsidiary, manages absolute return investment products
for institutional and high-net worth clients. We are in the process of
liquidating these investment products and returning investments to the
investors.  As of September 30, 2009, we liquidated all of our funds
except one.  All the liquid assets in the one remaining fund have been
liquidated.  There are illiquid assets, such as restricted stock and
warrants, which have not yet been liquidated.  We expect to complete
the liquidation in 2009.





27




Executive
Summary





Revenue
from continuing operations grew by 192% in the third quarter 2009 relative to
the third quarter 2008. Our commissions revenue for the same period grew by 23%
year-over-year, due primarily to continued growth of our Institutional Cash
Distributors money fund business which is being sold.  (Please see
“Results of Operations” below for a more detailed view of the impact of selling
ICD assets.) Investment banking revenue continues to recover from the near
paralysis of 2008 financial markets and grew by 95% year over year. Losses from
principal transactions improved 99% for the three months ended September 30,
2009 compared to the same period 2008 mainly due to the recovery of the broad
financial markets. We incurred a net loss of $16,569,000, or $1.71 per share for
the quarter.  Operationally, our core business generated a profit of
$11,000 on a non-GAAP pro-forma basis.





Much of
our net loss for the quarter is attributed to the expenses ($5,335,000) related
to the settlement of seven of our legal cases for $4,300,000 in cash and the
associated non-cash issuance of warrants valued at $1,035,000.  About
$690,000 in Professional Services cash expenses for the quarter is related to
legal payments that can be directly attributed to the settlement of the legal
cases or to defending ourselves in the remaining cases arising out of the Del
Biaggio/Cacchione matters.  We do not consider these expenses to be
part of our on-going core business.





Although
the ICD business has contributed to our revenue by a substantial amount
($6,667,000 in the quarter), it has not added to our net
results.  Since January 2009, upon agreement to sell the ICD assets
for $2,000,000, we have paid all amounts received as revenue either as expenses
or as commissions to the buyers of the ICD assets.





In the
analysis and review of our core business, we have also excluded the effect of
the unrealized gains and losses resulting from owning securities.  For
the quarter ended September 30, 2009, we had and excluded an unrealized gain of
$213,000 from our analysis.





After
adjusting for the revenue and expense items described above, on a non-GAAP
pro-forma basis, our core business provided an operating income of $11,000 for
the quarter.  (Please see the reconciliation of U.S. GAAP results to
pro-forma results in the “Results of Operations” section below.)





Business
Environment





On October 29, 2009, the Department of
Commerce announced that gross domestic product rose at an annualized rate of
3.5% in the third quarter compared to the second.  Much of the
third-quarter growth was the result of temporary government stimulus. Consumer
spending grew by 3.4%, the highest since early 2007, largely because people were
buying new cars in July and August with federal “cash for clunkers” credits of
$4,000 per qualifying vehicle. Sales have since fallen. Residential construction
leapt by 23.4%, the first advance since the end of 2005, helped by an $8,000 tax
credit for buyers of new homes. But new-home sales dipped by 3.6% in September,
as the deadline to qualify for the credit passed.  (As of November 10,
2009, Congress is considering granting a new tax credit for home buyers in an
amount to be determined.)





In the Spring of 2009, the broad
financial markets had begun to recover.  The financial sector,
however, has lagged behind.  Financial stocks, specifically the banks,
have been lagging behind the broad markets since August. While the S&P 500
trended upwards, the SPDR KBW Bank exchange-traded fund (ticker: KBE) has
remained in a flat trading range during the third quarter.





The fear in the banking community after
failures of many of its members is contributing to a credit tightening, making
it difficult for smaller companies to obtain loans.  The government’s
plan to strengthen banks as intermediaries in the capital markets may have hit a
roadblock where banks continue to be reluctant to lend to smaller
businesses.  This is constraining the capital markets.





Our
securities broker-dealer and investment banking activities are linked to the
capital markets. In addition, our business activities are focused in the
CleanTech, Consumer/Internet/Media, Health Care, Resources and Technology
sectors.  By their nature, our business activities are highly competitive
and are not only subject to general market conditions, volatile trading markets
and fluctuations in the volume of market activity, but also to the conditions
affecting the companies and markets in our areas of focus.





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





28




Issuance
of Debt





We issued
a series of strategic transactions beginning in May 2009 which culminated in the
issuance of Series D Convertible Preferred Stock on September 8,
2009.  The May 2009 transaction is described in our Form 10-Q for the
period ending June 30, 2009 and below.





Convertible
Notes





On May
29, 2009, we sold and issued $525,000 in principal amount of Secured Convertible
Promissory Notes (each a “Note,” and collectively, the “Notes”).  On
June 1, 2009, we issued an additional $100,000 of Notes. The investor group
included eight individuals, comprised of certain of our officers and employees
as well as an outside investor.  The Notes were issued in a private
placement exempt from registration requirements.  There were no
underwriters, underwriting discounts or commissions involved in the
transactions.  The Notes carried an interest rate of 11% per annum,
payable in cash quarterly, and were due two years from issuance, although they
were repayable earlier on the occurrence of certain events.  As part
of this transaction, we entered into a Security Agreement with the investors in
the Notes by which we pledged all assets of the Company as security for the
Notes.  If we had liquidated, the investors in the Notes would have
had to be repaid before any other obligations of the Company, which would have
reduced the amount of assets available for distribution to our
stockholders.





The Notes
were convertible into our common stock at a price of $0.50 per share and came
with warrants (the “Warrants”) to purchase additional shares of our common stock
at $0.50 per share for a number of shares of common stock equal to 75% of the
principal amount of the Notes purchased, divided by $0.50.  The Notes
were convertible beginning six months after issuance while the Warrants are
exercisable immediately.





Both the
Notes and the Warrants have anti-dilution features so that if we were to pay
dividends, split (forward or reverse) our common shares, or adjusts our shares
outstanding due to a combination, the conversion and exercises prices,
respectively, would also adjust proportionally.  The Notes had a
two-year maturity and the warrants will expire 10 years from the date of the
transaction.





The total
proceeds of $625,000 raised in the transaction described above is accounted for
under generally accepted accounting principles, ASC 470, “Debt”. We have
accounted for this transaction as the issuance of convertible debt and a
detachable stock warrant.  The total proceeds of $625,000 have been
allocated to these individual instruments based on their relative fair value as
determined by management.





We
estimated the fair value of its convertible debt at the time of
issuance.  As a result, the Notes and the Warrants are carried at fair
values of $419,000 and $206,000, respectively, at inception.  The Notes had
an embedded beneficial conversion option and the $419,000 value can be
bifurcated into a host valued at $239,000 and a beneficial conversion option
valued at $180,000.  The value of the Warrant was recorded as an
increase to additional paid-in capital. The total discount on the Notes of
$206,000 will be amortized over the term of the Notes.  The
amortization during the quarter was in the amount of $7,000.





The Notes
were converted into Series D Convertible Preferred Stock (see Note
4).  At September 30, 2009, no Notes remain
outstanding.  The associated warrants remain outstanding.





Unsecured
Promissory Notes





On
June 30, 2009, the Company issued $300,000 in unsecured promissory notes to
three of its employees at an interest rate of 3.25%.  The maturity
date of the notes was October 31, 2009, although they were repayable earlier on
the occurrence of certain events. These notes were paid in full in
cash.  At September 30, 2009, no unsecured promissory notes remain
outstanding.


.


29




Bridge
Note





On July
31, 2009, we issued Mr. Ronald L. Chez, the lead investor in the Series D
Transaction, a Secured Promissory Note in the amount of $500,000 at an annual
interest rate of 9.00%.  The term of the Note was three years,
redeemable by Mr. Chez upon presentation of written demand.  The Note
was guaranteed personally by Messrs. Jonathan Merriman (CEO) and Peter Coleman
(CFO).  We issued 10-year warrants to purchase 1,162,791 shares of our
common stock at an exercise price of $0.65 per share to Mr. Chez in connection
with this transaction. (See Note 5 regarding the accounting for the
warrants.)  The two members of management were compensated for the
guarantee with warrants to purchase 1,162,790 shares of our common
stock.





As
discussed above, we issued warrants to purchase 2,325,581 shares of common stock
in conjunction with the issuance of the Bridge Note. These warrants were
assessed in accordance with ASC 815 “Derivatives and Hedging” and it was
determined that the full ratchet provision included in the warrant agreement
triggered derivative liability accounting. As a result, in accordance with the
accounting guidance, the warrants were recorded at fair value and will be marked
to market on each reporting date with the change in fair value recorded in our
Consolidated Statements of Operations. Additionally, the proceeds of the
transaction will be allocated between the Bridge Note and the warrants using the
residual method in which proceeds are first allocated to the warrant liability
and any remaining value is then allocated to the Bridge Note.  The
warrants were valued using the Black-Scholes fair value model. The grant date
fair value of the warrants issued in connection with the Bridge Note to the note
holder and the members of management was $347,000 and $347,000, respectively. We
allocated all of the proceeds to the warrant liability and recorded a full debt
discount to be applied against the note using the residual method. The fair
value of the warrants issued to members of management in compensation for the
note guarantee was recorded as a debt issuance cost. Both the debt discount and
the debt issuance cost will be amortized to interest expense over the term of
the note. (See Note 5 below for more information regarding the warrant
liability.)





On
September 8, 2009, the Bridge Note was converted into Series D Convertible
Preferred Stock. At the date of conversion there was $503,000 of principal and
interest outstanding on the Bridge note which was converted into 1,171,000
shares of Series D Convertible Preferred Stock. Additionally, as of the
conversion date, the entire debt discount and related debt issuance costs were
expensed and no outstanding balance remained at September 30, 2009.





Series
D Convertible Preferred Stock





On
September 8, 2009, we issued 23,720,916 shares of Series D Convertible Preferred
Stock along with 5-year warrants to purchase 23,720,916 shares of our common
stock with an exercise price of $0.65 per share.  The investor group
of 56 constituted of individuals and entities including certain of our officers,
directors and employees, as well as outside investors.  All or
portions of the principal and accrued interest of the May 29, 2009 Convertible
Notes, the June 30 Unsecured Promissory Note and the July 31 Bridge Note were
converted into the Series D Convertible Preferred Stock shares.  None
of these debt instruments remain outstanding after September 8,
2009.  The warrants issued in conjunction with the May 29 Convertible
Notes and with the July 31 Bridge Note remain outstanding. (See Note 5 regarding
the accounting for the warrants issued in connection with the Series D
Convertible Preferred Stock.)





The
Series D Convertible Preferred Stock was issued in a private placement exempt
from registration requirements pursuant to Regulation D of the Securities Act of
1933, as amended.  Cash consideration was deposited into escrow on or
around August 27, 2009.  Each share of Series D Convertible Preferred
Stock is convertible into one share of our Common Stock.  The Series D
Convertible Preferred Stock carries a dividend rate of 6% per annum, payable in
cash monthly.





Both the
Series D Convertible Preferred Stock and the warrants issued in connection with
the Series D Convertible Preferred Stock have anti-dilution features including a
full ratchet provision so that if we were to pay dividends, split (forward or
reverse) our common shares, or adjust our shares outstanding due to a
combination, the conversion and exercises prices, respectively, would also
adjust proportionally.  The warrants will expire 5 years from the date
of the transaction.  Holders of the Series D Convertible Preferred
Stock may convert their Series D Convertible Preferred Stock into shares of our
common stock at any time in amounts no less that $100,000 unless it is for all
of the shares held by the holder.  The Series D Convertible Preferred
Stock will automatically convert at our discretion upon 10 day notice given when
the average closing price of our common stock over a 30-day period is at or
above $3.00 per share and when the average trading volume for the most recent
four-week period is 30,000 shares or more, provided that the shares have been
effectively registered with the Securities and Exchange Commission or all of the
Series D Convertible Preferred Stock may be sold under Rule 144 of the 1933
Exchange Act.





The total
proceeds of $10.2 million raised in the transaction described above are
accounted for under generally accepted accounting principles, primarily ASC 470,
“Debt”. We have accounted for this transaction as the issuance of convertible
preferred stock and a detachable stock warrant.  The total proceeds of
$10.2 million have been allocated to these individual instruments based on their
relative fair value as determined by management.





30




As
discussed above, we issued warrants to purchase 23,720,916 shares of common
stock in conjunction with the sale of the Series D Convertible Preferred Stock.
These warrants were assessed in accordance with ASC 815 “Derivatives and
Hedging” and it was determined that the full ratchet provision included in the
warrant agreement triggered derivative liability accounting. As a result, in
accordance with the accounting guidance, the warrants were recorded at fair
value and will be marked to market on each reporting date with the change in
fair value recorded in our Consolidated Statements of Operations. Additionally,
the proceeds of the transaction should be allocated between the Series D
Convertible Preferred Stock and the warrants using the residual method in which
proceeds are first allocated to the warrant liability and any remaining value is
then allocated to the preferred stock.  The warrants were valued using
the Black-Scholes fair value model. The grant date fair value of the warrants
issued with the Series D Convertible Preferred Stock was $15,264,000. As the
fair value of the warrants exceeds the proceeds received, we allocated all of
the proceeds, with the exception of the par value of the Series D Convertible
Preferred Stock, to the warrant liability. The additional value needed to record
the warrants at fair value was recorded as a charge to additional paid-in
capital (APIC) as it constitutes an expense of the strategic transaction. (See
Note 5 below for more information regarding the warrant liability.)





The Series D Convertible Preferred
Stock we issued pays dividends to the holders at an annual rate of 6%, payable
monthly in arrears.  As of September 30, 2009, we recorded a dividends
payable of $39,000 which was included in accrued liabilities as of September 30,
2009.





Liquidity
and Capital Resources





As of
September 30, 2009, liquid assets consisted primarily of cash and cash
equivalents of $7,526,000 and marketable securities of $4,629,000, for a total
of $12,155,000, which is $1,174,000 higher than $10,981,000 in liquid
assets as of December 31, 2008.





We
entered into strategic transactions on May 29, June 30, July 31, and September
8, 2009 which resulted in an increase in our capital.  These
transactions are described above under the captions “Issuance of Debt” and
“Series D Convertible Preferred Stock”.





Merriman
Curhan Ford & Co., as a broker-dealer, is subject to Rule 15c3-1 of the
Securities Exchange Act of 1934, which specifies uniform minimum net capital
requirements, as defined, for their registrants. As of September 30, 2009,
Merriman Curhan Ford & Co. had regulatory net capital of $1,869,000
which exceeded the required amount by $1,597,000.





Please
see also Note 2 beginning on page 10, regarding our going concern
disclosures.





Results
of Operations





Regulation
G Reconciliation of Non-GAAP Financial Measures





In evaluating our financial
performance, management reviews results from operations excluding non-operating
revenues and expenses.  Such pro-forma results are non-GAAP (Generally
Accepted Accounting Principles) performance measures but we believe it is useful
to assist investors in gaining an understanding of the trends and results of our
core business.  Pro-forma results should be viewed in addition to, and
not instead of, our reported results under U.S. GAAP.





The following is a reconciliation of
U.S. GAAP results to pro-forma results for the periods presented.





31




Three
      Months Ended September 30,2009
            
            
            2008As
      Reported
            
            
            Less
      ICD
            
            
            Less
      Other1
            
            
            Pro-Forma
            
            
            As
      Reported
            
            
            Less
      ICD
            
            
            Less
      Other1
            
            
            Pro-FormaRevenue:Commissions
            
            $
            9,804,718
            
            
            $
            6,667,486
            
            
            
            —
            
            
            $
            3,137,232
            
            
            $
            7,992,614
            
            
            $
            2,591,359
            
            
            
            —
            
            
            $
            5,401,255Principal
      transactions
            
            
            (35,522
            )
            
            
            —
            
            
            
            213,356
            
            
            
            (248,878
            )
            
            
            (5,384,303
            )
            
            
            —
            
            
            
            (7,723,627
            )
            
            
            2,339,324Investment
      banking
            
            
            3,127,596
            
            
            
            —
            
            
            
            —
            
            
            
            3,127,596
            
            
            
            1,600,260
            
            
            
            —
            
            
            
            —
            
            
            
            1,600,260Advisory
      and other fees
            
            
            411,602
            
            
            
            —
            
            
            
            —
            
            
            
            411,602
            
            
            
            341,656
            
            
            
            —
            
            
            
            —
            
            
            
            341,656Total
      revenue
            
            
            13,308,394
            
            
            
            6,667,486
            
            
            
            213,356
            
            
            
            6,427,552
            
            
            
            4,550,227
            
            
            
            2,591,359
            
            
            
            (7,723,627
            )
            
            
            9,682,495Operating
      expenses:Compensation
      and benefits
            
            
            10,230,680
            
            
            
            6,227,472
            
            
            
            —
            
            
            
            4,003,208
            
            
            
            7,876,092
            
            
            
            1,804,779
            
            
            
            —
            
            
            
            6,071,313Brokerage
      and clearing fees
            
            
            208,051
            
            
            
            14,172
            
            
            
            —
            
            
            
            193,879
            
            
            
            558,344
            
            
            
            17,633
            
            
            
            —
            
            
            
            540,711Professional
      services
            
            
            1,063,883
            
            
            
            65,205
            
            
            
            690,260
            
            
            
            308,418
            
            
            
            3,994,278
            
            
            
            13,273
            
            
            
            3,114,874
            
            
            
            866,131Occupancy
      and equipment
            
            
            551,300
            
            
            
            17,170
            
            
            
            —
            
            
            
            534,130
            
            
            
            540,104
            
            
            
            3,500
            
            
            
            —
            
            
            
            536,604Communications
      and technology
            
            
            881,879
            
            
            
            145,124
            
            
            
            —
            
            
            
            736,755
            
            
            
            662,912
            
            
            
            73,528
            
            
            
            —
            
            
            
            589,384Depreciation
      and amortization
            
            
            109,922
            
            
            
            —
            
            
            
            —
            
            
            
            109,922
            
            
            
            279,261
            
            
            
            —
            
            
            
            —
            
            
            
            279,261Travel
      and entertainment
            
            
            449,108
            
            
            
            167,248
            
            
            
            —
            
            
            
            281,860
            
            
            
            634,689
            
            
            
            110,454
            
            
            
            —
            
            
            
            524,235Litigation
      settlement
            
            
            5,334,926
            
            
            
            —
            
            
            
            5,334,926
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Other
      expenses
            
            
            369,581
            
            
            
            121,287
            
            
            
            —
            
            
            
            248,294
            
            
            
            1,295,405
            
            
            
            31,387
            
            
            
            —
            
            
            
            1,264,018Total
      operating expenses
            
            
            19,199,330
            
            
            
            6,757,678
            
            
            
            6,025,186
            
            
            
            6,416,466
            
            
            
            15,841,085
            
            
            
            2,054,554
            
            
            
            3,114,874
            
            
            
            10,671,657Operating
      income/(loss)
            
            
            (5,890,936
            )
            
            
            (90,192
            )
            
            
            (5,811,830
            )
            
            
            11,086
            
            
            
            (11,290,858
            )
            
            
            536,805
            
            
            
            (10,838,501
            )
            
            
            (989,162
            )




32




Nine
      Months Ended September 30,2009
            
            
            2008As
      Reported
            
            
            Less
      ICD
            
            
            Less
      Other1
            
            
            Pro-Forma
            
            
            As
      Reported
            
            
            Less
      ICD
            
            
            Less
      Other1
            
            
            Pro-FormaRevenue:Commissions
            
            $
            28,892,568
            
            
            $
            20,074,321
            
            
            
            —
            
            
            $
            8,818,247
            
            
            $
            24,353,696
            
            
            $
            7,161,056
            
            
            
            —
            
            
            $
            17,192,640Principal
      transactions
            
            
            (131,020
            )
            
            
            (2,288
            )
            
            
            (480,292
            )
            
            
            351,560
            
            
            
            (5,280,550
            )
            
            
            —
            
            
            
            (8,105,058
            )
            
            
            2,824,508Investment
      banking
            
            
            5,411,463
            
            
            
            —
            
            
            
            —
            
            
            
            5,411,463
            
            
            
            9,423,666
            
            
            
            —
            
            
            
            —
            
            
            
            9,423,666Advisory
      and other fees
            
            
            1,618,282
            
            
            
            —
            
            
            
            —
            
            
            
            1,618,282
            
            
            
            581,256
            
            
            
            —
            
            
            
            —
            
            
            
            581,256Total
      revenue
            
            
            35,791,293
            
            
            
            20,072,033
            
            
            
            (480,292
            )
            
            
            16,199,552
            
            
            
            29,078,068
            
            
            
            7,161,056
            
            
            
            (8,105,058
            )
            
            
            30,022,070Operating
      expenses:Compensation
      and benefits
            
            
            29,687,486
            
            
            
            18,519,995
            
            
            
            —
            
            
            
            11,167,491
            
            
            
            31,205,145
            
            
            
            4,954,164
            
            
            
            —
            
            
            
            26,250,981Brokerage
      and clearing fees
            
            
            791,407
            
            
            
            45,729
            
            
            
            —
            
            
            
            745,678
            
            
            
            2,042,828
            
            
            
            62,543
            
            
            
            —
            
            
            
            1,980,285Professional
      services
            
            
            3,096,428
            
            
            
            96,997
            
            
            
            1,790,287
            
            
            
            1,209,144
            
            
            
            7,356,228
            
            
            
            73,480
            
            
            
            3,299,835
            
            
            
            3,982,913Occupancy
      and equipment
            
            
            1,617,347
            
            
            
            41,606
            
            
            
            —
            
            
            
            1,575,741
            
            
            
            1,601,104
            
            
            
            7,040
            
            
            
            —
            
            
            
            1,594,064Communications
      and technology
            
            
            2,442,979
            
            
            
            377,840
            
            
            
            —
            
            
            
            2,065,139
            
            
            
            2,556,652
            
            
            
            243,177
            
            
            
            —
            
            
            
            2,313,475Depreciation
      and amortization
            
            
            372,913
            
            
            
            —
            
            
            
            —
            
            
            
            372,913
            
            
            
            537,166
            
            
            
            —
            
            
            
            —
            
            
            
            537,166Travel
      and entertainment
            
            
            1,058,840
            
            
            
            526,727
            
            
            
            —
            
            
            
            532,113
            
            
            
            2,528,083
            
            
            
            445,864
            
            
            
            —
            
            
            
            2,082,219Litigation
      settlement
            
            
            5,334,926
            
            
            
            —
            
            
            
            5,334,926
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Other
      expenses
            
            
            1,631,435
            
            
            
            289,341
            
            
            
            —
            
            
            
            1,342,094
            
            
            
            3,297,102
            
            
            
            117,877
            
            
            
            —
            
            
            
            3,179,225Total
      operating expenses
            
            
            46,033,761
            
            
            
            19,898,235
            
            
            
            7,125,213
            
            
            
            19,010,313
            
            
            
            51,124,308
            
            
            
            5,904,145
            
            
            
            3,299,835
            
            
            
            41,920,328Operating
      income/(loss)
            
            
            (10,242,468
            )
            
            
            173,798
            
            
            
            (7,605,505
            )
            
            
            (2,810,761
            )
            
            
            (22,046,240
            )
            
            
            1,256,911
            
            
            
            (11,404,893
            )
            
            
            (11,898,258
            )





Note
      1 – The column headed “Less Other” includes unrealized gains/losses in
      “Principal transactions” revenues, approximate legal expenses paid as
      related to the Del Biaggio/Cacchione matters in “Professional services”,
      and legal settlement expense as related to the Del Biaggio/Cacchione
      matters in “Litigation settlement”.




33




The following table sets forth the
results of operations for the three months and nine months ended September 30,
2009 and 2008:




Three Months Ended
            
            
            Nine Months EndedSeptember 30,
              2009
            
            
            September 30,
              2008
            
            
            September 30,
              2009
            
            
            September 30,
              2008Revenue:Commissions
            
            $
            9,804,718
            
            
            $
            7,992,614
            
            
            $
            28,892,568
            
            
            $
            24,353,696Principal
      transactions
            
            
            (35,522
            )
            
            
            (5,384,303
            )
            
            
            (131,020
            )
            
            
            (5,280,550
            )Investment
      banking
            
            
            3,127,596
            
            
            
            1,600,260
            
            
            
            5,411,463
            
            
            
            9,423,666Advisory
      and other
            
            
            411,602
            
            
            
            341,656
            
            
            
            1,618,282
            
            
            
            581,256Total
      revenue
            
            
            13,308,394
            
            
            
            4,550,227
            
            
            
            35,791,293
            
            
            
            29,078,068Operating
      expenses:Compensation
      and benefits
            
            
            10,230,680
            
            
            
            7,876,092
            
            
            
            29,687,486
            
            
            
            31,205,145Brokerage
      and clearing fees
            
            
            208,051
            
            
            
            558,344
            
            
            
            791,407
            
            
            
            2,042,828Professional
      services
            
            
            1,063,883
            
            
            
            3,994,278
            
            
            
            3,096,428
            
            
            
            7,356,228Occupancy
      and equipment
            
            
            551,300
            
            
            
            540,104
            
            
            
            1,617,347
            
            
            
            1,601,104Communications
      and technology
            
            
            881,879
            
            
            
            662,912
            
            
            
            2,442,979
            
            
            
            2,556,652Depreciation
      and amortization
            
            
            109,922
            
            
            
            279,261
            
            
            
            372,913
            
            
            
            537,166Travel
      and entertainment
            
            
            449,108
            
            
            
            634,689
            
            
            
            1,058,840
            
            
            
            2,528,083Litigation
      settlement expense
            
            
            5,334,926
            
            ─
            
            
            
            5,334,926
            
            ─Other
            
            
            369,581
            
            
            
            1,295,405
            
            
            
            1,631,435
            
            
            
            3,297,102Total
      operating expenses
            
            
            19,199,330
            
            
            
            15,841,085
            
            
            
            46,033,761
            
            
            
            51,124,308Operating
      loss
            
            
            (5,890,936
            )
            
            
            (11,290,858
            )
            
            
            (10,242,468
            )
            
            
            (22,046,240
            )Other
      income
            ─
            
            ─
            
            
            
            2,000,000
            
            ─Change
      in fair value of warrant liability
            
            
            (9,628,460
            )
            ─
            
            
            
            (9,628,460
            )
            ─Interest
      income
            
            
            4,425
            
            
            
            195,283
            
            
            
            13,591
            
            
            
            325,703Interest
      expense
            
            
            (1,289,401
            )
            
            
            (20,236
            )
            
            
            (1,333,569
            )
            
            
            (53,619
            )Loss
      before provision for income tax
            
            
            (16,804,372
            )
            
            
            (11,115,811
            )
            
            
            (19,190,906
            )
            
            
            (21,774,156
            )(Provision
      for) benefit from income tax
            
            
            235,727
            
            
            
            (198,014
            )
            
            
            230,528
            
            
            
            1,640,730Loss
      from continued operations
            
            
            (16,568,645
            )
            
            
            (11,313,825
            )
            
            
            (18,960,378
            )
            
            
            (20,133,426
            )Loss
      from discontinued operations
            
            
            ─
            
            
            
            (409,513
            )
            
            
            (94,894
            )
            
            
            (3,753,729
            )Net
      loss
            
            $
            (16,568,645
            )
            
            
            (11,723,338
            )
            
            $
            (19,055,272
            )
            
            $
            (23,887,155
            )Preferred
      stock deemed dividend
            
            
            (5,066,702
            )
            
            
            ─
            
            
            
            (5,066,702
            )
            
            
            ─Preferred
      stock cash dividend
            
            
            (39,100
            )
            
            
            ─
            
            
            
            (39,100
            )
            
            
            ─Net
      loss attributable to common shareholders
            
            $
            (21,674,447
            )
            
            $
            (11,723,338
            )
            
            $
            (24,161,074
            )
            
            $
            (23,887,155
            )




34




Our net
loss for the three months and nine months ended September 30, 2009 and 2008
included the following non-cash, debt and settlement related
expenses:





Three Months Ended
            
            
            Nine Months EndedSeptember 30,
              2009
            
            
            September 30,
              2008
            
            
            September 30,
              2009
            
            
            September 30,
              2008Amortization
      of discounts on notes payable
            
            
            542,871
            
            
            
            —
            
            
            
            552,639
            
            
            
            2,584Amortization
      of debt issuance costs
            
            
            346,995
            
            
            
            —
            
            
            
            346,995
            
            
            
            —Amortization
      of beneficial conversion feature
            
            
            180,639
            
            
            
            —
            
            
            
            180,639
            
            
            
            —Change
      in fair value of warrant liability
            
            
            9,628,460
            
            
            
            —
            
            
            
            9,628,460
            
            
            
            —Non-cash
      legal settlement expense
            
            
            1,230,953
            
            
            
            —
            
            
            
            1,230,953
            
            
            
            —Total
            
            $
            11,929,918
            
            
            
            —
            
            
            $
            11,939,686
            
            
            $
            2,584





35






The
following table sets forth our revenue and transaction volumes from our
investment banking activities for the three months and nine months ended
September 30, 2009 and 2008:




Three Months Ended
            
            
            Nine Months EndedSeptember 30,
              2009
            
            
            September 30,
              2008
            
            
            September 30,
              2009
            
            
            September 30,
              2008Revenue:Capital
      raising
            
            $
            1,816,667
            
            
            $
            1,379,382
            
            
            $
            2,680,799
            
            
            $
            8,862,067Financial
      advisory and other
            
            
            1,310,929
            
            
            
            220,878
            
            
            
            2,730,664
            
            
            
            561,599Total
      investment banking revenue
            
            $
            3,127,596
            
            
            $
            1,600,260
            
            
            $
            5,411,463
            
            
            $
            9,423,666Transaction
      Volumes:Public
      offerings:Capital
      underwritten participations
            
            $
            416,895,000
            
            
            $
            —
            
            
            $
            451,270,000
            
            
            $
            182,780,000Number
      of transactions
            
            
            4
            
            
            
            —
            
            
            
            5
            
            
            
            3Private
      placements:Capital
      raised
            
            $
            37,390,000
            
            
            $
            19,080,000
            
            
            $
            89,018,000
            
            
            $
            257,980,000Number
      of transactions
            
            
            4
            
            
            
            1
            
            
            
            7
            
            
            
            10Financial
      advisory:Transaction
      amounts
            
            $
            141,900,000
            
            
            $
            —
            
            
            $
            194,800,000
            
            
            $
            87,300,000Number
      of transactions
            
            
            4
            
            
            
            —
            
            
            
            9
            
            
            
            3




Our
investment banking revenue was $3,128,000 or 24% of our revenue during third
quarter 2009, representing a 95% increase from the similar quarter in 2008.
During the third quarter 2009, the financial markets became active again, unlike
the same period in 2008 when the funding markets were totally deadlocked.
Banking revenue for the three months ended September 30, 2009 increased
dramatically by 193% from the second quarter 2009.  In the third
quarter 2009, we participated in three times as many transactions as in the
second quarter 2009. We participated in four secondary public offerings, acted
as placement agent for four private placements, and participated in four
financial advisory assignments.




During
the three months ended September 30, 2009 we had no investment banking clients
that accounted for more than 10% of our revenue, while one client accounted for
25% of our revenue during the same period in 2008.




36




Commissions
and Principal Transactions Revenue




Our
broker-dealer activity includes the following:




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








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




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





Three Months Ended
            
            
            Nine Months EndedSeptember 30,
              2009
            
            
            September 30,
              2008
            
            
            September 30,
              2009
            
            
            September 30,
              2008Revenue:Commissions
            
            $
            9,804,718
            
            
            $
            7,992,614
            
            
            $
            28,892,568
            
            
            $
            24,353,696Less
      commissions attributed to ICD
            
            
            (6,667,486
            )
            
            
            (2,591,359
            )
            
            
            (20,074,321
            )
            
            
            (7,161,056
            )Commissions
      excluding ICD
            
            
            3,137,232
            
            
            
            5,401,255
            
            
            
            8,818,247
            
            
            
            17,192,640Principal
      transactions:Customer
      principal transactions, proprietary trading and market
    making
            
            $
            (547,345
            )
            
            $
            (2,209,483
            )
            
            $
            (219,523
            )
            
            $
            (5,738,840
            )Investment
      portfolio
            
            
            511,823
            
            
            
            (3,174,820
            )
            
            
            88,503
            
            
            
            458,290Total
      principal transactions revenue
            
            $
            (35,522
            )
            
            $
            (5,384,303
            )
            
            $
            (131,020
            )
            
            $
            (5,280,550
            )Transaction
      Volumes:Number
      of shares traded
            
            
            162,350,775
            
            
            
            321,882,832
            
            
            
            643,702,710
            
            
            
            1,094,758,300Number
      of active clients
            
            
            204
            
            
            
            291
            
            
            
            279
            
            
            
            475





Commissions
amounted to $9,805,000, or 74%, of our revenue during the third quarter 2009,
representing a 23% increase from the similar period in 2008. The increase was
attributable to ICD, which we are selling.  Excluding ICD, commissions
declined by 42% year over year but improved by 19% over the second quarter
2009.




Principal
transactions loss improved by 99% during the third quarter 2009 versus third
quarter 2008, but declined from a gain of $747,000 in the second quarter 2009.
The year-over-year improvement was a result primarily of unrealized gains in our
investment portfolio as well as the managed reduction in the number of stocks
for which we make a market. As of September 30, 2009, we made markets in 154
stocks, compared to 1,406 stocks as of September 30, 2008. Principal
transactions revenue consists of four different activities - customer principal
trades, market making, trading for our proprietary account, and realized and
unrealized gains and losses in our investment portfolio. As a broker-dealer, we
account for all of our marketable security positions on a trading basis and as a
result, all security positions are marked to fair market value each day. Returns
from market making and proprietary trading activities tend to be more volatile
than acting as agent or principal for customers.





During
the third quarter of 2009, proprietary trading lost $547,000 in realized and
unrealized trading losses versus a loss of $2,442,000 in the same period in
2008.





During
the third quarter 2009 and 2008, no single brokerage customer accounted for more
than 10% of our revenue.




37





Compensation
and Benefits Expenses




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





The
following table sets forth the major components of our compensation and benefits
for the three and nine months ended September 30, 2009 and 2008:





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30,
              2009
            
            
            September
      30,
              2008
            
            
            September
      30,
              2009
            
            
            September
      30,
              2008Incentive
      compensation and discretionary bonuses
            
            $
            8,163,543
            
            
            $
            3,355,499
            
            
            $
            22,254,424
            
            
            $
            15,440,428Salaries
      and wages
            
            
            1,423,620
            
            
            
            3,308,102
            
            
            
            5,280,639
            
            
            
            10,448,825Stock-based
      compensation
            
            
            170,207
            
            
            
            580,428
            
            
            
            429,986
            
            
            
            1,897,033Payroll
      taxes, benefits and other
            
            
            473,310
            
            
            
            632,063
            
            
            
            1,722,437
            
            
            
            3,418,859Total
      compensation and benefits
            
            $
            10,230,680
            
            
            $
            7,876,092
            
            
            $
            29,687,486
            
            
            $
            31,205,145Total
      compensation and benefits as a percentage of revenue
            
            
            77
            %
            
            
            173
            %
            
            
            83
            %
            
            
            107
            %Cash
      compensation and benefits as a percentage of revenue
            
            
            76
            %
            
            
            160
            %
            
            
            82
            %
            
            
            101
            %





The
increase in compensation and benefits expense of $2,355,000 or 30%, from the
third quarter 2008 to the third quarter 2009 was due to increased ICD
revenues and corresponding commissions partially offset by reduced non-ICD
brokerage revenue and corresponding reduced commissions payable.  We
are in the process of selling the ICD assets and will exclude the effects of ICD
on our financial statements when the sale is completed.  Our higher
investment banking revenue and corresponding bonuses added somewhat to the
compensation and benefit expenses.  Excluding ICD, compensation and
benefit expenses decreased year-over-year by $2,068,000.





Cash
compensation is equal to total compensation and benefits expense excluding
stock-based compensation. Cash compensation and benefits expense as a percentage
of revenue decreased to 76% of revenues during the third quarter 2009 as
compared to 160% in 2008. This decrease was primarily the result of higher
revenues.





Stock-based
compensation expense decreased by 71% in the third quarter 2009 as compared to
the same period 2008. The decline in stock-based compensation expense can be
attributed to fewer stock options outstanding as a result of the Company’s Stock
Options Give-Back Program in October 2008.  This program resulted in
about 3 million shares of stock options given back.  The program was
open to all employees.  Executive management gave back the large majority
of all stock options.





No single
sales professional accounted for more than 10% of our revenue during the three
months ended September 30, 2009 and 2008.




Other
Operating Expenses




Brokerage
and clearing fees include trade processing expenses that we pay to our clearing
broker and execution fees that we pay to floor brokers and electronic
communication networks. Merriman Curhan Ford & Co. is a fully-disclosed
broker-dealer which has engaged a third party clearing broker to perform all of
the clearance functions. The clearing broker-dealer processes and settles the
customer transactions for Merriman Curhan Ford & Co. and maintains the
detailed customer records. These expenses are almost entirely variable with
commission revenue and the volume of brokerage transactions. Our brokerage and
clearing fees decreased by $350,000, or 63%, during the third quarter of 2009 as
compared to the third quarter of 2008. This decrease reflected reduced volume of
trades partially offset by higher costs associated with execution of foreign
securities for our clients during third quarter 2009 as compared to third
quarter 2008. Execution fees we pay for foreign securities are higher than they
are for domestic securities.





Professional
services expense includes legal, audit, and consulting fees, as well as expenses
related to investment banking transactions. The decrease of $2,930,000 or 73%,
in the third quarter of 2009 from the third quarter of 2008 was primarily
attributed to lower legal fees associated with the Company’s legal matters,
attributable to stabilization of the litigation and investigations related to
Del Biaggio and Cacchione (see Legal Proceedings in Item 1 of Part
II).




38




Occupancy
and equipment includes rental costs for our office facilities and equipment, as
well as equipment, software and leasehold improvement expenses. These expenses
are largely fixed in nature. The increase of $11,000, or 2%, in the third
quarter of 2009 from the same quarter of 2008 was due primarily to increased
energy consumption costs in our New York offices.





Communications
and technology expense includes market data and quote services, voice, data and
Internet service fees, and data processing costs. The increase of $219,000, or
33%, in the third quarter of 2009 from the third quarter of 2008 was primarily
due to increased costs in renewals of service contracts, necessary for our
business.





Depreciation
and amortization expense primarily relate to the depreciation of our computer
equipment and leasehold improvements. The decrease of $169,000, or 61%, in the
third quarter of 2009 from the third quarter of 2008 was due to the disposal of
some of the Company’s equipment and office space.





Travel
and entertainment expense results from business development activities across
our various businesses. The decrease of $186,000, or 29%, in the third quarter
of 2009 from the third quarter of 2008 was due mostly to reduced costs
associated with lower volume of business and reduced expenses associated with
selective business development.





Other
operating expense includes company events, recruiting fees, professional
liability and property insurance, marketing, business licenses and taxes, office
supplies and other miscellaneous office expenses. The decrease of approximately
$926,000, or 71%, in the third quarter of 2009 from the third quarter of 2008
was due to the Company’s active efforts to curb expenses, particularly in the
area of company-sponsored events.




Income
Tax Expense




At the
end of each interim reporting period, we calculate an effective tax rate based
on our estimate of the tax provision (benefit) that will be provided for the
full year, stated as a percentage of estimated annual pre-tax income (loss). The
tax provision (benefit) for the interim period is determined using this
estimated annual effective tax rate. For the three months and nine months ended
September 30, 2009, we recorded a $235,000 and $230,000 income tax benefit,
respectively. This relates primarily to a state tax benefit recorded during the
quarter upon filing of our returns.  For the three months and nine
months ended September 30, 2008, we recorded an income tax expense of $198,000
and a benefit of $1,641,000, respectively.  The benefit for the nine
months ended September 30, 2008 is mainly attributable to the release of the FIN
48 liability due to the approval of an accounting method change for federal tax
purposes.





Historically
and currently, we have recorded a valuation allowance on the deferred tax
assets, the significant component of which relates to net operating loss tax
carryforwards. Management continually evaluates the realizability of its
deferred tax assets based upon negative and positive evidence available. Based
on the evidence available at this time, we continue to conclude that it is not
“more likely than not” that it will be able to realize the benefit of its
deferred tax assets in the future.





We do not
have any material accrued interest or penalties associated with any unrecognized
tax benefits. Our policy is to account for interest, if any, as interest expense
and penalties as income tax expense.





Our tax
years 2006-2008 will remain open for three years for examination by the Internal
Revenue Service from the date the federal corporation tax returns were filed.
Our tax years 2004-2008 will remain open for three to four years for examination
by state tax authorities from the date the state corporation tax returns were
filed. Net operating losses deducted are subject to review and adjustment for
three to four years after the net operating losses are deducted on the U.S. and
state returns filed.





The
Worker, Homeownership, and Business Assistance Act of 2009 (HR 3845) was signed
into law by President Obama on November 6, 2009.  This legislation allows
businesses with net operating losses (NOLs) for 2008 or 2009 to carry back those
losses for up to five years to recover tax liability assessed in these prior
periods.  The Act also includes a provision suspending the 90 percent
limitation on the use of  any alternative tax NOL deduction attributable to
carrybacks of the applicable NOL for which an extended carryback period is
elected.  The company has not evaluated the potential benefit that could be
recovered by filing a carryback to years 2003 and later.





Other
Income





Other
income, shown in our Consolidated Statements of Operations, consists of
$1,200,000 recognized as revenue in the first quarter and $800,000 in the second
quarter 2009 related to the sale of our ICD assets.  All proceeds from
the sales have been received.




39




Off-Balance
Sheet Arrangements





We were
not a party to any off-balance sheet arrangements during the nine months ended
September 30, 2009 and 2008. In particular, we do not have any interest in
so-called limited purpose entities, which include special purpose entities and
structured finance entities.





Commitments





The
following table summarizes our significant commitments as of September 30, 2009,
consisting of capital leases and future minimum lease payments under all
non-cancelable operating leases with initial or remaining terms in excess of one
year.




Operating
              Leases
            
            
            Capital
              Leases2009
            
            $
            426,679
            
            
            $
            123,1112010
            
            
            1,697,990
            
            
            
            268,8532011
            
            
            1,648,743
            
            
            
            146,6472012
            
            
            1,095,440
            
            
            
            —2013
            
            
            616,000
            
            
            
            —Thereafter
            
            
            —
            
            
            
            —Total
      commitments
            
            
            5,484,852
            
            
            
            538,611Interest
            
            
            
            
            
            
            (24,427
            )Commitments,
      net of interest
            
            $
            5,484,852
            
            
            $
            514,184




Loss
from Discontinued Operations





On April
17, 2007, we acquired 100 percent of the outstanding common shares of MedPanel
Corp. which we subsequently renamed Panel Intelligence LLC (“Panel”) and made
into a subsidiary of the Merriman Curhan Ford Group, Inc. The results of Panel’s
operations have been included in our consolidated financial statements since
that date. As a result of the acquisition, we began providing independent market
data and information to clients in the biotechnology, pharmaceutical, medical
device, and financial industries by leveraging Panel's proprietary methodology
and vast network of medical experts.





We paid
$6.1 million in common stock for Panel. The value of the 1,547,743 shares of
common shares issued was determined based on the average market price of the our
common stock over the period including three days before and after the terms of
the acquisition were agreed to and announced. The selling stockholders were also
entitled to additional consideration on the third anniversary from the closing
which is based upon Panel Intelligence achieving specific revenue and
profitability milestones.





In
December 2008, we determined that the sale of Panel would reduce investments
required to develop Panel’s business.  Its sale would also generate
capital necessary for our core business.   The sale of Panel was
completed in January 2009.  We determined that the plan of sale
criteria in ASC 360, “Property, Plant and Equipment”, had been met. As a result,
the revenue and expenses of Panel have been reclassified and included in
discontinued operations in the consolidated statements of
operations. Accordingly, the carrying value of the Panel assets was
adjusted to their fair value less costs to sell.  As a result, an
impairment loss in the amount of $1,937,000 was recorded and is included in
“Other expenses” for the year ended December 31, 2008.  In January
2009, we sold Panel to Panel Intelligence, LLC (Newco) for $1,000,000 and shares
of our common stock in the amount of $100,000.





Sale
of ICD





On
January 16, 2009, the Company entered into an agreement to sell the assets of
Institutional Cash Distributors (ICD), a division of Merriman Curhan Ford &
Co., to a group of investors who are also its employees in order to raise
capital.  ICD is a broker of money market funds serving the short-term
investing needs of corporate finance departments at companies throughout the
United States and Europe.  The assets being sold include the Company’s
rights in trademark, copyright and other intellectual property used in the
business, customer lists, marketing materials, and books and
records.  As of March 31, 2009, the Company determined that the
discontinued operations criteria in ASC 360, “Property, Plant and Equipment”,
have not been met, as such the revenues and expenses of ICD are still presented
as part of continuing operations.  In accordance with ASC 605,
“Revenue Recognition”, the Company recognized $1.2 million in the first quarter
2009 and $800,000 in the second quarter 2009 as Other
Income.  All sales proceeds have been received.





The
completion of the sale is subject to review and approval by regulatory
authorities.  Upon completion, we will no longer report the ICD
related revenues and expenses as part of our financial results.




40




Critical
Accounting Policies and Estimates




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




Securities
Owned





Corporate
Equities – are comprised primarily of exchange-traded equity securities that the
Company takes selective proprietary positions based on expectations of future
market movements and conditions. They are generally valued based on quoted
prices from the exchange. To the extent these securities are actively traded,
valuation adjustments are not applied and they are categorized in Level 1 of the
fair value hierarchy.





Stock
Warrants – represent warrants to purchase equity in a publicly traded
company.  Such positions are considered illiquid and do not have
readily determinable fair values, and therefore require significant management
judgment or estimation. For these securities, the Company uses the Black-Scholes
valuation methodology or similar techniques. They are classified within Level 3
of the fair value hierarchy.





Underwriters’
Purchase Options – represent the overallotment of units for a publicly traded
company for which the Company acted as an underwriter.  Such positions
are considered illiquid and do not have readily determinable fair values, and
therefore require significant management judgment or estimation. For these
securities, the Company uses the Black-Scholes valuation methodology. They are
classified within Level 3 of the fair value hierarchy.





Valuation
of Securities Owned





“Securities
owned” and “Securities sold, but not yet purchased” are reflected in the
consolidated statements of financial condition on a trade-date basis. Related
unrealized gains or losses are generally recognized in “Principal transactions
revenue” in the Consolidated Statements of Operations. The use of fair value to
measure financial instruments is fundamental to our financial statements and is
one of our most critical accounting policies.




The fair
value of a financial instrument is the amount that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date (the exit price). Instruments that we own
(long positions) are marked to bid prices, and instruments that we have sold,
but not yet purchased (short positions), are marked to offer prices. Fair value
measurements are not adjusted for transaction costs. Fair values of our
financial instruments are generally obtained from quoted market prices in active
markets, broker or dealer price quotations, or alternative pricing sources with
reasonable levels of price transparency. To the extent certain financial
instruments trade infrequently or are non-marketable securities and, therefore,
have little or no price transparency, we value these instruments based on
management’s estimates.




Substantially
all of our financial instruments are recorded at fair value or contract amounts
that approximate fair value. Securities owned and securities sold, not yet
purchased, are stated at fair value, with any related changes in unrealized
appreciation or depreciation reflected in Principal Transactions in the
consolidated statements of operations. Financial instruments carried at contract
amounts include cash and cash equivalents and amounts due from and to brokers,
dealers and clearing brokers.




41




Valuation
of Warrant Liabilities





Stock
warrants issued to our investors and creditors are rights to purchase our common
stock.  Such positions are considered illiquid and do not have readily
determinable fair values, and therefore require significant management judgment
or estimation. For the warrant liabilities, we use the Black-Scholes valuation
methodology or similar techniques. They are classified within Level 3 of the
fair value hierarchy. In accordance with ASC 820 “Fair Value Measurements and
Disclosures”, assets measured at fair value on a recurring basis are categorized
based upon the lowest level of significant input to the valuations (Levels 1, 2,
or 3, see “Fair Value Measurement – Definition and Hierarchy”,
below).








Fair
Value Measurement—Definition and Hierarchy





The
Company adopted the provisions of ASC 820, “Fair Value Measurements and
Disclosures”. Under this standard, fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in
an orderly transaction between market participants at the measurement
date.





Where
available, fair value is based on observable market prices or parameters or
derived from such prices or parameters. Where observable prices or inputs are
not available, valuation models are applied. These valuation techniques involve
some level of management estimation and judgment, the degree of which is
dependent on the price transparency for the instruments or market and the
instruments’ complexity. Assets and liabilities recorded at fair value in the
consolidated statement of financial condition are categorized based upon the
level of judgment associated with the inputs used to measure their fair value.
Hierarchical levels, defined in ASC 820 and directly related to the amount of
subjectivity associated with the inputs to fair valuation of these assets and
liabilities, are as follows:





Level 1 —
Inputs are unadjusted, quoted prices in active markets for identical assets or
liabilities at the measurement date. The types of assets and liabilities carried
at Level 1 fair value generally are G-7 government and agency securities,
equities listed in active markets, investments in publicly traded mutual funds
with quoted market prices and listed derivatives.





Level 2 —
Inputs (other than quoted prices included in Level 1) are either directly or
indirectly observable for the asset or liability through correlation with market
data at the measurement date and for the duration of the instrument’s
anticipated life. Fair valued assets that are generally included in this
category are stock warrants for which there are market-based implied
volatilities, unregistered common stock and thinly traded common
stock.





Level 3 —
Inputs reflect management’s best estimate of what market participants would use
in pricing the asset or liability at the measurement date. Consideration is
given to the risk inherent in the valuation technique and the risk inherent in
the inputs to the model. Generally, assets carried at fair value and included in
this category include stock warrants for which market-based implied volatilities
are not available.





Assets
measured at fair value on a recurring basis are categorized into a Level based
upon the lowest level of significant input to the valuations.





Revenue
Recognition




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




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




42




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





OTCQX
revenue is recognized in two parts – Due Diligence and Listing
Fees.  Due Diligence Fees are recognized at the completion of the Due
Diligence process.  The Listing Fees are pro-rated monthly from the
time the end of the Due Diligence period until the end of the engagement
term.





Stock-Based
Compensation




On
January 1, 2006, we adopted guidelines incorporated in ASC 718, “Stock
Compensation”, which requires the measurement and recognition of compensation
expense, based on estimated fair values, for all share-based awards, made to
employees and directors, including stock options, non-vested stock, and
participation in our employee stock purchase plan. Share-based compensation
expense recognized in our consolidated statement of operations includes
compensation expense for share-based awards granted (i) prior to, but not
yet vested as of December 31, 2005, based on the grant date fair value, and
(ii) subsequent to December 31, 2005. Compensation expense for all
share-based awards subsequent to December 31, 2005 is recognized using the
straight-line single-option method. Because share-based compensation expense is
based on awards that are ultimately expected to vest, share-based compensation
expense has been reduced to account for estimated forfeitures. Forfeitures are
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates.




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





Because share-based
compensation expense is based on awards that are ultimately expected to vest, it
has been reduced to account for estimated forfeitures. ASC 718 requires
forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. Changes in
these inputs and assumptions can materially affect the measure of estimated fair
value of our share-based compensation.





Deferred
Tax Valuation Allowance




We
account for income taxes in accordance with the provision of ASC 740, “Income
Taxes”, which requires the recognition of deferred tax assets and liabilities at
tax rates expected to be in effect when these balances reverse. Future tax
benefits attributable to temporary differences are recognized to the extent that
the realization of such benefits is more likely than not. We have concluded that
it is not more likely than not that our deferred tax assets as of September 30,
2009 and 2008 will be realized based on the scheduling of deferred tax
liabilities and projected taxable income. The amount of the deferred tax assets
actually realized, however, could vary if there are differences in the timing or
amount of future reversals of existing deferred tax liabilities or changes in
the actual amounts of future taxable income. Should we determine that we will be
able to realize all or part of the deferred tax asset in the future, an
adjustment to the deferred tax asset will be recorded in the period such
determination is made.




43





Related
Party Transactions





Unsecured
Promissory Notes





On
June 30, 2009, the Company issued $300,000 in unsecured promissory notes to
three of its employees at an interest rate of 3.25%.  The maturity
date of the notes was October 31, 2009, although they were repayable earlier on
the occurrence of certain events. These notes were paid in full in
cash.  At September 30, 2009, no unsecured promissory notes remain
outstanding.





Bridge
Note





On July
31, 2009, we issued Mr. Ronald L. Chez, the lead investor in the Series D
Transaction, a Secured Promissory Note in the amount of $500,000 at an annual
interest rate of 9.00%.  The term of the Note was three years,
redeemable by Mr. Chez upon presentation of written demand.  The Note
was guaranteed personally by our officers, namely Messrs. Jonathan Merriman
(CEO) and Peter Coleman (CFO).  We issued 10-year warrants to purchase
1,162,791 shares of our common stock at $0.65 each share to Mr. Chez in
connection with this transaction.  Identical warrants were issued to
purchase 581,395 shares of our common stock each to Messrs. Merriman and Coleman
for the guarantee.





The
Bridge Note was converted into the Series D Convertible Preferred
Stock.  Subsequent to the Series D Transaction, Mr. Chez has joined
our Board of Directors.  At September 30, 2009, the Bridge Note was no
longer outstanding.





Series
D Convertible Preferred Stock





On
September 8, 2009, we issued 23,720,916 shares of Series D Convertible Preferred
Stock along with 5-year warrants to purchase 23,720,916 shares of our common
stock at $0.65 each share.  The investor group of 56 constituted of
individuals and entities including certain of our officers, directors and
employees, as well as outside investors.





The
Series D Convertible Preferred Stock was issued in a private placement exempt
from registration requirements pursuant to Regulation D of the Securities Act of
1933, as amended.  Cash consideration was deposited into escrow on or
around August 27, 2009.  Each share of Series D Convertible Preferred
Stock is convertible into one share of our Common Stock.  The Series D
Convertible Preferred Stock carries a dividend rate of 6% per annum, payable in
cash monthly.





Three of
the investors in the Series D Convertible Preferred Stock transaction, Messrs.
Andrew Arno, Douglas Bergeron, and Ronald Chez, have since joined our Board of
Directors.  In addition, our CEO and CFO who are also officers of
Merriman Curhan Ford & Co. (“MCF&Co.”), our primary operating
subsidiary, along with 11 other executives and senior managers of MCF&Co.
were also investors in the Series D Convertible Preferred Stock
transaction.  Finally, all 5 of the members of ourBoard of Directors
prior to the transaction were investors in the Series D Convertible Preferred
Stock transaction.





Secured
Demand Note





On August
12, 2009, we obtained a Temporary Secured Demand Note (“Demand Note”) in the
amount of $1,329,000 from the D. Jonathan Merriman Living Trust (“Trust”) as a
subordinated loan.  The trustee of the trust, D. Jonathan Merriman, is
also our Chief Executive Officer.  The Demand Note was collateralized
by securities held in a brokerage account at a third party by the
Trust.  The Demand Note was repaid on September 23, 2009 and the
securities were transferred back to the Trust.  We compensated the
Trust with total interest and fees in the amount of $179,000, most of which was
invested in the Series D Convertible Preferred Stock transaction.




44




Strategic
Advisory Committee





We formed a Strategic Advisory
Committee of the Board of Directors chaired by Mr. Ronald Chez, the lead
investor in the Series D Convertible Preferred Stock strategic
transaction.  During the first year, the Chair of the Committee will
be compensated with warrants to purchase 300,000 shares our common stock at
$0.65, to be issued pro-rata on a monthly basis.  To date, Mr. Chez is
the sole member of the Committee.  No other compensation arrangement
for service on the Committee has been made.





Subsequent
Events





Midsummer
Investment, Ltd., v. Merriman Curhan Ford Group, Inc.





On
November 6, 2009, Midsummer Investment, Ltd. (“Midsummer”) filed a complaint in
federal court, Southern District of New York, alleging that Midsummer
was denied an anti-dilution adjustment to a warrant issued by MCF&Co.
to them, and that MCF&Co. refused to honor an exercise of that
warrant.  MCF&Co. believes that Midsummer is not entitled to any
anti-dilution adjustment and its attempted exercise was not accompanied by
proper payment.  We believe that MCF&Co. has meritorious defenses and
it intends to contest this claim vigorously.





Settlement
with the Securities and Exchange Commission





On
November 10, 2009, the Securities and Exchange Commission (“SEC”) issued an
“Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to
Sections 15(b) and 21(c) of the Securities and Exchange Act of 1934, Making
Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order as to
Merriman Curhan Ford & Co., D. Jonathan Merriman, and Christopher
Aguilar.”  The Order was issued in connection with the conduct of a
former retail broker, David “Scott” Cacchione, from approximately March 2006 to
April 2008 for violation of the anti-fraud provisions of the federal securities
laws.  Cacchione was fired in May 2008, shortly after the underlying
facts became known.




The Order
censures and imposes sanctions for the failure of MCF&Co. to reasonably
supervise Cacchione with a view toward preventing future violations arising out
of his disseminating confidential customer information to third parties and
executing unauthorized orders for certain customers.  MCF&Co. will
pay a penalty of $100,000 and will hire an Independent Consultant to review and
make recommendations as needed to MCF&Co.’s written policies and procedures
relating to the supervision of registered representatives.




The Order
also imposes sanctions on Jon Merriman, MCF&Co.’s former CEO and current CEO
of the Company, and Christopher Aguilar, MCF&Co.’s former Chief Compliance
Officer, for failure to adequately supervise Cacchione.  Jon Merriman
must pay a penalty of $75,000 and Chris Aguilar must pay a penalty of
$40,000.  Both individuals are also suspended from acting in a
supervisory capacity for any broker or dealer for a period of twelve months from
the date of the Order.




The Order
makes no finding or allegation of any fraudulent activity involving anyone in
MCF&Co. other than Cacchione.  MCF&Co., Mr. Merriman, and Mr.
Aguilar cooperated fully with the SEC’s investigation and consented to the SEC’s
Order without admitting or denying the findings.




45




ITEM  3.  
Quantitative and Qualitative Disclosures About Market Risk




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




Equity
Price Risk




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





Interest
Rate Risk





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




Foreign
Currency Risk




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




46




ITEM 4.  Controls and
Procedures





Evaluation
of Disclosure Controls and Procedures





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





Based on
their evaluation of the Company's disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934), the Principal Executive Officer and Principal Financial Officer of the
Company have concluded that the disclosure controls and procedures are effective
as of September 30, 2009.





Changes
in internal controls





There was
no change in the Company's internal control over financial reporting (as defined
in Rules 13a-15(d) and 15d-15(d) of the Exchange Act) that occurred during the
quarter ended September 30, 2009, that materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.




47




PART
II.   OTHER INFORMATION




ITEM 1.         Legal
Proceedings





The
Company is the subject of a formal investigation commenced by the Securities and
Exchange Commission (“SEC”).  The SEC investigation is focused in large
part on the activities of a former retail broker of the Company’s subsidiary,
Merriman Curhan Ford & Co. (“MCF”), David Scott Cacchione (“Cacchione”), and
one of his customers, William Del Biaggio III (“Del Biaggio”). The activities
relate primarily to the misuse of various client accounts as collateral for
loans to Del Biaggio from third party lenders.  Cacchione signed “account
control agreements” in which he purported to act on behalf of the Company to
authorize the use of various client accounts as security for loans to Del
Biaggio from various third-party lenders.  Cacchione did not have the
authority to do so.





Cacchione
also improperly provided client account statements to third-party lenders or to
Del Biaggio for the purpose of representing to the lenders that the accounts
belonged to Del Biaggio.  The retail client account statements were altered
so that the accounts appeared to belong to Del Biaggio when in fact some of the
accounts belonged to other MCF retail clients.  Del Biaggio is no longer a
customer of MCF, and Cacchione’s employment was terminated in June
2008.





The
Company’s internal investigation found no evidence that any of Cacchione’s
supervisors or any member of the Company or MCF management was aware of the
actions of Del Biaggio and Cacchione as described above until shortly before
Cacchione’s employment was terminated.  MCF has been phasing out its
retail business and will concentrate on strengthening its core investment
banking and institutional brokerage businesses.  Both Cacchione and Del
Biaggio have recently pleaded guilty to securities fraud in the United States
District Court, Northern District of California and have been sentenced to
jail time.  In addition, they have been named as defendants in
separate SEC enforcement actions.





The SEC
staff has indicated that it intends to recommend to the Commission an
enforcement action arising out of Cacchione’s actions and the failure to
adequately supervise him.  The Company is cooperating fully with the SEC in
its investigation and is presently engaged in settlement efforts with the
SEC.  (Please see “Subsequent Events” in the Management Discussion
Analysis section on page 45.)





As noted
above, a number of lawsuits and other claims have been filed (or asserted)
against MCF and in at least one instance, the Company, in connection with the
alleged actions of Del Biaggio and Cacchione.  The total amount of damages
sought under such lawsuits and other claims is approximately $57.5 million. Six
of these lawsuits and one threatened lawsuit aggregating to $43.5 million were
settled on September 8, 2009.  These were deemed by the Company to be
of greatest concern.  The settlement has freed considerable management
time and legal resources as well as reduced legal expenses.  The
Company and MCF deny any wrongdoing and will defend themselves and attempt to
obtain the most favorable possible outcome of the remaining lawsuits for
themselves and the Company’s shareholders.





The
lawsuits against the Company and MCF that result from Cacchione’s activities are
as follows:





DGB
Investments, Inc. v. Merriman Curhan Ford & Co.





In May
2008, Merriman Curhan Ford & Co. (“MCF”) was served with a complaint filed
in the Santa Clara County, California Superior Court by DGB Investments, Inc.
which loaned money to William Del Biaggio III, the former customer of
MCF.  The complaint names as defendants Del Biaggio, David Scott
Cacchione, a former retail broker of MCF, and MCF. Plaintiff alleges that Del
Biaggio defaulted on a multi-million dollar loan obtained from Plaintiff. 
Effective June 4, 2008, MCF terminated Cacchione’s employment.   The
complaint further alleges that Cacchione, while still employed with MCF, signed
an account control agreement purporting to pledge a retail client stock account
as collateral for the Del Biaggio loan. On the basis of these allegations,
Plaintiff asserts various claims against MCF and others.  Plaintiff sought
$3 million in damages.  On July 15, 2009, an amended complaint was filed
naming as additional defendants, D. Jonathan Merriman, the Company’s CEO and
former CEO of MCF, and Robert E. Ford, an officer of MCF.  On
September 8, 2009, MCF settled the claims for $296,000 and five-year warrants to
purchase 105,846 shares of the Company’s common stock at $0.65.




48





Heritage
Bank of Commerce v. Merriman Curhan Ford & Co.





In May
2008, MCF was served with a complaint filed in the Santa Clara County Superior
Court by Heritage Bank of Commerce, which loaned money to Del Biaggio, naming as
defendants Del Biaggio and MCF.  Plaintiff alleges that Del Biaggio
defaulted on a multi-million dollar loan obtained from Plaintiff.  The
complaint further alleges that Cacchione, while still employed with MCF, signed
an account control agreement purporting to pledge various retail client stock
accounts as collateral for the Del Biaggio loan. On the basis of these
allegations, Plaintiff asserts various claims against MCF and others. 
Plaintiff sought $ 4 million in damages.  On Plaintiff’s motion, a retired
judge was subsequently appointed judicial referee for all
purposes.  On July 24, 2009, an amended complaint was filed naming as
additional defendants, D. Jonathan Merriman, the Company’s CEO and former CEO of
MCF, and Robert E. Ford, an officer of MCF.  On September 8, 2009, MCF
settled the claims for $427,000 and five-year warrants to purchase 152,769
shares of the Company’s common stock at $0.65.





Modern
Bank, N.A. v. Merriman Curhan Ford & Co.





In June
2008, MCF was served with a complaint filed in the Santa Clara County Superior
Court by Modern Bank, N.A., which loaned money to Del Biaggio, naming as
defendants Del Biaggio, MCF, and Cacchione.  Plaintiff alleges that Del
Biaggio defaulted on a multi-million dollar loan obtained from Plaintiff. 
The complaint further alleges that Cacchione, while still employed with MCF,
signed an account control agreement purporting to pledge a retail client stock
account as collateral for the Del Biaggio loan. On the basis of these
allegations, Plaintiff asserts various claims against MCF and others. 
Plaintiff sought $10 million in damages.  On July 24, 2009, an amended
complaint was filed naming as additional defendants, D. Jonathan Merriman, the
Company’s CEO and former CEO of MCF, and Robert E. Ford, an officer of MCF. On
September 8, 2009, MCF settled the claims for $987,000 and five-year warrants to
purchase 353,077 shares of the Company’s common stock at $0.65.





Security
Pacific Bank v. Merriman Curhan Ford & Co.





In June
2008, MCF was served with a complaint filed in the Los Angeles County,
California Superior Court by Security Pacific Bank, which loaned money to Del
Biaggio, naming as defendants Del Biaggio, MCF, and Cacchione.  Plaintiff
alleges that Del Biaggio defaulted on a multi-million dollar loan obtained from
Plaintiff.  The complaint further alleges that Cacchione, while still
employed with MCF, signed an account control agreement purporting to pledge
retail client stock accounts as collateral for the Del Biaggio loan. On the
basis of these allegations, Plaintiff asserts various claims against MCF and
others.  Plaintiff sought $5 million in damages.  On September 8,
2009, MCF settled the claims for $494,000 and five-year warrants to purchase
176,615 shares of the Company’s common stock at $0.65.





AEG
Facilities, Inc. v. Merriman Curhan Ford & Co.





In June
2008, MCF was served with a complaint filed in the Santa Clara County Superior
Court by AEG Facilities, Inc. which loaned money to Del Biaggio, naming as
defendants Del Biaggio, MCF, and Cacchione.  Plaintiff alleges that Del
Biaggio defaulted on a multi-million dollar loan obtained from Plaintiff. 
The complaint further alleges that Cacchione, while still employed with MCF,
signed an account control agreement purporting to pledge various retail client
stock accounts as collateral for the Del Biaggio loan. On the basis of these
allegations, Plaintiff asserts various claims against MCF and others. 
Plaintiff sought $7 million in damages.  On July 15, 2009, an amended
complaint was filed naming as additional defendants D. Jonathan Merriman, the
Company’s CEO and former CEO of MCF, and Robert E. Ford, an officer of
MCF.  On September 8, 2009, MCF settled the claims for $691,000 and
five-year warrants to purchase 247,077 shares of the Company’s common stock at
$0.65.





Valley
Community Bank v. Merriman Curhan Ford & Co.





In June
2008, MCF.was served with a complaint filed in the Santa Clara County Superior
Court by Valley Community Bank, which loaned money to Del Biaggio, naming as
defendants Del Biaggio, MCF, and Cacchione.  Plaintiff alleges that Del
Biaggio defaulted on a multi-million dollar loan obtained from Plaintiff. 
The complaint further alleges that Cacchione, while still employed with MCF,
signed account control agreements purporting to pledge various retail client
stock accounts as collateral for the Del Biaggio loan. On the basis of these
allegations, Plaintiff asserts various claims against MCF and others. 
Plaintiff sought over $4 million in damages.  On September 8, 2009, MCF
settled the claims for $419,000 and five-year warrants to purchase 150,000
shares of the Company’s common stock at $0.65.





Settlement
With Craig Leipold




In
addition to the legal actions described above, on September 8, 2009, MCF settled
an unasserted claim for $987,000 and five-year warrants to purchase 353,077
shares of the Company’s common stock at $0.65.  The potential lawsuit
was on similar facts to the lawsuits we settled.




49




United
American Bank v. Merriman Curhan Ford & Co.





In July
2008, MCF was served with a complaint filed in the Santa Clara County Superior
Court by United American Bank, which loaned money to Del Biaggio, alleging that
MCF entered into an account control agreement for an account that Del
Biaggio had previously pledged to another lender.  The account pledged
was in the name of Del Biaggio.  Plaintiff brought claims for, among other
things, fraud arising out of the failure to disclose the alleged previous
pledge.  Plaintiff alleges damages in the amount of $1.75 million. 
After ensuring that the proper clearance had been obtained from the
court in Del Biaggio's bankruptcy case, MCF turned over the pledged collateral
to Plaintiff United American Bank, performing its obligation under the account
control agreement.  MCF then demanded that it be dismissed from the action,
and is continuing to follow up that demand.  Counsel for UAB has not
responded to MCF's demands.  We believe that MCF has little or no
remaining exposure in this matter, and it intends to contest this claim
vigorously.





Don
Arata, et al. v. Merriman Curhan Ford & Co.





In July
2008, the Company and MCF were served with a complaint filed in the San
Francisco County, California Superior Court by several plaintiffs who invested
money with Del Biaggio and related entities.  In March 2009, the Company
and MCF were served with an amended consolidated complaint on behalf of 39
plaintiffs which consolidated several similar pending actions filed by the same
law firm.  Plaintiffs allege, among other things, fraud based on
Cacchione’s alleged assistance to Del Biaggio in connection with the allegedly
fraudulent investments and MCF’s failure to discover and stop the continuing
fraud.   Plaintiffs in this lawsuit seek damages of over $9
million.  The Company and MCF responded to the amended consolidated
complaint in June 2009 denying all liability.  We believe that we and
MCF have meritorious defenses and intend to contest these claims
vigorously.  (The previously disclosed Davis, Cook, Bachelor and
Hengehold cases now are part of the consolidated cases.)





The
Private Bank of the Peninsula v. Merriman Curhan Ford & Co.





In July
2008, MCF was served with a complaint filed in the Santa Clara County Superior
Court by The Private Bank of the Peninsula.  Plaintiff alleges, among other
things, fraud based on Cacchione having induced plaintiff into making loans to
Del Biaggio.  Plaintiff in this lawsuit alleges damages of
$916,666.65.  We believe that MCF has meritorious defenses and it intends
to contest this claim vigorously.





Pacific
Capital Bank v. Merriman Curhan Ford & Co.





In
October 2008, MCF was served with a complaint filed in the San Francisco County
Superior Court by Pacific Capital Bank.  Plaintiff alleges, among other
things, fraud based on Cacchione having induced plaintiff into making loans to
Del Biaggio.  Plaintiff in this lawsuit alleges damages of $1.84
million.  We believe that MCF has meritorious defenses and it intends to
contest this claim vigorously.





Irving
Bronstein et. al. v. Merriman Curhan Ford & Co.





In early
2009, MCF and David Jonathan Merriman were served with a FINRA arbitration claim
filed by Irving Bronstein and several related family members and entities. 
Claimants allege, among other things, that MCF benefited from the sale of a
particular security it held at the expense of its customers, including the
claimants, and fraud based on Cacchione’s alleged assistance to Del Biaggio in
connection with allegedly fraudulent investments and MCF’s failure to discover
and stop the fraud.  Claimants seek damages in a range of $2.7 to $10
million.  MCF and Mr. Merriman have responded to the statement of claim
denying all liability.  Arbitration is scheduled to begin March 30,
2010.  We believe that MCF and Mr. Merriman have meritorious defenses
and they intend to contest these claims vigorously.




50




John
Zarich v. Merriman Curhan Ford & Co.





In or
around April 2009, John Zarich filed an arbitration claim with FINRA naming
MCF.   The statement of claim alleges that Zarich was convinced
by Cacchione to purchase shares of a small, risky stock in which MCF held a
position.  It further alleges that Cacchione convinced Zarich not to
sell the shares when the stock’s price fell.  The statement seeks
$265,000 in compensatory damages plus punitive damages of $200,000 and 10%
interest beginning January 2, 2008.  Arbitration is scheduled to begin
February 1, 2010.  We believe that MCF has meritorious defenses and it
intends to contest this claim vigorously.





Gary
Thornhill, et al. v. Merriman Curhan Ford & Co.





In May
2009, a complaint was filed in the San Francisco County Superior Court by Gary
Thornhill and several related family members and entities, naming as defendants
the Company and MCF.  The complaint alleges, , among other things,
fraud based on Cacchione’s alleged assistance to Del Biaggio in connection with
the allegedly fraudulent investments and MCF’s failure to discover and stop the
continuing fraud.  Plaintiffs in this lawsuit seek damages of
$230,000.  A response to the complaint is due in August 2009.  We
believe that we and MCF have meritorious defenses and intend to contest these
claims vigorously.





Demand
by Shelly Schaffer to Merriman Curhan Ford & Co. for Payment of Attorneys’
Fees





On April
24, 2009, former Vice President of Client Services Shelly Schaffer, through her
attorney, Robert Shartsis, made a written demand for payment of attorneys’ fees
for Ms. Schaffer’s defense in a civil action by the Securities and Exchange
Commission.  Ms. Schaffer, who was hired by MCF on May 25, 2006,
retained Mr. Shartsis to respond to an SEC Enforcement action in which it is
alleged that Ms. Schaffer violated the antifraud provisions of federal
securities laws and applicable regulations.  Ms. Schaffer worked for
Cacchione prior to their coming to MCF.  MCF has denied Ms. Schaffer’s
requests for payment of her attorneys’ fees on the grounds that the accusations
against her concern activities that were outside the course and scope of her
employment.  Ms. Schaffer’s attorney has stated his intention to sue
MCF for payment of his fees, which he claims are approximately $100,000.00 and
will increase as the SEC investigation continues.  We believe that MCF
has meritorious defenses and it intends to contest the claims
vigorously.





Lawsuits
against MCF unrelated to the Del Biaggio/Cacchione matters are as
follows:





Spare
Backup v. Merriman Curhan Ford & Co.





Unrelated
to the Del Biaggio/Cacchione matters, in April 2008, MCF entered into an
engagement to provide investment banking services to Spare Backup, Inc. 
MCF was able to close a round of bridge financing in June 2008.  MCF was
successful in raising $1,300,000 in capital for Spare Backup.  As a result
of closing the financing transaction, MCF was entitled to reimbursement of its
expenses, a convertible note with principal valued at $161,100 and 370,370
shares of Spare Backup common stock.  As of November 2008, these
transaction fees had not been paid to MCF.  We hired counsel to seek
payment of the fees and to proceed to arbitration, as is specified in the
engagement letter.  In January 2009, MCF filed a petition to compel
arbitration in the San Francisco County Superior Court.  In response to the
petition to compel arbitration, Spare Backup filed a complaint in the Riverside
County Superior Court, Indio Branch, for fraud and declaratory relief alleging
that MCF fraudulently induced it to execute the investment banking engagement
letter.  The petition for arbitration was granted and in May of 2009 and
the Indio action was stayed for all purposes pending the outcome of
arbitration.   The arbitration date has been set for March 22,
2010.




Wesley
Rusch v. Merriman Curhan Ford & Co.





Unrelated
to the Del Biaggio/Cacchione matters, in October 2008, MCF was served with a
claim in FINRA Arbitration by Wesley Rusch. Mr. Rusch is a former at-will
employee of Merriman Curhan Ford & Co. and worked in the compliance
department. Mr. Rusch was terminated by Merriman Curhan Ford & Co.
in July 2007. Mr. Rusch alleges theories of discrimination and lack of
cause for termination.  Mr. Rusch filed a Statement of Claim seeking
damages of over $1 million.  We contested this claim at the
arbitration before a FINRA arbitration panel in March 2009 which resulted
in a decision in our favor in July 2009.  Mr. Rusch
requested that the San Francisco Superior Court vacate the decision, and we
requested that it be confirmed.   We expect a decision within the next
90 days.




51




Joy
Ann Fell v. Merriman Curhan Ford & Co.





Unrelated
to the Del Biaggio/Cacchione matters, in November 2008, MCF received a demand
letter from a former employee, Joy Ann Fell.  In January 2009, MCF received
a claim filed by Ms. Fell in FINRA arbitration.  Ms. Fell worked in our
investment banking department and was terminated in October of 2008, as part of
a reduction in force.  Ms. Fell alleges claims of breach of an implied
employment contract, emotional distress and work-place discrimination.  The
demand for money damages is approximately $350,000.  We believe that MCF
has meritorious defenses and it intends to contest this claim vigorously. 
MCF has responded to the claim and the parties have propounded, but not
responded to, written discovery.  The parties and FINRA have jointly
selected an arbitration panel of three New York-based
arbitrators:  Aaron Tyk, Caryl D. Feldman, and Beth Bird
Pocker.  The matter is set for hearing at the New York FINRA Office
for February 23-25, 2010.





Peter
Marcil v. Merriman Curhan Ford & Co.





Unrelated
to the Del Biaggio/Cacchione matters, in January 2009, our broker-dealer
subsidiary, MCF, was served with a claim in FINRA Arbitration by Peter Marcil.
Mr. Marcil is a former at-will employee of Merriman Curhan Ford &
Co. and worked in the investment banking department. Mr. Marcil resigned
from Merriman Curhan Ford & Co. in March of 2007. Mr. Marcil
alleges breach of an implied employment contract, wrongful termination, and
intentional infliction of emotional distress. Damages are not specified in the
arbitration claim.   MCF has not replied to the claim and an
arbitration hearing date has not been set.  The parties participated
in a mediation with San Francisco Attorney/Mediator Mark Rudy on September 14,
2009 and have agreed to continue settlement negotiations.  We believe
that MCF has meritorious defenses and it intends to contest this claim
vigorously.  However, in the event that MCF does not prevail, based
upon the facts as we know them to date, we do not believe that the outcome will
have a material effect on our financial position, financial results or cash
flows.




Dow
Corning Corporation





Unrelated
to the Del Biaggio/Cacchione matters, in late July and early August 2009,
counsel for Dow Corning Corporation (“DCC”) indicated in correspondence and
communications that DCC may have some type of claim against MCF and the Company
in connection with its purchases of auction rate securities through MCF’s ICD
Division.  Counsel would not furnish any specifics about the purported
claim or any purported damages, but requested an agreement tolling any
applicable statute of limitations for sixty (60) days to allow the parties to
undertake “settlement discussions.”  MCF, the Company, Institutional
Cash Distributors, LLC and certain representatives of MCF’s ICD Division entered
into such a tolling agreement with DCC, which has been extended an additional
sixty (60) days, cancelable on ten (10) days notice.  No discussions
have ensued as of the date of this report.  Accordingly the Company is
not aware of the basis of any purported claim.





We
believe that these cases are either unlikely to result in adverse rulings or are
in early stages and the amount of a likely adverse ruling cannot be estimated at
present.





Insurance
Litigation





On
January 14, 2009, Merriman Curhan Ford & Co. and Merriman Curhan Ford Group,
Inc. (collectively the “Company”) filed a civil action in the Superior Court for
Los Angeles County (the “Coverage Lawsuit”) against its directors and officers
liability insurer, XL Specialty Insurance Company (“XL
Specialty”).  In the Coverage Lawsuit, the Company has asserted claims
for breach of contract, tortious breach of contract, and declaratory relief,
alleging that XL Specialty wrongfully denied coverage for various ongoing
third-party claims and government investigations.  The Company seeks
an award of compensatory damages, punitive damages, attorneys’ fees and
costs.  XL Specialty has filed a cross-complaint against the Company
for declaratory relief, by which XL Specialty seeks a judicial determination
that it does not owe any coverage obligations regarding the third-party claims
and government investigations (XL Specialty is not pursuing any claims for
damages against the Company).  The parties are presently engaged in
discovery, and the case is set for trial on February 16, 2010.





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




52





ITEM 1A. Risk
Factors





In
addition to the other information set forth in this report, including reports we
incorporate by reference, you should carefully consider the risk factors
previously disclosed in response to Item 1A to Part 1 of our Annual Report on
Form 10-K for the year ended December 31, 2008, filed on March 31,
2009, as amended by our Form 10-K/A filed on April 30, 2009, our quarterly
Report filed on August 11, 2009  Form 10-Q and the additional risk
factors described below.





Our
assets are Subject to a liquidation preference in favor of the holders of our
Series D Convertible Preferred Stock, which will impact common stockholders
rights if we liquidate.





On
September 8, 2009, the Company sold and issued an aggregate of $10.2 million in
Series D Convertible Preferred Stock.  Under the Certificate of
Designation filed in connection with this transaction, the holders of the Series
D Convertible Preferred Stock are entitled to receive the repayment of their
original investment, together with any accrued but unpaid dividends, before any
payment is made to holders of the Company's Common Stock. After the holders of
the Series D Convertible Preferred Stock had have received the distribution
described above, they are entitled to participate in the distribution of any
additional assets along with the holders of the Common Stock on an as-converted
basis.  The holders of the Company’s Common Stock might therefore
receive nothing in liquidation, or receive much less than they would if there
was no Series D Convertible Preferred Stock Outstanding





Your
ownership percentage may be diluted by warrants issued in connection with our
bridge financing.





The
investors in the Convertible Notes Convertible Notes issued on May 29, 2009 and
June 1, 2009 received warrants to purchase an aggregate of 937,500 shares of the
Common Stock of the Company at $0.50 per share.  The investor and
guarantors of the Note issued on July 31, 2009 received warrants to purchase an
aggregate of 2,326,000 shares of the Common Stock of the Company at $0.65 per
share.  While the Convertible Notes and the Note are no longer
outstanding, the warrants issued in conjunction with them are, and exercise of
these warrants would dilute the ownership percentage of existing stockholders in
the Company.





Your
ownership percentage may be diluted by Warrants issued in connection with the
issuance of the Series D Convertible Preferred Stock.





In
connection with the issuance of the Series D Convertible Preferred Stock, on
September 8, 2009 the Company issued warrants with a five-year term to purchase
23,720,916 shares of the Common Stock of the Company at $0.65 per share (the
“Warrants”).  Exercise of these warrants would dilute the ownership
percentage of exiting stockholders in the Company.





The
holders of our Series D Convertible Preferred Stock may exercise a significant
degree of control over the Company.





The terms
of the Certificate of Designation filed in connection with the issuance of the
Series D Convertible Preferred Stock provided that the holders of the Series D
Convertible Preferred Stock are entitled to elect four of the nine members of
our Board of Directors.   The holders of Series D Convertible
Preferred Stock may gain additional voting power if they exercise the Warrants
or if they acquire shares of our Common Stock in the market.  The
interests of the holders of the Company’s Series D Convertible Preferred Stock
might not be aligned with those of the holders of Common Stock, which could
result in the Company being sold or liquidated in a transaction in which the
holders of Common Stock received little or nothing.





If
our CEO leaves the Company, additional warrants will be
issued which may further dilute the ownership percentage of the
holders of the Company's Common Stock





If D.
Jonathan Merriman ceases to serve as Chief Executive Officer of the Company
prior to August 27, 2012, the Company agreed in connection with
the issuance of the Series D Convertible Preferred Stock to issue
additional warrants (the “Merriman Warrants”) to the holders of the Series D
Preferred Stock to purchase shares of the Company’s Common Stock.  The
Merriman Warrants would be exercisable for a total of 23,720,916 shares of
Common Stock, with an exercise price of $0.65 per share and a term of five
years.  Exercise of the Merriman Warrants would dilute the ownership
percentage of existing holders of Common Stock.  If Mr.
Merriman dies, is terminated without “Cause” or resigns with “Good Reason,”
these warrants will not be issuable.  “Cause” and “Good Reason” are
defined in the Investors Rights Agreement entered into in connection with the
issuance of the Series D Preferred Stock, which was filed as Exhibit 10.48 to
the Company’s Amended Current Report on Form 8-K/A on September 2,
2009.




53





ITEM
6. Exhibits





4.3
            
            Subscription
      Agreement by and among the Company and the subscribers dated May 29, 2009
      providing for the sale and issuance of Secured Convertible Promissory
      Notes. (Incorporated by reference to Current Report on Form 8-K filed on
      June 3, 2009)4.4
            
            Form
      of Secured Convertible Promissory Notes dated May 29, 2009 and June 1,
      2009. (Incorporated by reference to Current Report on Form 8-K filed on
      June 3, 2009)4.5
            
            Form
      of Security Agreement dated May 29, 2009 by and among the Company and the
      investors in the Secured Convertible Promissory Notes. (Incorporated by
      reference to Current Report on Form 8-K filed on June 3,
    2009)4.6
            
            Form
      of Warrants dated May 29, 2009 and June 1, 2009 by and among the Company
      and the investors in the Secured Convertible Promissory Notes.
      (Incorporated by reference to Current Report on Form 8-K filed on June 3,
      2009)


31.1
            
            Certification
      of Principal Executive Officer Pursuant To Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
            
            Certification
      of Chief Financial Officer Pursuant To Section 302 of the Sarbanes-Oxley
      Act of 2002.32.1
            
            Certification
      of Chief Executive Officer 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.




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SIGNATURES




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




MERRIMAN
      CURHAN FORD GROUP, INC.November
      16, 2009
              By:
              /s/ D.
      JONATHAN MERRIMAND.
      Jonathan Merriman,Chief
      Executive Officer(Principal
      Executive Officer)November
      16, 2009
              By:
              /s/ PETER
      V. COLEMANPeter
      V. ColemanChief
      Financial Officer(Principal
      Financial Officer)




55