**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, 2006**




 ̈
            **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**









**MCF
      CORPORATION**


**(Exact
      Name of Registrant as Specified in its Charter)**




**Delaware**
              **(State
                or Other Jurisdiction of**
              **Incorporation
                or Organization)**
            
            **11-2936371**
              **(I.R.S.
                Employer**
              **Identification
                No.)**




**600
                California Street, 9th Floor**
              **San
                Francisco, CA**
              **(Address
                of Principal Executive Offices)**
            
            **94108**
              **(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 o No x




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





Large
                accelerated filero
            
            Accelerated
                filerx
            
            Non-accelerated
                filero




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





The
      number of shares of Registrant's common stock outstanding as of November 6,
      2006
      was 74,218,892.













**Form
      10-Q**


**For
      the Nine Months Ended September 30, 2006**





**Page****No.**PART
                I FINANCIAL INFORMATIONITEM
                1. Financial Statements (unaudited)Condensed
                Consolidated Statements of Operations For the Three Months and Nine
                Months
                Ended September 30, 2006 and 2005
            
            
            2Condensed
                Consolidated Statements of Financial Condition as of September 30,
                2006
                and December 31, 2005
            
            
            3Condensed
                Consolidated Statements of Cash Flows For the Nine Months Ended September
                30, 2006 and 2005
            
            
            4Notes
                to Condensed Consolidated Financial Statements
            
            
            5ITEM
                2. Management's Discussion and Analysis of Financial Condition and
                Results
                of Operations
            
            
            16ITEM
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            
            
            28ITEM
                4. Controls and Procedures
            
            
            28PART
                II OTHER INFORMATIONITEM
                1. Legal Proceedings
            
            
            29ITEM
                1A. Risk Factors
            
            
            29ITEM
                6. Exhibits
            
            
            36SignaturesCertifications




1





**PART
      I.  FINANCIAL INFORMATION**





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




**MCF
      CORPORATION**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(unaudited)**




**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
              **2006**
            
            **September
                30,**
              **2005**
            
            **September
                30,**
              **2006**
            
            **September
                30,**
              **2005**Revenue:Commissions
            
            $
            6,700,416
            
            $
            6,943,963
            
            $
            23,344,124
            
            $
            20,265,658Principal
                transactions
            
            
            (1,148,313
            )
            
            838,504
            
            
            (1,480,963
            )
            
            315,770Investment
                banking
            
            
            1,839,288
            
            
            1,130,351
            
            
            11,750,176
            
            
            9,839,450Other
            
            
            242,010
            
            
            200,382
            
            
            873,424
            
            
            456,595Total
                revenue
            
            
            7,633,401
            
            
            9,113,200
            
            
            34,486,761
            
            
            30,877,473Operating
                expenses:Compensation
                and benefits
            
            
            8,716,833
            
            
            6,761,813
            
            
            30,542,987
            
            
            23,130,359Brokerage
                and clearing fees
            
            
            598,644
            
            
            688,320
            
            
            1,987,504
            
            
            1,775,597Professional
                services
            
            
            576,060
            
            
            502,093
            
            
            1,884,345
            
            
            1,248,923Occupancy
                and equipment
            
            
            436,769
            
            
            426,109
            
            
            1,268,917
            
            
            1,159,307Communications
                and technology
            
            
            802,777
            
            
            496,285
            
            
            2,137,892
            
            
            1,362,638Depreciation
                and amortization
            
            
            171,916
            
            
            132,606
            
            
            508,851
            
            
            367,718Travel
                and entertainment
            
            
            623,587
            
            
            427,274
            
            
            2,005,242
            
            
            1,211,686Other
            
            
            1,069,601
            
            
            1,184,191
            
            
            1,632,265
            
            
            2,320,431Total
                operating expenses
            
            
            12,996,187
            
            
            10,618,691
            
            
            41,968,003
            
            
            32,576,659Operating
                loss
            
            
            (5,362,786
            )
            
            (1,505,491
            )
            
            (7,481,242
            )
            
            (1,699,186
            )Interest
                income
            
            
            118,840
            
            
            115,316
            
            
            370,684
            
            
            305,407Interest
                expense
            
            
            134,895
            
            
            (15,755
            )
            
            (408,036
            )
            
            (49,468
            )Loss
                before income taxes
            
            
            (5,109,051
            )
            
            (1,405,930
            )
            
            (7,518,594
            )
            
            (1,443,247
            )Income
                tax (expense) benefit
            
            
            —
            
            
            (86,814
            )
            
            —
            
            
            (127,408
            )Net
                loss
            
            $
            (5,109,051
            )
            
            (1,492,744
            )
            
            (7,518,594
            )
            
            (1,570,655
            )Earnings
                (loss) per share:Basic
            
            $
            (0.07
            )
            $
            (0.02
            )
            $
            (0.11
            )
            $
            (0.02
            )Diluted
            
            $
            (0.07
            )
            $
            (0.02
            )
            $
            (0.11
            )
            $
            (0.02
            )Weighted
                average common shares outstanding:Basic
            
            
            71,063,452
            
            
            66,905,944
            
            
            69,346,704
            
            
            66,226,377Diluted
            
            
            71,063,452
            
            
            66,905,944
            
            
            69,346,704
            
            
            66,226,377




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




2




**MCF
      CORPORATION**


**CONDENSED
      CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION**


**(unaudited)**




**September
                30,**
              **2006**
            
            **December
                31,**
              **2005**ASSETSCash
                and cash equivalents
            
            $
            10,129,541
            
            $
            11,138,923Cash
                restricted for fund investment (Note 1)
            
            
            6,300,944
            
            
            —Securities
                owned:Marketable,
                at fair value
            
            
            10,209,824
            
            
            8,627,543Not
                readily marketable, at estimated fair value
            
            
            1,862,172
            
            
            1,065,743Restricted
                cash
            
            
            628,181
            
            
            627,606Due
                from clearing broker
            
            
            586,933
            
            
            973,138Accounts
                receivable, net
            
            
            727,410
            
            
            2,073,195Equipment
                and fixtures, net
            
            
            1,244,166
            
            
            1,378,235Intangible
                assets
            
            
            418,800
            
            
            394,456Prepaid
                expenses and other assets
            
            
            1,931,336
            
            
            1,415,574Total
                assets
            
            $
            34,039,307
            
            $
            27,694,413LIABILITIES,
                MINORITY INTEREST AND STOCKHOLDERS' EQUITYAccounts
                payable
            
            $
            1,181,017
            
            $
            901,138Commissions
                and bonus payable
            
            
            3,020,997
            
            
            4,735,892Accrued
                liabilities
            
            
            2,078,518
            
            
            2,201,499Due
                to clearing and other brokers
            
            
            19,268
            
            
            118,798Securities
                sold, not yet purchased
            
            
            1,809,258
            
            
            41,579Capital
                lease obligation
            
            
            608,272
            
            
            883,993Convertible
                notes payable and participation interest obligation, net
            
            
            6,712,559
            
            
            176,741Notes
                payable
            
            
            162,221
            
            
            231,772Total
                liabilities
            
            
            15,592,110
            
            
            9,291,412Commitments
                and contingenciesMinority
                interest
            
            
            2,188,050
            
            
            —Stockholders'
                equity:Preferred
                stock, Series A—$0.0001 par value; 2,000,000 shares authorized; 0 shares
                issued and outstanding as of September 30, 2006 and December 31,
                2005,
                respectively; aggregate liquidation preference of $0
            
            
            —
            
            
            —Preferred
                stock, Series B—$0.0001 par value; 12,500,000 shares authorized; 8,750,000
                shares issued and 0 shares outstanding as of September 30, 2006 and
                December 31, 2005; aggregate liquidation preference of $0
            
            
            —
            
            
            —Preferred
                stock, Series C—$0.0001 par value; 14,200,000 shares authorized;
                11,800,000 shares issued and 0 shares outstanding as of September
                30, 2006
                and December 31, 2005; aggregate liquidation preference of
                $0
            
            
            —
            
            
            —Common
                stock, $0.0001 par value; 300,000,000 shares authorized; 74,212,747
                and
                71,467,118 shares issued and outstanding as of September 30, 2006
                and
                December 31, 2005, respectively
            
            
            7,421
            
            
            7,147Additional
                paid-in capital
            
            
            113,952,794
            
            
            111,725,167Deferred
                compensation
            
            
            —
            
            
            (3,146,839
            )Accumulated
                deficit
            
            
            (97,701,068
            )
            
            (90,182,474
            )Total
                stockholders' equity
            
            
            16,259,147
            
            
            18,403,001Total
                liabilities, minority interest and stockholders' equity
            
            $
            34,039,307
            
            $
            27,694,413




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




3





**MCF
      CORPORATION**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(unaudited)**




**Nine
                Months Ended September 30,****2006**
            
            **2005**Cash
                flows from operating activities:Net
                loss
            
            $
            (7,518,594
            )
            $
            (1,570,655
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            508,851
            
            
            367,718Share-based
                compensation
            
            
            3,179,305
            
            
            1,468,064Tax
                benefits from employee stock options
            
            
            —
            
            
            (10,424
            )Amortization
                of discounts on convertible notes payable
            
            
            326,383
            
            
            7,752Amortization
                of debt issuance costs
            
            
            26,783
            
            
            —Unrealized
                (gain) loss on securities owned
            
            
            2,810,298
            
            
            (363,187
            )Other
            
            
            13,055
            
            
            (17,132
            )Changes
                in operating assets and liabilities:Securities
                owned
            
            
            (3,421,329
            )
            
            (1,902,458
            )Restricted
                cash
            
            
            (575
            )
            
            (2,866
            )Due
                from clearing broker
            
            
            386,205
            
            
            (446,910
            )Accounts
                receivable
            
            
            1,345,785
            
            
            346,256Prepaid
                expenses and other assets
            
            
            (542,545
            )
            
            196,781Accounts
                payable
            
            
            279,879
            
            
            806,804Commissions
                and bonus payable
            
            
            (1,714,895
            )
            
            (1,136,806
            )Accrued
                liabilities
            
            
            (122,981
            )
            
            113,527Due
                to clearing and other brokers
            
            
            (99,530
            )
            
            28,848Net
                cash used in operating activities
            
            
            (4,543,905
            )
            
            (2,114,688
            )Cash
                flows from investing activities:Cash
                restricted for fund investment
            
            
            (6,300,944
            )
            
            —Purchase
                of equipment and fixtures
            
            
            (353,623
            )
            
            (557,617
            )Investment
                in Catalyst
            
            
            (58,558
            )
            
            (353,882
            )Net
                cash used in investing activities
            
            
            (6,713,125
            )
            
            (911,499
            )Cash
                flows from financing activities:Proceeds
                from the exercise of stock options and warrants
            
            
            301,799
            
            
            116,682Proceeds
                from the issuance of common stock
            
            
            603,070
            
            
            591,651Proceeds
                from the issuance of note payable ($6,112,171) and stock warrant
                ($1,387,829)
            
            
            7,500,000
            
            
            —Minority
                interest in fund
            
            
            2,188,050
            
            
            —Debt
                service principal payments
            
            
            (345,271
            )
            
            (201,631
            )Net
                cash provided by financing activities
            
            
            10,247,648
            
            
            506,702Decrease
                in cash and cash equivalents
            
            
            (1,009,382
            )
            
            (2,519,485
            )Cash
                and cash equivalents at beginning of period
            
            
            11,138,923
            
            
            17,459,113Cash
                and cash equivalents at end of period
            
            $
            10,129,541
            
            $
            14,939,628Supplementary
                disclosure of cash flow information:Cash
                paid during the period:Interest
            
            $
            55,624
            
            $
            66,410Income
                taxes
            
            $
            18,800
            
            $
            68,161Non-cash
                investing and financing activities:Reclassification
                of deferred compensation
            
            $
            3,146,839
            
            $
            —Issuance
                of non-vested stock
            
            $
            —
            
            $
            1,945,973Issuance
                of stock options accounted for at intrinsic value
            
            $
            —
            
            $
            12,000Acquisition
                of Catalyst
            
            $
            —
            
            $
            74,940Issuance
                of common stock to Ascend
            
            $
            —
            
            $
            500,000





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




4




**MCF
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(unaudited)**




**1.
      Significant Accounting Policies**




*Basis
      of Presentation*




The
      interim financial statements included herein for MCF Corporation, or the
      Company, have been prepared, without audit, pursuant to the rules 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 2005 audited consolidated financial statements
      and notes thereto included in the Company's Annual Report on Form 10-K for
      the
      year ended December 31, 2005.





In
      May
      2006, the stockholders of the Company voted to approve the amendment to the
      Amended Certificate of Incorporation to effect a reverse stock split at a ratio
      of 1-for-7, which is authorized to be implemented within the next two
      years.





Cash
      Restricted for Fund Investment





In
      March
      2006, the Company launched its first proprietary hedge fund managed by MCF
      Asset
      Management, LLC. The Company invested $7.5 million into the fund as a limited
      partner. Accordingly, the Company has consolidated all of the assets and
      liabilities of the fund, including $6,301,000 of cash and cash equivalents,
      because the Company has effective control of the fund that results from the
      large initial percentage interest in the limited partnership. The Company will
      deconsolidate the assets and liabilities of the fund, including the cash and
      cash equivalents of the fund, if and when effective control of the fund
      transfers to other investors in the future. If the Company did not have
      effective control of the fund as of September 30, 2006, these assets,
      liabilities and minority interest, including the $6,301,000 of cash and cash
      equivalents would not have been included in the Company's consolidated
      statements of financial condition. Instead, the Company would have recorded
      an
      asset representing an investment in the fund managed by MCF Asset Management,
      LLC which is subject to a one year lock-up provision which makes this investment
      illiquid for one year.




*Securities
      Owned*





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





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





*Commissions
      and Principal Transactions Revenue*





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





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




5




**MCF
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED**


**(unaudited)**




*Investment
      Banking Revenue*




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





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





*Share-Based
      Compensation Expense*





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





The
      Company adopted SFAS 123(R) using the modified prospective application
      transition method, as of January 1, 2006, the first day of the Company's
      fiscal year 2006. The Company's consolidated financial statements as of and
      for
      the nine months ended September 30, 2006 reflect the impact of SFAS 123(R).
      In
      accordance with the modified prospective application transition method, the
      Company's consolidated financial statements for prior periods have not been
      restated to reflect, and do not include, the impact of SFAS 123(R). Share-based
      compensation expense recognized under SFAS 123(R) for the nine months ended
      September 30, 2006 was $3,179,000, which includes $211,000 of share-based
      compensation issued in connection with the acquisition of Catalyst (see Note
      4).




Prior
      to
      the adoption of SFAS 123(R), the Company accounted for share-based awards to
      employees and directors using the intrinsic value method in accordance with
      Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock
      Issued to Employees,” as allowed under SFAS 123, “Accounting for Stock-Based
      Compensation.” Share-based compensation expense of $1,468,000 for the nine
      months ended September 30, 2005 was solely related to non-vested stock awards
      and stock options granted with intrinsic value that the Company had been
      recognizing in its consolidated statements of operations in accordance with
      the
      provisions set forth above. In accordance with the intrinsic value method,
      no
      share-based compensation expense was otherwise recognized in the Company's
      consolidated statements of operations because the exercise price of nearly
      all
      of the Company's stock options granted to employees and directors equaled the
      fair market value of the underlying stock at the grant date.




SFAS
      123(R) requires companies to estimate the fair value of share-based awards
      on
      the date of grant using an option-pricing model. The value of the portion of
      the
      award that is ultimately expected to vest is recognized as expense in the
      Company's consolidated statements of operations over the requisite service
      periods. Share-based compensation expense recognized in the Company's
      consolidated statement of operations for the nine months ended September 30,
      2006 includes compensation expense for share-based awards granted (i) prior
      to, but not yet vested as of December 31, 2005, based on the grant date
      fair value estimated in accordance with the provisions of SFAS 123, and
      (ii) subsequent to December 31, 2005, based on the grant date fair
      value estimated in accordance with the provisions of SFAS 123(R). Compensation
      expense for all share-based awards subsequent to December 31, 2005 is
      recognized using the straight-line single-option method. Because share-based
      compensation expense is based on awards that are ultimately expected to vest,
      share-based compensation expense has been reduced to account for estimated
      forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of
      grant and revised, if necessary, in subsequent periods if actual forfeitures
      differ from those estimates. In the Company's pro forma information required
      under SFAS 123 for periods prior to fiscal 2006, the Company accounted for
      forfeitures as they occurred.




6




**MCF
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED**


**(unaudited)**




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




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





*Income
      Taxes*





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





*Segment
      Reporting*





SFAS
      No. 131, *Disclosures about Segments of an Enterprise and Related
      Information,* establishes annual and interim reporting standards for operating segments of
      a
      company. It also requires entity-wide disclosures about the products and
      services an entity provides, the material countries in which it holds assets
      and
      reports revenue, and its major customers. The Company organizes its operations
      into four operating segments for the purpose of making operating decisions
      or
      assessing performance. These operating segments are organized along operating
      subsidiaries, Merriman Curhan Ford & Co., MCF Asset Management, LLC and
      MCF Wealth Management, LLC, as well as corporate support. Accordingly, the
      Company operates in four reportable operating segments in the United
      States.





*Reclassification*




Certain
      prior year amounts have been reclassified to conform to current year
      consolidated financial statement presentation. Such reclassification had no
      impact on net loss or stockholders' equity.




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




**2.
      Issuance of Debt**





On
      March
      7, 2006, the Company completed a $7.5 million private placement of a variable
      rate secured convertible debenture with a detachable stock warrant. The issue
      was placed with Midsummer Investment, Ltd. The Company invested the proceeds
      in
      one of the proprietary funds managed by MCF Asset Management, LLC, a wholly
      owned subsidiary. The debenture bears interest at a variable rate based on
      the
      annual investment performance of the investment in the proprietary funds managed
      by MCF Asset Management, LLC. The interest rate can be zero or a positive number
      and is based on the investment performance for each separate calendar
      year.





The
      debenture is convertible into the Company's common stock at a conversion price
      of $1.41 per share, subject to certain anti-dilutive adjustments. Specifically,
      if the Company issues common stock at an effective price below $1.41, then
      the
      conversion price of the debenture will be reduced to equal this new effective
      price. This anti-dilution provision excludes certain exempt issuances, such
      as
      employee stock options. Midsummer may elect to convert the debenture into common
      stock of the Company at the conversion price at any time following the closing
      date. The Company may redeem all or part of the debenture after three years
      at
      110% of the principal amount being redeemed. The Company may elect to force
      conversion of the debenture into common stock if the Company's common stock
      trades above $4.94 for 20 consecutive trading days. The debenture contains
      covenants that may preclude the Company from issuing additional debt over a
      specified limit, entering into certain new liens on company assets, repurchasing
      stock or paying dividends when the debenture remains outstanding with balance
      of
      at least $2 million. The maturity date of the notes is December 31, 2010. Stock
      warrants to purchase 1,875,000 shares of common stock at $1.41 per share were
      also issued to the investor. The stock warrants have a six year term. The stock
      warrant includes a similar anti-dilution provision for subsequent common stock
      issuance at prices below $1.41 per share.




7




**MCF
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED**


**(unaudited)**




The
      $7,500,000 raised in the transaction described above is accounted for under
      generally accepted accounting principles, primarily APB 14, “Accounting for
      Convertible Debt and Debt Issued with Stock Purchase Warrants”, SFAS 133,
“Accounting for Derivative Instruments and Hedging Activities”, EITF Issue 98-5,
“Accounting for Convertible Securities with Beneficial Conversion Features or
      Contingently Adjustable Conversion Ratios”, and EITF Issue 00-19, “Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company's Own Stock”. The Company has accounted for this transaction as the
      issuance of convertible debt, an embedded derivative referred to as a
      participation interest obligation, and a detachable stock warrant.  The
      $7,500,000 has been allocated to the derivative using its fair value with the
      balance allocated to the debt and the stock warrant based on their relative
      fair
      value as determined by management. During the third quarter of 2006, the Company
      obtained an appraisal from a third party to support the fair market values
      used
      to allocate the proceeds. Management’s initial estimates were adjusted to the
      appraisal amounts. This true-up resulted in a credit to interest expense during
      the third quarter in the amount of $304,000.




The
      fair
      value of the stock warrant of $1,291,000 has been recorded as a discount to
      the
      convertible debenture and an increase to additional paid-in capital. The
      fair value of the participation interest obligation of $2,276,000 is also
      treated as a discount to the convertible debenture and is based on a forecast
      of
      future cash flows to be paid to the lender discounted at a risk adjusted
      yield.  The discount to the convertible debenture of $3,567,000 is
      amortized to interest expense using the level yield method over the term of
      the
      debenture. As of September 30, 2006, the implicit rate on the convertible debt
      is 13.8%.  The participation interest obligation is carried in the
      statements of financial condition at fair value and the Company will reassess
      fair value of the participation interest obligation at the end of each reporting
      period with adjustments recorded to interest expense.




**3.
      Share-Based Compensation Expense**





*Stock
      Options*





The
      1999
      Stock Option Plan, 2000 Stock Option and Incentive Plan, 2001 Stock Option
      and
      Incentive Plan, 2003 Stock Option and Incentive Plan, 2004 Non-Qualified Stock
      Option and Inducement Plan and 2006 Directors' Stock Option and Incentive Plan,
      collectively the Option Plans, permit the Company to grant employees, outside
      directors, and consultants incentive stock options, nonqualified stock options
      or stock purchase rights to purchase shares of the Company's common stock.
      The
      Option Plans do not permit the exercise of non-vested stock options, and
      therefore as of September 30, 2006 and December 31, 2005 there were no
      shares subject to repurchase.





As
      of
      September 30, 2006, there were 34,940,000 shares authorized for issuance under
      the Option Plans, and 4,290,000 shares authorized for issuance outside of the
      Option Plans. As of September 30, 2006, 2,683,000 shares were available for
      future option grants under the Option Plans. There were no shares available
      for
      future option grants outside of the Options Plans. Compensation expense for
      stock options during the three months and nine months ended September 30, 2006
      was $363,000 and $1,004,000, respectively.





The
      following table is a summary of the Company's stock option activity for the
      nine
      months ended September 30, 2006:




**Options**
              **Outstanding**
            
            **Weighted**
              **Average**
              **Exercise Price**Balance
                as of December 31, 2005
            
            
            23,270,046
            
            $
            0.89Granted
            
            
            2,467,000
            
            
            0.93Exercised
            
            
            (368,690
            )
            
            (0.30
            )Canceled
            
            
            (471,507
            )
            
            (1.67
            )Balance
                as of September 30, 2006
            
            
            24,896,849
            
            $
            0.89Exercisable
                as of September 30, 2006
            
            
            20,067,063
            
            $
            0.86





The
      total
      intrinsic value of options exercised during the nine months ended September
      30,
      2006 was $295,000.




8




**MCF
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED**


**(unaudited)**




The
      following table summarizes information with respect to stock options outstanding
      at September 30, 2006:




**Options
                Outstanding at September 30, 2006**
            
            **Vested
                Options at September 30, 2006****Range
                of Exercise Price**
            
            **Number**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Life
                (Years)**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Aggregate**
              **Intrinsic**
              **Value**
            
            **Number**
            
            **Weighted**
              **Average
                Exercise**
              **Price**
            
            **Aggregate**
              **Intrinsic**
              **Value**$0.05
                — $0.50
            
            
            14,564,208
            
            
            6.36
            
            $
            0.42
            
            
            4,354,698
            
            
            14,232,846
            
            $
            0.42
            
            
            4,222,885$0.51
                — $1.00
            
            
            3,342,020
            
            
            7.46
            
            $
            0.65
            
            
            232,939
            
            
            1,890,539
            
            
            0.56
            
            
            299,083$1.01
                — $2.00
            
            
            4,920,968
            
            
            8.44
            
            $
            1.27
            
            
            —
            
            
            1,874,025
            
            
            1.38
            
            
            —$2.01
                — $4.00
            
            
            1,794,653
            
            
            4.10
            
            $
            3.15
            
            
            —
            
            
            1,794,653
            
            
            3.15
            
            
            —$4.01
                — $7.00
            
            
            275,000
            
            
            3.41
            
            $
            7.00
            
            
            —
            
            
            275,000
            
            
            7.00
            
            
            —24,896,849
            
            
            6.72
            
            $
            0.89
            
            
            4,587,637
            
            
            20,067,063
            
            $
            0.86
            
            
            4,521,968




As
      of
      September 30, 2006, total unrecognized compensation expense related to unvested
      stock options was $3,014,000. This amount is expected to be recognized as
      expense over a weighted-average period of 1.4 years.




*Non-Vested
      Stock*




At
      the
      date of grant, the recipients of non-vested stock have most of the rights of
      a
      stockholder other than voting rights, subject to certain restrictions on
      transferability and a risk of forfeiture. Non-vested shares typically vest
      over
      a two to four year period beginning on the date of grant. The fair value of
      non-vested stock is equal to the market value of the shares on the date of
      grant. The Company recognizes the compensation expense for non-vested stock
      on a
      straight-line basis over the requisite service period. Compensation expense
      for
      non-vested stock during the three months ended September 30, 2006 and 2005
      was
      $463,000 and $298,000, respectively. Compensation expense for non-vested stock
      during the nine months ended September 30, 2006 and 2005 was $1,481,000 and
      $1,411,000, respectively.





The
      following table is a summary of the Company's non-vested stock activity for
      the
      nine months ended September 30, 2006:




**Non-Vested**
              **Stock**
              **Outstanding**
            
            **Weighted**
              **Average**
              **Grant
                Date**
              **Fair
                Value**
            
            **Intrinsic**
              **Value
                at**
              **September
                30, 2006**Balance
                as of December 31, 2005
            
            
            4,069,878
            
            $
            1.12Granted
            
            
            560,000
            
            
            1.12Vested
            
            
            (2,132,074
            )
            
            (0.74
            )Canceled
            
            
            (187,711
            )
            
            (1.47
            )Balance
                as of September 30, 2006
            
            
            2,310,093
            
            $
            1.44
            
            $
            3,326,534




The
      total
      intrinsic value of non-vested stock which vested during the nine months ended
      September 30, 2006 was $1,578,000.




As
      of
      September 30, 2006, total unrecognized compensation expense related to
      non-vested stock was $1,970,000. This expense is expected to be recognized
      over
      a weighted-average period of 1.04 years.




9




**MCF
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED**


**(unaudited)**




*2002
      Employee Stock Purchase Plan*





The
      Company offers an Employee Stock Purchase Plan, or ESPP, to its employees.
      As of
      September 30, 2006, 2,550,124 shares have been authorized by the stockholders
      of
      the Company for issuance under the ESPP, of which 2,236,115 have been issued.
      Compensation expense for ESPP during the three months and nine months ended
      September 30, 2006 was $301,000 and $483,000, respectively.





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





As
      of
      September 30, 2006, unrecognized compensation expense related to the ESPP was
      $228,000. This amount is expected to be recognized as expense over a
      weighted-average period of 1.02 years.





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





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




Prior
      to
      the adoption of SFAS 123(R), the Company accounted for share-based awards to
      employees and directors using the intrinsic value method in accordance with
      APB
      25, as allowed under SFAS 123, “Accounting for Stock-Based Compensation.”
Share-based compensation expense of $1,468,000 for the nine months ended
      September 30, 2005 was solely related to share-based awards resulting from
      stock
      options granted with intrinsic value and non-vested stock awards that the
      Company had been recognizing in its consolidated statements of operations in
      accordance with the provisions set forth above. In accordance with the intrinsic
      value method, no share-based compensation expense was otherwise recognized
      in
      the Company's consolidated statements of operations because the exercise price
      of nearly all of the Company's stock options granted to employees and directors
      equaled the fair market value of the underlying stock at the grant
      date.





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





If
      the
      Company had recognized compensation expense over the relevant service period
      under the fair value method consistent with the provisions of SFAS 123,
“Accounting for Stock Based Compensation” as amended by SFAS 148, “Accounting
      for Stock Based Compensation-Transition and Disclosure,” with respect to stock
      options granted for the three months and nine months ended September 30, 2005,
      net income would have changed, resulting in pro forma net income and pro forma
      net income per share as presented below:





**Three
                Months**
              **Ended
                September 30,**
              **2005**
            
            **Nine
                Months**
              **Ended
                September 30,**
              **2005**Net
                loss, as reported
            
            $
            (1,492,744
            )
            $
            (1,570,655
            )Add:
                Stock-based employee compensation expense included in the reported
                net
                loss
            
            
            18,203
            
            
            56,609Less:
                Stock-based employee compensation expense determined under fair value
                method for all awards
            
            
            (523,094
            )
            
            (1,336,476
            )Pro
                forma net loss
            
            $
            (1,997,635
            )
            $
            (2,850,522
            )Net
                loss per share, as reported:Basic
            
            $
            (0.02
            )
            $
            (0.02
            )Diluted
            
            $
            (0.02
            )
            $
            (0.02
            )Net
                loss per share, pro forma:Basic
            
            $
            (0.03
            )
            $
            (0.04
            )Diluted
            
            $
            (0.03
            )
            $
            (0.04
            )




10




**MCF
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED**


**(unaudited)**




The
      pro
      forma share based compensation expense for the nine months ended September
      30,
      2005 has increased by $208,000 since it was initially disclosed in the Quarterly
      Report on Form 10-Q for the third quarter of 2005. The increase primarily
      relates to the accounting for the contingent shares issuable to the Catalyst
      Shareholder that is subject to performance conditions (see Note 4). The Company
      determined in 2005 that the issuance of the common stock over the service period
      is probable and should have disclosed $23,000 per month as pro forma expense
      from March to December 2005.





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




The
      weighted average fair value of the non-vested stock granted under the Company's
      stock option plans for the first nine months of 2006 and 2005 was $1.12 and
      $1.51 per share, respectively. The fair value of the non-vested stock award
      is
      estimated on the date of grant using the intrinsic value method.





The
      weighted average fair value of each stock option granted for the nine months
      ended September 30, 2006 and 2005 was $0.53 and $0.80, respectively. The
      fair value of each option award is estimated on the date of grant using the
      Black-Scholes Option Pricing Model, with the following assumptions for the
      nine
      months ended September 30, 2006 and 2005:




**Nine
                months Ended September 30,****2006**
            
            **2005**Expected
                volatility
            
            
            82.71
            %
            
            94.76
            %Expected
                life (years)
            
            
            4.50
            
            
            3.62Risk-free
                interest rate
            
            
            4.79
            %
            
            3.71
            %Expected
                dividend yield
            
            
            0
            %
            
            0
            %





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




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





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





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





The
      dividend yield assumption is based on the Company's history and expectation
      of
      dividend payouts.





As
      share-based compensation expense recognized in the consolidated statement of
      operations for the nine months ended September 30, 2006 is based on awards
      ultimately expected to vest, it has been reduced for estimated forfeitures.
      Forfeitures were estimated based on the Company's historical
      experience.





*Assumptions
      for option-based awards under SFAS 123*





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




11




**MCF
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED**


**(unaudited)**




**4.
      Contingent Consideration**




In
      February 2005, the Company acquired Catalyst Financial Planning &
Investment Management, Inc., or Catalyst, a registered investment advisor with
      over $100 million in assets under management at the time of acquisition. The
      purchase consideration for Catalyst consisted of both cash and common stock
      that
      will be paid over a three year period. The Company paid to the sole shareholder
      of Catalyst, or Catalyst Shareholder, $330,000 as initial consideration at
      the
      closing and placed into escrow 555,195 shares of common stock to be issued
      over
      the three year period following the closing date. The issuance of these shares
      is conditioned upon the Catalyst Shareholder being a full-time employee at
      the
      anniversary dates. The Catalyst Shareholder is entitled to additional
      consideration that can be payable in either cash or common stock at the Catalyst
      Shareholder's option. The additional consideration will be based on a multiple
      of revenue growth at the end of the first three anniversary dates from the
      closing. However, if the Catalyst revenue declines during the three years
      following the closing, the Catalyst Shareholder will forego some of the initial
      consideration based on a multiple of revenue decline at the end of the first
      three anniversary dates.





With
      the
      adoption of SFAS 123(R) in January 2006, the Company is treating the 555,195
      common shares as a non-vested stock grant that vests over three years, subject
      to performance conditions. The Company has determined that the issuance of
      the
      common stock over the service period is probable and will record an expense
      of
      $23,000 per month over the three year service period. During the nine months
      ended September 30, 2006, the Company recorded a charge to compensation and
      benefits expense in the amount of $211,000. At the first anniversary date in
      February 2006, the Company issued 185,065 shares of common stock from escrow
      and
      paid $59,000 to the Catalyst Shareholder for additional consideration that
      resulted from growth in the Catalyst revenue. The additional consideration
      was
      recorded as an increase in the intangible assets acquired.





**5.
      Income Taxes**





At
      the
      end of each interim reporting period the Company calculates an effective tax
      rate based on the Company's best 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.





The
      effective tax rate differs from the statutory rate primarily due to the
      existence and utilization of net operating loss carryforwards which have been
      offset by a valuation allowance resulting in a tax provision equal to the
      companies expected current expense for the year. The
      Company historically has had and expects to have for the current year,
      current tax expense primarily related to alternative minimum, state
      and minimum tax liabilities.




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 we will be able to
      realize the benefit of our deferred tax assets in the future.




**6.
      Earnings (loss) per Share**




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




**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Net
                loss available to common stockholders - basic
            
            $
            (5,109,051
            )
            $
            (1,492,744
            )
            $
            (7,518,594
            )
            $
            (1,570,655
            )Net
                loss available to common stockholders - diluted
            
            $
            (5,109,051
            )
            $
            (1,492,744
            )
            $
            (7,518,594
            )
            $
            (1,570,655
            )Weighted-average
                number of common shares - basic
            
            
            71,063,452
            
            
            66,905,944
            
            
            69,346,704
            
            
            66,226,377Weighted-average
                number of common shares - diluted
            
            
            71,063,452
            
            
            66,905,944
            
            
            69,346,704
            
            
            66,226,377Basic
                net loss per common share
            
            $
            (0.07
            )
            $
            (0.02
            )
            $
            (0.11
            )
            $
            (0.02
            )Diluted
                net loss per common share
            
            $
            (0.07
            )
            $
            (0.02
            )
            $
            (0.11
            )
            $
            (0.02
            )





Basic
      earnings (loss) per share is computed by dividing net income (loss) by the
      weighted average number of common shares outstanding, excluding shares of
      non-vested stock. Diluted earnings per share is calculated by dividing net
      income, plus interest and dividends on dilutive securities, 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 months and nine months ended September 30, 2006 and 2005 because
      the addition of common shares that would be issued assuming exercise or
      conversion would be anti-dilutive.




12




**MCF
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED**


**(unaudited)**





Shares
      used in the diluted net income 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 earnings per share
      computation is calculated based on the average share price of the Company's
      common stock for each period using the treasury stock method. Under the treasury
      stock method, the tax-effected proceeds that would be hypothetically received
      from the exercise of all stock options and warrants with exercise prices below
      the average share price of the Company's common stock are assumed to be used
      to
      repurchase shares of the Company's common stock. Because the Company reported
      a
      net loss during the three months and nine months ended September 30, 2006 and
      2005, the Company excluded the impact of all stock options and warrants in
      the
      computation of dilutive earnings per share, as their effect would be
      anti-dilutive.





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




**Three Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Stock
                options and warrants excluded due to the exercise price exceeding
                the
                average fair value of the Company's common stock during the
                period
            
            
            10,633,748
            
            
            9,983,740
            
            
            9,347,292
            
            
            8,123,311Weighted
                average non-vested stock, stock options and stock warrants, calculated
                using the treasury stock method, that were excluded due to the Company
                reporting a net loss during the period
            
            
            10,980,771
            
            
            16,142,510
            
            
            14,126,041
            
            
            17,655,135Weighted
                average shares issuable upon conversion of the convertible notes
                payable
            
            
            6,319,149
            
            
            1,000,000
            
            
            5,052,685
            
            
            1,000,000Weighted
                average shares contingently issuable
            
            
            370,130
            
            
            1,470,974
            
            
            562,238
            
            
            846,876Total
                common stock equivalents excluded from diluted net loss per
                share
            
            
            28,303,798
            
            
            28,597,224
            
            
            29,088,256
            
            
            27,625,322





**7.
      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, 2006,
      Merriman Curhan Ford & Co. had regulatory net capital, as defined, of
      $5,586,000, which exceeded the amount required by $4,282,000. 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.




**8.
      Minority Interest**





In
      March
      2006, the Company launched its first proprietary hedge fund managed by MCF
      Asset
      Management, LLC, a wholly owned subsidiary of the Company. The Company invested
      the proceeds from the $7.5 million private placement of secured convertible
      debenture and stock warrant into the fund as a limited partner. As of September
      30, 2006, the Company's limited partnership interest represented 78% of the
      fund. Accordingly, the Company has consolidated all of the assets and
      liabilities of the fund because the Company has effective control of the fund
      that resulted from the large initial percentage interest in the limited
      partnership. The Company will deconsolidate the assets and liabilities of the
      fund and carry the limited partnership interest at fair value if and when
      effective control of the fund transfers to other investors in the future. This
      should occur when the Company's limited partnership interest represents less
      than 50% of the fund. The Company has recorded the minority interest on the
      consolidated statements of financial position as of September 30, 2006 which
      reflects the minority investors' interest in the fund's assets and
      liabilities.





By
      consolidating the assets and liabilities of the fund as of September 30, 2006,
      the Company recorded in the consolidated statements of financial condition
      $6,301,000 of cash and cash equivalents, $4,211,000 of marketable securities
      owned, $783,000 of non-marketable securities owned, $7,000 of due from clearing
      broker, $80,000 in prepaid and other assets, $53,000 in accrued liabilities,
      $1,460,000 in securities sold, not yet purchased and $2,188,000 in minority
      interest. If the Company did not have effective control of the fund as of
      September 30, 2006, these assets, liabilities and minority interest, including
      the $6,301,000 of cash and cash equivalents would not have been included in
      the
      Company's consolidated statements of financial condition. Instead, the Company
      would have recorded an asset representing an investment in the fund managed
      by
      MCF Asset Management, LLC in the amount of $7,677,000. The investment in the
      fund includes a one year lock-up provision which makes this investment illiquid
      for one year.




13




**MCF
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED**


**(unaudited)**




**9.
      Segment Reporting**





The
      Company considers the capital markets, asset management, wealth management
      and
      corporate support operations to be four separately reportable segments. The
      capital markets segment includes the Company's investment banking and
      institutional brokerage operations. Asset management includes the Company's
      fee
      based asset management operations. The Company's asset management segment was
      initiated in March 2006 with the launching of the first proprietary fund managed
      by MCF Asset Management, LLC. Accordingly, there is no comparable 2005 financial
      information for this segment. Wealth management includes the Company's fee
      based
      financial planning and investment management operations. The Company's wealth
      management segment was initiated subsequent to completing the acquisition of
      Catalyst in February 2005. The corporate support segment includes overhead
      costs
      that are not directly allocated to the other operating segments. The accounting
      policies of these segments are the same as those described in Note 1. There
      are
      no significant revenue transactions between the segments. The Company's revenue
      from foreign operations was deminimus during the nine months ended September
      30,
      2006 and 2005.





The
      following table presents the financial information for the Company's segments
      for the three months ended September 30, 2006 and 2005.




**Capital**
              **Markets**
            
            **Asset**
              **Management**
            
            **Wealth**
              **Management**
            
            **Corporate**
              **Support**
            
            **Consolidated**
              **Totals**2006


Total
                revenue
            
            $
            7,428,739
            
            $
            (2,249
            )
            $
            206,911
            
            $
            —
            
            $
            7,633,401Compensation
                and benefits
            
            
            6,306,576
            
            
            155,133
            
            
            182,615
            
            
            2,072,509
            
            
            8,716,833Non-compensation
                related expenses
            
            
            2,568,769
            
            
            78,904
            
            
            95,858
            
            
            1,535,823
            
            
            4,279,354Operating
                income (loss)
            
            $
            (1,446,606
            )
            $
            (236,286
            )
            $
            (71,562
            )
            $
            (3,608,332
            )
            $
            (5,362,786
            )2005Total
                revenue
            
            $
            8,913,875
            
            $
            —
            
            $
            196,328
            
            $
            2,997
            
            $
            9,113,200Compensation
                and benefits
            
            
            5,652,172
            
            
            31,352
            
            
            121,734
            
            
            956,555
            
            
            6,761,813Total
                expense
            
            
            2,418,479
            
            
            3,688
            
            
            64,634
            
            
            1,370,077
            
            
            3,856,878Pre-tax
                income (loss)
            
            $
            843,224
            
            $
            (35,040
            )
            $
            9,960
            
            $
            (2,323,635
            )
            $
            (1,505,491
            )




The
      following table presents the financial information for the Company's segments
      for the nine months ended September 30, 2006 and 2005.




**Capital**
              **Markets**
            
            **Asset**
              **Management**
            
            **Wealth**
              **Management**
            
            **Corporate**
              **Support**
            
            **Consolidated**
              **Totals**2006


Total
                revenue
            
            $
            33,673,654
            
            $
            178,004
            
            $
            635,103
            
            $
            —
            
            $
            34,486,761Compensation
                and benefits
            
            
            23,624,002
            
            
            373,532
            
            
            555,677
            
            
            5,989,776
            
            
            30,542,987Non-compensation
                related expenses
            
            
            7,142,673
            
            
            194,690
            
            
            261,234
            
            
            3,826,419
            
            
            11,425,016Operating
                income (loss)
            
            $
            2,906,979
            
            $
            (390,218
            )
            $
            (181,808
            )
            $
            (9,816,195
            )
            $
            (7,481,242
            )2005Total
                revenue
            
            $
            30,425,226
            
            $
            —
            
            $
            449,250
            
            $
            2,997
            
            $
            30,877,473Compensation
                and benefits
            
            
            18,887,514
            
            
            33,048
            
            
            296,222
            
            
            3,913,575
            
            
            23,130,359Total
                expense
            
            
            5,584,268
            
            
            4,527
            
            
            140,851
            
            
            3,716,654
            
            
            9,446,300Pre-tax
                income (loss)
            
            $
            5,953,444
            
            $
            (37,575
            )
            $
            12,177
            
            $
            (7,627,232
            )
            $
            (1,699,186
            )




14




**MCF
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED**


**(unaudited)**




**10.
      Ascend Services Ltd.**





In
      May
      2005, the Company entered into a stock purchase agreement with Ascend Services
      Ltd., or Ascend. The Company issued 1,078,749 shares of common stock and Ascend
      issued an unsecured promissory note payable to the Company in the amount of
      $1.5
      million. The shares were initially held in escrow. Upon Ascend achieving
      specified milestones related to its credit standing, the 1,078,749 shares of
      common stock were be released from escrow in three installments of 359,583
      shares each and provided to Ascend. Upon satisfaction of the conditions
      specified in the escrow agreement and simultaneous with the release of the
      related stock certificates, the related amount of the promissory note became
      effective and started accruing interest. The promissory note accrued interest
      at
      10% per annum and matured on February 28, 2006.





Ascend
      attempted to raise capital financing in order to enter the reinsurance business.
      In May 2005, the Company released the first installment of 359,583 shares
      of common stock to Ascend while the related promissory note with a face value
      of
      $500,000 became effective. In December 2005, the Company learned that
      Ascend had not been able to execute on their business plan and would not likely
      have the financial resources to repay the $500,000 note receivable at maturity.
      As a result, the Company recorded a charge to other operating expense in 2005
      to
      write-off the $500,000 note receivable balance. In February 2006, Ascend
      defaulted on the repayment of the note receivable. The remaining 719,166 shares
      of common stock were returned to the Company from escrow on February 28,
      2006.





In
      April
      2006, the Company entered into a settlement agreement with Ascend Holdings
      Ltd.,
      Ascend Services Ltd., and other parties with debt obligations from the Ascend
      group of companies. A private equity firm acquired all of the assets of the
      Ascend group of companies and as a term of that acquisition satisfied the legacy
      debt obligations of the Ascend group of companies, including the Company's
      $500,000 note receivable. As a result, the Company reversed the $500,000 charge
      to write-off the note receivable balance upon the receipt of $500,000 in April
      2006.





**11.
      Subsequent Events**





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




15





**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,” “will,” “should,” “expects,” “anticipates,”
“targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,”
“estimates,” “predicts,” “potential” or “continue,” variations of such words,
      and similar expressions are intended to identify such forward-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 24 and elsewhere herein. We undertake no obligation
      to revise or update publicly any forward-looking statements for any
      reason.




**Company
      Overview**




MCF
      Corporation is a financial services holding company that provides investment
      research, capital markets services, corporate and venture services, investment
      banking, asset management and wealth management through its operating
      subsidiaries, Merriman Curhan Ford & Co., MCF Asset Management, LLC and
      MCF Wealth Management, LLC. We are focused on providing a full range of
      specialized and integrated services to institutional investors and corporate
      clients.





**Merriman
      Curhan Ford & Co.**





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





·  Equity
      Research


·  Sales
      and Trading


·  Specialized Trade Execution


·  Market
      Making


·  Equity
      Capital Markets


·  Corporate and Venture Services


·  Public
      Offerings


·  Private
      Placements


·  Mergers
      and Acquisitions


·  Strategic Advisory Services





By
      the
      end of the 1990's, many of the investment banks that previously served this
      niche were acquired by large commercial banks and subsequently refocused to
      serve larger clients and larger transactions. We are gaining market share by
      originating differentiated research for our institutional investor clients
      and
      providing specialized services for our fast-growing corporate clients.





**MCF
      Asset Management, LLC**





MCF
      Asset
      Management, LLC, or MCFAM, creates investment products for both institutional
      and high-net worth clients. Through the corporate and professional resources
      of
      MCF Corporation, MCFAM has developed an institutional-standard investment
      management platform. We launched our first fund in March 2006.





We
      believe both institutions and wealthy individuals will continue to shift more
      of
      their investment dollars into alternative asset class strategies. It is our
      intent to help our clients in their investment process by offering access to
      alternative investment strategies, as well as certain niche based long-only
      strategies.  We plan to establish our own alternative investment products
      and evaluate opportunities to acquire and partner with managers of
      alternative asset investments.




16




**MCF
      Wealth Management, LLC**





Through
      MCF Wealth Management LLC, we provide a tailored, integrated offering of
      personal financial services to help corporate executives and high-net-worth
      clients achieve their financial goals through our fee-based investment advisory
      firms, such as Catalyst Financial Planning and Investment Management. Catalyst
      was the first registered investment advisor to be acquired by MCF Wealth
      Management in 2005. Today, Catalyst counsels more than 60 clients and manages
      over $151 million in assets. MCF Wealth Management, LLC continues to evaluate
      acquisitions of existing wealth management businesses, as well as
      organically grow assets under management through client referrals and Merriman
      Curhan Ford & Co.'s client base.




**Business
      Environment**




Stocks
      and bonds performed well in the third quarter, buoyed by the Federal Reserve
      Board's decision to hold interest rates steady, falling crude oil prices and
      favorable readings in some key inflation measures. Weaker-than-expected
      employment reports, together with data showing a slowing housing market and
      moderating core inflation readings persuaded the Federal Reserve Board to pause
      in its credit-tightening campaign.




The
      blue-chip Dow Jones Industrial Average SM posted a
      return of 4.74%, briefly climbing above its all-time closing high in the final
      days of the quarter. However, the Russell 2000 ® Index just managed to finish
      the quarter in positive territory with a 0.44% return while the Russell 2000®
Growth Index declined by 1.75% during the quarter. Large-cap value stocks led
      the market higher, indicating investors' willingness to buy but also
      highlighting their desire to minimize risk. Average
      daily trading volume on the Nasdaq increased 13% in the third quarter of 2006,
      compared to the third quarter of 2005. During the third quarter of 2006, total
      small-cap follow-on equity issuance volumes decreased by 47% and small-cap
      initial public offering volumes decreased by 51% as compared to the third
      quarter of 2005 .




Our
      securities broker-dealer and investment banking activities are linked to the
      capital markets. In addition, our business activities are focused in the
      consumer growth, healthcare, specialty growth 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.




**Executive
      Overview**




Revenue
      recognized in the third quarter 2006 was $7,633,000, 16% lower than the third
      quarter of 2005. Commisions revenue decreased by 4% while investment banking
      revenue increased by 63% during the third quarter of 2006 as compared to the
      third quarter of 2005. Our net loss for the three months ended September 30,
      2006 was $5,109,000, or $0.07 per share which was higher than our net loss
      of
      $1,493,000, or $0.02 per share, for the three months ended September 30, 2005.
      The increase in third quarter net loss by $3,616,000 from 2005 to 2006 included
      a $1,987,000 swing from a $839,000 net gain in principal transactions revenue
      in
      2005 to a $1,148,000 net loss in 2006, and higher compensation and benefits
      expense due in part to the $881,000 increase in non-cash expensing of stock
      options in connection with our adoption of SFAS 123(R). The 2006 losses
      classified as principal transaction revenue resulted primarily from unrealized
      declines in the mark-to-fair market value of positions in our proprietary
      trading account. Additonally, we held our third annual Investor Summit
      conference in September 2006. The expenses associated with this annual
      conference were recognized in the third quarter 2006.




17




**Results
      of Operations**





The
      following table sets forth a summary of financial highlights for the three
      months and nine months ended September 30, 2006 and
      2005:




**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
              **2006**
            
            **September
                30,**
              **2005**
            
            **September
                30,**
              **2006**
            
            **September
                30,**
              **2005**Revenue:Commissions
            
            $
            6,700,416
            
            $
            6,943,963
            
            $
            23,344,124
            
            $
            20,265,658Principal
                transactions
            
            
            (1,148,313
            )
            
            838,504
            
            
            (1,480,963
            )
            
            315,770Investment
                banking
            
            
            1,839,288
            
            
            1,130,351
            
            
            11,750,176
            
            
            9,839,450Other
            
            
            242,010
            
            
            200,382
            
            
            873,424
            
            
            456,595Total
                revenue
            
            
            7,633,401
            
            
            9,113,200
            
            
            34,486,761
            
            
            30,877,473Operating
                expenses:Compensation
                and benefits
            
            
            8,716,833
            
            
            6,761,813
            
            
            30,542,987
            
            
            23,130,359Brokerage
                and clearing fees
            
            
            598,644
            
            
            688,320
            
            
            1,987,504
            
            
            1,775,597Professional
                services
            
            
            576,060
            
            
            502,093
            
            
            1,884,345
            
            
            1,248,923Occupancy
                and equipment
            
            
            436,769
            
            
            426,109
            
            
            1,268,917
            
            
            1,159,307Communications
                and technology
            
            
            802,777
            
            
            496,285
            
            
            2,137,892
            
            
            1,362,638Depreciation
                and amortization
            
            
            171,916
            
            
            132,606
            
            
            508,851
            
            
            367,718Travel
                and entertainment
            
            
            623,587
            
            
            427,274
            
            
            2,005,242
            
            
            1,211,686Other
            
            
            1,069,601
            
            
            1,184,191
            
            
            1,632,265
            
            
            2,320,431Total
                operating expenses
            
            
            12,996,187
            
            
            10,618,691
            
            
            41,968,003
            
            
            32,576,659Operating
                loss
            
            
            (5,362,786
            )
            
            (1,505,491
            )
            
            (7,481,242
            )
            
            (1,699,186
            )Interest
                income
            
            
            118,840
            
            
            115,316
            
            
            370,684
            
            
            305,407Interest
                expense
            
            
            134,895
            
            
            (15,755
            )
            
            (408,036
            )
            
            (49,468
            )Loss
                before income taxes
            
            
            (5,109,051
            )
            
            (1,405,930
            )
            
            (7,518,594
            )
            
            (1,443,247
            )Income
                tax (expense) benefit
            
            
            —
            
            
            (86,814
            )
            
            —
            
            
            (127,408
            )Net
                loss
            
            $
            (5,109,051
            )
            
            (1,492,744
            )
            
            (7,518,594
            )
            
            (1,570,655
            )Supplemental
                non-GAAP financial measure:Operating
                loss
            
            
            (5,362,786
            )
            
            (1,505,491
            )
            
            (7,481,242
            )
            
            (1,699,186
            )Adjustments:Depreciation
                and amortization
            
            
            171,916
            
            
            132,606
            
            
            508,851
            
            
            367,718Share-based
                payments
            
            
            1,197,256
            
            
            316,536
            
            
            3,179,305
            
            
            1,468,065Adjusted
                operating income (loss)
            
            
            (3,993,614
            )
            
            (1,056,349
            )
            
            (3,793,086
            )
            
            136,597





Revenue
      during the third quarter of 2006 decreased $1,480,000 or 16%, from the third
      quarter of 2005. Commissions revenue declined by 4% while investment banking
      grew by 63% during the third quarter of 2006 as compared to the third quarter
      of
      2005. Proprietary trading swung from a $839,000 net gain during the third
      quarter 2005 to a $1,148,000 net loss during the third quarter of 2006 which
      significantly adversely impacted both revenue and profitability by such amount
      during 2006. We incurred a net loss of $5,109,000 during the three months ended
      September 30, 2006 as compared to net loss of $1,493,000 for the similar period
      in 2005. Our adjusted operating loss was $3,994,000 for the third quarter of
      2006 which represents an increase from our adjusted operating loss of $1,056,000
      for the third quarter of 2005.




18




Adjusted
      operating income (loss) is a key metric we use in evaluating our financial
      performance. Adjusted operating income (loss) is considered a non-GAAP financial
      measure as defined by Regulation G promulgated by the SEC pursuant to the
      Securities Act of 1933, as amended. We consider adjusted operating income (loss)
      an important measure of our ability to generate cash flows to service debt,
      fund
      capital expenditures and fund other corporate investing and financing
      activities. Adjusted operating income (loss) eliminates the non-cash effect
      of
      tangible asset depreciation and amortization of intangible assets and
      stock-based compensation. Adjusted operating income (loss) is similar to
      earnings before interest, tax depreciation and amortization, or EBITDA, that
      we
      have presented in the past as a non-GAAP metric used for evaluating our
      financial performance. However, adjusted operating income (loss) uses operating
      income (loss) as a starting point instead of net income (loss) which simplifies
      the presentation. Adjusted operating income (loss) should be considered in
      addition to, rather than as a substitute for, pre-tax income, net income and
      cash flows from operating activities.





***Commissions
      and Principal Transactions Revenue***





Our
      broker-dealer activity includes the following:




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





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




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




**Three Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****Revenue:**Commissions
            
            $
            6,700,416
            
            $
            6,943,963
            
            $
            23,344,124
            
            $
            20,265,658





Principal
                transactions:Customer
                principal transactions, proprietary trading and market
                making
            
            
            (1,224,828
            )
            
            1,037,478
            
            
            (1,352,561
            )
            
            271,230





Investment
                portfolio
            
            
            76,515
            
            
            (198,974
            )
            
            (128,402
            )
            
            44,540Total
                principal transactions revenue
            
            $
            (1,148,313
            )
            $
            838,504
            
            $
            (1,480,963
            )
            $
            315,770





**Transaction
                Volumes:**Number
                of shares traded
            
            
            193,667,000
            
            
            293,312,000
            
            
            701,399,000
            
            
            757,226,000Number
                of active clients
            
            
            362
            
            
            426
            
            
            510
            
            
            559




Commissions
      revenue amounted to $6,700,000 or 88% of our revenue during the third quarter
      of
      2006, representing a 4% decrease from commissions recognized during the third
      quarter of 2005. The
      decline in commissions revenue was mainly
      attributable  to
      a
      decrease in our average daily trading volume in equity securities, partially
      offset by an increase in average commissions per share . As
      of
      September 30, 2006, companies covered by our research analysts have grown to
      196
      with plans to exceed 200 by the end of the year. During the third quarter of
      2006 and 2005, no single brokerage customer accounted for more than 10% of
      our
      revenue.




19




Principal
      transactions reduced revenue by $1,148,000 during the third quarter 2006 and
      increased revenue by $839,000 during the third quarter 2005. Principal
      transaction revenue consists of four different activities - customer principal
      trades, market making, trading for our proprietary account, and realized and
      unrealized gains and losses in our investment portfolio. As a broker-dealer,
      we
      account for all of our marketable security positions on a trading basis and
      as a
      result, all security positions are marked to fair market value each
      day.




During
      the third quarter of 2006, we incurred $1,287,000 in net losses resulting
      primarily from a decline in the mark-to-fair market value of positions in our
      proprietary trading account. These losses were partially offset by revenue
      from
      principal trades for customers.




On
      August
      8, 2006, Merriman Curhan Ford & Co. filed a Schedule 13D with the Securities
      and Exchange Commission related to the shares of Points International Ltd. that
      it owns in its proprietary account. We believe that Points International Ltd.
      is
      an undervalued company in the Internet media space and that it would benefit
      all
      shareholders of Points International Ltd. to implement a formal process to
      develop strategic partners in order to accelerate their growth.




***Investment
      Banking Revenue***




Our
      investment banking activity includes the following:





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





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




The
      following table sets forth our revenue and transaction volumes from our
      investment banking activities during the three months and nine months ended
      September 30, 2006 and 2005:




**Three Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****Revenue:**Capital
                raising
            
            $
            1,194,288
            
            $
            784,911
            
            $
            10,429,291
            
            $
            9,288,885Financial
                advisory
            
            
            645,000
            
            
            345,440
            
            
            1,320,885
            
            
            550,565Total
                investment banking revenue
            
            $
            1,839,288
            
            $
            1,130,351
            
            $
            11,750,176
            
            $
            9,839,450**Transaction
                Volumes:**Public
                offerings:Capital
                underwriting participation
            
            $
            —
            
            $
            42,100,000
            
            $
            104,151,000
            
            $
            183,325,000Number
                of transactions
            
            
            —
            
            
            2
            
            
            10
            
            
            5Private
                placements:Capital
                raised
            
            $
            19,385,000
            
            $
            3,000,000
            
            $
            108,385,000
            
            $
            220,419,000Number
                of transactions
            
            
            4
            
            
            1
            
            
            8
            
            
            10




Our
      investment banking revenue amounted to $1,839,000, or 24% of our revenue during
      the third quarter of 2006, representing a 63% increase compared to $1,130,000
      recognized during the third quarter of 2005. Our investment banking revenue
      moderated significantly from the second quarter 2006 due in part to a slow
      down
      in small-cap equity issuances during July and August. Additionally, we had
      closed our largest sole managed private placement transaction during the second
      quarter of 2006. During the three months ended September 30, 2006 and 2005,
      no
      single investment banking customer accounted for more than 10% of our
      revenue.




20




***Compensation
      and Benefits Expenses***





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





The
      following table sets forth the major components of our compensation and benefits
      for the three months and nine months ended September 30, 2006 and
      2005:




****
            
            **Three Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Incentive
                compensation and discretionary bonuses
            
            $
            4,171,208
            
            $
            3,308,472
            
            $
            17,431,415
            
            $
            12,702,930Salaries
                and wages
            
            
            2,560,090
            
            
            2,522,864
            
            
            7,220,425
            
            
            6,810,614Stock-based
                compensation
            
            
            1,197,256
            
            
            316,536
            
            
            3,179,305
            
            
            1,468,065Payroll
                taxes, benefits and other
            
            
            788,279
            
            
            613,941
            
            
            2,711,842
            
            
            2,148,750Total
                compensation and benefits
            
            $
            8,716,833
            
            $
            6,761,813
            
            $
            30,542,987
            
            $
            23,130,359Total
                compensation and benefits as a percentage of revenue
            
            
            114
            %
            
            74
            %
            
            89
            %
            
            75
            %Cash
                compensation and benefits as a percentage of revenue
            
            
            99
            %
            
            71
            %
            
            79
            %
            
            70
            %





The
      amount of compensation and benefits expense that we incur during a given period
      is largely dependent upon the level of revenue recognized during that period,
      since most of our employees are paid based on a percentage of the revenue
      attributed to their efforts.  The
      increase in compensation and benefits expense of $1,955,000, or 29%, from the
      third quarter of 2005 to the third quarter of 2006 was due primarily to higher
      non-cash stock-based compensation expense and incentive compensation. Cash
      compensation as a percentage of revenue was 99% during the three months ended
      September 30, 2006 which was higher than the 71% recorded during the three
      months ended September 30, 2005. Cash compensation as a percentage of revenue
      would have been 84% during the third quarter of 2006 if we had not incurred
      the
      proprietary trading losses of $1,287,000. Cash compensation is equal to total
      compensation and benefits expense excluding stock-based compensation. Our
      headcount has increased from 148 at September 30, 2005 to 170 at September
      30,
      2006. During the third quarter 2006 and 2005, one sales professional accounted
      for 12% and 15% of our revenue, respectively.





The
      nine
      months ended September 30, 2006 represents our first fiscal period following
      adoption of SFAS 123(R), “Share-Based Payment,” which requires that we
      recognize compensation expense on our consolidated statement of operations
      for
      all share-based awards made to employees and directors based on estimated fair
      values. We have adopted SFAS 123(R) using the modified prospective application
      transition method, and accordingly have not restated financial statements for
      prior periods to include the impact of SFAS 123(R). To determine the valuation
      of share-based awards under SFAS 123(R), we continue to use the Black-Scholes
      option pricing model that we utilized to determine our pro forma share-based
      compensation in prior periods. Share-based compensation was $1,197,000 during
      the three months ended September 30, 2006, which included $70,000 from the
      issuance of common stock as contingent consideration to the Catalyst
      Shareholder. Additional information regarding our adoption of SFAS 123(R) during
      the nine months ended September 30, 2006 is set forth in the notes to the
      financial statements above and in “Critical Accounting Policies and Estimates”
below.




21


***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. Additionally, security trades are executed by
      third-party broker-dealers and electronic trading systems. These expenses are
      almost entirely variable with commission revenue and the volume of brokerage
      transactions. Our brokerage and clearing fees decreased by $90,000, or 13%,
      during the third quarter of 2006 as compared to the third quarter of 2005.
      This
      decrease reflected the savings from changing to a new clearing broker that
      was
      completed in June 2006. Brokerage and clearing fees increased by $212,000,
      or
      12% during the nine months ended September 30, 2006 as compared to the similar
      period in 2005. This increase was in line with the growth in our commissions
      revenue and market making activity.





Professional
      services expense includes legal fees, accounting fees, expenses related to
      investment banking transactions, consulting fees and recruiting fees. Many
      of
      these expenses, such as legal and accounting fees, are to a large extent fixed
      in nature. The increase of $74,000 or 15%, from the third quarter of 2005 to
      the
      third quarter of 2006 was primarily attributed to attorney fees associated
      with
      business development activities and other legal matters. The increase of
      $635,000 or 51%, during the nine months ended September 30, 2006 as compared
      to
      the similar period in 2005 was primarily attributed to the expensing of legal
      fees during the second quarter which we previously deferred resulting from
      investment banking transactions that have not closed. We defer expenses,
      including legal fees, related to securities offerings in which we act as
      underwriter 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..





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 3%, from the third
      quarter of 2005 to the third quarter of 2006 and the increase of 110,000, or
      9%,
      during the nine months ended September 30, 2006 as compared to the similar
      period in 2005 resulted mostly from facility maintenance and related
      services.





Communications
      and technology expense includes voice, data and Internet service fees, and
      data
      processing costs. While variable in nature, these tend to be more correlated
      to
      headcount than revenue. The increase of $306,000, or 62%, from the third quarter
      of 2005 to the third quarter of 2006 and the increase of $775,000, or 57%,
      during the nine months ended September 30, 2006 as compared to the similar
      period in 2005 was due to network connections and market data service fees
      incurred in our sales, trading and research operations. The higher costs are
      the
      result of increased headcount and the expansion of our offices.




Depreciation
      and amortization expense primarily relate to the depreciation of our computer
      equipment and leasehold improvements. Depreciation and amortization is mostly
      fixed in nature. The increase of $39,000, or 30%, from the third quarter of
      2005
      to the third quarter of 2006 and the increase of $141,000, or 38%, during the
      nine months ended September 30, 2006 as compared to the similar period in 2005
      was due to increased capital expenditures during 2005, including leasehold
      improvements, to facilitate our growth and expansion.





Travel
      and entertainment expense results from business development activities across
      our various businesses. The increase of $196,000, or 46%, from the third quarter
      of 2005 to the third quarter of 2006 and the increase of $794,000, or 66%,
      during the nine months ended September 30, 2006 as compared to the similar
      period in 2005 was due mostly to increased investment banking business
      development and capital markets activity, as well as expensing of travel
      expenses during the second quarter which we had previously deferred resulting
      from investment banking transactions that have not closed. We defer expenses,
      including travel and entertainment costs, related to securities offerings in
      which we act as underwriter 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.




Other
      operating expense includes professional liability and property insurance,
      printing and copying, business licenses and taxes, office supplies and other
      miscellaneous office expenses. The decrease of approximately $115,000, or 10%,
      from the third quarter of 2005 to the third quarter of 2006 was due to a legal
      claim incurred in 2005 that did not occur in 2006.The decrease of $688,000,
      or
      30%, during the nine months ended September 30, 2006 as compared to the similar
      period in 2005 also included the recovery of the $500,000 note receivable from
      Ascend Services, Ltd. that we had previously written off through bad debt
      expense in 2005.




22


***Interest
      Income***





Interest
      income represents interest earned on our cash balances maintained at financial
      institutions. The increase of $4,000, or 3%, from the third quarter of 2005
      to
      the third quarter of 2006 and the increase of $65,000, or 21%, during the nine
      months ended September 30, 2006 as compared to the similar period in 2005 was
      due to higher average earning assets and higher average interest rates during
      these periods.





***Interest
      Expense***





Interest
      expense primarily represents interest related to the convertible debenture
      issued in March 2006, as well as interest for our various capital leases used
      to
      finance purchase of furniture and fixtures. Interest expense for the nine months
      ended September 30, 2006 was $408,000 which included $319,000 for the
      convertible debenture issued in March 2006. During the third quarter of 2006,
      we
      revised interest expense for the convertible debenture using a fixed implicit
      rate of 13.8%. This resulted in a true-up adjustment in the amount of $304,000
      for interest that was expensed during the six months ended June 30, 2006 that
      resulted in a negative interest expense of $135,000 during the third quarter
      of
      2006.





The
      amount of interest payable in cash to MidSummer Investments, Inc. each year
      is
      based on the return on our $7,500,000 investment managed by MCF Asset
      Management, LLC for each calendar year. The return on our investment during
      the
      nine months ended September 30, 2006 was $174,000. The amount of interest that
      would be payable to Midsummer based on this return is $131,000.





***Issuance
      of Debt***





In
      March
      2006, we completed a $7.5 million private placement of a variable rate secured
      convertible debenture with a detachable stock warrant. The issue was placed
      with
      Midsummer Investment, Ltd. We invested the proceeds in one of the proprietary
      funds managed by MCF Asset Management, LLC, our wholly-owned subsidiary. The
      debenture bears interest at a variable rate based on the annual investment
      performance of the fund. Stock warrants to purchase 1,875,000 shares of common
      stock at $1.41 per share were also issued to the investor. The stock warrants
      have a six year term. See Note 2 to the condensed consolidated financial
      statements for additional information.





We
      have
      accounted for this transaction as the issuance of convertible debt, an embedded
      derivative referred to as a participation interest obligation, and a detachable
      stock warrant. The $7,500,000 has been allocated to the derivative using its
      fair value with the balance allocated to the debt and the stock warrants based
      on their relative fair value as determined by management.  During the third
      quarter of 2006, we obtained an appraisal from a third party to support the
      fair
      market values used to allocate the proceeds. Our initial estimates were adjusted
      to the appraisal amounts. This true-up resulted in a credit to interest expense
      during the third quarter in the amount of $304,000.





The
      fair
      value of the stock warrant of $1,291,000 has been recorded as a discount to
      the
      convertible debenture and an increase to additional paid-in capital. The
      fair value of the participation interest obligation of $2,276,000 is also
      treated as a discount to the convertible debenture and is based on a forecast
      of
      future cash flows to be paid to the lender discounted at a risk adjusted
      yield.  The discount to the convertible debenture of $3,567,000 is
      amortized to interest expense using the level yield method over the term of
      the
      debenture. As of September 30, 2006, the implicit rate on the convertible debt
      is 13.8%.  The participation interest obligation is carried in the
      statements of financial condition at fair value and the Company will reassess
      fair value of the participation interest obligation at the end of each reporting
      period with adjustments recorded to interest expense.





***Income
      Tax Expense***





At
      the
      end of each interim reporting period we calculate an effective tax rate based
      on
      our best 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.





The
      effective tax rate differs from the statutory rate primarily due to the
      existence and utilization of net operating loss carryforwards which have been
      offset by a valuation allowance resulting in a tax provision equal to the
      companies expected current expense for the year. We historically have
      had and expect to have for the current year, current tax
      expense primarily related to alternative minimum, state and minimum tax
      liabilities.




Historically
      and currently, we have recorded a valuation allowance on our 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 we will be able to realize the benefit of
      our deferred tax assets in the future.




23




***Off-Balance
      Sheet Arrangements***





We
      were
      not a party to any off-balance sheet arrangements during the nine months ended
      September 30, 2006 and 2005. In particular, we do not have any interest in
      so-called limited purpose entities, which include special purpose entities
      and
      structured finance entities.




***Minority
      Interest***





In
      March
      2006, the Company launched its first proprietary hedge fund managed by MCF
      Asset
      Management, LLC, our wholly owned subsidiary. We invested the proceeds from
      the
      $7,500,000 private placement of secured convertible debenture and stock warrant
      into the fund as a limited partner. As of September 30, 2006, our limited
      partnership interest represented 78% of the fund. Accordingly, we have
      consolidated all of the assets and liabilities of the fund because we have
      effective control of the fund that results from the large initial percentage
      interest in the limited partnership. We will deconsolidate the assets and
      liabilities of the fund and carry the limited partnership interest at fair
      value
      if and when effective control of the fund transfers to other investors in the
      future. This should occur when our limited partnership interest represents
      less
      than 50% of the fund. We have recorded the minority interest on the consolidated
      statements of financial position as of September 30, 2006 which reflects the
      minority investors' interest in the fund's assets and liabilities.





By
      consolidating the assets and liabilities of the fund as of September 30, 2006,
      we recorded in the consolidated statements of financial condition $6,301,000
      of
      cash and cash equivalents, $4,211,000 of marketable securities owned, $783,000
      of non-marketable securities owned, $7,000 of due from clearing broker, $80,000
      in prepaid and other assets, $53,000 in accrued liabilities, $1,460,000 in
      securities sold, not yet purchased and $2,188,000 in minority interest. If
      we
      did not have effective control of the fund as of September 30, 2006, these
      assets, liabilities and minority interest, including the $6,301,000 of cash
      and
      cash equivalents would not have been included in our consolidated statements
      of
      financial condition. Instead, we would have recorded an asset representing
      an
      investment in the fund managed by MCF Asset Management, LLC in the amount of
      $7,677,000. The investment in the fund includes a one year lock-up provision
      which makes this investment illiquid for one year.





***Commitments***





The
      following is a table summarizing our significant commitments as of September
      30,
      2006, consisting of debt payments related to convertible notes payable,
      non-convertible notes payable, capital leases and future minimum lease payments
      under all non-cancelable operating leases with initial or remaining terms in
      excess of one year.




**Notes**
                **Payable**
              
              **Operating**
                **Leases**
              
              **Capital**
                **Leases**2006
              
              $
              26,694
              
              $
              518,779
              
              $
              106,7842007
              
              
              106,775
              
              
              1,838,616
              
              
              349,1292008
              
              
              243,990
              
              
              1,206,478
              
              
              197,0442009
              
              
              —
              
              
              832,568
              
              
              —2010
              
              
              7,500,000
              
              
              869,731
              
              
              —Thereafter
              
              
              —
              
              
              709,898
              
              
              —Total
                  commitments
              
              $
              7,877,459
              
              $
              5,976,070
              
              $
              652,957




24




**Critical
      Accounting Policies and Estimates**




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




*Valuation
      of Securities Owned*




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





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




*Revenue
      Recognition*




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





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





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




25





*Stock-Based
      Compensation*




On
      January 1, 2006, we adopted SFAS 123(R), “Shared-Based Payment,” which
      requires the measurement and recognition of compensation expense, based on
      estimated fair values, for all share-based awards, made to employees and
      directors, including stock options, non-vested stock, and participation in
      our
      employee stock purchase plan. Share-based compensation expense recognized in
      our
      consolidated statement of operations for the nine months ended September 30,
      2006 includes compensation expense for share-based awards granted (i) prior
      to, but not yet vested as of December 31, 2005, based on the grant date
      fair value estimated in accordance with the provisions of SFAS 123, and
      (ii) subsequent to December 31, 2005, based on the grant date fair
      value estimated in accordance with the provisions of SFAS 123(R).





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





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




*Valuation
      of Derivative Embedded in Convertible Debenture*





In
      March
      2006, we completed a $7.5 million private placement of a variable rate secured
      convertible debenture with a detachable stock warrant. The debenture bears
      interest at a variable rate based on the annual investment performance of the
      investment in the proprietary funds managed by MCF Asset Management, LLC. We
      have accounted for this transaction as the issuance of convertible debt, an
      embedded derivative referred to as a participation interest obligation, and
      a
      detachable stock warrant.  The convertible debenture is carried on the
      statements of financial condition net of a $1,291,000 discount for the stock
      warrant.  The participation interest obligation of $2,276,000 is also
      treated as a discount to the convertible debenture and is based on a forecast
      of
      future cash flows to be paid to the lender discounted at a risk adjusted
      yield.  As of September 30, 2006, the implicit rate on the convertible debt
      is 13.8%.  The participation interest obligation is carried in the
      statements of financial condition at fair value and we will reassess fair value
      of the participation interest obligation at the end of each reporting period
      with adjustments recorded to interest expense. Changes in the forecast of
      future cash flows to be paid to the lender can materially affect the estimated
      fair value of the participation interest obligation which can materially affect
      the amount of interest expense recorded in a period. During the third quarter
      of
      2006, we obtained an appraisal from a third party to support the fair market
      values used to allocate the proceeds. Our initial estimates were adjusted to
      the
      appraisal amounts. This true-up resulted in a credit to interest expense during
      the third quarter in the amount of $304,000.





*Deferred
      Tax Valuation Allowance*




We
      account for income taxes in accordance with the provision of SFAS No.
      109, *Accounting for Income Taxes* ,
      which
      requires the recognition of deferred tax assets and liabilities at tax rates
      expected to be in effect when these balances reverse. Future tax benefits
      attributable to temporary differences are recognized to the extent that the
      realization of such benefits is more likely than not. We have concluded that
      it
      is more likely than not that our deferred tax assets as of September 30, 2006
      and 2005 will not be realized based on the scheduling of deferred tax
      liabilities and projected taxable income. The amount of the deferred tax assets
      actually realized, however, could vary if there are differences in the timing or
      amount of future reversals of existing deferred tax liabilities or changes
      in
      the actual amounts of future taxable income. Should we determine that we will
      be
      able to realize all or part of the deferred tax asset in the future, an
      adjustment to the deferred tax asset will be recorded in the period such
      determination is made.




26




**Liquidity
      and Capital Resources**




Historically,
      we have satisfied our liquidity and regulatory capital needs through the
      issuance of equity and debt securities. As of September 30, 2006 liquid assets
      consisted primarily of cash and cash equivalents and marketable securities.
      Excluding the assets of the proprietary fund managed by MCF Asset Management,
      LLC that is being consolidated for financial statement purposes until we no
      longer exercise effective control over the fund, liquid assets of amounted
      to
      $16,129,000 as of September 30, 2006. This consisted of $10,130,000 in cash
      and
      cash equivalents and $5,999,000 in marketable securities.





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,
      2006, Merriman Curhan Ford & Co. had regulatory net capital, as
      defined, of $5,586,000, which exceeded the amount required by
      $4,282,000.





Cash
      and
      cash equivalents decreased by $1,009,000 during the nine months ended September
      30, 2006. Cash used in our operating activities was $4,544,000 which primarily
      represents the increase in marketable securities owned, payment of employee
      bonuses earned in 2005, and net loss for the period adjusted for non-cash
      expenses including share-based payments.




Our
      adjusted operating income (loss) was $3,793,000 for the first nine months of
      2006. Adjusted operating income (loss) is considered a non-GAAP financial
      measure as defined by Regulation G promulgated by the SEC pursuant to the
      Securities Act of 1933, as amended. We consider adjusted operating income (loss)
      an important measure of our ability to generate cash flows to service debt,
      fund
      capital expenditures and fund other corporate investing and financing
      activities. Adjusted operating income (loss) eliminates the non-cash effect
      of
      tangible asset depreciation and amortization of intangible assets and
      stock-based compensation. A reconciliation of adjusted operating income (loss)
      is provided on page 18 of this Quarterly Report.




Cash used
      in investing activities amounted to $6,713,000 which consisted of
      the investment in proprietary fund managed by MCF Asset Management,
      LLC, purchases of equipment and fixtures and the contingent payment to the
      Catalyst Shareholder. Cash proceeds from our financing activities was
      $10,248,000 which included the proceeds from the $7,500,000 convertible
      debenture, the minority interest in the fund and proceeds related to
      issuance of common stock in connection with our employee stock purchase plan
      and
      stock option and warrant exercises.





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




27




**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
      activities. 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.




*Interest
      Rate Risk*




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




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




*Foreign
      Currency Risk*




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




**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, 2006.





**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, 2006, that materially affected, or is
      reasonably likely to materially affect, the Company's internal control over
      financial reporting.





During
      the second quarter of 2006, the Company engaged Pershing, LLC as clearing broker
      for Merriman Curhan Ford & Co. and began using their institutional
      securities processing applications. Additionally, Merriman Curhan Ford & Co.
      implemented a new securities order management system that is being licensed
      from
      Fidessa. The implementation of these new trading systems did not materially
      affect the Company's internal control over financial reporting (as defined
      in
      Rules 13a-15(d) and 15d-15(d) of the Exchange Act).




28





**PART
      II.   OTHER INFORMATION**





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




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




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




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




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




**In
      re Odimo Incorporated Securities Litigation** ***.***




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





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





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





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




**Item
      1A. Risk Factors**




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





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





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




29




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





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





·  establish, maintain and increase our client base;





·  manage the quality of our services;





·  compete effectively with existing and potential competitors;





·  further develop our business activities;





·  manage
      expanding operations; and





·  attract and retain qualified personnel.





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





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





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





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





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




30





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





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





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





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





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





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




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


·
              the
                    valuations of our principal
                    investments;


·
            the
                number of capital markets transactions completed by our clients,
                and the
                level of fees we receive from those transactions; and·
            variations
                in expenditures for personnel, consulting and legal expenses, and
                expenses
                of establishing new business units, including marketing and technology
                expenses.




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





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





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




31




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





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





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





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





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





During
      the nine months ended September 30, 2006, one sales professional accounted
      for
      12% of our revenue. We have a number of revenue producers employed by our
      various businesses. We do not have employment contracts with these employees.
      The loss of one or more of these employees could adversely affect our business
      and results of operations.





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





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





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





During
      the nine months ended September 30, 2006, one investment banking customer
      accounted for 11% of our revenue. Additionally, we have been dependent on a
      small number of customers, for a large percentage of our revenue at some times
      in the past and we cannot assure you that we will not become so dependent again
      in the future. If we do become dependent on a single customer or small group
      of
      customers, the loss of one or more large customers could materially adversely
      affect our business and results of operations.





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





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




32




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





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





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





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





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





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





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





Our
      business is highly dependent on communications and information systems,
      including systems provided by our clearing brokers. Any failure or interruption
      of our systems, the systems of our clearing broker or third party trading
      systems could cause delays or other problems in our securities trading
      activities, which could have a material adverse effect on our operating results.
      In addition, our clearing brokers provide our principal disaster recovery
      system. We cannot assure you that we or our clearing brokers will not suffer
      any
      systems failure or interruption, including one caused by an earthquake, fire,
      other natural disaster, power or telecommunications failure, act of God, act
      of
      war or otherwise, or that our or our clearing brokers' back-up procedures and
      capabilities in the event of any such failure or interruption will be
      adequate.




33




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





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


·
              variations
                  in quarterly operating results;
 
 ·
            our
                announcements of significant contracts, milestones,
                acquisitions; 
 ·
            our
                relationships with other companies; 
 ·
            our
                ability to obtain needed capital
                commitments; 
 ·
            additions
                or departures of key personnel; 
 ·
            sales
                of common stock, conversion of securities convertible into common
                stock,
                exercise of options and warrants to purchase common stock or termination
                of stock transfer restrictions; 
 ·
            general
                economic conditions, including conditions in the securities brokerage
                and
                investment banking markets; 
 ·
            changes
                in financial estimates by securities analysts;
                and 
 ·
            fluctuation
                in stock market price and volume.


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





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





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





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





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





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





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




34




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





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





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





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





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





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





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





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





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





Our
      executive officers and directors, and entities affiliated with them, currently
      control approximately 24% of our outstanding common stock including exercise
      of
      their options and warrants. These stockholders, if they act together, will
      be
      able to exercise substantial influence over all matters requiring approval
      by
      our stockholders, including the election of directors and approval of
      significant corporate transactions. This concentration of ownership may also
      have the effect of delaying or preventing a change in control of us and might
      affect the market price of our common stock.





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





We
      have a
      significant number of outstanding stock options and warrants. During the nine
      months ended September 30, 2006, shares issuable upon the exercise of these
      options and warrants, at prices ranging currently from approximately $0.05
      to
      $7.00 per share, represent approximately 12% of our total outstanding stock
      on a
      fully diluted basis using the treasury stock method.





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





35




**Item
        6. **Exhibits****




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.




36





**SIGNATURES**




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




MCF
                CORPORATIONNovember
                7, 2006
            By:
            /s/  D.
              JONATHAN MERRIMAND.
              Jonathan Merriman,Chairman
              of the Board and Chief Executive Officer
              (Principal
                Executive Officer)




November
                7, 2006
            By:
            /s/ JOHN
              D.
              HIESTANDJohn
                D. Hiestand
              Chief
                Financial Officer
              (Principal
                Financial Officer)