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UNITED STATES

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 Quarter Ended March 31, 2007.



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

Commission File Number: 0-33377

MCG CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 54-1889518                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|1100 Wilson Boulevard, Suite 3000 Arlington, VA                |  | 22209                               
|(Address of principal executive office)                        |  | (Zip Code)                          

(703) 247-7500

(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, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ̈

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 filer x                        Accelerated filer ̈Non-accelerated filer ̈

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

The number of shares of the registrants Common Stock, $.01 par value, outstanding as of April 27, 2007 was 62,483,922.



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##### Table of Contents

MCG CAPITAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2007

TABLE OF CONTENTS



|           |  |                                                                                                                 |  |   
|---------- |  | --------------------------------------------------------------------------------------------------------------- |  | --
|PART I     |  | FINANCIAL INFORMATION                                                                                           |  | 3 
|           |  |                                                                                                                
|Item 1.    |  | Financial Statements                                                                                            |  |   
|           |  |                                                                                                                
|           |  | Consolidated Balance SheetsMarch 31, 2007 (unaudited) and December 31, 2006                                    |  | 3 
|           |  |                                                                                                                
|           |  | Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2007 and 2006            |  | 4 
|           |  |                                                                                                                
|           |  | Consolidated Statements of Changes in Net Assets (unaudited) for the three months ended March 31, 2007 and 2006 |  | 5 
|           |  |                                                                                                                
|           |  | Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2007 and 2006            |  | 6 
|           |  |                                                                                                                
|           |  | Consolidated Schedule of Investments as of March 31, 2007 (unaudited)                                           |  | 7 
|           |  |                                                                                                                
|           |  | Consolidated Schedule of Investments as of December 31, 2006                                                    |  | 12
|           |  |                                                                                                                
|           |  | Notes to Consolidated Financial Statements (unaudited)                                                          |  | 18
|           |  |                                                                                                                
|           |  | Report of Independent Registered Public Accounting Firm                                                         |  | 29
|           |  |                                                                                                                
|           |  | Selected Financial Data                                                                                         |  | 30
|           |  |                                                                                                                
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |  | 31
|           |  |                                                                                                                
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                      |  | 52
|           |  |                                                                                                                
|Item 4.    |  | Controls and Procedures                                                                                         |  | 53
|           |  |                                                                                                                
|PART II    |  | OTHER INFORMATION                                                                                               |  | 53
|           |  |                                                                                                                
|Item 1.    |  | Legal Proceedings                                                                                               |  | 53
|           |  |                                                                                                                
|Item 1A.   |  | Risk Factors                                                                                                    |  | 53
|           |  |                                                                                                                
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                     |  | 60
|           |  |                                                                                                                
|Item 3.    |  | Defaults Upon Senior Securities                                                                                 |  | 60
|           |  |                                                                                                                
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                             |  | 60
|           |  |                                                                                                                
|Item 5.    |  | Other Information                                                                                               |  | 60
|           |  |                                                                                                                
|Item 6.    |  | Exhibits                                                                                                        |  | 61
|           | 
|Signatures |  | 67                                                                                                             





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##### Table of Contents

PART I. FINANCIAL INFORMATION

MCG Capital Corporation

Consolidated Balance Sheets

(in thousands, except per share amounts)



|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                                        |  | March 31,2007 |           |   | December 31,2006 |  
|                                                                                                                                                                                                        |  | (unaudited)   |           |   |                  |  
|Assets                                                                                                                                                                                                  |  |               |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                                                                                               |  | $             | 17,559    |   |                  | $ | 21,691    |  
|Cash, securitization accounts                                                                                                                                                                           |  |               | 20,866    |   |                  |   | 15,931    |  
|Cash, restricted                                                                                                                                                                                        |  |               | 2,620     |   |                  |   | 2,587     |  
|Investments at fair value                                                                                                                                                                               |  |               |           |   |                  |   |           |  
|Non-affiliate investments (cost of $636,646 and $595,885, respectively)                                                                                                                                 |  |               | 660,848   |   |                  |   | 621,582   |  
|Affiliate investments (cost of $105,686 and $105,553, respectively)                                                                                                                                     |  |               | 109,820   |   |                  |   | 109,890   |  
|Control investments (cost of $586,945 and $541,267, respectively)                                                                                                                                       |  |               | 581,764   |   |                  |   | 526,140   |  
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|Total investments (cost of $1,329,277 and $1,242,705, respectively)                                                                                                                                     |  |               | 1,352,432 |   |                  |   | 1,257,612 |  
|Unearned income on commercial loans                                                                                                                                                                     |  |               | (10,266   | ) |                  |   | (9,539    | )
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|Total investments net of unearned income                                                                                                                                                                |  |               | 1,342,166 |   |                  |   | 1,248,073 |  
|Interest receivable                                                                                                                                                                                     |  |               | 11,659    |   |                  |   | 10,451    |  
|Other assets                                                                                                                                                                                            |  |               | 15,126    |   |                  |   | 20,535    |  
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|Total assets                                                                                                                                                                                            |  | $             | 1,409,996 |   |                  | $ | 1,319,268 |  
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|Liabilities                                                                                                                                                                                             |  |               |           |   |                  |   |           |  
|Borrowings (maturing within one year of $206,602 and $167,983, respectively)                                                                                                                            |  | $             | 606,102   |   |                  | $ | 521,883   |  
|Interest payable                                                                                                                                                                                        |  |               | 6,100     |   |                  |   | 5,198     |  
|Dividends payable                                                                                                                                                                                       |  |               | 26,170    |   |                  |   | 24,652    |  
|Other liabilities                                                                                                                                                                                       |  |               | 10,926    |   |                  |   | 14,398    |  
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                                                       |  |               | 649,298   |   |                  |   | 566,131   |  
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|Stockholders Equity                                                                                                                                                                                    |  |               |           |   |                  |   |           |  
|Preferred stock, par value $.01, authorized 1 share, none issued and outstanding                                                                                                                        |  |               |          |   |                  |   |          |  
|Common stock, par value $.01, authorized 200,000 shares on March 31, 2007 and December 31, 2006, 59,472 issued and outstanding on
March 31, 2007 and 58,694 issued and outstanding on December 31, 2006 |  |               | 595       |   |                  |   | 587       |  
|Paid-in capital                                                                                                                                                                                         |  |               | 831,990   |   |                  |   | 828,795   |  
|Distributions in excess of earnings:                                                                                                                                                                    |  |               |           |   |                  |   |           |  
|Paid-in capital                                                                                                                                                                                         |  |               | (78,072   | ) |                  |   | (78,072   | )
|Other                                                                                                                                                                                                   |  |               | (16,259   | ) |                  |   | (12,365   | )
|Net unrealized appreciation on investments                                                                                                                                                              |  |               | 23,155    |   |                  |   | 14,907    |  
|Stockholder loans                                                                                                                                                                                       |  |               | (711      | ) |                  |   | (715      | )
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|Total stockholders equity                                                                                                                                                                              |  |               | 760,698   |   |                  |   | 753,137   |  
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|                                                                                                                                                                                                        |  |              
|Total liabilities and stockholders equity                                                                                                                                                              |  | $             | 1,409,996 |   |                  | $ | 1,319,268 |  
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|Net asset value per common share at period end                                                                                                                                                          |  | $             | 12.79     |   |                  | $ | 12.83     |  

See notes to consolidated financial statements



3



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MCG Capital Corporation

Consolidated Statements of Operations (unaudited)

(in thousands, except per share amounts)



|                                                                                       |  |                             |        |   |      |   |        |  
|-------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                       |  | Three Months EndedMarch 31, |       
|                                                                                       |  | 2007                        |        |   | 2006 |  
|Revenue                                                                                |  |                             |        |   |      |   |        |  
|Interest and dividend income                                                           |  |                             |        |   |      |   |        |  
|Non-affiliate investments (less than 5% owned)                                         |  | $                           | 19,040 |   |      | $ | 22,244 |  
|Affiliate investments (5% to 25% owned)                                                |  |                             | 3,211  |   |      |   | 1,464  |  
|Control investments (more than 25% owned)                                              |  |                             | 14,442 |   |      |   | 8,774  |  
|                                                                                       |  |                             |        |   |      |   |        |  
|Total interest and dividend income                                                     |  |                             | 36,693 |   |      |   | 32,482 |  
|Advisory fees and other income                                                         |  |                             |        |   |      |   |        |  
|Non-affiliate investments (less than 5% owned)                                         |  |                             | 1,657  |   |      |   | 3,067  |  
|Affiliate investments (5% to 25% owned)                                                |  |                             |       |   |      |   | 1,271  |  
|Control investments (more than 25% owned)                                              |  |                             | 1,792  |   |      |   | 817    |  
|                                                                                       |  |                             |        |   |      |   |        |  
|Total advisory fees and other income                                                   |  |                             | 3,449  |   |      |   | 5,155  |  
|                                                                                       |  |                             |        |   |      |   |        |  
|Total revenue                                                                          |  |                             | 40,142 |   |      |   | 37,637 |  
|                                                                                       |  |                             |        |   |      |   |        |  
|Operating expenses                                                                     |  |                             |        |   |      |   |        |  
|Interest expense                                                                       |  |                             | 9,145  |   |      |   | 8,912  |  
|Employee compensation:                                                                 |  |                             |        |   |      |   |        |  
|Salaries and benefits                                                                  |  |                             | 5,502  |   |      |   | 5,462  |  
|Amortization of employee restricted stock awards                                       |  |                             | 2,982  |   |      |   | 610    |  
|                                                                                       |  |                             |        |   |      |   |        |  
|Total employee compensation                                                            |  |                             | 8,484  |   |      |   | 6,072  |  
|General and administrative expense                                                     |  |                             | 2,467  |   |      |   | 1,889  |  
|                                                                                       |  |                             |        |   |      |   |        |  
|Total operating expenses                                                               |  |                             | 20,096 |   |      |   | 16,873 |  
|                                                                                       |  |                             |        |   |      |   |        |  
|Net operating income before investment gains and losses and provision for income taxes |  |                             | 20,046 |   |      |   | 20,764 |  
|                                                                                       |  |                             |        |   |      |   |        |  
|Net realized gains (losses) on investments                                             |  |                             |        |   |      |   |        |  
|Non-affiliate investments (less than 5% owned)                                         |  |                             |       |   |      |   | 685    |  
|Affiliate investments (5% to 25% owned)                                                |  |                             |       |   |      |   | 9      |  
|Control investments (more than 25% owned)                                              |  |                             | 2,527  |   |      |   | (2,910 | )
|                                                                                       |  |                             |        |   |      |   |        |  
|Total net realized gains (losses) on investments                                       |  |                             | 2,527  |   |      |   | (2,216 | )
|Net unrealized appreciation on investments                                             |  |                             |        |   |      |   |        |  
|Non-affiliate investments (less than 5% owned)                                         |  |                             | (1,495 | ) |      |   | 4,547  |  
|Affiliate investments (5% to 25% owned)                                                |  |                             | (203   | ) |      |   | 1,898  |  
|Control investments (more than 25% owned)                                              |  |                             | 9,946  |   |      |   | 1,409  |  
|                                                                                       |  |                             |        |   |      |   |        |  
|Total net unrealized appreciation on investments                                       |  |                             | 8,248  |   |      |   | 7,854  |  
|                                                                                       |  |                             |        |   |      |   |        |  
|Net investment gains before provision for income taxes                                 |  |                             | 10,775 |   |      |   | 5,638  |  
|Provision for income taxes                                                             |  |                             | 367    |   |      |   |       |  
|                                                                                       |  |                             |        |   |      |   |        |  
|Net income                                                                             |  | $                           | 30,454 |   |      | $ | 26,402 |  
|                                                                                       |  |                             |        |   |      |   |        |  
|Earnings per common share basic and diluted                                            |  | $                           | 0.52   |   |      | $ | 0.50   |  
|Cash distributions declared per common share                                           |  | $                           | 0.44   |   |      | $ | 0.42   |  
|Weighted average common shares outstanding                                             |  |                             | 58,067 |   |      |   | 53,197 |  
|Weighted average common shares outstanding and dilutive common stock equivalents       |  |                             | 58,134 |   |      |   | 53,197 |  

See notes to consolidated financial statements



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MCG Capital Corporation

Consolidated Statements of Changes in Net Assets (unaudited)

(in thousands, except per share amounts)



|                                                                                       |  |                             |         |   |      |   |         |  
|-------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                       |  | Three Months EndedMarch 31, |        
|                                                                                       |  | 2007                        |         |   | 2006 |  
|Operations:                                                                            |  |                             |         |   |      |   |         |  
|Net operating income before investment gains and losses and provision for income taxes |  | $                           | 20,046  |   |      | $ | 20,764  |  
|Net realized gains (losses) on investments                                             |  |                             | 2,527   |   |      |   | (2,216  | )
|Net unrealized appreciation on investments                                             |  |                             | 8,248   |   |      |   | 7,854   |  
|Provision for income taxes                                                             |  |                             | (367    | ) |      |   |        |  
|                                                                                       |  |                             |         |   |      |   |         |  
|Net increase in net assets resulting from operations                                   |  |                             | 30,454  |   |      |   | 26,402  |  
|                                                                                       |  |                             |         |   |      |   |         |  
|                                                                                       |  |                            
|Shareholder distributions:                                                             |  |                             |         |   |      |   |         |  
|Distributions declared                                                                 |  |                             | (26,100 | ) |      |   | (21,905 | )
|                                                                                       |  |                             |         |   |      |   |         |  
|Net decrease in net assets resulting from shareholder distributions                    |  |                             | (26,100 | ) |      |   | (21,905 | )
|                                                                                       |  |                             |         |   |      |   |         |  
|Capital share transactions:                                                            |  |                             |         |   |      |   |         |  
|Issuance of common stock                                                               |  |                             | 57      |   |      |   | 34      |  
|Repayment of stockholder loans                                                         |  |                             | 4       |   |      |   | 582     |  
|Amortization of non-employee director restricted stock awards                          |  |                             | 164     |   |      |   |        |  
|Amortization of employee restricted stock awards                                       |  |                             | 2,982   |   |      |   | 610     |  
|                                                                                       |  |                             |         |   |      |   |         |  
|Net increase in net assets resulting from capital share transactions                   |  |                             | 3,207   |   |      |   | 1,226   |  
|                                                                                       |  |                             |         |   |      |   |         |  
|Total increase in net assets                                                           |  |                             | 7,561   |   |      |   | 5,723   |  
|Net assets at beginning of period                                                      |  |                             | 753,137 |   |      |   | 666,087 |  
|                                                                                       |  |                             |         |   |      |   |         |  
|Net assets at end of period                                                            |  | $                           | 760,698 |   |      | $ | 671,810 |  
|                                                                                       |  |                             |         |   |      |   |         |  
|                                                                                       |  |                            
|Net asset value per common share                                                       |  | $                           | 12.79   |   |      | $ | 12.59   |  
|                                                                                       |  |                            
|Common shares outstanding at end of period                                             |  |                             | 59,472  |   |      |   | 53,375  |  

See notes to consolidated financial statements



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MCG Capital Corporation

Consolidated Statements of Cash Flows (unaudited)

(in thousands)



|                                                                                  |  |                             |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | --------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                  |  | Three Months EndedMarch 31, |         
|                                                                                  |  | 2007                        |          |   | 2006 |  
|Operating activities                                                              |  |                             |          |   |      |   |          |  
|Net income                                                                        |  | $                           | 30,454   |   |      | $ | 26,402   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                             |          |   |      |   |          |  
|Depreciation                                                                      |  |                             | 75       |   |      |   | 80       |  
|Amortization of non-employee director restricted stock awards                     |  |                             | 164      |   |      |   |         |  
|Amortization of employee restricted stock awards                                  |  |                             | 2,982    |   |      |   | 610      |  
|Amortization of deferred debt issuance costs                                      |  |                             | 448      |   |      |   | 1,244    |  
|Net realized (gains) losses on investments                                        |  |                             | (2,527   | ) |      |   | 2,216    |  
|Net change in unrealized appreciation on investments                              |  |                             | (8,248   | ) |      |   | (7,854   | )
|(Increase) decrease in cashsecuritization accounts from interest collections     |  |                             | (19      | ) |      |   | 3,419    |  
|(Increase) decrease in interest receivable                                        |  |                             | (1,218   | ) |      |   | 2,103    |  
|Increase in accrued payment-in-kind interest and dividends                        |  |                             | (8,580   | ) |      |   | (3,849   | )
|Decrease in other assets                                                          |  |                             | 5,445    |   |      |   | 4,089    |  
|Increase (decrease) in unearned income                                            |  |                             | 727      |   |      |   | (739     | )
|Increase (decrease) in interest payable                                           |  |                             | 902      |   |      |   | (1,601   | )
|Decrease in other liabilities                                                     |  |                             | (3,403   | ) |      |   | (3,381   | )
|                                                                                  |  |                             |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                             | 17,202   |   |      |   | 22,739   |  
|                                                                                  |  |                             |          |   |      |   |          |  
|Investing activities                                                              |  |                             |          |   |      |   |          |  
|Originations, draws and advances on loans                                         |  |                             | (140,193 | ) |      |   | (101,962 | )
|Principal payments on loans                                                       |  |                             | 79,372   |   |      |   | 122,297  |  
|Purchase of equity investments                                                    |  |                             | (24,655  | ) |      |   | (18,864  | )
|Proceeds from sales of equity investments                                         |  |                             | 9,954    |   |      |   | 814      |  
|(Purchase) disposal of premises, equipment and software                           |  |                             | (297     | ) |      |   | 53       |  
|                                                                                  |  |                             |          |   |      |   |          |  
|Net cash (used in) provided by investing activities                               |  |                             | (75,819  | ) |      |   | 2,338    |  
|                                                                                  |  |                             |          |   |      |   |          |  
|Financing activities                                                              |  |                             |          |   |      |   |          |  
|Net proceeds from borrowings                                                      |  |                             | 84,219   |   |      |   | 25,091   |  
|Increase in cashsecuritization accounts for paydown of principal on debt         |  |                             | (4,916   | ) |      |   | (33,174  | )
|Payment of financing costs                                                        |  |                             | (227     | ) |      |   | (22      | )
|Distributions paid                                                                |  |                             | (24,652  | ) |      |   | (20,967  | )
|Issuance of common stock, net of costs                                            |  |                             | 57       |   |      |   | 34       |  
|Repayment of stockholder loans                                                    |  |                             | 4        |   |      |   | 582      |  
|                                                                                  |  |                             |          |   |      |   |          |  
|Net cash provided by (used in) financing activities                               |  |                             | 54,485   |   |      |   | (28,456  | )
|                                                                                  |  |                             |          |   |      |   |          |  
|Decrease in cash and cash equivalents                                             |  |                             | (4,132   | ) |      |   | (3,379   | )
|Cash and cash equivalents at beginning of period                                  |  |                             | 21,691   |   |      |   | 45,626   |  
|                                                                                  |  |                             |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                        |  | $                           | 17,559   |   |      | $ | 42,247   |  
|                                                                                  |  |                             |          |   |      |   |          |  
|Supplemental disclosures                                                          |  |                             |          |   |      |   |          |  
|Interest paid                                                                     |  | $                           | 7,795    |   |      | $ | 9,269    |  
|Income taxes paid                                                                 |  |                             | 30       |   |      |   | 137      |  

See notes to consolidated financial statements



6



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments (unaudited)

March 31, 2007

(dollars in
thousands)



|                                                                                                |  |                                              |         |                                                                                      |        |           |        |        |   |              |        |   |             
|----------------------------------------------------------------------------------------------- |  | -------------------------------------------- | ------- | ------------------------------------------------------------------------------------ | ------ | --------- | ------ | ------ | - | ------------ | ------ | - | ------------
|Portfolio Company                                                                               |  | Industry                                     |         | Investment (8)                                                                       |        | Principal |        | Cost   |   | FairValue   
|Control Investments: Majority-owned (5):                                                        |  |                                              |         |                                                                                      |        |           |        |        |  
|Broadview Networks Holdings, Inc. (2)                                                           |  | Communications- CLEC                         |         | Series A Preferred Stock (87,254 shares) Series A-1
Preferred Stock (100,702 shares) |        |           |        |        | $ | 67,75561,074 |        | $ | 77,47589,417
|                                                                                                |  | Common Stock (4,698,987 shares)              |         |                                                                                      |        |           |        |       |   |              |      
|Chesapeake Tower Holdings, LLC                                                                  |  | Communications- Other                        |         | Senior Debt (11.4%, Due 5/10)                                                        |        | $         | 400    |        |   | 400          |        |   | 400         
|                                                                                                |  | Preferred LLC Interest (3,139 units)         |         |                                                                                      |        |           |        | 3,139  |   |              | 3,139 
|                                                                                                |  | Common LLC Interest (4,000 units)            |         |                                                                                      |        |           |        |       |   |              |      
|Cleartel Communications, Inc. (2) (6)                                                           |  | Communications- CLEC                         |         | Subordinated Debt (14.6%, Due 12/10-3/11)                                            |        |           | 80,313 |        |   | 80,313       |        |   | 80,313      
|                                                                                                |  | Subordinated Unsecured Debt (15.1%,Due 3/11) |         |                                                                                      | 200    |           |        | 200    |   |              | 200   
|                                                                                                |  | Preferred Stock (57,862 shares)              |         |                                                                                      |        |           |        | 50,613 |   |              | 612   
|                                                                                                |  | Common Stock (9 shares)                      |         |                                                                                      |        |           |        | 540    |   |              |      
|                                                                                                |  | Guaranty ($7,032)                            |         |                                                                                      |        |           |        |        |   |              |       
|Coastal Sunbelt, LLC (2)                                                                        |  | Food Services                                |         | Senior Debt (9.4%, Due 1/12) (1)                                                     |        |           | 9,500  |        |   | 9,500        |        |   | 9,500       
|                                                                                                |  | Subordinated Debt (15.0%, Due 1/13)          |         |                                                                                      | 7,805  |           |        | 7,805  |   |              | 7,805 
|                                                                                                |  | Preferred LLC Interest (55,800 units)        |         |                                                                                      |        |           |        | 5,738  |   |              | 5,738 
|                                                                                                |  | Warrants to purchase Class B Common Stock    |         |                                                                                      |        |           |        |       |   |              |      
|Helicon Cable Holdings, LLC (2)                                                                 |  | Cable                                        |         | Senior Debt (10.4%, Due 12/12) (1)                                                   |        |           | 19,291 |        |   | 19,291       |        |   | 19,291      
|                                                                                                |  | Subordinated Debt (14.3%, Due 6/13) (1)      |         |                                                                                      | 10,594 |           |        | 10,594 |   |              | 10,594
|                                                                                                |  | Preferred LLC Interest (82,500 units)        |         |                                                                                      |        |           |        | 9,405  |   |              | 9,405 
|                                                                                                |  | Standby Letter of Credit ($300)              |         |                                                                                      |        |           |        |        |   |              |       
|Jet Plastica Investors, LLC (2)                                                                 |  | Plastic Products                             |         | Subordinated Debt (14.0%, Due 3/13) (1)                                              |        |           | 26,290 |        |   | 26,290       |        |   | 26,290      
|                                                                                                |  | Preferred LLC Interest (301,595 units)       |         |                                                                                      |        |           |        | 31,488 |   |              | 39,254
|JupiterKagan, Inc. (2)                                                                          |  | Information Services                         |         | Senior Debt (12.0%, Due 3/10) (1)                                                    |        |           | 5,649  |        |   | 5,649        |        |   | 5,649       
|                                                                                                |  | Series A Preferred Stock (100,000 shares)    |         |                                                                                      |        |           |        | 10,000 |   |              | 10,000
|                                                                                                |  | Common Stock (770,000 shares)                |         |                                                                                      |        |           |        |       |   |              |      
|                                                                                                |  | Standby Letter of Credit ($225)              |         |                                                                                      |        |           |        |        |   |              |       
|                                                                                                |  | Guaranty ($1,287)                            |         |                                                                                      |        |           |        |        |   |              |       
|Midwest Tower Partners, LLC (2)                                                                 |  | Communications- Other                        |         | Common LLC Interest (79,171 units)                                                   |        |           |        |        |   | 55           |        |   | 1,393       
|                                                                                                |  |                                              |         |                                                                                      |        |           |        |        |   |              |       
|Orbitel Holdings, LLC (2)                                                                       |  | Cable                                        |         | Senior Debt (11.4%, Due 3/12) (1)                                                    |        |           | 14,095 |        |   | 14,095       |        |   | 14,095      
|                                                                                                |  | Preferred LLC Interest (120,000 units)       |         |                                                                                      |        |           |        | 12,132 |   |              | 12,132
|                                                                                                |  | Standby Letter of Credit ($95)               |         |                                                                                      |        |           |        |        |   |              |       
|RadioPharmacy Investors, LLC (2)                                                                |  | Healthcare                                   |         | Senior Debt (9.9%, Due 12/10) (1)                                                    |        |           | 7,000  |        |   | 7,000        |        |   | 7,000       
|                                                                                                |  | Subordinated Debt (15.0%, Due 12/11) (1)     |         |                                                                                      | 9,327  |           |        | 9,327  |   |              | 9,327 
|                                                                                                |  | Preferred LLC Interest (70,000 units)        |         |                                                                                      |        |           |        | 7,667  |   |              | 10,593
|Superior Industries Investors, LLC (2)                                                          |  | Sporting Goods                               |         | Subordinated Debt (14.0%, Due 3/13) (1)                                              |        |           | 17,404 |        |   | 17,404       |        |   | 17,404      
|                                                                                                |  | Preferred LLC Interest (125,400 units)       |         |                                                                                      |        |           |        | 13,084 |   |              | 15,499
|Superior Publishing Corporation (2)                                                             |  | Newspaper                                    |         | Subordinated Debt (20.0%, Due 10/10) (1)                                             |        |           | 21,055 |        |   | 19,022       |        |   | 19,022      
|                                                                                                |  | Series A-1 Preferred Stock (7,999 shares)    |         |                                                                                      |        |           |        | 7,999  |   |              | 9,104 
|                                                                                                |  | Common Stock (100 shares)                    |         |                                                                                      |        |           |        | 365    |   |              |      
|Working Mother Media, Inc. (6)                                                                  |  | Publishing                                   |         | Senior Debt (8.8%, Due 12/08)                                                        |        |           | 18,119 |        |   | 11,537       |        |   | 11,537      
|                                                                                                |  | Class A Preferred Stock (12,497 shares)      |         |                                                                                      |        |           |        | 12,497 |   |              | 5,180 
|                                                                                                |  | Class B Preferred Stock (1 share)            |         |                                                                                      |        |           |        | 1      |   |              |      
|                                                                                                |  | Class C Preferred Stock (1 share)            |         |                                                                                      |        |           |        | 1      |   |              |      
|                                                                                                |  | Common Stock (510 shares)                    |         |                                                                                      |        |           |        | 1      |   |              |      
|                                                                                                |  | Guaranty ($387)                              |         |                                                                                      |        |           |        |        |   |              |       
|Total Control Investments: Majority-owned (represents 39.0% of total investments at
fair value) |  |                                              | 531,981 |                                                                                      |        | 527,368  

See notes to consolidated financial statements



7



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments (unaudited)

March 31, 2007

(dollars in thousands)



|                                                                                                   |  |                                                             |  |                                         |        |           |        |        |         |           |        |   |       
|-------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------- |  | --------------------------------------- | ------ | --------- | ------ | ------ | ------- | --------- | ------ | - | ------
|Portfolio Company                                                                                  |  | Industry                                                    |  | Investment (8)                          |        | Principal |        | Cost   |         | FairValue
|Control Investments: Non-majority owned (4):                                                       |  |                                                             |  |                                         |        |           |        |        |        
|Crystal Media Network, LLC (6) (7)                                                                 |  | Broadcasting                                                |  | LLC Interest                            |        |           |        |        | $       | 3,060     |        | $ | 659   
|Intran Media, LLC                                                                                  |  | Other Media                                                 |  | Senior Debt (9.9%, Due 12/11) (1)       |        | $         | 12,000 |        |         | 12,000    |        |   | 12,000
|                                                                                                   |  | Preferred Units (86,000 units)                              |  |                                         |        |           |        | 8,873  |         |           | 8,873 
|National Product Services, Inc. (2)                                                                |  | Business Services                                           |  | Senior Debt (13.2%, Due 6/09)           |        |           | 12,455 |        |         | 5,723     |        |   | 12,506
|                                                                                                   |  | Subordinated Debt (16.0%, Due 6/09)                         |  |                                         | 12,064 |           |        | 10,225 |         |           | 3,856 
|                                                                                                   |  | Common Stock (995,428 shares)                               |  |                                         |        |           |        |       |         |           |      
|PremierGarage Holdings, LLC (2)                                                                    |  | Home Furnishings                                            |  | Senior Debt (10.1%, Due 6/10-12/10)     |        |           | 10,400 |        |         | 10,400    |        |   | 10,400
|                                                                                                   |  | Preferred LLC Units (445 units)                             |  |                                         |        |           |        | 4,683  |         |           | 4,683 
|                                                                                                   |  | Common LLC Units (356 units)                                |  |                                         |        |           |        |       |         |           | 1,419 
|Total Control Investments: Non-majority-owned (represents 4.0% of total investments at fair value) |  |                                                             |  |                                         |        | 54,964    |        |        | 54,396 
|Total Control Investments: (represents 43.0% of total investments at fair value)                   |  |                                                             |  |                                         |        | 586,945   |        |        | 581,764
|Affiliate Investments (3):                                                                         |  |                                                             |  |                                         |        |           |        |        |        
|Active Brands International, Inc. (2) (9)                                                          |  | Clothing & Accessories                                      |  | Subordinated Debt (13.0%, Due 2/11) (1) |        |           | 10,000 |        |         | 10,000    |        |   | 10,000
|                                                                                                   |  | Class A Common Stock (1,500 shares)                         |  |                                         |        |           |        | 1,500  |         |           | 1,439 
|                                                                                                   |  | Warrants to purchase Common Stock (expire 2/16)             |  |                                         |        |           |        | 331    |         |           | 504   
|Advanced Sleep Concepts, Inc. (2)                                                                  |  | Home Furnishings                                            |  | Senior Debt (13.8%, Due 10/11) (1)      |        |           | 7,000  |        |         | 7,000     |        |   | 7,000 
|                                                                                                   |  | Subordinated Debt 16.0%, Due 04/12) (1)                     |  |                                         | 4,586  |           |        | 4,586  |         |           | 4,586 
|                                                                                                   |  | Common Stock (423 shares)                                   |  |                                         |        |           |        | 524    |         |           | 524   
|                                                                                                   |  | Warrants to purchase Common Stock (expire 10/16)            |  |                                         |        |           |        | 348    |         |           | 348   
|Cherry Hill Holdings, Inc. (2)                                                                     |  | Photographic Studio                                         |  | Senior Debt (12.9%, Due 8/11) (1)       |        |           | 12,213 |        |         | 12,213    |        |   | 12,213
|                                                                                                   |  | Series A Preferred Stock (750 shares)                       |  |                                         |        |           |        | 794    |         |           | 794   
|iVerify. US Inc. (6)                                                                               |  | Communications-Other                                        |  | Preferred Stock (54 shares)             |        |           |        |        |         | 578       |        |   |      
|                                                                                                   |  | Common Stock (20 shares)                                    |  |                                         |        |           |        | 550    |         |           |      
|On Target Media, LLC                                                                               |  | Other Media                                                 |  | Class A LLC Interest (68 units)         |        |           |        |        |         | 1,882     |        |   | 1,882 
|                                                                                                   |  | Class B LLC Interest (68 units)                             |  |                                         |        |           |        |       |         |           | 1,810 
|Stratford School Holdings, Inc. (2)                                                                |  | Education                                                   |  | Senior Debt (9.9%, Due 7/11-9/11) (1)   |        |           | 14,500 |        |         | 14,500    |        |   | 14,500
|                                                                                                   |  | Subordinated Debt (14.0%, Due 12/11) (1)                    |  |                                         | 6,718  |           |        | 6,718  |         |           | 6,718 
|                                                                                                   |  | Preferred Stock (10,000 shares)                             |  |                                         |        |           |        | 90     |         |           | 3,037 
|                                                                                                   |  | Warrants to purchase Common Stock (expire 5/15)             |  |                                         |        |           |        | 67     |         |           | 1,039 
|Sunshine Media Delaware, LLC (2)                                                                   |  | Publishing                                                  |  | Senior Debt (16.1%, Due 12/08)          |        |           | 13,711 |        |         | 12,399    |        |   | 12,399
|                                                                                                   |  | Class A LLC Interest (563,808 units)                        |  |                                         |        |           |        | 564    |         |           | 357   
|                                                                                                   |  | Warrants to purchase Class B LLC interest (expire 1/11)     |  |                                         |        |           |        |       |         |           |      
|TNR Entertainment Corp.                                                                            |  | DVD Rental                                                  |  | Senior Debt (10.4%, Due 7/10) (1)       |        |           | 12,500 |        |         | 12,500    |        |   | 12,500
|                                                                                                   |  | Subordinated Debt (14.0%, Due 1/11) (1)                     |  |                                         | 13,057 |           |        | 13,057 |         |           | 13,057
|                                                                                                   |  | Series D Preferred Stock (1,806,452 shares)                 |  |                                         |        |           |        | 3,000  |         |           | 3,000 
|                                                                                                   |  | Warrants to purchase Series D Preferred Stock (expire 7/16) |  |                                         |        |           |        |       |         |           |      
|XFone, Inc. (6)                                                                                    |  | Communications-Other                                        |  | Common Stock (868,946 shares)           |        |           |        |        |         | 2,485     |        |   | 2,113 
|                                                                                                   |  | Warrants to purchase Common Stock(expire 3/11)              |  |                                         |        |           |        |       |         |           |      
|Total Affiliate Investments (represents 8.1% of total investments at fair value)                   |  |                                                             |  |                                         |        | 105,686   |        |        | 109,820

See notes to consolidated financial statements



8



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments (unaudited)

March 31, 2007

(dollars in thousands)



|                                                |  |                                                  |  |                                                          |        |           |        |        |   |            |        |   |       
|----------------------------------------------- |  | ------------------------------------------------ |  | -------------------------------------------------------- | ------ | --------- | ------ | ------ | - | ---------- | ------ | - | ------
|Portfolio Company                               |  | Industry                                         |  | Investment (8)                                           |        | Principal |        | Cost   |   | Fair Value
|Non-Affiliate Investments (less than 5% owned): |  |                                                  |  |                                                          |        |           |        |        |  
|Allens TV Cable Service, Inc.                  |  | Cable                                            |  | Senior Debt (12.1%, Due 12/12) (1)                       |        | $         | 7,848  |        | $ | 7,848      |        | $ | 7,848 
|                                                |  | Subordinated Debt (12.1%, Due 12/12) (1)         |  |                                                          | 2,129  |           |        | 2,129  |   |            | 2,129 
|                                                |  | Warrants to purchase Common Stock (expire 11/15) |  |                                                          |        |           |        |       |   |            |      
|Amerifit Nutrition, Inc. (2)                    |  | Drugs                                            |  | Senior Debt (12.1%, Due 3/10) (1)                        |        |           | 5,379  |        |   | 5,379      |        |   | 5,379 
|B & H Education, Inc. (2)                       |  | Education                                        |  | Senior Debt (9.9%, Due 3/10) (1)                         |        |           | 3,750  |        |   | 3,750      |        |   | 3,750 
|                                                |  | Series A-1 Preferred Stock ( 5,384 shares)       |  |                                                          |        |           |        | 1,221  |   |            | 1,548 
|Badoud Enterprises, Inc. (2)                    |  | Newspaper                                        |  | Senior Debt (10.4%, Due 9/11) (1)                        |        |           | 4,599  |        |   | 4,599      |        |   | 4,599 
|BLI Holdings, Inc. (2)                          |  | Drugs                                            |  | Subordinated Debt (13.1%, Due 3/10) (1)                  |        |           | 10,000 |        |   | 10,000     |        |   | 10,000
|Builders First Source, Inc.                     |  | Building & Development                           |  | Senior Debt (7.9%, Due 8/11) (1)                         |        |           | 884    |        |   | 884        |        |   | 871   
|Cervalis LLC                                    |  | Business Services                                |  | Senior Debt (10.1%, Due 3/12) (1)                        |        |           | 5,000  |        |   | 5,000      |        |   | 5,000 
|Coastal Sunbelt Real Estate, Inc.               |  | Real Estate Investments                          |  | Senior Debt (8.9%, Due 1/12)                             |        |           | 10,500 |        |   | 10,500     |        |   | 10,500
|                                                |  | Subordinated Debt (15.0%, Due 7/12)              |  |                                                          | 2,014  |           |        | 2,014  |   |            | 2,014 
|                                                |  | Series A-2 Preferred Stock (20,000 shares)       |  |                                                          |        |           |        | 2,057  |   |            | 2,057 
|                                                |  | Warrants to purchase Class B Common Stock        |  |                                                          |        |           |        |       |   |            |      
|Communications & Power Industries, Inc.         |  | Aerospace & Defense                              |  | Senior Debt (7.6%, Due 7/10) (1)                         |        |           | 741    |        |   | 741        |        |   | 744   
|Communicom Broadcasting, LLC (2)                |  | Broadcasting                                     |  | Senior Debt (12.4%, Due 2/11) (1)                        |        |           | 8,082  |        |   | 8,082      |        |   | 8,082 
|Community Media Group, Inc. (2)                 |  | Newspaper                                        |  | Senior Debt (9.9%, Due 9/10) (1)                         |        |           | 19,402 |        |   | 19,402     |        |   | 19,402
|Cornerstone Healthcare Group Holding, Inc.      |  | Healthcare                                       |  | Subordinated Debt (14.0%, Due 7/12) (1)                  |        |           | 7,242  |        |   | 7,242      |        |   | 7,242 
|Country Road Communications LLC (2)             |  | Communications-Other                             |  | Subordinated Debt (13.2%, Due 7/13) (1)                  |        |           | 13,000 |        |   | 13,000     |        |   | 13,000
|Creative Loafing, Inc. (2)                      |  | Newspaper                                        |  | Senior Debt (12.0%, Due 6/10) (1)                        |        |           | 18,275 |        |   | 18,275     |        |   | 18,275
|Crescent Publishing Company LLC (2)             |  | Newspaper                                        |  | Senior Debt (15.1%, Due 6/09) (1)                        |        |           | 7,574  |        |   | 7,574      |        |   | 7,574 
|Cruz Bay Publishing, Inc.                       |  | Publishing                                       |  | Subordinated Debt (12.4%, Due 12/13)                     |        |           | 20,000 |        |   | 20,000     |        |   | 20,000
|CWP/RMK Acquisition Corp                        |  | Home Furnishings                                 |  | Senior Debt (8.9%, Due 6/11) (1)                         |        |           | 6,250  |        |   | 6,250      |        |   | 6,250 
|                                                |  | Subordinated Debt (13.4%, Due 12/12) (1)         |  |                                                          | 11,750 |           |        | 11,750 |   |            | 11,750
|                                                |  | Common Stock (500 shares)                        |  |                                                          |        |           |        | 500    |   |            | 279   
|Dayton Parts Holdings, LLC (2)                  |  | Auto Parts                                       |  | Subordinated Debt (12.5%, Due 6/11) (1)                  |        |           | 21,500 |        |   | 21,500     |        |   | 21,500
|                                                |  | Preferred LLC Interest (16,371 units)            |  |                                                          |        |           |        | 589    |   |            | 589   
|                                                |  | Class A Common LLC Interest (10,914 units)       |  |                                                          |        |           |        | 408    |   |            | 630   
|D&B Towers, LLC                                 |  | Communications-Other                             |  | Senior Debt (15.4%, Due 6/08) (1)                        |        |           | 5,457  |        |   | 5,458      |        |   | 4,305 
|dick clark productions, inc. (6)                |  | Broadcasting                                     |  | Common Stock (235,714 shares)                            |        |           |        |        |   | 210        |        |   | 510   
|                                                |  | Warrants to purchase Common Stock (expire 7/11)  |  |                                                          |        |           |        | 858    |   |            | 5,049 
|The e-Media Club, LLC (6)                       |  | Investment Fund                                  |  | LLC Interest                                             |        |           |        |        |   | 88         |        |   | 23    
|EAS Group, Inc.                                 |  | Technology                                       |  | Subordinated Debt (19.0%, Due 4/11) (1)                  |        |           | 11,875 |        |   | 11,875     |        |   | 11,875
|Empower IT Holdings, Inc. (2)                   |  | Information Services                             |  | Senior Debt (11.9%, Due 5/12) (1)                        |        |           | 6,313  |        |   | 6,313      |        |   | 6,313 
|                                                |  | Subordinated Debt (14.5%, Due 6/12) (1)          |  |                                                          | 5,001  |           |        | 5,001  |   |            | 5,001 
|Equibrand Holding Corporation (2)               |  | Leisure Activities                               |  | Senior Debt (12.4%, Due 9/10) (1)                        |        |           | 4,640  |        |   | 4,640      |        |   | 4,640 
|                                                |  | Subordinated Debt (16.0%, Due 3/11) (1)          |  |                                                          | 9,611  |           |        | 9,611  |   |            | 9,611 
|Flexsol Packaging Corp.                         |  | Chemicals/Plastics                               |  | Subordinated Debt (12.9%, Due 12/12) (1)                 |        |           | 3,000  |        |   | 3,000      |        |   | 2,640 
|Golden Knight II CLO, Ltd.                      |  | Diversified Financial Services                   |  | Income Notes (due 4/19)                                  |        |           |        |        |   | 3,575      |        |   | 3,575 
|GoldenSource Holdings Inc. (6)                  |  | Technology                                       |  | Warrants to purchase Class A Common Stock (expire 10/08) |        |           |        |        |   |           |        |   |      
|Home Interiors & Gifts, Inc.                    |  | Home Furnishings                                 |  | Senior Debt (10.4%, Due 3/11)                            |        |           | 4,434  |        |   | 4,434      |        |   | 3,270 

See notes to consolidated financial statements



9



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments (unaudited)

March 31, 2007

(dollars in thousands)



|                                          |  |                                                         |  |                                                 |        |           |        |        |   |            |        |   |       
|----------------------------------------- |  | ------------------------------------------------------- |  | ----------------------------------------------- | ------ | --------- | ------ | ------ | - | ---------- | ------ | - | ------
|Portfolio Company                         |  | Industry                                                |  | Investment (8)                                  |        | Principal |        | Cost   |   | Fair Value
|Jenzabar, Inc. (2)                        |  | Technology                                              |  | Senior Preferred Stock (5,000 shares)           |        |           |        |        | $ | 6,519      |        | $ | 6,519 
|                                          |  | Subordinated Preferred Stock (109,800 shares)           |  |                                                 |        |           |        | 1,098  |   |            | 1,098 
|                                          |  | Warrants to purchase Common Stock (expire 4/16)         |  |                                                 |        |           |        | 422    |   |            | 17,109
|Jupitermedia Corporation (6)              |  | Information Services                                    |  | Common Stock (148,373 shares)                   |        |           |        |        |   | 2,114      |        |   | 982   
|Legacy Cabinets, Inc                      |  | Home Furnishings                                        |  | Subordinated Debt (12.9%, Due 8/13) (1)         |        | $         | 3,000  |        |   | 3,000      |        |   | 3,000 
|Marietta Intermediate Holding Corporation |  | Cosmetics                                               |  | Subordinated Debt (16.3%, Due 12/11) (1)        |        |           | 2,008  |        |   | 2,008      |        |   | 1,737 
|The Matrixx Group, Incorporated (2)       |  | Plastic Products                                        |  | Subordinated Debt (13.8%, Due 9/13) (1)         |        |           | 16,020 |        |   | 16,020     |        |   | 16,020
|MCI Holdings, LLC (2)                     |  | Healthcare                                              |  | Subordinated Debt (12.7%, Due 4/13) (1)         |        |           | 29,990 |        |   | 29,990     |        |   | 29,990
|                                          |  | Class A LLC Interest (4,712,042 units)                  |  |                                                 |        |           |        | 3,000  |   |            | 3,182 
|Metrologic Instruments, Inc.              |  | Technology                                              |  | Subordinated Debt (11.8%, Due 12/13) (1)        |        |           | 3,000  |        |   | 3,000      |        |   | 3,037 
|Metropolitan Telecommunications           |  | Communications-CLEC                                     |  | Senior Debt (11.5%, Due 6/10-9/10) (1)          |        |           | 20,300 |        |   | 20,300     |        |   | 20,300
|                                          |  | Subordinated Debt (15.4%, Due 12/10) (1)                |  |                                                 | 10,929 |           |        | 10,929 |   |            | 10,929
|Holding Company (2)                       |  |                                                         |  | Warrants to purchase Common Stock (expire 9/13) |        |           |        |        |   | 1,843      |        |   | 8,099 
|MicroCal Holdings, LLC (2)                |  | Laboratory Instruments                                  |  | Senior Debt (9.9%, Due 3/10-9/10) (1)           |        |           | 12,390 |        |   | 12,390     |        |   | 12,390
|                                          |  | Subordinated Debt (14.5%, Due 3/11) (1)                 |  |                                                 | 9,115  |           |        | 9,115  |   |            | 9,115 
|Micro Dental Laboratories (2)             |  | Healthcare                                              |  | Senior Debt (10.8%, Due 8/07) (1)               |        |           | 12,977 |        |   | 12,977     |        |   | 12,977
|                                          |  | Subordinated Debt (15.0%, Due 8/07) (1)                 |  |                                                 | 15,265 |           |        | 15,265 |   |            | 15,265
|Miles Media Holding, LLC (2)              |  | Publishing                                              |  | Senior Debt (12.9%, Due 6/12) (1)               |        |           | 8,938  |        |   | 8,938      |        |   | 8,938 
|                                          |  | Subordinated Debt (16.4%, Due 12/12) (1)                |  |                                                 | 4,000  |           |        | 4,000  |   |            | 4,000 
|                                          |  | Warrants to purchase LLC units (expire 6/09 and 6/15)   |  |                                                 |        |           |        | 439    |   |            | 1,914 
|National Display Holdings, LLC (2)        |  | Electronics                                             |  | Senior Debt (10.5%, Due 12/10-12/11) (1)        |        |           | 22,500 |        |   | 22,500     |        |   | 22,500
|                                          |  | Subordinated Debt (15.0%, Due 12/12) (1)                |  |                                                 | 19,248 |           |        | 19,248 |   |            | 19,248
|                                          |  | Class A Common LLC Interest (1,000,000 units)           |  |                                                 |        |           |        | 333    |   |            | 583   
|New Century Companies, Inc. (6)           |  | Industrial Equipment                                    |  | Warrants to purchase Common Stock (expire 6/10) |        |           |        |        |   |           |        |   |      
|PartMiner, Inc. (2)                       |  | Information Services                                    |  | Senior Debt (11.8%, Due 6/09) (1)               |        |           | 2,341  |        |   | 2,341      |        |   | 2,341 
|Philadelphia Newspapers, LLC              |  | Newspapers                                              |  | Subordinated Debt (16.0%, Due 6/14) (1)         |        |           | 5,013  |        |   | 5,013      |        |   | 5,013 
|Powercom Corporation (2)                  |  | Communications-CLEC                                     |  | Senior Debt (12.0%, Due 12/06)                  |        |           | 1,798  |        |   | 1,798      |        |   | 1,798 
|                                          |  | Warrants to purchase Class A Common Stock (expire 6/14) |  |                                                 |        |           |        | 286    |   |            |      
|Quantum Medical Holdings, LLC (2)         |  | Laboratory Instruments                                  |  | Senior Debt (11.4%, Due 5/11) (1)               |        |           | 15,500 |        |   | 15,500     |        |   | 15,500
|                                          |  | Subordinated Debt (15.0%, Due 12/11) (1)                |  |                                                 | 18,091 |           |        | 18,091 |   |            | 18,091
|                                          |  | Preferred LLC Interest (1,000,000 units)                |  |                                                 |        |           |        | 435    |   |            | 1,021 
|Restaurant Technologies, Inc.             |  | Food Services                                           |  | Subordinated Debt (15.5%, Due 2/12) (1)         |        |           | 25,408 |        |   | 25,408     |        |   | 25,408
|                                          |  | Series A-4 Convertible Preferred Stock (7,813 shares)   |  |                                                 |        |           |        | 299    |   |            | 299   
|Sagamore Hill Broadcasting, LLC (2)       |  | Broadcasting                                            |  | Senior Debt (10.6%, Due 11/09) (1)              |        |           | 14,000 |        |   | 14,000     |        |   | 14,000

See notes to consolidated financial statements



10



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments (unaudited)

March 31, 2007

(dollars in thousands)



|                                                                                      |  |                                                                  |  |                                              |       |           |        |       |   |           |            |       |   |        | 
|------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------- |  | -------------------------------------------- | ----- | --------- | ------ | ----- | - | --------- | ---------- | ----- | - | ------ | 
|Portfolio Company                                                                     |  | Industry                                                         |  | Investment (8)                               |       | Principal |        | Cost  |   |           | Fair Value |      
|Summit Business Media Intermediate Holding Company, LLC                               |  | Information Services                                             |  | Subordinated Debt (12.3%, Due 12/13) (1)     |       | $         | 6,000  |       | $ | 6,000     |            |       | $ | 6,000  | 
|Teleguam Holdings, LLC (2)                                                            |  | Communications-Other                                             |  | Subordinated Debt (12.4%, Due 10/12) (1)     |       |           | 20,000 |       |   | 20,000    |            |       |   | 20,000 | 
|Total Sleep Holdings, Inc. (2) (6)                                                    |  | Healthcare                                                       |  | Subordinated Debt (16.1%, Due 9/11)          |       |           | 23,575 |       |   | 23,229    |            |       |   | 19,502 | 
|ValuePage, Inc. (6)                                                                   |  | Communications-Other                                             |  | Senior Debt (12.8%, Due 6/08)                |       |           | 1,156  |       |   | 1,085     |            |       |   | 1,085  | 
|Velocity Technology Enterprises, Inc. (2)                                             |  | Business Services                                                |  | Senior Debt (9.6%, Due 12/12)                |       |           | 11,500 |       |   | 11,500    |            |       |   | 11,500 | 
|                                                                                      |  | Series A Preferred Stock (1,506,602 Shares)                      |  |                                              |       |           |        | 1,500 |   |           |            | 1,500 |  
|VS&A-PBI Holding LLC (6)                                                              |  | Publishing                                                       |  | LLC Interest                                 |       |           |        |       |   | 500       |            |       |   |       | 
|VOX Communications Group Holdings, LLC (2)                                            |  | Broadcasting                                                     |  | Senior Debt (13.6%, Due 12/07-6/10) (1)      |       |           | 11,108 |       |   | 11,000    |            |       |   | 11,000 | 
|                                                                                      |  | Convertible Preferred Subordinated Notes (13.4%, Due 6/15-10/16) |  |                                              | 1,390 |           |        | 1,276 |   |           |            | 905   |  
|Wicks Business Information, LLC                                                       |  | Publishing                                                       |  | Unsecured Note (10.3%, Due 2/08)             |       |           | 243    |       |   | 243       |            |       |   | 243    | 
|Wiesner Publishing Company, LLC (6)                                                   |  | Publishing                                                       |  | Warrants to purchase LLC units (expire 6/12) |       |           |        |       |   | 406       |            |       |   | 3,429  | 
|Xpressdocs Holdings, Inc (2)                                                          |  | Business Services                                                |  | Senior Debt (9.2%, Due 7/11-12/11) (1)       |       |           | 18,918 |       |   | 18,918    |            |       |   | 18,918 | 
|                                                                                      |  | Subordinated Debt (14.0%, Due 7/12) (1)                          |  |                                              | 6,113 |           |        | 6,113 |   |           |            | 6,113 |  
|                                                                                      |  | Series A Preferred Stock (161,870 shares)                        |  |                                              |       |           |        | 500   |   |           |            | 426   |  
|Total Non-Affiliate Investments (represents 48.9% of total investments at fair value) |  |                                                                  |  |                                              |       | 636,646   |        |       |   | 660,848   |           
|Total Investments                                                                     |  |                                                                  |  |                                              |       | 1,329,277 |        |       |   | 1,352,432 |           
|Unearned Income                                                                       |  |                                                                  |  |                                              |       | (10,266   | )      |       |   | (10,266   | )         
|                                                                                      |  |                                                                  |  |                                              |       |           |        |       |   |           |            |       |   |        | 
|Total Investments Net of Unearned Income                                              |  |                                                                  |  |                                              | $     | 1,319,011 |        |       | $ | 1,342,166 |           
|                                                                                      |  |                                                                  |  |                                              |       |           |        |       |   |           |            |       |   |        | 
|                                                                                      |  |                                                                  | 
|Call Options Written                                                                  |  |                                                                  |  |                                              |       |           |        |       |   |           |           
|Crystal Media Network, LLC (7)                                                        |  | Broadcasting                                                     |  | Call options written                         |       |           |        |       | $ |          |            |       | $ |       | 
|Total Call Options Written                                                            |  |                                                                  |  |                                              | $     |          |        |       | $ |          |           
|                                                                                      |  |                                                                  |  |                                              |       |           |        |       |   |           |            |       |   |        | 

See notes to consolidated financial statements



11



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2006

(dollars in
thousands)



|                                                                                                |  |                                             |  |                                              |        |           |        |        |         |           |        |   |       
|----------------------------------------------------------------------------------------------- |  | ------------------------------------------- |  | -------------------------------------------- | ------ | --------- | ------ | ------ | ------- | --------- | ------ | - | ------
|Portfolio Company                                                                               |  | Industry                                    |  | Investment (8)                               |        | Principal |        | Cost   |         | FairValue
|Control Investments: Majority-owned (5):                                                        |  |                                             |  |                                              |        |           |        |        |        
|Broadview Networks Holdings, Inc. (2)                                                           |  | Communications-CLEC                         |  | Series A Preferred Stock (87,254 shares)     |        |           |        |        | $       | 64,318    |        | $ | 74,165
|                                                                                                |  | Series A-1 Preferred Stock (100,702 shares) |  |                                              |        |           |        | 57,380 |         |           | 85,597
|                                                                                                |  | Common Stock (4,698,987 shares)             |  |                                              |        |           |        |       |         |           |      
|Chesapeake Tower Holdings, LLC                                                                  |  | Communications-Other                        |  | Senior Debt (11.4%, Due 5/10)                |        | $         | 400    |        |         | 400       |        |   | 400   
|                                                                                                |  | Preferred LLC Interest (3,139 units)        |  |                                              |        |           |        | 3,139  |         |           | 3,139 
|                                                                                                |  | Common LLC Interest (4,000 units)           |  |                                              |        |           |        |       |         |           |      
|Cleartel Communications, Inc. (2)                                                               |  | Communications-CLEC                         |  | Subordinated Debt (14.7%, Due12/10-12/11)    |        |           | 71,962 |        |         | 71,962    |        |   | 71,962
|                                                                                                |  | Preferred Stock (57,859 shares)             |  |                                              |        |           |        | 50,613 |         |           | 612   
|                                                                                                |  | Common Stock (9 shares)                     |  |                                              |        |           |        | 540    |         |           |      
|                                                                                                |  | Guaranty ($7,125)                           |  |                                              |        |           |        |        |         |           |       
|Helicon Cable Holdings, LLC (2)                                                                 |  | Cable                                       |  | Senior Debt (10.4%, Due 12/12) (1)           |        |           | 12,250 |        |         | 12,250    |        |   | 12,250
|                                                                                                |  | Subordinated Debt (14.3%, Due 6/13) (1)     |  |                                              | 7,187  |           |        | 7,187  |         |           | 7,187 
|                                                                                                |  | Preferred LLC Interest (82,500 units)       |  |                                              |        |           |        | 9,180  |         |           | 9,180 
|                                                                                                |  | Standby Letter of Credit ($300)             |  |                                              |        |           |        |        |         |           |       
|Jet Plastica Investors, LLC (2)                                                                 |  | Plastic Products                            |  | Subordinated Debt (14.0%, Due 3/13) (1)      |        |           | 26,159 |        |         | 26,159    |        |   | 26,159
|                                                                                                |  | Preferred LLC Interest (301,595 units)      |  |                                              |        |           |        | 30,893 |         |           | 30,893
|JupiterKagan, Inc. (2)                                                                          |  | Information Services                        |  | Senior Debt (12.1%, Due 3/10) (1)            |        |           | 5,349  |        |         | 5,349     |        |   | 5,349 
|                                                                                                |  | Series A Preferred Stock (100,000 shares)   |  |                                              |        |           |        | 10,000 |         |           | 10,000
|                                                                                                |  | Common Stock (770,000 shares)               |  |                                              |        |           |        |       |         |           |      
|                                                                                                |  | Standby Letter of Credit ($225)             |  |                                              |        |           |        |        |         |           |       
|                                                                                                |  | Guaranty ($1,353)                           |  |                                              |        |           |        |        |         |           |       
|Midwest Tower Partners, LLC (2)                                                                 |  | Communications-Other                        |  | Senior Debt (10.0%, 8/07)                    |        |           | 9,781  |        |         | 9,781     |        |   | 9,781 
|                                                                                                |  | Subordinated Debt (14.3%, Due 2/08) (1)     |  |                                              | 17,485 |           |        | 17,485 |         |           | 17,485
|                                                                                                |  | Preferred LLC Interest (17,563 units)       |  |                                              |        |           |        | 2,438  |         |           | 2,438 
|                                                                                                |  | Common LLC Interest (79,117 units)          |  |                                              |        |           |        | 201    |         |           | 5,213 
|RadioPharmacy Investors, LLC (2)                                                                |  | Healthcare                                  |  | Senior Debt ( 9.9%, Due 12/10) (1)           |        |           | 7,000  |        |         | 7,000     |        |   | 7,000 
|                                                                                                |  | Subordinated Debt (15.0%, Due 12/11) (1)    |  |                                              | 9,258  |           |        | 9,258  |         |           | 9,258 
|                                                                                                |  | Preferred LLC Interest (70,000 units)       |  |                                              |        |           |        | 7,522  |         |           | 10,657
|Superior Industries Investors, LLC (2)                                                          |  | Sporting Goods                              |  | Subordinated Debt (14.0%, Due 3/13-3/15) (1) |        |           | 14,083 |        |         | 14,083    |        |   | 14,083
|                                                                                                |  | Preferred LLC Interest (125,400 units)      |  |                                              |        |           |        | 12,837 |         |           | 12,837
|Superior Publishing Corporation (2)                                                             |  | Newspaper                                   |  | Subordinated Debt (20.0%, Due 10/10) (1)     |        |           | 20,731 |        |         | 19,022    |        |   | 19,022
|                                                                                                |  | Preferred Stock (7,999 shares)              |  |                                              |        |           |        | 7,999  |         |           | 9,244 
|                                                                                                |  | Common Stock (100 shares)                   |  |                                              |        |           |        | 365    |         |           |      
|Working Mother Media, Inc. (6)                                                                  |  | Publishing                                  |  | Senior Debt (8.8%, Due 12/08)                |        |           | 17,869 |        |         | 11,546    |        |   | 11,546
|                                                                                                |  | Class A Preferred Stock (12,497 shares)     |  |                                              |        |           |        | 12,497 |         |           | 5,019 
|                                                                                                |  | Class B Preferred Stock (1 share)           |  |                                              |        |           |        | 1      |         |           |      
|                                                                                                |  | Class C Preferred Stock (1 share)           |  |                                              |        |           |        | 1      |         |           |      
|                                                                                                |  | Common Stock (510 shares)                   |  |                                              |        |           |        | 1      |         |           |      
|                                                                                                |  | Guaranty ($476)                             |  |                                              |        |           |        |        |         |           |       
|Total Control investments: Majority-owned (represents 37.5% of total investments at fair value) |  |                                             |  |                                              |        | 481,407   |        |        | 470,476
|Control Investments: Non-majority owned (4):                                                    |  |                                             |  |                                              |        |           |        |        |        
|Crystal Media Network, LLC (6) (7)                                                              |  | Broadcasting                                |  | LLC Interest                                 |        |           |        |        |         | 3,060     |        |   | 547   

See notes to consolidated financial statements



12



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2006

(dollars in thousands)



|                                                                                                   |  |                                                                |                                                     |                                         |        |           |        |        |         |           |        |       |       
|-------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------- | --------------------------------------------------- | --------------------------------------- | ------ | --------- | ------ | ------ | ------- | --------- | ------ | ----- | ------
|Portfolio Company                                                                                  |  | Industry                                                       |                                                     | Investment (8)                          |        | Principal |        | Cost   |         | FairValue
|Intran Media, LLC                                                                                  |  | Other Media                                                    |                                                     | Senior Debt (9.9%, Due 12/11) (1)       |        | $         | 12,000 |        | $       | 12,000    |        | $     | 12,000
|                                                                                                   |  | Preferred Units (86,000 units)                                 |                                                     |                                         |        |           |        | 8,661  |         |           | 8,661 
|National Product Services, Inc. (2)                                                                |  | Business Services                                              |                                                     | Senior Debt (13.2%, Due 6/09)           |        |           | 12,316 |        |         | 5,710     |        |       | 12,365
|                                                                                                   |  | Subordinated Debt (16.0%, Due 6/09)                            |                                                     |                                         | 11,594 |           |        | 10,225 |         |           | 3,035 
|                                                                                                   |  | Common Stock (995,428 shares)                                  |                                                     |                                         |        |           |        |       |         |           |      
|Platinum Wireless, Inc. (6)                                                                        |  | Communications-Other                                           |                                                     | Common Stock (2,937 shares)             |        |           |        |        |         | 4,640     |        |       | 3,764 
|                                                                                                   |  | Option to purchase Common Stock (expire 12/31/13)              |                                                     |                                         |        |           |        | 272    |         |           |      
|PremierGarage Holdings, LLC (2)                                                                    |  | Home Furnishings                                               |                                                     | Senior Debt (10.1%, Due 6/10-12/10)     |        |           | 10,700 |        |         | 10,700    |        |       | 10,700
|                                                                                                   |  | Preferred LLC Units (445 units)                                |                                                     |                                         |        |           |        | 4,592  |         |           | 4,592 
|                                                                                                   |  | Common LLC Units (356 units)                                   |                                                     |                                         |        |           |        |       |         |           |      
|Total Control Investments: Non-majority-owned (represents 4.4% of total investments at fair value) |  |                                                                |                                                     |                                         |        | 59,860    |        |        | 55,664 
|Total Control Investments: (represents 41.9% of total investments at fair value)                   |  |                                                                |                                                     |                                         |        | 541,267   |        |        | 526,140
|Affiliate Investments (3):                                                                         |  |                                                                |                                                     |                                         |        |           |        |        |        
|Advanced Sleep Concepts, Inc. (2)                                                                  |  | Home Furnishings                                               |                                                     | Senior Debt (13.8%, Due 10/11) (1)      |        |           | 7,000  |        |         | 7,000     |        |       | 7,000 
|                                                                                                   |  |                                                                | Subordinated Debt 16.0%, Due 4/12) (1)              |                                         |        | 4,540     |        |        | 4,540   |           |        | 4,540
|                                                                                                   |  |                                                                | Common Stock (423 shares)                           |                                         |        |           |        |        | 524     |           |        | 524  
|                                                                                                   |  |                                                                | Warrants to purchase Common Stock (expire 10/12/16) |                                         |        |           |        |        | 348     |           |        | 348  
|Cherry Hill Holdings, Inc. (2)                                                                     |  | PhotographicStudio                                             |                                                     | Senior Debt (12.9%, Due 8/11) (1)       |        |           | 12,122 |        |         | 12,122    |        |       | 12,122
|                                                                                                   |  | Series A Preferred Stock (750 shares)                          |                                                     |                                         |        |           |        | 775    |         |           | 775   
|iVerify. US Inc. (6)                                                                               |  | Communications-Other                                           |                                                     | Preferred Stock (54 shares)             |        |           |        |        |         | 578       |        |       |      
|                                                                                                   |  | Common Stock (20 shares)                                       |                                                     |                                         |        |           |        | 550    |         |           |      
|NYL Brands Holdings, Inc. (2) (9)                                                                  |  | Clothing &Accessories                                          |                                                     | Subordinated Debt (13.0%, Due 2/11) (1) |        |           | 10,000 |        |         | 10,000    |        |       | 10,000
|                                                                                                   |  | Class A Common Stock (1,500 shares)                            |                                                     |                                         |        |           |        | 1,500  |         |           | 1,500 
|                                                                                                   |  | Warrants to purchase Common Stock                              |                                                     |                                         |        |           |        | 331    |         |           | 526   
|                                                                                                   |  | (expire 2/3/16)                                                |                                                     |                                         |        |           |        |        |         |           |       
|On Target Media, LLC                                                                               |  | Other Media                                                    |                                                     | Class A LLC Interest                    |        |           |        |        |         | 1,836     |        |       | 1,836 
|                                                                                                   |  | Class B LLC Interest                                           |                                                     |                                         |        |           |        |       |         |           | 1,613 
|Stratford School Holdings, Inc. (2)                                                                |  | Education                                                      |                                                     | Senior Debt (9.9%, Due 7/11-9/11) (1)   |        |           | 14,500 |        |         | 14,500    |        |       | 14,500
|                                                                                                   |  | Subordinated Debt (14.0%, Due 12/11) (1)                       |                                                     |                                         | 6,924  |           |        | 6,924  |         |           | 6,924 
|                                                                                                   |  | Preferred Stock (10,000 shares)                                |                                                     |                                         |        |           |        | 60     |         |           | 2,997 
|                                                                                                   |  | Warrants to purchase Common Stock (expire 5/31/15)             |                                                     |                                         |        |           |        | 68     |         |           | 1,026 
|Sunshine Media Delaware, LLC (2)                                                                   |  | Publishing                                                     |                                                     | Senior Debt (14.7%, Due 12/08)          |        |           | 13,632 |        |         | 12,281    |        |       | 12,281
|                                                                                                   |  | Class A LLC Interest                                           |                                                     |                                         |        |           |        | 564    |         |           | 329   
|                                                                                                   |  | Warrants to purchase Class B LLC interest (expire 1/31/11)     |                                                     |                                         |        |           |        |       |         |           |      
|TNR Entertainment Corp.                                                                            |  | DVD Rental                                                     |                                                     | Senior Debt (10.4%, Due 7/10) (1)       |        |           | 12,500 |        |         | 12,500    |        |       | 12,500
|                                                                                                   |  | Subordinated Debt (17.5%, Due 1/11) (1)                        |                                                     |                                         | 13,067 |           |        | 13,067 |         |           | 13,067
|                                                                                                   |  | Series D Preferred Stock (1,806,452 shares)                    |                                                     |                                         |        |           |        | 3,000  |         |           | 3,000 
|                                                                                                   |  | Warrants to purchase Series D Preferred Stock (expire 7/31/16) |                                                     |                                         |        |           |        |       |         |           |      
|XFone, Inc (6)                                                                                     |  | Communications-Other                                           |                                                     | Common Stock (868,947 shares)           |        |           |        |        |         | 2,485     |        |       | 2,482 
|                                                                                                   |  | Warrants to purchase Common Stock (expire 3/3/11)              |                                                     |                                         |        |           |        |       |         |           |      
|Total Affiliate Investments (represents 8.7% of total investments at fair value)                   |  |                                                                |                                                     |                                         |        | 105,553   |        |        | 109,890

See notes to consolidated financial statements



13



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2006

(dollars in thousands)



|                                                |  |                                                     |                                       |                                                                           |        |           |            |        |     |            |        |     |           
|----------------------------------------------- |  | --------------------------------------------------- | ------------------------------------- | ------------------------------------------------------------------------- | ------ | --------- | ---------- | ------ | --- | ---------- | ------ | --- | ----------
|Portfolio Company                               |  | Industry                                            |                                       | Investment (8)                                                            |        | Principal |            | Cost   |     | FairValue 
|Non-Affiliate Investments (less than 5% owned): |  |                                                     |                                       |                                                                           |        |          
|Allens TV Cable Service, Inc.                  |  | Cable                                               |                                       | Senior Debt (12.1%, Due 12/12) (1)                                        |        | $         | 7,998      |        | $   | 7,998      |        | $   | 7,998     
|                                                |  | Subordinated Debt (12.1%, Due 12/12) (1)            |                                       |                                                                           | 2,096  |           |            | 2,096  |     |            | 2,096 
|                                                |  | Warrants to purchase Common Stock (expire 12/31/15) |                                       |                                                                           |        |           |            |       |     |            |      
|Amerifit Nutrition, Inc. (2)                    |  | Drugs                                               |                                       | Senior Debt (12.0%, Due 3/10) (1)                                         |        |           | 5,569      |        |     | 5,569      |        |     | 5,569     
|B & H Education, Inc. (2)                       |  | Education                                           |                                       | Senior Debt (10.4%, Due 3/10) (1)                                         |        |           | 4,000      |        |     | 4,000      |        |     | 4,000     
|                                                |  | Preferred Stock ( 5,384 shares)                     |                                       |                                                                           |        |           |            | 1,188  |     |            | 1,540 
|Badoud Enterprises, Inc. (2)                    |  | Newspaper                                           |                                       | Senior Debt (10.4%, Due 9/11) (1)                                         |        |           | 4,799      |        |     | 4,799      |        |     | 4,799     
|BLI Holdings, Inc. (2)                          |  | Drugs                                               |                                       | Subordinated Debt (13.1%, Due 3/10) (1)                                   |        |           | 10,000     |        |     | 10,000     |        |     | 10,000    
|Builders First Source, Inc.                     |  | Building & Development                              |                                       | Senior Debt (7.9%, Due 8/11) (1)                                          |        |           | 886        |        |     | 886        |        |     | 873       
|Cambridge Information Group, Inc. (2)           |  | Information Services                                |                                       | Subordinated Debt (12.9%, Due 11/11) (1)                                  |        |           | 8,500      |        |     | 8,500      |        |     | 8,500     
|CEI Holdings, Inc.                              |  | Cosmetics                                           |                                       | Subordinated Debt (13.1%, Due 12/11) (1)                                  |        |           | 4,755      |        |     | 4,755      |        |     | 4,755     
|Communications & Power Industries, Inc.         |  | Aerospace & Defense                                 |                                       | Senior Debt (7.6%, Due 7/10) (1)                                          |        |           | 741        |        |     | 741        |        |     | 744       
|Communicom Broadcasting, LLC (2)                |  | Broadcasting                                        |                                       | Senior Debt (12.4%, Due 2/11) (1)                                         |        |           | 8,068      |        |     | 8,068      |        |     | 8,068     
|Community Media Group, Inc. (2)                 |  | Newspaper                                           |                                       | Senior Debt (9.9%, Due 9/10) (1)                                          |        |           | 19,730     |        |     | 19,730     |        |     | 19,730    
|Cornerstone Healthcare Group Holding, Inc.      |  | Healthcare                                          |                                       | Subordinated Debt (14.0%, Due 7/12) (1)                                   |        |           | 7,206      |        |     | 7,206      |        |     | 7,206     
|Country Road Communications LLC (2)             |  | Communications-Other                                |                                       | Subordinated Debt (13. 3%, Due 7/13) (1)                                  |        |           | 13,000     |        |     | 13,000     |        |     | 13,000    
|Creative Loafing, Inc. (2)                      |  | Newspaper                                           |                                       | Senior Debt (12.0%, Due 6/10) (1)                                         |        |           | 18,275     |        |     | 18,275     |        |     | 18,275    
|Crescent Publishing Company LLC (2)             |  | Newspaper                                           |                                       | Senior Debt (15.1%, Due 6/09-6/10) (1)                                    |        |           | 7,503      |        |     | 7,503      |        |     | 7,503     
|Cruz Bay Publishing, Inc.                       |  | Publishing                                          |                                       | Subordinated Debt (12.4%, Due 12/13)                                      |        |           | 20,000     |        |     | 20,000     |        |     | 20,000    
|CWP/RMK Acquisition Corp                        |  | Home Furnishings                                    |                                       | Senior Debt (8.9%, Due 6/11) (1)                                          |        |           | 6,250      |        |     | 6,250      |        |     | 6,250     
|                                                |  | Subordinated Debt (13.4%, Due 12/12) (1)            |                                       |                                                                           | 11,750 |           |            | 11,750 |     |            | 11,750
|                                                |  | Common Stock (500 shares)                           |                                       |                                                                           |        |           |            | 500    |     |            | 500   
|Dayton Parts Holdings, LLC (2)                  |  | Auto Parts                                          |                                       | Subordinated Debt (12.5%, Due 6/11) (1)                                   |        |           | 16,000     |        |     | 16,000     |        |     | 16,000    
|                                                |  |                                                     | Preferred LLC Interest (16,371 units) |                                                                           |        |           |            |        | 589 |            |        | 589
|                                                |  |                                                     | Class A LLC Interest (10,914 units)   |                                                                           |        |           |            |        | 408 |            |        | 609
|D&B Towers, LLC                                 |  | Communications-Other                                |                                       | Senior Debt (15.4%, Due 6/08) (1)                                         |        |           | 5,412      |        |     | 5,412      |        |     | 5,062     
|dick clark productions, inc. (6)                |  | Broadcasting                                        |                                       | Common Stock (235,714 shares)                                             |        |           |            |        |     | 210        |        |     | 510       
|                                                |  | Warrants to purchase Common Stock (expire 7/25/11)  |                                       |                                                                           |        |           |            | 858    |     |            | 5,049 
|The e-Media Club, LLC (6)                       |  | Investment Fund                                     |                                       | LLC Interest                                                              |        |           |            |        |     | 88         |        |     | 34        
|EAS Group, Inc.                                 |  | Technology                                          |                                       | Subordinated Debt (16.0%, Due 4/11) (1)                                   |        |           | 11,529     |        |     | 11,529     |        |     | 11,529    
|Empower IT Holdings, Inc. (2)                   |  | Information Services                                |                                       | Senior Debt (11.9%, Due 5/12) (1) Subordinated Debt (14.5%, Due 6/12) (1) |        |           | 7,9595,116 |        |     | 7,9595,116 |        |     | 7,9595,116
|Equibrand Holding Corporation (2)               |  | Leisure Activities                                  |                                       | Senior Debt (12.4%, Due 9/10) (1)                                         |        |           | 4,640      |        |     | 4,640      |        |     | 4,640     
|                                                |  | Subordinated Debt (15.8%, Due 3/11) (1)             |                                       |                                                                           | 9,674  |           |            | 9,674  |     |            | 9,674 
|Flexsol Packaging Corp.                         |  | Chemicals/Plastics                                  |                                       | Subordinated Debt (13.5%, Due 12/12) (1)                                  |        |           | 3,000      |        |     | 3,000      |        |     | 2,955     
|GoldenSource Holdings Inc. (6)                  |  | Technology                                          |                                       | Warrants to purchase Common Stock (expire 10/31/08)                       |        |           |            |        |     |           |        |     |          
|Home Interiors & Gifts, Inc.                    |  | Home Furnishings                                    |                                       | Senior Debt (10.4%, Due 3/11)                                             |        |           | 4,492      |        |     | 4,492      |        |     | 3,308     

See notes to consolidated financial statements



14



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2006

(dollars in thousands)



|                                                    |  |                                                            |  |                                                                                                                                     |        |           |              |        |   |                   |        |   |                  
|--------------------------------------------------- |  | ---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------- | ------ | --------- | ------------ | ------ | - | ----------------- | ------ | - | -----------------
|Portfolio Company                                   |  | Industry                                                   |  | Investment (8)                                                                                                                      |        | Principal |              | Cost   |   | FairValue        
|Jenzabar, Inc. (2)                                  |  | Technology                                                 |  | Preferred Stock (5,000 shares)                                                                                                      |        |           |              |        | $ | 6,381             |        | $ | 6,381            
|                                                    |  | Subordinated Preferred Stock (109,800 shares)              |  |                                                                                                                                     |        |           |              | 1,098  |   |                   | 1,098 
|                                                    |  | Warrants to purchase Common Stock (expire 4/30/16)         |  |                                                                                                                                     |        |           |              | 422    |   |                   | 17,180
|The Joseph F. Biddle Publishing Company (2)         |  | Newspaper                                                  |  | Senior Debt (8.9%, Due 12/11) (1)                                                                                                   |        | $         | 7,050        |        |   | 7,050             |        |   | 7,050            
|Jupitermedia Corporation (6)                        |  | Information Services                                       |  | Common Stock (148,373 shares)                                                                                                       |        |           |              |        |   | 2,114             |        |   | 1,175            
|Legacy Cabinets, Inc                                |  | Home Furnishings                                           |  | Subordinated Debt (12.9%, Due 8/13) (1)                                                                                             |        |           | 3,000        |        |   | 3,000             |        |   | 3,000            
|Marietta Intermediate Holding Corporation           |  | Cosmetics                                                  |  | Subordinated Debt (14.8%, Due 12/11) (1)                                                                                            |        |           | 2,000        |        |   | 2,000             |        |   | 1,517            
|MCI Holdings, LLC (2)                               |  | Healthcare                                                 |  | Subordinated Debt (12.7%, Due 3/12-4/13) (1)                                                                                        |        |           | 29,791       |        |   | 29,791            |        |   | 29,791           
|                                                    |  | Class A LLC Interest (4,712,042 units)                     |  |                                                                                                                                     |        |           |              | 3,000  |   |                   | 3,388 
|Metropolitan Telecommunications Holding Company (2) |  | Communications-CLEC                                        |  | Senior Debt (12.5%, Due 6/010-9/10) (1) Subordinated Debt (16.4%, Due 12/10) (1) Warrants to purchase Common Stock (expire 9/30/13) |        |           | 20,72510,929 |        |   | 20,72510,9291,843 |        |   | 20,72510,9298,320
|MicroCal Holdings, LLC (2)                          |  | Laboratory Instruments                                     |  | Senior Debt (9.9%, Due 3/10-9/10) (1)                                                                                               |        |           | 12,800       |        |   | 12,800            |        |   | 12,800           
|                                                    |  | Subordinated Debt (14.5%, Due 3/11) (1)                    |  |                                                                                                                                     | 9,115  |           |              | 9,115  |   |                   | 9,115 
|MicroDental Laboratories (2)                        |  | Healthcare                                                 |  | Senior Debt (10.7%, Due 5/11-11/11) (1)                                                                                             |        |           | 13,186       |        |   | 13,186            |        |   | 13,186           
|                                                    |  | Subordinated Debt (15.0%, Due 5/12) (1)                    |  |                                                                                                                                     | 6,999  |           |              | 6,999  |   |                   | 6,999 
|Miles Media Holding, LLC (2)                        |  | Publishing                                                 |  | Senior Debt (11.9%, Due 6/12) (1)                                                                                                   |        |           | 9,150        |        |   | 9,150             |        |   | 9,150            
|                                                    |  | Subordinated Debt (16.4%, Due 12/12) (1)                   |  |                                                                                                                                     | 4,000  |           |              | 4,000  |   |                   | 4,000 
|                                                    |  | Warrants to purchase LLC Units (expire 6/30/09)            |  |                                                                                                                                     |        |           |              | 439    |   |                   | 2,119 
|National Display Holdings, LLC (2)                  |  | Electronics                                                |  | Senior Debt (11.4%, Due 12/11) (1)                                                                                                  |        |           | 10,000       |        |   | 10,000            |        |   | 10,000           
|                                                    |  | Subordinated Debt (15.0%, Due 12/12) (1)                   |  |                                                                                                                                     | 13,682 |           |              | 13,682 |   |                   | 13,682
|                                                    |  | Class A LLC Interest (1,000,000 units)                     |  |                                                                                                                                     |        |           |              | 1,000  |   |                   | 1,152 
|New Century Companies, Inc. (6)                     |  | Industrial Equipment                                       |  | Warrants to purchase Common Stock (expire 6/30/10)                                                                                  |        |           |              |        |   |                  |        |   |                 
|PartMiner, Inc. (2)                                 |  | Information Services                                       |  | Senior Debt (14.9%, Due 6/09) (1)                                                                                                   |        |           | 3,341        |        |   | 3,341             |        |   | 3,341            
|Philadelphia Newspapers, LLC                        |  | Newspapers                                                 |  | Subordinated Debt (16.0%, Due 6/14) (1)                                                                                             |        |           | 5,017        |        |   | 5,017             |        |   | 5,017            
|Powercom Corporation (2)                            |  | Communications-CLEC                                        |  | Senior Debt (12.0%, Due 12/06)                                                                                                      |        |           | 1,798        |        |   | 1,798             |        |   | 1,798            
|                                                    |  | Warrants to purchase Class A Common Stock (expire 6/30/14) |  |                                                                                                                                     |        |           |              | 286    |   |                   |      
|Quantum Medical Holdings, LLC (2)                   |  | Laboratory Instruments                                     |  | Senior Debt (11.1%, Due 12/10- 5/11) (1)                                                                                            |        |           | 17,500       |        |   | 17,500            |        |   | 17,500           
|                                                    |  | Subordinated Debt (15.0%, Due 12/11) (1)                   |  |                                                                                                                                     | 18,032 |           |              | 18,032 |   |                   | 18,032
|                                                    |  | Preferred LLC Interest (1,000,000 units)                   |  |                                                                                                                                     |        |           |              | 421    |   |                   | 955   
|Restaurant Technologies, Inc.                       |  | Food Services                                              |  | Subordinated Debt (16.0%, Due 2/12) (1)                                                                                             |        |           | 20,923       |        |   | 20,923            |        |   | 20,923           
|                                                    |  | Series Preferred Stock (7,813 shares)                      |  |                                                                                                                                     |        |           |              | 281    |   |                   | 281   
|Sagamore Hill Broadcasting, LLC (2)                 |  | Broadcasting                                               |  | Senior Debt (11.4%, Due 11/09) (1)                                                                                                  |        |           | 14,000       |        |   | 14,000            |        |   | 14,000           

See notes to consolidated financial statements



15



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2006

(dollars in thousands)



|                                                                                      |  |                                                                   |  |                                                 |       |           |        |       |   |           |            |       |   |        | 
|------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------- |  | ----------------------------------------------- | ----- | --------- | ------ | ----- | - | --------- | ---------- | ----- | - | ------ | 
|Portfolio Company                                                                     |  | Industry                                                          |  | Investment (8)                                  |       | Principal |        | Cost  |   |           | Fair Value |      
|Summit Business Media Intermediate Holding Company, LLC                               |  | InformationServices                                               |  | Subordinated Debt (12.4%,Due 11/13)             |       | $         | 6,000  |       | $ | 6,000     |            |       | $ | 6,000  | 
|Switch & Data Holdings, Inc.                                                          |  | BusinessServices                                                  |  | Subordinated Debt (12.6%, Due 4/11) (1)         |       |           | 12,000 |       |   | 12,000    |            |       |   | 12,000 | 
|Team Express, Inc. (2)                                                                |  | Retail                                                            |  | Subordinated Debt (15.0%, Due 6/11) (1)         |       |           | 7,327  |       |   | 7,327     |            |       |   | 7,327  | 
|Teleguam Holdings, LLC (2)                                                            |  | Communications-Other                                              |  | Subordinated Debt (12.4%, Due 10/12) (1)        |       |           | 20,000 |       |   | 20,000    |            |       |   | 20,000 | 
|Total Sleep Holdings, Inc. (2)                                                        |  | Healthcare                                                        |  | Subordinated Debt (16.0%, Due 9/11) (1)         |       |           | 23,179 |       |   | 23,005    |            |       |   | 19,034 | 
|ValuePage, Inc. (6)                                                                   |  | Communications-Other                                              |  | Senior Debt (12.8%, Due 6/08)                   |       |           | 1,146  |       |   | 1,095     |            |       |   | 1,095  | 
|VS&A-PBI Holding LLC (6)                                                              |  | Publishing                                                        |  | LLC Interest                                    |       |           |        |       |   | 500       |            |       |   |       | 
|VOX Communications Group Holdings, LLC                                                |  | Broadcasting                                                      |  | Senior Debt (13.6%, Due 12/07-6/10) (1)         |       |           | 11,054 |       |   | 11,000    |            |       |   | 11,000 | 
|                                                                                      |  | Convertible Preferred Subordinated Notes (12.4%, Due 6/15-10/16 ) |  |                                                 | 1,317 |           |        | 1,244 |   |           |            | 677   |  
|Wicks Business Information, LLC                                                       |  | Publishing                                                        |  | Unsecured Note (10.3%, Due 2/08)                |       |           | 237    |       |   | 237       |            |       |   | 237    | 
|Wiesner Publishing Company, LLC                                                       |  | Publishing                                                        |  | Warrants to purchase LLC units (expire 6/30/12) |       |           |        |       |   | 406       |            |       |   | 3,339  | 
|Wire Rope Corporation of America, Inc.                                                |  | IndustrialEquipment                                               |  | Senior Debt (13.1%, Due 6/11) (1)               |       |           | 6,000  |       |   | 6,000     |            |       |   | 6,120  | 
|WirelessLines II, Inc.                                                                |  | Communications-Other                                              |  | Senior Debt (8.0%, Due 4/07)                    |       |           | 129    |       |   | 129       |            |       |   | 129    | 
|Xpressdocs Holdings, Inc (2)                                                          |  | BusinessServices                                                  |  | Senior Debt (9.3%, Due 7/11) (1)                |       |           | 17,255 |       |   | 17,255    |            |       |   | 17,255 | 
|                                                                                      |  | Subordinated Debt (14.0%, Due 7/12) (1)                           |  |                                                 | 6,075 |           |        | 6,075 |   |           |            | 6,075 |  
|                                                                                      |  | Series A Preferred Stock (161,870 shares)                         |  |                                                 |       |           |        | 500   |   |           |            | 500   |  
|Total Non-Affiliate Investments (represents 49.4% of total investments at fair value) |  |                                                                   |  |                                                 |       | 595,885   |        |       |   | 621,582   |           
|Total Investments                                                                     |  |                                                                   |  |                                                 |       | 1,242,705 |        |       |   | 1,257,612 |           
|Unearned Income                                                                       |  |                                                                   |  |                                                 |       | (9,539    | )      |       |   | (9,539    | )         
|Total Investments Net of Unearned Income                                              |  |                                                                   |  |                                                 | $     | 1,233,166 |        |       | $ | 1,248,073 |           
|                                                                                      |  |                                                                   |  |                                                 |       |           |        |       |   |           |            |       |   |        | 
|Call Options Written                                                                  |  |                                                                   |  |                                                 |       |           |        |       |   |           |           
|Crystal Media Network, LLC (7)                                                        |  | Broadcasting                                                      |  | Call options written                            |       |           |        |       | $ |          |            |       | $ |       | 
|Total Call Options Written                                                            |  |                                                                   |  |                                                 | $     |          |        |       | $ |          |           
|                                                                                      |  |                                                                   |  |                                                 |       |           |        |       |   |           |            |       |   |        | 

See notes to consolidated financial statements



16



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

March 31, 2007 and
December 31, 2006

(dollars in thousands)



|(1) | Some or all of this security has been pledged as collateral in one or more of MCGs credit facilities. See Note 3 to the Consolidated Financial Statements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Some of the securities listed are issued by affiliate(s) of the listed portfolio company.
|--- | -----------------------------------------------------------------------------------------

|(3) | Affiliate investments are generally defined under the Investment Company Act of 1940 as companies in which MCG owns at least 5% but not more than 25% of the voting securities of the
company.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Control investments are generally defined under the Investment Company Act of 1940 as companies in which MCG owns more than 25% of the voting securities of the company. MCG defines
non-majority owned control investments as companies in which MCG owns more than 25% but not more than 50% of the voting securities of the company.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | MCG defines majority owned control investments as companies in which MCG owns more than 50% of the voting securities of the company.
|--- | ------------------------------------------------------------------------------------------------------------------------------------

|(6) | Non-income producing at the relevant period end.
|--- | ------------------------------------------------

|(7) | MCG has a written call option outstanding on up to a 10% interest in Crystal Media. The option expires January 31, 2008.
|--- | ------------------------------------------------------------------------------------------------------------------------

|(8) | Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The
maturity dates represent the earliest and the latest maturity dates.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | During the first quarter of 2007, NYL Brands Holdings, Inc changed its name to Active Brands International, Inc.
|--- | ----------------------------------------------------------------------------------------------------------------

See notes to consolidated financial statements.



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited)

(in thousands, except per share data)

Note
1Description of Business and Unaudited Interim Consolidated Financial Statements Basis of Presentation

MCG Capital Corporation
(MCG or the Company) is a solutions-focused commercial finance company providing capital and advisory services to middle market companies throughout the United States. The Company is a non-diversified internally managed,
closed-end investment company that elected to be treated as a business development company under the Investment Company Act of 1940, as amended (1940 Act).

The accompanying financial statements reflect the consolidated accounts of MCG, including Solutions Capital I, LP, Solutions Capital GP, LLC, MCG Opportunity Investment Fund I, LLC and MCGs special purpose
financing subsidiaries, MCG Finance I, LLC, MCG Finance II, LLC, MCG Finance III, LLC, MCG Finance IV, LLC, MCG Finance V, LLC, MCG Finance VI, LLC, MCG Finance VII, LLC, and MCG Finance VIII, LLC, with all significant intercompany balances
eliminated. In accordance with Article 6 of Regulation S-X under the Securities Act of 1933 and Securities Exchange Act of 1934, the Company does not consolidate portfolio company investments, including those in which it has a controlling interest.

Interim consolidated financial statements of MCG are prepared in accordance with generally accepted accounting principles
(GAAP) for interim financial information and pursuant to the requirements of reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in
accordance with GAAP are omitted. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods, have been included. The
results of operations for the three months ended March 31, 2007 are not necessarily indicative of results that ultimately may be achieved for the year. The interim unaudited consolidated financial statements and notes thereto should be read in
conjunction with the financial statements and notes thereto included in the Companys Form 10-K for the fiscal year ended December 31, 2006, as filed with the SEC. Certain prior period information has been reclassified to conform to
current year presentation.

Taxable subsidiaries

The Company currently qualifies as a regulated investment company (a RIC) for federal income tax purposes, which allows it to avoid paying corporate income taxes on any income or gains that it distributes
to its shareholders. The Company has certain wholly owned taxable subsidiaries (the Taxable Subsidiaries), each of which holds one or more of the Companys portfolio investments that are listed on the Consolidated Schedule of
Investments. The Taxable Subsidiaries are consolidated with the Company for GAAP purposes, such that the Companys consolidated financial statements reflect its investments in the portfolio companies owned by the Taxable Subsidiaries. The
purpose of the Taxable Subsidiaries is to permit the Company to hold portfolio companies that are organized as limited liability companies (LLCs) (or other forms of passthrough entities) and still satisfy the RIC tax requirement
that at least 90% of the Companys gross revenue for income tax purposes must consist of investment income. Absent the Taxable Subsidiaries, a proportionate amount of any gross income of an LLC (or other passthrough entity) portfolio
investment would flow through directly to the Company. To the extent that such income did not consist of investment income, it could jeopardize the ability of the Company to qualify as a RIC and therefore cause the Company to incur significant
amounts of federal income taxes. Where the LLCs (or other pass-through entities) are owned by the Taxable Subsidiaries, however,

their income is taxed to
the Taxable Subsidiaries and does not flow through to the Company, thereby helping the Company preserve its RIC status and resultant tax advantages. The Taxable Subsidiaries are not consolidated for income tax purposes and may generate income tax
expense as a result of their ownership of the portfolio companies. This income tax expense, if any, is reflected in the Companys Consolidated Statement of Operations.



18



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



Note 2Investments

The composition of MCGs investments as of March 31, 2007 and December 31, 2006, at cost, was as follows, excluding unearned income:



|                                 |  |                    |           |                              |                   |   |                    |   |                              |  |       |  
|-------------------------------- |  | ------------------ | --------- | ---------------------------- | ----------------- | - | ------------------ | - | ---------------------------- |  | ----- | -
|                                 |  | March 31, 2007     |           |                              | December 31, 2006 |  
|                                 |  | Investments atCost |           | Percentage ofTotal Portfolio |                   |   | Investmentsat Cost |   | Percentage ofTotal Portfolio | 
|Senior secured debt              |  | $                  | 426,582   |                              | 32.1              | % |                    | $ | 384,490                      |  | 30.9  | %
|Subordinated debt                |  |                    |           |                              |                   |   |                    |   |                              |  |       |  
|Secured                          |  |                    | 524,763   |                              | 39.5              |   |                    |   | 506,681                      |  | 40.8  |  
|Unsecured                        |  |                    | 25,849    |                              | 1.9               |   |                    |   | 25,233                       |  | 2.0   |  
|                                 |  |                    |           |                              |                   |   |                    |   |                              |  |       |  
|Total debt investments           |  |                    | 977,194   |                              | 73.5              |   |                    |   | 916,404                      |  | 73.7  |  
|                                 |  |                    |           |                              |                   |   |                    |   |                              |  |       |  
|Preferred equity                 |  |                    | 328,404   |                              | 24.7              |   |                    |   | 296,942                      |  | 23.9  |  
|Common/Common equivalents equity |  |                    | 23,679    |                              | 1.8               |   |                    |   | 29,359                       |  | 2.4   |  
|                                 |  |                    |           |                              |                   |   |                    |   |                              |  |       |  
|Total equity investments         |  |                    | 352,083   |                              | 26.5              |   |                    |   | 326,301                      |  | 26.3  |  
|                                 |  |                    |           |                              |                   |   |                    |   |                              |  |       |  
|Total                            |  | $                  | 1,329,277 |                              | 100.0             | % |                    | $ | 1,242,705                    |  | 100.0 | %
|                                 |  |                    |           |                              |                   |   |                    |   |                              |  |       |  

The composition of MCGs investments as of March 31, 2007 and December 31, 2006, at
fair value, was as follows, excluding unearned income:



|                                 |  |                          |           |                              |                   |   |                          |   |                              |  |       |  
|-------------------------------- |  | ------------------------ | --------- | ---------------------------- | ----------------- | - | ------------------------ | - | ---------------------------- |  | ----- | -
|                                 |  | March 31, 2007           |           |                              | December 31, 2006 |  
|                                 |  | Investments atFair Value |           | Percentage ofTotal Portfolio |                   |   | Investments atFair Value |   | Percentage ofTotal Portfolio | 
|Senior secured debt              |  | $                        | 431,038   |                              | 31.9              | % |                          | $ | 389,721                      |  | 31.0  | %
|Subordinated debt                |  |                          |           |                              |                   |   |                          |   |                              |  |       |  
|Secured                          |  |                          | 514,073   |                              | 38.0              |   |                          |   | 494,992                      |  | 39.3  |  
|Unsecured                        |  |                          | 25,478    |                              | 1.9               |   |                          |   | 24,666                       |  | 2.0   |  
|                                 |  |                          |           |                              |                   |   |                          |   |                              |  |       |  
|Total debt investments           |  |                          | 970,589   |                              | 71.8              |   |                          |   | 909,379                      |  | 72.3  |  
|                                 |  |                          |           |                              |                   |   |                          |   |                              |  |       |  
|Preferred equity                 |  |                          | 326,567   |                              | 24.1              |   |                          |   | 285,150                      |  | 22.7  |  
|Common/Common equivalents equity |  |                          | 55,276    |                              | 4.1               |   |                          |   | 63,083                       |  | 5.0   |  
|                                 |  |                          |           |                              |                   |   |                          |   |                              |  |       |  
|Total equity investments         |  |                          | 381,843   |                              | 28.2              |   |                          |   | 348,233                      |  | 27.7  |  
|                                 |  |                          |           |                              |                   |   |                          |   |                              |  |       |  
|Total                            |  | $                        | 1,352,432 |                              | 100.0             | % |                          | $ | 1,257,612                    |  | 100.0 | %
|                                 |  |                          |           |                              |                   |   |                          |   |                              |  |       |  

The Companys debt instruments generally provide for a contractual variable interest rate
generally ranging from approximately 8% to 16%, a portion of which may be deferred. At March 31, 2007, approximately 62% of loans in the portfolio, based on amounts outstanding at fair value, were at variable rates determined on the basis of a
benchmark LIBOR or prime rate and approximately 38% were at fixed rates. In addition, at March 31, 2007, approximately 32% of the loan portfolio has floors of between 1.50% and 3.0% on the LIBOR base index. The Companys loans generally
have stated maturities at origination that range from four to eight years. Customers typically pay an origination fee based on a percentage of the commitment amount. They also often pay a fee based on any undrawn commitments.

When one of the Companys loans becomes more than 90 days past due, or if the Company otherwise does not expect the customer to be able to service
its debt and other obligations, the Company will, as a general matter, place the loan on non-accrual status and will generally cease recognizing interest income on that loan



19



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



until all past due principal and interest has been paid or otherwise restructured such that the interest income is determined to be collectible. The Company
may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection. The following table summarizes the Companys loans greater than 90 days past due and loans on non-accrual status, at fair value,
at March 31, 2007 and December 31, 2006:



|                                                             |  |                |         |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|------------------------------------------------------------ |  | -------------- | ------- | ------------------ | ----------------- | - | ------------------- | --- | - | --------- | - | ------------------ |  | --- | ------------------- |  | --- | -
|                                                             |  | March 31, 2007 |         |                    | December 31, 2006 |  
|                                                             |  | Fair Value     |         | % of LoanPortfolio |                   |   | % of TotalPortfolio |     |   | FairValue |   | % of LoanPortfolio |  |     | % of TotalPortfolio | 
|Loans greater than 90 days past due                          |  |                |         |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|On non-accrual status                                        |  | $              | 20,587  |                    | 2.1               | % |                     | 1.5 | % |           | $ | 20,129             |  | 2.2 | %                   |  | 1.6 | %
|Not on non-accrual status                                    |  |                | 1,798   |                    | 0.2               |   |                     | 0.1 |   |           |   | 1,798              |  | 0.2 |                     |  | 0.1 |  
|                                                             |  |                |         |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|Total loans greater than 90 days past due                    |  | $              | 22,385  |                    | 2.3               | % |                     | 1.6 | % |           | $ | 21,927             |  | 2.4 | %                   |  | 1.7 | %
|                                                             |  |                |         |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|Loans on non-accrual status                                  |  |                |         |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|0 to 90 days past due                                        |  | $              | 96,812  |                    | 10.0              | % |                     | 7.2 | % |           | $ | 15,259             |  | 1.7 | %                   |  | 1.2 | %
|Greater than 90 days past due                                |  |                | 20,587  |                    | 2.1               |   |                     | 1.5 |   |           |   | 20,129             |  | 2.2 |                     |  | 1.6 |  
|                                                             |  |                |         |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|Total loans on non-accrual status                            |  | $              | 117,399 |                    | 12.1              | % |                     | 8.7 | % |           | $ | 35,388             |  | 3.9 | %                   |  | 2.8 | %
|                                                             |  |                |         |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|Loans on non-accrual status or greater than 90 days past due |  | $              | 119,197 |                    | 12.3              | % |                     | 8.8 | % |           | $ | 37,186             |  | 4.1 | %                   |  | 2.9 | %
|                                                             |  |                |         |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  



20



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



The table below shows the composition of MCGs portfolio by industry (excluding unearned income)
at cost as of March 31, 2007 and December 31, 2006:



|                                                                |  |                    |           |                              |                   |   |                    |   |                              |  |       |  
|--------------------------------------------------------------- |  | ------------------ | --------- | ---------------------------- | ----------------- | - | ------------------ | - | ---------------------------- |  | ----- | -
|                                                                |  | March 31, 2007     |           |                              | December 31, 2006 |  
|                                                                |  | Investments atCost |           | Percentage ofTotal Portfolio |                   |   | Investments atCost |   | Percentage ofTotal Portfolio | 
|Telecommunications  CLEC (competitive local exchange carriers) |  | $                  | 295,651   |                              | 22.2              | % |                    | $ | 280,394                      |  | 22.6  | %
|Other Communications                                            |  |                    | 46,749    |                              | 3.5               |   |                    |   | 81,605                       |  | 6.6   |  
|Healthcare                                                      |  |                    | 115,697   |                              | 8.7               |   |                    |   | 106,967                      |  | 8.6   |  
|Newspaper                                                       |  |                    | 82,249    |                              | 6.2               |   |                    |   | 89,760                       |  | 7.2   |  
|Cable                                                           |  |                    | 75,494    |                              | 5.7               |   |                    |   | 38,711                       |  | 3.1   |  
|Plastic Products                                                |  |                    | 73,798    |                              | 5.6               |   |                    |   | 57,052                       |  | 4.6   |  
|Publishing                                                      |  |                    | 71,526    |                              | 5.4               |   |                    |   | 71,623                       |  | 5.8   |  
|Business Services                                               |  |                    | 59,479    |                              | 4.4               |   |                    |   | 51,765                       |  | 4.2   |  
|Laboratory Instruments                                          |  |                    | 55,531    |                              | 4.2               |   |                    |   | 57,868                       |  | 4.6   |  
|Home Furnishings                                                |  |                    | 53,475    |                              | 4.0               |   |                    |   | 53,696                       |  | 4.3   |  
|Food Services                                                   |  |                    | 48,750    |                              | 3.7               |   |                    |   | 21,204                       |  | 1.7   |  
|Electronics                                                     |  |                    | 42,081    |                              | 3.2               |   |                    |   | 24,682                       |  | 2.0   |  
|Broadcasting                                                    |  |                    | 38,486    |                              | 2.9               |   |                    |   | 38,440                       |  | 3.1   |  
|Information Services                                            |  |                    | 37,418    |                              | 2.8               |   |                    |   | 48,379                       |  | 3.9   |  
|Sporting Goods                                                  |  |                    | 30,488    |                              | 2.3               |   |                    |   | 26,920                       |  | 2.2   |  
|DVD Rental                                                      |  |                    | 28,557    |                              | 2.1               |   |                    |   | 28,567                       |  | 2.3   |  
|Education                                                       |  |                    | 26,346    |                              | 2.0               |   |                    |   | 26,740                       |  | 2.1   |  
|Technology                                                      |  |                    | 22,914    |                              | 1.7               |   |                    |   | 19,430                       |  | 1.6   |  
|Other Media                                                     |  |                    | 22,755    |                              | 1.7               |   |                    |   | 22,497                       |  | 1.8   |  
|Auto Parts                                                      |  |                    | 22,497    |                              | 1.7               |   |                    |   | 16,997                       |  | 1.4   |  
|Drugs                                                           |  |                    | 15,379    |                              | 1.2               |   |                    |   | 15,569                       |  | 1.2   |  
|Real Estate Investments                                         |  |                    | 14,571    |                              | 1.1               |   |                    |   |                             |  |      |  
|Leisure Activities                                              |  |                    | 14,251    |                              | 1.1               |   |                    |   | 14,314                       |  | 1.2   |  
|Photographic Studio                                             |  |                    | 13,007    |                              | 1.0               |   |                    |   | 12,897                       |  | 1.0   |  
|Retail                                                          |  |                    | 11,832    |                              | 0.9               |   |                    |   | 19,158                       |  | 1.5   |  
|Cosmetics                                                       |  |                    | 2,008     |                              | 0.1               |   |                    |   | 6,755                        |  | 0.5   |  
|Other (a)                                                       |  |                    | 8,288     |                              | 0.6               |   |                    |   | 10,715                       |  | 0.9   |  
|                                                                |  |                    |           |                              |                   |   |                    |   |                              |  |       |  
|                                                                |  | $                  | 1,329,277 |                              | 100.0             | % |                    | $ | 1,242,705                    |  | 100.0 | %
|                                                                |  |                    |           |                              |                   |   |                    |   |                              |  |       |  



|(a) | No individual industry within this category exceeds 1%.
|--- | -------------------------------------------------------



21



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



The table below shows the composition of MCGs portfolio by industry (excluding unearned income)
at fair value as of March 31, 2007 and December 31, 2006:



|                          |  |                          |           |                              |                   |   |                          |   |                              |  |       |  
|------------------------- |  | ------------------------ | --------- | ---------------------------- | ----------------- | - | ------------------------ | - | ---------------------------- |  | ----- | -
|                          |  | March 31, 2007           |           |                              | December 31, 2006 |  
|                          |  | Investments atFair Value |           | Percentage ofTotal Portfolio |                   |   | Investments atFair Value |   | Percentage ofTotal Portfolio | 
|Telecommunications  CLEC |  | $                        | 289,143   |                              | 21.4              | % |                          | $ | 274,108                      |  | 21.8  | %
|Other Communications      |  |                          | 45,434    |                              | 3.4               |   |                          |   | 83,988                       |  | 6.7   |  
|Healthcare                |  |                          | 115,078   |                              | 8.5               |   |                          |   | 106,519                      |  | 8.5   |  
|Newspaper                 |  |                          | 82,989    |                              | 6.1               |   |                          |   | 90,640                       |  | 7.2   |  
|Plastic Products          |  |                          | 81,564    |                              | 6.0               |   |                          |   | 57,052                       |  | 4.5   |  
|Cable                     |  |                          | 75,494    |                              | 5.6               |   |                          |   | 38,711                       |  | 3.1   |  
|Publishing                |  |                          | 67,997    |                              | 5.0               |   |                          |   | 68,020                       |  | 5.4   |  
|Business Services         |  |                          | 59,819    |                              | 4.4               |   |                          |   | 51,230                       |  | 4.1   |  
|Laboratory Instruments    |  |                          | 56,117    |                              | 4.1               |   |                          |   | 58,402                       |  | 4.6   |  
|Home Furnishings          |  |                          | 53,509    |                              | 4.0               |   |                          |   | 52,512                       |  | 4.2   |  
|Food Services             |  |                          | 48,750    |                              | 3.6               |   |                          |   | 21,204                       |  | 1.7   |  
|Electronics               |  |                          | 42,331    |                              | 3.1               |   |                          |   | 24,834                       |  | 2.0   |  
|Broadcasting              |  |                          | 40,205    |                              | 3.0               |   |                          |   | 39,851                       |  | 3.2   |  
|Technology                |  |                          | 39,638    |                              | 2.9               |   |                          |   | 36,188                       |  | 2.9   |  
|Information Services      |  |                          | 36,286    |                              | 2.7               |   |                          |   | 47,440                       |  | 3.8   |  
|Sporting Goods            |  |                          | 32,903    |                              | 2.4               |   |                          |   | 26,920                       |  | 2.1   |  
|Education                 |  |                          | 30,592    |                              | 2.3               |   |                          |   | 30,987                       |  | 2.5   |  
|DVD Rental                |  |                          | 28,557    |                              | 2.1               |   |                          |   | 28,567                       |  | 2.3   |  
|Other Media               |  |                          | 24,565    |                              | 1.8               |   |                          |   | 24,110                       |  | 1.9   |  
|Auto Parts                |  |                          | 22,719    |                              | 1.7               |   |                          |   | 17,198                       |  | 1.4   |  
|Drugs                     |  |                          | 15,379    |                              | 1.1               |   |                          |   | 15,569                       |  | 1.2   |  
|Real Estate Investments   |  |                          | 14,571    |                              | 1.1               |   |                          |   |                             |  |      |  
|Leisure Activities        |  |                          | 14,251    |                              | 1.1               |   |                          |   | 14,314                       |  | 1.1   |  
|Photographic Studio       |  |                          | 13,007    |                              | 1.0               |   |                          |   | 12,897                       |  | 1.0   |  
|Retail                    |  |                          | 11,944    |                              | 0.9               |   |                          |   | 19,353                       |  | 1.5   |  
|Cosmetics                 |  |                          | 1,737     |                              | 0.1               |   |                          |   | 6,272                        |  | 0.5   |  
|Other (a)                 |  |                          | 7,853     |                              | 0.6               |   |                          |   | 10,726                       |  | 0.8   |  
|                          |  |                          |           |                              |                   |   |                          |   |                              |  |       |  
|                          |  | $                        | 1,352,432 |                              | 100.0             | % |                          | $ | 1,257,612                    |  | 100.0 | %
|                          |  |                          |           |                              |                   |   |                          |   |                              |  |       |  



|(a) | No individual industry within this category exceeds 1%.
|--- | -------------------------------------------------------



22



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



Note 3Borrowings

The following is a summary of the Companys borrowings as of March 31, 2007 and December 31, 2006:



|                                       |  |                |         |                   |   |                |  |                   |         |  |   |        
|-------------------------------------- |  | -------------- | ------- | ----------------- | - | -------------- |  | ----------------- | ------- |  | - | -------
|                                       |  | March 31, 2007 |         | December 31, 2006
|                                       |  | FacilityAmount |         | AmountOutstanding |   | FacilityAmount |  | AmountOutstanding
|Unsecured Notes                        |  | $              | 50,000  |                   | $ | 50,000         |  | $                 | 50,000  |  | $ | 50,000 
|Commercial Loan Trust 2006-2           |  |                | 200,000 |                   |   | 82,859         |  |                   | 200,000 |  |   | 84,040 
|Commercial Loan Funding Trust Facility |  |                |        |                   |   |               |  |                   | 250,000 |  |   | 83,943 
|Class A Variable Funding Certificates  |  |                | 218,750 |                   |   | 89,743         |  |                   |        |  |   |       
|Class B Variable Funding Certificates  |  |                | 31,250  |                   |   | 7,000          |  |                   |        |  |   |       
|Term Securitization                    |  |                |         |                   |   |                |  |                   |         |  |   |        
|Series 2006-1 Class A-1 Notes          |  |                | 106,250 |                   |   | 106,250        |  |                   | 106,250 |  |   | 106,250
|Series 2006-1 Class A-2 Notes          |  |                | 50,000  |                   |   | 32,000         |  |                   | 50,000  |  |   | 11,400 
|Series 2006-1 Class A-3 Notes          |  |                | 85,000  |                   |   | 60,000         |  |                   | 85,000  |  |   | 35,000 
|Series 2006-1 Class B Notes            |  |                | 58,750  |                   |   | 58,750         |  |                   | 58,750  |  |   | 58,750 
|Series 2006-1 Class C Notes            |  |                | 45,000  |                   |   | 45,000         |  |                   | 45,000  |  |   | 45,000 
|Series 2006-1 Class D Notes            |  |                | 47,500  |                   |   | 47,500         |  |                   | 47,500  |  |   | 47,500 
|Revolving Unsecured Credit Facility    |  |                | 100,000 |                   |   | 27,000         |  |                   | 100,000 |  |   |       
|                                       |  |                |         |                   |   |                |  |                   |         |  |   |        
|Total                                  |  | $              | 992,500 |                   | $ | 606,102        |  | $                 | 992,500 |  | $ | 521,883
|                                       |  |                |         |                   |   |                |  |                   |         |  |   |        

All of the Companys debt facilities, except the Revolving Unsecured Credit Facility and the
Unsecured Notes, are funded through the Companys bankruptcy remote, special purpose, wholly owned subsidiaries and, therefore, the assets of these subsidiaries may not be available to the Companys creditors. In some cases, advances under
the Companys debt facilities are subject to certain other covenants, including having sufficient levels of collateral and various restrictions on which loans the Company may leverage as collateral. The Company borrows directly as well as
indirectly through credit facilities maintained by its subsidiaries.

Unsecured Notes. On October 11, 2005, the Company issued
$50,000 of investment grade five-year unsecured notes in a private placement. The notes were rated BBB- by Fitch Ratings, Inc. and have a fixed interest rate of 6.73% per year payable semi-annually. Bayerische Hypo-Und Vereinsbank,
AG, New York Branch (HVB) acted as the placement agent for the issuance.

Commercial Loan Trust 2006-2. On May 2,
2006 the Company established, through MCG Commercial Loan Trust 2006-2, a $200,000 warehouse credit facility with Merrill Lynch Capital Corp. The warehouse credit facility allows MCG Commercial Loan Trust 2006-2 to acquire up to $250,000 of
commercial loans with borrowings of up to $200,000 subject to certain covenants, concentration limitations and other restrictions. The warehouse credit facility is primarily secured by the assets of MCG Commercial Loan Trust 2006-2, including the
commercial loans purchased by the trust from the Company. Under the terms of the credit and warehouse agreement, the loans may be senior secured loans, second lien loans or unsecured loans, as defined in the agreement, subject to certain
limitations. Up to 60% of the collateral in this warehouse facility may be non-senior secured loans, and the remaining 40% must be senior secured loans.

The Company uses this facility to fund the origination of loans that will collateralize a future term securitization. Advances under the facility, equal to 80% of the value of commercial loans purchased by the trust,
bear interest based on LIBOR plus 0.75% and interest is payable monthly. The facility is scheduled to terminate on the earlier of November 30, 2007 or the completion of a term securitization and may be extended under certain circumstances. As
of March 31, 2007 the Company had $82,859 outstanding under this facility.



23



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



MCG Commercial Loan Funding Trust. The Company has, through MCG Commercial Loan Funding Trust,
a $250,000 warehouse financing facility funded through Three Pillars Funding LLC, an asset-backed commercial paper conduit administered by SunTrust Capital Markets, Inc. The warehouse financing facility operates like a revolving credit facility that
is primarily secured by the assets of MCG Commercial Loan Funding Trust, including commercial loans sold by the Company to the trust. The pool of commercial loans in the trust must meet certain requirements, including, but not limited to, term,
average life, investment rating, agency rating and industry diversity requirements. There are also certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs.
Such limitations, requirements, and associated defined terms are as provided for in the documents governing the facility. This facility is funded through two separate Variable Funding Certificates, (VFC), a $218,750 Class A VFC and
a $31,250 Class B VFC. Advances under the Class A VFC may be up to 70% of eligible collateral and bear interest at the commercial paper rate plus 0.95%. Advances under the Class B VFC may be up to 10% of eligible collateral and bear interest at
the commercial paper rate plus 1.75%. The facility is scheduled to terminate on November 7, 2007, but is subject to annual renewal and may be extended under certain circumstances. During July 2006, the facility was renewed until July 27,
2007. As of March 31, 2007, the Company had $89,743 Class A VFC and $7,000 Class B VFC outstanding under this facility. See Note 8 Subsequent Events for further discussion of this facility.

Commercial Loan Trust 2006-1. On April 18, 2006, the Company completed a $500,000 debt securitization through MCG Commercial Loan Trust
2006-1, its wholly owned subsidiary. The 2006-1 Trust issued $106,250 of Class A-1 Notes rated AAA / Aaa, $50,000 of Class A-2 Notes rated AAA / Aaa, $85,000 of Class A-3 Notes rated AAA / Aaa, $58,750 of Class B Notes rated AA / Aa2,
$45,000 of Class C Notes rated A / A2 and $47,500 of Class D Notes rated BBB / Baa2 as rated by Moodys and S&P, respectively. The Series 2006-1 Class A-1 Notes, Class A-2 Notes, Class A-3 Notes, Class B Notes, Class C Notes
and Class D Notes bear interest of LIBOR plus 0.33%, 0.35%, 0.33%, 0.58%, 1.05% and 2.25%, respectively.

The Company retains all of the
equity in the securitization. The securitization includes a reinvestment period of five years, during which principal collections received on the underlying collateral may be used to purchase new collateral from the Company. Under the terms of the
securitization, up to 55% of the collateral may be non-senior secured commercial loans and the remaining 45% must be senior secured commercial loans.

The Class A-1, Class B, Class C and Class D Notes are term notes. The Class A-2 Notes are a revolving class of secured notes and have a revolving period of five years. The Class A-3 Notes are a delayed
draw class of secured notes and are required to be drawn by April 2007. All of the notes are secured by the assets of MCG Commercial Loan Trust 2006-1, including commercial loans totaling $449,195 as of March 31, 2007, which were purchased by
the trust from the Company. Additional commercial loans will be purchased by the trust from the Company primarily using the proceeds from the Class A-3 delayed draw notes and the Class A-2 revolving notes. The pool of commercial loans in
the trust must meet certain requirements, including, but not limited to, asset mix and concentration, collateral coverage, term, agency rating, minimum coupon, minimum spread and sector diversity requirements. As of March 31, 2007, the Company
had $349,500 of these notes outstanding.

Revolving Unsecured Credit Facility. This facility is a $100,000 unsecured revolving
credit facility established with HVB. The facility allows for additional lenders with HVB acting as the agent. The $100,000 commitment is maintained by four lenders. HVB, Chevy Chase Bank, Sovereign Bank, and Royal Bank of Canada maintain
commitments of $50,000, $10,000, $15,000, and $25,000, respectively. Advances under this credit facility bear interest at LIBOR plus 2.00% or the prime rate plus 0.50%, and there is a commitment fee of 0.25% per annum on undrawn amounts. The
credit facility contains customary terms and conditions, including, without limitation, affirmative and negative covenants such as information reporting, minimum stockholders



24



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



equity, minimum asset coverage ratio, minimum cash net operating income, and a minimum ratio of earnings before interest and taxes to interest expense. The
credit facility also contains customary events of default with customary cure and notice, including, without limitation, nonpayment, misrepresentation in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, change
of control, change of management, and material adverse change. As of March 31, 2007 the Company had $27,000 outstanding under this credit facility.

Borrowings outstanding, by interest rate benchmark, as of March 31, 2007 and December 31, 2006 were as follows:



|                      |  |                |         |                   |   |        
|--------------------- |  | -------------- | ------- | ----------------- | - | -------
|                      |  | March 31, 2007 |         | December 31, 2006
|LIBOR                 |  | $              | 432,359 |                   | $ | 387,940
|Prime rate            |  |                | 27,000  |                   |   |       
|Commercial paper rate |  |                | 96,743  |                   |   | 83,943 
|Fixed rate            |  |                | 50,000  |                   |   | 50,000 
|                      |  |                |         |                   |   |        
|                      |  | $              | 606,102 |                   | $ | 521,883
|                      |  |                |         |                   |   |        

Note 4Share Based Compensation

Employee Share Based Compensation

During the
three months ended March 31, 2007, the Company granted approximately 981 restricted shares under the 2006 Employee Restricted Stock Plan. The forfeiture provisions will lapse quarterly with respect to 781 of these restricted shares through
December 31, 2010. The remaining 200 of these restricted shares are subject to both time-and performance-based forfeiture provisions that lapse annually each February 28thfrom 2007 through 2010. During the three months ended March 31, 2007, approximately 6 restricted shares were forfeited.

During the three months ended March 31, 2007 and 2006, the Company recognized compensation expense related to employee restricted stock of
approximately $2,982 and $610, respectively. In addition, dividends paid on restricted shares securing non-recourse employee loans and on forfeited shares totaled $70 and $512 for the quarter ended March 31, 2007 and 2006, respectively, and are
included in salaries and benefits in the Consolidated Statements of Operations. At March 31, 2007, total unrecognized compensation cost related to restricted stock granted to employees was approximately $22,867 and is expected to be recognized
over a weighted average remaining requisite service period of approximately 3.2 years.

Non-Employee Director Share Based Compensation

Compensation cost related to restricted shares issued to non-employee directors under the 2006 Non-employee Director Restricted Stock Plan was
approximately $164 and $0 during the three months ended March 31, 2007 and 2006, respectively. The compensation cost related to restricted shares granted to non-employee directors is considered part of the overall compensation to these
directors for their services as



25



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



directors of the Company, therefore this cost is included as a component of general and administrative expense on the Companys Consolidated Statement
of Operations for the three months ended March 31, 2007. At March 31, 2007, total unrecognized compensation cost related to restricted stock granted to non-employee directors was approximately $236 and is expected to be recognized over a
weighted average remaining requisite service period of approximately 2.0 years.

The following table summarizes the Companys
restricted stock award activity during the three months ended March 31, 2007:



|                                                                       |  |        |   |  |                                       |      
|---------------------------------------------------------------------- |  | ------ | - |  | ------------------------------------- | -----
|                                                                       |  | Shares |   |  | Weighted AverageGrant Date Fair Value
|Restricted stock subject to forfeiture provisions at December 31, 2006 |  | 458    |   |  | $                                     | 16.50
|Restricted stock granted                                               |  | 981    |   |  |                                       | 19.76
|Restricted stock for which forfeiture provisions lapsed                |  | (158   | ) |  |                                       | 18.76
|Restricted stock forfeited                                             |  | (6     | ) |  |                                       | 20.07
|                                                                       |  |        |   |  |                                       |      
|Restricted stock subject to forfeiture provisions at March 31, 2007    |  | 1,275  |   |  | $                                     | 18.71
|                                                                       |  |        |   |  |                                       |      

Note 5Income Taxes and Distributions

As a regulated investment company (RIC) under Subchapter M of the Internal Revenue Code, the Companys income generally will not be
subject to taxation to the extent such income is distributed to stockholders. However, certain of the Companys investments are owned by wholly owned subsidiaries that are subject to corporate level federal, state, and local income tax in their
respective jurisdictions. Income taxes for the Companys taxable operating subsidiaries are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as the utilization of available operating loss carryforwards. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to the taxable income in the years in which those temporary differences are expected to be recovered or settled.

During the three months ended March 31, 2007, the Company recorded a provision for income taxes of $367 primarily related to unrealized gains on the Companys investments.

Since December 2001, the Company has declared distributions totaling $10.19 per share. Each year a statement on Form 1099-DIV identifying the source of
the distribution (i.e., paid from ordinary income, paid from net capital gains on the sale of securities, and/or a return of paid-in-capital surplus which is a nontaxable distribution) is mailed to the Companys stockholders. To the extent the
Companys taxable earnings fall below the total amount of its distributions for that fiscal year, a portion of those distributions may be deemed a tax return of capital to the Companys stockholders. For the fiscal years ended
December 31, 2006, 2005, 2004, and 2003 a portion of the distributions to the Companys stockholders was deemed a return of capital. For the quarter ended March 31, 2007, the Company declared a distribution of $0.44 per share. The
determination of the tax attributes of the Companys distributions is made annually as of the end of the Companys fiscal year based upon its taxable income for the full year and distributions paid for the full year, therefore a
determination made on a quarterly basis may not be representative of the actual tax attributes of its distributions for a full year. If the Company determined the tax attributes of its distributions year-to-date as of March 31, 2007, 70.4%
would be from ordinary income and 29.6% would be a return of capital for stockholders, however there can be no certainty to shareholders that this determination is representative of what the tax attributes of its 2007 distributions to shareholders
will actually be.



26



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



The following table is a reconciliation of GAAP net income to taxable net income for the three months
ended March 31, 2007 and the year ended December 31, 2006:



|                                                                                |  |                                  |        |   |                              |   |         |  
|------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ---------------------------- | - | ------- | -
|                                                                                |  | Three Months EndedMarch 31, 2007 |        |   | Year Ended December 31, 2006 |  
|Net income                                                                      |  | $                                | 30,454 |   |                              | $ | 100,949 |  
|Net change in unrealized appreciation on investments not taxable until realized |  |                                  | (8,248 | ) |                              |   | (34,604 | )
|Timing difference related to deductibility of long-term incentive compensation  |  |                                  | 336    |   |                              |   | 2,468   |  
|Interest income on non-accrual loans that is taxable                            |  |                                  | 5,397  |   |                              |   | 3,612   |  
|Dividend income accrued for GAAP purposes which is not yet taxable              |  |                                  | (8,622 | ) |                              |   | (21,612 | )
|Federal tax expense                                                             |  |                                  | 337    |   |                              |   | 2,661   |  
|Other, net                                                                      |  |                                  | (2,582 | ) |                              |   | (93     | )
|                                                                                |  |                                  |        |   |                              |   |         |  
|Taxable income before deductions for distributions                              |  | $                                | 17,072 |   |                              | $ | 53,381  |  
|                                                                                |  |                                  |        |   |                              |   |         |  

Note 6Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per common share for the three months ended March 31, 2007 and 2006:



|                                                                                   |  |                             |        |      |   |       
|---------------------------------------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------
|                                                                                   |  | Three Months EndedMarch 31,
|                                                                                   |  | 2007                        |        | 2006
|Basic                                                                              |  |                             |        |      |   |       
|Net income                                                                         |  | $                           | 30,454 |      | $ | 26,402
|Weighted average common shares outstanding                                         |  |                             | 58,067 |      |   | 53,197
|Earnings per common share-basic                                                    |  | $                           | 0.52   |      | $ | 0.50  
|Diluted                                                                            |  |                             |        |      |   |       
|Net income                                                                         |  | $                           | 30,454 |      | $ | 26,402
|Weighted average common shares outstanding                                         |  |                             | 58,067 |      |   | 53,197
|Dilutive effect of restricted stock on which forfeiture provisions have not lapsed |  |                             | 67     |      |   |      
|                                                                                   |  |                             |        |      |   |       
|Weighted average common shares and common stock equivalents                        |  |                             | 58,134 |      |   | 53,197
|Earnings per common share-diluted                                                  |  | $                           | 0.52   |      | $ | 0.50  

For purposes of calculating earnings per common share, shares of restricted common stock for which
forfeiture provisions have not lapsed and are solely based on passage of time are included in diluted earnings per common share based on the treasury stock method. Shares of restricted common stock for which forfeiture provisions have not lapsed and
are based on performance criteria are included in diluted earnings per common share when it becomes probable such criteria will be met and is calculated using the treasury stock method.



27



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##### Table of Contents

Note 7Financial Highlights

Following is a schedule of financial highlights for the three months ended March 31, 2007 and 2006:



|                                                                                                          |  |      |         |    |      |   |         |   
|--------------------------------------------------------------------------------------------------------- |  | ---- | ------- | -- | ---- | - | ------- | --
|                                                                                                          |  | 2007 |         |    | 2006 |  
|Per share data:                                                                                           |  |      |         |    |      |   |         |   
|Net asset value at beginning of period (a)                                                                |  | $    | 12.83   |    |      | $ | 12.48   |   
|                                                                                                          |  |     
|Net operating income before investment gains and losses (b)                                               |  |      | 0.35    |    |      |   | 0.39    |   
|Net realized gains (losses) on investments (b)                                                            |  |      | 0.04    |    |      |   | (0.04   | ) 
|Net change in unrealized appreciation on investments (b)                                                  |  |      | 0.14    |    |      |   | 0.15    |   
|Provision for income taxes                                                                                |  |      | (0.01   | )  |      |   |        |   
|                                                                                                          |  |      |         |    |      |   |         |   
|Net income                                                                                                |  |      | 0.52    |    |      |   | 0.50    |   
|                                                                                                          |  |     
|Distributions declared                                                                                    |  |      | (0.44   | )  |      |   | (0.42   | ) 
|Effect of distributions recorded as compensation expense (b)                                              |  |      |        |    |      |   | 0.01    |   
|                                                                                                          |  |      |         |    |      |   |         |   
|Net decrease in stockholders equity resulting from distributions                                         |  |      | (0.44   | )  |      |   | (0.41   | ) 
|Net increase in stockholders equity from reduction in stockholder loans                                  |  |      |        |    |      |   | 0.01    |   
|Dilutive effect of issuance of restricted stock and restricted stock subject to forfeiture provisions (c) |  |      | (0.17   | )  |      |   |        |   
|Net increase in stockholders equity from restricted stock amortization (b)                               |  |      | 0.05    |    |      |   | 0.01    |   
|                                                                                                          |  |      |         |    |      |   |         |   
|Net (decrease) increase in stockholders equity relating to share issuances                               |  |      | (0.12   | )  |      |   | 0.02    |   
|                                                                                                          |  |      |         |    |      |   |         |   
|Net asset value at end of period (a)                                                                      |  | $    | 12.79   |    |      | $ | 12.59   |   
|                                                                                                          |  |      |         |    |      |   |         |   
|Per share market value at end of period                                                                   |  | $    | 18.76   |    |      | $ | 14.11   |   
|Total return (d)                                                                                          |  |      | (5.51   | )% |      |   | (0.41   | )%
|Shares outstanding at end of period                                                                       |  |      | 59,472  |    |      |   | 53,375  |   
|                                                                                                          |  |     
|Ratio/Supplemental data:                                                                                  |  |      |         |    |      |   |         |   
|Net assets at end of period                                                                               |  | $    | 760,698 |    |      | $ | 671,810 |   
|Ratio of operating expenses to average net assets (annualized)                                            |  |      | 10.87   | %  |      |   | 10.39   | % 
|Ratio of net operating income to average net assets (annualized)                                          |  |      | 10.84   | %  |      |   | 12.79   | % 



|(a) | Based on total shares outstanding.
|--- | ----------------------------------

|(b) | Based on average shares outstanding.
|--- | ------------------------------------

|(c) | The dilutive effect of issuance of restricted stock and restricted stock subject to forfeiture provisions represents the effect of restricted stock issued during the period and the
effect of the lapsing of forfeiture provisions on restricted stock on earnings per share.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | Total return equals the change in the ending market value over the beginning of period price per share plus dividends paid per share during the period, divided by the beginning
price.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 8Subsequent Events

On April 3, 2007, the Company entered into the sixth amendment to its MCG Commercial Loan Funding Trust facility, funded by Three Pillars Funding LLC, an asset-backed commercial paper conduit administered by
SunTrust Capital Markets, Inc. Pursuant to this amendment, the scheduled termination date has been extended from November 2007 to November 2010. This facility remains subject to annual renewal by the lender. The next annual renewal date is
July 27, 2007.

On April 25, 2007, the Company raised approximately $53,350 in net proceeds from the sale of 3,000,000 shares of
its common stock. The Company expects to use the net proceeds from this offering to temporarily reduce borrowings under its Revolving Unsecured Credit Facility and its Commercial Loan Funding Trust Facility, to originate investments in primarily
middle market private companies and for general corporate purposes.



28



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

MCG Capital Corporation

We have reviewed the accompanying
consolidated balance sheet of MCG Capital Corporation as of March 31, 2007, including the consolidated schedule of investments, and the related consolidated statements of operations, changes in net assets, cash flows, and financial highlights
for the three-month periods ended March 31, 2007 and 2006. These financial statements are the responsibility of the Companys management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries
of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are
not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance
sheet of MCG Capital Corporation as of December 31, 2006, including the consolidated schedule of investments, and the related consolidated statements of operations, stockholders equity, cash flows, and financial highlights for the year
then ended (not presented herein), and in our report dated February 26, 2007 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 2006, including the consolidated schedule of investments, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ ERNST & YOUNG LLP

McLean, Virginia

April 30, 2007



29



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##### Table of Contents

Selected Financial Data

The following selected financial data, excluding the Other period-end
data, is derived from our unaudited consolidated financial statements. This selected financial data should be read in conjunction with our Managements Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements (unaudited) and notes thereto included in this Quarterly Report.



|                                                                                                                          |  |                             |           |      |   |          
|------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | --------- | ---- | - | ---------
|                                                                                                                          |  | Three Months EndedMarch 31,
|(dollars in thousands except per share and other period-end data)                                                         |  | 2007                        |           | 2006
|Income statement data:                                                                                                    |  |                             |           |      |   |          
|Revenue                                                                                                                   |  | $                           | 40,142    |      | $ | 37,637   
|Net operating income before investment gains and losses and provision for income taxes                                    |  |                             | 20,046    |      |   | 20,764   
|Distributable net operating income (DNOI)(a)                                                                            |  |                             | 23,028    |      |   | 21,374   
|Net income                                                                                                                |  |                             | 30,454    |      |   | 26,402   
|                                                                                                                          |  |                            
|Per common share data:                                                                                                    |  |                             |           |      |   |          
|Net operating income before investment gains and losses and provision for income taxes per common sharebasic and diluted |  | $                           | 0.35      |      | $ | 0.39     
|DNOI per common sharebasic and diluted(a)                                                                                |  |                             | 0.40      |      |   | 0.40     
|Earnings per common sharebasic and diluted                                                                               |  |                             | 0.52      |      |   | 0.50     
|Cash dividends declared per common share                                                                                  |  |                             | 0.44      |      |   | 0.42     
|                                                                                                                          |  |                            
|Selected period-end balances:                                                                                             |  |                             |           |      |   |          
|Total investment portfolio                                                                                                |  | $                           | 1,352,432 |      | $ | 1,105,072
|Total assets                                                                                                              |  |                             | 1,409,996 |      |   | 1,278,993
|Borrowings                                                                                                                |  |                             | 606,102   |      |   | 573,945  
|Total stockholders equity                                                                                                |  |                             | 760,698   |      |   | 671,810  
|Net asset value per common share(b)                                                                                       |  |                             | 12.79     |      |   | 12.59    
|                                                                                                                          |  |                            
|Other period-end data:                                                                                                    |  |                             |           |      |   |          
|Number of portfolio companies                                                                                             |  |                             | 83        |      |   | 89       
|Number of employees                                                                                                       |  |                             | 86        |      |   | 79       
|                                                                                                                          |  |                            
|Reconciliation of DNOI to net operating income before investment gains and losses and provision for income taxes:         |  |                             |           |      |   |          
|Net operating income before investment gains and losses and provision for income taxes                                    |  | $                           | 20,046    |      | $ | 20,764   
|Amortization of employee restricted stock awards                                                                          |  |                             | 2,982     |      |   | 610      
|                                                                                                                          |  |                             |           |      |   |          
|DNOI                                                                                                                      |  | $                           | 23,028    |      | $ | 21,374   
|                                                                                                                          |  |                             |           |      |   |          
|Weighted average common shares outstanding                                                                                |  |                             | 58,067    |      |   | 53,197   
|Weighted average common shares outstanding and dilutive common stock equivalents                                          |  |                             | 58,134    |      |   | 53,197   
|Earnings per common sharebasic and diluted                                                                               |  | $                           | 0.52      |      | $ | 0.50     
|Net operating income before investment gains and losses and provision for income taxes per common sharebasic and diluted |  | $                           | 0.35      |      | $ | 0.39     
|DNOI per sharebasic and diluted                                                                                          |  | $                           | 0.40      |      | $ | 0.40     



|(a) | Distributable net operating income is net operating income before investment gains and losses and provision for income taxes, as determined in accordance with U.S. generally
accepted accounting principles, excluding amortization of employee restricted stock awards. We view DNOI and the related per share measures as useful and appropriate supplements to net operating income, net income, earnings per share and cash flows
from operating activities. DNOI serves as an additional measure of our operating performance exclusive of employee restricted stock amortization, which represents an expense of MCG but does not require settlement in cash. DNOI should not be
considered as an alternative to net operating income, net income, earnings per share or cash flows from operating activities (each computed in accordance with GAAP). Instead, DNOI should be reviewed in connection with net operating income, net
income, earnings per share and cash flows from operating activities in our consolidated financial statements, to help analyze how our business is performing.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Based on common shares outstanding at period-end.
|--- | -------------------------------------------------



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The information contained in this section should be read in conjunction with the Selected Financial Data and our Consolidated Financial Statements and
notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.

This Quarterly Report on Form 10-Q, including Managements
Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on
current expectations, estimates and projections about our industry, our beliefs, and our assumptions. Words such as anticipates, expects, intends, plans, believes, seeks, and
estimates and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors,
some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:



| |  |  | economic downturns or recessions may impair our customers ability to repay our loans and increase our non-performing assets;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | economic downturns or recessions may disproportionately impact the industries in which we invest, and such conditions may reduce our returns or cause us to incur
losses in our portfolio and experience diminished demand for capital in these industries;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities and adversely impact our
financial results;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | interest rate volatility could adversely affect our results;
| | - |  | ------------------------------------------------------------



| |  |  | the risks associated with the possible disruption in our operations due to terrorism; and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | the risks, uncertainties and other factors we identify from time to time in our filings with the Securities and Exchange Commission, including our Form 10-Ks, Form
10-Qs and Form 8-Ks.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Although we believe that the assumptions on which these forward-looking statements are based are
reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be incorrect. In light of these and other uncertainties, the inclusion of a projection or
forward-looking statement in this Quarterly Report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. You should not place undue reliance on these forward-looking statements, which apply
only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Overview

MCG Capital Corporation is
a solutions-focused commercial finance company providing capital and advisory services to middle market companies throughout the United States. We make debt and equity investments primarily in companies with annual revenue of $20 million to $200
million and earnings before interest, taxes, depreciation and amortization (EBITDA) of $3 million to $25 million, which we refer to as middle market companies. Our capital is generally used by our portfolio companies to
finance acquisitions, recapitalizations, buyouts, organic growth and working capital. We primarily acquire new customers directly through our contacts with owner operators and other investors, such as private equity sponsors.

We are an internally managed, non-diversified, closed-end investment company that has elected to be regulated as a business development company under the
Investment Company Act of 1940 or the 1940 Act. As a business development company, we are required to meet various regulatory tests which include investing at least 70% of our total assets in private or thinly traded public U.S.-based
companies and meeting a coverage ratio



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##### Table of Contents

of total net assets to total senior securities, which include all of our borrowings (including accrued interest payable) and any preferred stock we may issue
in the future, of at least 200%. In addition, we have elected to be treated for federal income tax purposes as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code. In order to continue to qualify as a
RIC for federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements. If we satisfy these requirements, we generally will not have to pay corporate-level
taxes on any income we distribute to our stockholders as dividends, allowing us to substantially reduce or eliminate our corporate-level tax liability. From time to time our wholly owned subsidiaries may execute transactions that trigger
corporate-level tax liabilities. In such cases, we recognize a tax provision in the period that the taxable event becomes probable.

Portfolio Composition and Investment Activity

The total value of our investment portfolio, exclusive of unearned income,
was $1,352.4 million and $1,257.6 million at March 31, 2007 and December 31, 2006, respectively. Our gross originations and advances totaled $177.9 million and $132.1 million during the three months ended March 31, 2007 and 2006,
respectively. During the three months ended March 31, 2007, we originated investments of $104.0 million in eight new portfolio companies and made advances and new investments of $73.9 million to existing portfolio companies. The new
originations of $104.0 million were composed of $50.6 million of senior debt, $28.8 million of secured subordinated debt and $24.6 million of equity. During the three months ended March 31, 2007, the total value of newly originated investments,
additional investments in existing portfolio companies, accrual of payment-in-kind interest and dividends, and net unrealized appreciation on investments, net of sales and repayments of securities, resulted in a $94.8 million increase in the total
portfolio value of our investments, exclusive of unearned income.

The following table shows our portfolio of investments by security type
at March 31, 2007 and December 31, 2006:



|                                 |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|-------------------------------- |  | ------------------------ | ------- | ---------------------------- | ----------------- | - | ------------------------ | - | ---------------------------- |  | ----- | -
|                                 |  | March 31, 2007           |         |                              | December 31, 2006 |  
|(dollars in millions)            |  | Investments atFair Value |         | Percentage ofTotal Portfolio |                   |   | Investments atFair Value |   | Percentage ofTotal Portfolio | 
|Senior secured debt              |  | $                        | 431.0   |                              | 31.9              | % |                          | $ | 389.7                        |  | 31.0  | %
|Subordinated debt                |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|Secured                          |  |                          | 514.1   |                              | 38.0              |   |                          |   | 495.0                        |  | 39.3  |  
|Unsecured                        |  |                          | 25.5    |                              | 1.9               |   |                          |   | 24.7                         |  | 2.0   |  
|                                 |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|Total debt investments           |  |                          | 970.6   |                              | 71.8              |   |                          |   | 909.4                        |  | 72.3  |  
|                                 |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|Preferred equity                 |  |                          | 326.5   |                              | 24.1              |   |                          |   | 285.1                        |  | 22.7  |  
|Common/common equivalents equity |  |                          | 55.3    |                              | 4.1               |   |                          |   | 63.1                         |  | 5.0   |  
|                                 |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|Total equity investments         |  |                          | 381.8   |                              | 28.2              |   |                          |   | 348.2                        |  | 27.7  |  
|                                 |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|Total                            |  | $                        | 1,352.4 |                              | 100.0             | % |                          | $ | 1,257.6                      |  | 100.0 | %
|                                 |  |                          |         |                              |                   |   |                          |   |                              |  |       |  

Total portfolio investment activity (exclusive of unearned income) for the three months ended
March 31, 2007 and 2006 was as follows:



|                                                    |  |      |         |   |      |   |         |  
|--------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|(dollars in millions)                               |  | 2007 |         |   | 2006 |  
|Investment portfolio at beginning of period         |  | $    | 1,257.6 |   |      | $ | 1,097.6 |  
|Originations and advances                           |  |      | 177.9   |   |      |   | 132.1   |  
|Gross payments/reductions/sales of securities       |  |      | (93.8   | ) |      |   | (130.2  | )
|Net unrealized gains                                |  |      | 10.8    |   |      |   | 4.8     |  
|Net realized gains (losses)                         |  |      | 2.5     |   |      |   | (2.2    | )
|Reversals of unrealized (appreciation) depreciation |  |      | (2.6    | ) |      |   | 3.0     |  
|                                                    |  |      |         |   |      |   |         |  
|Investment portfolio at end of period               |  | $    | 1,352.4 |   |      | $ | 1,105.1 |  
|                                                    |  |      |         |   |      |   |         |  



32



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The following table shows our gross originations and advances during the three months ended
March 31, 2007 and 2006 by security type:



|                                 |  |      |       |  |       |   |  |   |       |  |       |  
|-------------------------------- |  | ---- | ----- |  | ----- | - |  | - | ----- |  | ----- | -
|(dollars in millions)            |  | 2007 |       |  | 2006  |  
|Senior secured debt              |  | $    | 73.2  |  | 41.1  | % |  | $ | 45.0  |  | 34.1  | %
|Subordinated debt                |  |      | 70.7  |  | 39.7  |   |  |   | 59.0  |  | 44.6  |  
|Preferred equity                 |  |      | 33.9  |  | 19.1  |   |  |   | 21.4  |  | 16.2  |  
|Common/common equivalents equity |  |      | 0.1   |  | 0.1   |   |  |   | 6.7   |  | 5.1   |  
|                                 |  |      |       |  |       |   |  |   |       |  |       |  
|Total                            |  | $    | 177.9 |  | 100.0 | % |  | $ | 132.1 |  | 100.0 | %
|                                 |  |      |       |  |       |   |  |   |       |  |       |  

The following table shows our gross payments, reductions, and sales of securities during the three
months ended March 31, 2007 and 2006 by security type:



|                      |  |      |      |  |       |   |  |   |       |  |       |  
|--------------------- |  | ---- | ---- |  | ----- | - |  | - | ----- |  | ----- | -
|(dollars in millions) |  | 2007 |      |  | 2006  |  
|Senior secured debt   |  | $    | 31.1 |  | 33.2  | % |  | $ | 105.8 |  | 81.3  | %
|Subordinated debt     |  |      | 52.0 |  | 55.4  |   |  |   | 20.6  |  | 15.8  |  
|Equity                |  |      | 10.7 |  | 11.4  |   |  |   | 3.8   |  | 2.9   |  
|                      |  |      |      |  |       |   |  |   |       |  |       |  
|Total                 |  | $    | 93.8 |  | 100.0 | % |  | $ | 130.2 |  | 100.0 | %
|                      |  |      |      |  |       |   |  |   |       |  |       |  

During the three months ended March 31, 2007 and 2006, our gross payments, reductions and
sales of securities by transaction type included:



|                                                       |  |      |      |      |   |      
|------------------------------------------------------ |  | ---- | ---- | ---- | - | -----
|(dollars in millions)                                  |  | 2007 |      | 2006
|Scheduled principal amortization                       |  | $    | 5.5  |      | $ | 13.4 
|Senior loan sales                                      |  |      | 2.0  |      |   | 4.1  
|Principal repayments                                   |  |      | 72.3 |      |   | 104.8
|Payment of accrued paid-in-kind interest and dividends |  |      | 4.7  |      |   | 4.1  
|Sale of equity investments                             |  |      | 9.3  |      |   | 3.8  
|                                                       |  |      |      |      |   |      
|Total                                                  |  | $    | 93.8 |      | $ | 130.2
|                                                       |  |      |      |      |   |      



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The following table shows our portfolio of investments by industry at fair value, as of March 31,
2007 and December 31, 2006 (excluding unearned income):



|                                                                |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|--------------------------------------------------------------- |  | ------------------------ | ------- | ---------------------------- | ----------------- | - | ------------------------ | - | ---------------------------- |  | ----- | -
|                                                                |  | March 31, 2007           |         |                              | December 31, 2006 |  
|(dollars in millions)                                           |  | Investments atFair Value |         | Percentage ofTotal Portfolio |                   |   | Investments atFair Value |   | Percentage ofTotal Portfolio | 
|Telecommunications  CLEC (competitive local exchange carriers) |  | $                        | 289.1   |                              | 21.4              | % |                          | $ | 274.1                        |  | 21.8  | %
|Other Communications                                            |  |                          | 45.4    |                              | 3.4               |   |                          |   | 84.0                         |  | 6.7   |  
|Healthcare                                                      |  |                          | 115.1   |                              | 8.5               |   |                          |   | 106.5                        |  | 8.5   |  
|Newspaper                                                       |  |                          | 83.0    |                              | 6.1               |   |                          |   | 90.6                         |  | 7.2   |  
|Plastic Products                                                |  |                          | 81.6    |                              | 6.0               |   |                          |   | 57.1                         |  | 4.5   |  
|Cable                                                           |  |                          | 75.5    |                              | 5.6               |   |                          |   | 38.7                         |  | 3.1   |  
|Publishing                                                      |  |                          | 68.0    |                              | 5.0               |   |                          |   | 68.0                         |  | 5.4   |  
|Business Services                                               |  |                          | 59.8    |                              | 4.4               |   |                          |   | 51.2                         |  | 4.1   |  
|Laboratory Instruments                                          |  |                          | 56.1    |                              | 4.1               |   |                          |   | 58.4                         |  | 4.6   |  
|Home Furnishings                                                |  |                          | 53.5    |                              | 4.0               |   |                          |   | 52.5                         |  | 4.2   |  
|Food Services                                                   |  |                          | 48.7    |                              | 3.6               |   |                          |   | 21.2                         |  | 1.7   |  
|Electronics                                                     |  |                          | 42.3    |                              | 3.1               |   |                          |   | 24.8                         |  | 2.0   |  
|Broadcasting                                                    |  |                          | 40.2    |                              | 3.0               |   |                          |   | 39.9                         |  | 3.2   |  
|Technology                                                      |  |                          | 39.6    |                              | 2.9               |   |                          |   | 36.2                         |  | 2.9   |  
|Information Services                                            |  |                          | 36.3    |                              | 2.7               |   |                          |   | 47.4                         |  | 3.8   |  
|Sporting Goods                                                  |  |                          | 32.9    |                              | 2.4               |   |                          |   | 26.9                         |  | 2.1   |  
|Education                                                       |  |                          | 30.6    |                              | 2.3               |   |                          |   | 31.0                         |  | 2.5   |  
|DVD Rental                                                      |  |                          | 28.6    |                              | 2.1               |   |                          |   | 28.6                         |  | 2.3   |  
|Other Media                                                     |  |                          | 24.6    |                              | 1.8               |   |                          |   | 24.1                         |  | 1.9   |  
|Auto Parts                                                      |  |                          | 22.7    |                              | 1.7               |   |                          |   | 17.2                         |  | 1.4   |  
|Drugs                                                           |  |                          | 15.4    |                              | 1.1               |   |                          |   | 15.6                         |  | 1.2   |  
|Real Estate Investments                                         |  |                          | 14.6    |                              | 1.1               |   |                          |   |                             |  |      |  
|Leisure Activities                                              |  |                          | 14.3    |                              | 1.1               |   |                          |   | 14.3                         |  | 1.1   |  
|Photographic Studio                                             |  |                          | 13.0    |                              | 1.0               |   |                          |   | 12.9                         |  | 1.0   |  
|Retail                                                          |  |                          | 11.9    |                              | 0.9               |   |                          |   | 19.4                         |  | 1.5   |  
|Cosmetics                                                       |  |                          | 1.7     |                              | 0.1               |   |                          |   | 6.3                          |  | 0.5   |  
|Other (a)                                                       |  |                          | 7.9     |                              | 0.6               |   |                          |   | 10.7                         |  | 0.8   |  
|                                                                |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|                                                                |  | $                        | 1,352.4 |                              | 100.0             | % |                          | $ | 1,257.6                      |  | 100.0 | %
|                                                                |  |                          |         |                              |                   |   |                          |   |                              |  |       |  



|(a) | No individual industry within this category exceeds 1%.
|--- | -------------------------------------------------------

At March 31, 2007, our ten largest portfolio companies represented approximately 41.7% of the total fair value of our investments. These ten customers accounted for approximately 39.1% of our total revenue during the three months ended
March 31, 2007. At March 31, 2007, approximately 24.8% of our portfolio at fair value was invested in companies in the communications industry, of which 21.4% were in CLECs. Our two largest portfolio companies, Broadview Networks Holdings,
Inc. (Broadview) and Cleartel Communications, Inc. (Cleartel) are CLECs. Our remaining investments in the communications industry include telecommunications tower companies, rural local exchange carriers, Internet service
providers, wireless companies and security alarm companies. See Results of Operations for additional information regarding our investments in Broadview and Cleartel.



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Asset Quality

Asset quality is generally a function of portfolio company performance, economic conditions, and our underwriting and ongoing management of our investment portfolio. In addition to various risk management and
monitoring tools, we also use an investment rating system to characterize and monitor our expected level of returns on each investment in our portfolio. We use the following 1 to 5 investment rating scale:



|                 |  |                                                                                                                                                                
|---------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|InvestmentRating |  | Summary Description                                                                                                                                            
|1                |  | Capital gain expected or realized                                                                                                                              
|2                |  | Full return of principal and interest or dividend expected with customer performing in accordance with plan                                                    
|3                |  | Full return of principal and interest or dividend expected but customer requires closer monitoring                                                             
|4                |  | Some loss of interest or dividend expected but still expecting an overall positive internal rate of return on the investment                                   
|5                |  | Loss of interest or dividend and some loss of principal investment expected which would result in an overall negative internal rate of return on the investment

The following table shows the distribution of our investments on the 1 to 5 investment rating
scale at fair value as of March 31, 2007 and December 31, 2006:



|                      |  |  |  |                          |         |     |                              |       |   |                          |   |         |                              |  |       |  
|--------------------- |  |  |  | ------------------------ | ------- | --- | ---------------------------- | ----- | - | ------------------------ | - | ------- | ---------------------------- |  | ----- | -
|(dollars in millions) |  |  |  |                          |         |     |                              |       |  
|                      |  |  |  | March 31, 2007           |         |     | December 31, 2006            |      
|Investment Rating     |  |  |  | Investments atFair Value |         |     | Percentage ofTotal Portfolio |       |   | Investments atFair Value |   |         | Percentage ofTotal Portfolio | 
|1                     |  |  |  | $                        | 841.0   | (a) |                              | 62.2  | % |                          | $ | 785.3   | (a)                          |  | 62.4  | %
|2                     |  |  |  |                          | 261.0   |     |                              | 19.3  |   |                          |   | 285.5   |                              |  | 22.7  |  
|3                     |  |  |  |                          | 224.4   |     |                              | 16.6  |   |                          |   | 158.2   |                              |  | 12.6  |  
|4                     |  |  |  |                          | 24.7    |     |                              | 1.8   |   |                          |   | 23.6    |                              |  | 1.9   |  
|5                     |  |  |  |                          | 1.3     |     |                              | 0.1   |   |                          |   | 5.0     |                              |  | 0.4   |  
|                      |  |  |  |                          |         |     |                              |       |   |                          |   |         |                              |  |       |  
|                      |  |  |  | $                        | 1,352.4 |     |                              | 100.0 | % |                          | $ | 1,257.6 |                              |  | 100.0 | %
|                      |  |  |  |                          |         |     |                              |       |   |                          |   |         |                              |  |       |  



|(a) | At March 31, 2007 and December 31, 2006, approximately $466.0 million and $447.4 million, respectively, of our investments with an investment rating of 1 were
loans to companies in which we also hold equity securities or for which we have already realized a gain on our equity investment.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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When one of our loans becomes more than 90 days past due, or if we otherwise do not expect the customer
to be able to service its debt and other obligations, we will, as a general matter, place the loan on non-accrual status and will generally cease recognizing interest income on that loan until all past due principal and interest has been paid or
otherwise restructured such that the interest income is determined to be collectible. We may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection. The following table summarizes loans on
non-accrual status and loans greater than 90 days past due, at fair value, at March 31, 2007 and December 31, 2006:



|                                                             |  |                |       |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|------------------------------------------------------------ |  | -------------- | ----- | ------------------ | ----------------- | - | ------------------- | --- | - | --------- | - | ------------------ |  | --- | ------------------- |  | --- | -
|                                                             |  | March 31, 2007 |       |                    | December 31, 2006 |  
|(dollars in millions)                                        |  | FairValue      |       | % ofLoan Portfolio |                   |   | % ofTotal Portfolio |     |   | FairValue |   | % ofLoan Portfolio |  |     | % ofTotal Portfolio | 
|Loans greater than 90 days past due                          |  |                |       |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|On non-accrual status                                        |  | $              | 20.6  |                    | 2.1               | % |                     | 1.5 | % |           | $ | 20.1               |  | 2.2 | %                   |  | 1.6 | %
|Not on non-accrual status                                    |  |                | 1.8   |                    | 0.2               |   |                     | 0.1 |   |           |   | 1.8                |  | 0.2 |                     |  | 0.1 |  
|                                                             |  |                |       |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|Total loans greater than 90 days past due                    |  | $              | 22.4  |                    | 2.3               | % |                     | 1.6 | % |           | $ | 21.9               |  | 2.4 | %                   |  | 1.7 | %
|                                                             |  |                |       |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|Loans on non-accrual status                                  |  |                |       |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|0 to 90 days past due                                        |  | $              | 96.8  |                    | 10.0              | % |                     | 7.2 | % |           | $ | 15.3               |  | 1.7 | %                   |  | 1.2 | %
|Greater than 90 days past due                                |  |                | 20.6  |                    | 2.1               |   |                     | 1.5 |   |           |   | 20.1               |  | 2.2 |                     |  | 1.6 |  
|                                                             |  |                |       |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|Total loans on non-accrual status                            |  | $              | 117.4 |                    | 12.1              | % |                     | 8.7 | % |           | $ | 35.4               |  | 3.9 | %                   |  | 2.8 | %
|                                                             |  |                |       |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|Loans on non-accrual status or greater than 90 days past due |  | $              | 119.2 |                    | 12.3              | % |                     | 8.8 | % |           | $ | 37.2               |  | 4.1 | %                   |  | 2.9 | %
|                                                             |  |                |       |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  

The increase in loans on non-accrual status from $35.4 million at December 31, 2006 to $117.4
million at March 31, 2007 is primarily due to our investment in Cleartel, which we placed on non-accrual status during the three months ended March 31, 2007. During the first quarter of 2007, we invested $8.6 million of subordinated debt
in Cleartel, a CLEC serving primarily residential customers, and made changes to Cleartels debt structure, including changes to the interest rates and classes of subordinated debt. The amount we invested during the first quarter of 2007 is in
addition to the $19.8 million of subordinated debt that we invested in Cleartel during the fourth quarter of 2006 in connection with Cleartels acquisition of Supra Telecom (Supra), a Floridabased CLEC. As of March 31,
2007, we held multiple tranches of Cleartel subordinated debt with an aggregate fair value of $80.5 million. During the first quarter of 2007, Cleartels progress on the integration of Supra did not meet our expectations. As a result, the
realization of expected synergies has not occurred as timely as expected and Cleartel incurred an estimated EBITDA loss of $0.8 million during the first quarter of 2007, due to gross margin compression, which was not anticipated. No reductions were
recorded to the fair value of our Cleartel investments during the first quarter of 2007 since, at this time, we believe the expected synergies will be achieved over the next several quarters. However, since our Cleartel investment is a control
investment and because Cleartel is not currently generating sufficient earnings to service its capital structure, we have placed the investment on non-accrual status until the underlying financial results and cash flows of Cleartel improve.
Cleartels underperformance during the quarter reduced our first quarter 2007 revenue, distributable net operating income, net operating income, and net income by approximately $3.0 million. Placing Cleartel on non-accrual status increased the
percentage of our loan portfolio on non-accrual status at March 31, 2007 by 8.3% to 12.1%. At March 31, 2007, Cleartel represented approximately 6.0% of the fair value of our investments compared to 5.8% of the fair value of our
investments at December 31, 2006. Cleartel was one of the portfolio companies for which an independent valuation was obtained as of December 31, 2006.

Our ability to recognize income from our investment in Cleartel in future periods will be dependent on the performance and value of Cleartel.



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Results of Operations

Comparison of the Three Months Ended March 31, 2007 and 2006

The following table shows the
components of our net income for the three months ended March 31, 2007 and 2006:



|                                                                                                |  |      |      |      |   |        |  |   |                  |   |  |     |   
|----------------------------------------------------------------------------------------------- |  | ---- | ---- | ---- | - | ------ |  | - | ---------------- | - |  | --- | --
|(dollars in millions)                                                                           |  | 2007 |      | 2006 |   | Change |  |   | PercentageChange |  
|Revenue                                                                                         |  |      |      |      |   |        |  |   |                  |   |  |     |   
|Interest and dividend income                                                                    |  | $    | 35.6 |      | $ | 30.1   |  | $ | 5.5              |   |  | 18  | % 
|Loan fees                                                                                       |  |      | 1.1  |      |   | 2.4    |  |   | (1.3             | ) |  | (54 | %)
|                                                                                                |  |      |      |      |   |        |  |   |                  |   |  |     |   
|Total interest and dividend income                                                              |  |      | 36.7 |      |   | 32.5   |  |   | 4.2              |   |  | 13  | % 
|Advisory fees and other income                                                                  |  |      | 3.4  |      |   | 5.2    |  |   | (1.8             | ) |  | (35 | %)
|                                                                                                |  |      |      |      |   |        |  |   |                  |   |  |     |   
|Total revenue                                                                                   |  |      | 40.1 |      |   | 37.7   |  |   | 2.4              |   |  | 6   | % 
|                                                                                                |  |      |      |     
|Operating expenses                                                                              |  |      |      |      |   |        |  |   |                  |   |  |     |   
|Interest expense                                                                                |  |      | 9.1  |      |   | 8.9    |  |   | 0.2              |   |  | 2   | % 
|Employee compensation:                                                                          |  |      |      |      |   |        |  |   |                  |   |  |     |   
|Salaries and benefits                                                                           |  |      | 5.5  |      |   | 5.5    |  |   |                 |   |  |    | % 
|Amortization of employee restricted stock                                                       |  |      | 3.0  |      |   | 0.6    |  |   | 2.4              |   |  | 400 | % 
|                                                                                                |  |      |      |      |   |        |  |   |                  |   |  |     |   
|Total employee compensation                                                                     |  |      | 8.5  |      |   | 6.1    |  |   | 2.4              |   |  | 39  | % 
|General and administrative expense                                                              |  |      | 2.5  |      |   | 1.9    |  |   | 0.6              |   |  | 32  | % 
|                                                                                                |  |      |      |      |   |        |  |   |                  |   |  |     |   
|Total operating expenses                                                                        |  |      | 20.1 |      |   | 16.9   |  |   | 3.2              |   |  | 19  | % 
|                                                                                                |  |      |      |     
|Net operating income before investment gains and provision for income taxes on investment gains |  |      | 20.0 |      |   | 20.8   |  |   | (0.8             | ) |  | (4  | %)
|                                                                                                |  |      |      |     
|Net investment gains before provision for taxes                                                 |  |      | 10.8 |      |   | 5.6    |  |   | 5.2              |   |  | 93  | % 
|                                                                                                |  |      |      |     
|Provision for income taxes                                                                      |  |      | 0.3  |      |   |       |  |   | 0.3              |   |  | 100 | % 
|                                                                                                |  |      |      |      |   |        |  |   |                  |   |  |     |   
|Net income                                                                                      |  | $    | 30.5 |      | $ | 26.4   |  | $ | 4.1              |   |  | 16  | % 
|                                                                                                |  |      |      |      |   |        |  |   |                  |   |  |     |   

Total Revenue

Total revenue includes interest and dividend income, loan fees and advisory fees and other income. The level of interest income is directly related to the balance of the interest-bearing investment portfolio
outstanding during the period multiplied by the weighted average yield. The weighted average yield varies from period to period based on the current stated interest rate on interest-bearing investments and the amounts of loans for which interest is
not accruing. Dividend income results from dividends earned on our equity investments or from dividends declared and paid by our portfolio companies. Dividend income will vary from period to period depending upon the level of yield on our equity
investments and the amount of equities outstanding, as well as the value of the underlying securities.

Total interest and dividend income,
which includes loan fees, increased $4.2 million for the three months ended March 31, 2007 compared to the three months ended March 31, 2006. Interest income, exclusive of loan fees, decreased approximately $(0.3) million during the three
months ended March 31, 2007 compared to the three months ended March 31, 2006, due to a decrease in the spread to LIBOR in our loan portfolio, which had an impact of approximately $(1.6) million, and the decrease in our average loan
portfolio, which had an impact of approximately $(0.1) million, partially offset by the increase in LIBOR, which had an impact of approximately $1.4 million. The decrease in interest income was primarily the result of the placement of our Cleartel
investment on non-accrual status due to Cleartels underperformance during the quarter, which reduced our interest income during the three months ended March 31, 2007 by approximately $2.8 million. We include in interest income certain
amounts that we have not received in cash, such as contractual paid-in-kind (PIK) interest. PIK interest



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represents contractually deferred interest that is added to the loan balance and which may be prepaid either by contract or the portfolio companys
choice, but is generally paid at the end of the loan term. The following table shows the PIK related activity for the three months ended March 31, 2007 and 2006:



|                                        |  |      |      |   |      |   |      |  
|--------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|(dollars in millions)                   |  | 2007 |      |   | 2006 |  
|Beginning PIK loan balance              |  | $    | 11.1 |   |      | $ | 13.5 |  
|PIK interest earned during the period   |  |      | 2.9  |   |      |   | 4.3  |  
|Principal payments of cash on PIK loans |  |      | (3.7 | ) |      |   | (4.1 | )
|PIK loans purchased                     |  |      | 0.4  |   |      |   | (0.2 | )
|Interest Receivable converted to PIK    |  |      | 0.4  |   |      |   |     |  
|Realized loss                           |  |      |     |   |      |   | 1.6  |  
|                                        |  |      |      |   |      |   |      |  
|Ending PIK loan balance                 |  | $    | 11.1 |   |      | $ | 15.1 |  
|                                        |  |      |      |   |      |   |      |  

Dividend income increased approximately $5.8 million for the three months ended March 31,
2007 compared to the three months ended March 31, 2006, due to an increase in accrued preferred dividends. Certain of our equity investments have stated accruing dividend rates, for which we accrue dividends as they are earned to the extent we
believe they will ultimately be paid. The increase in accrued preferred dividends for the three months ended March 31, 2007 as compared to the three months ended March 31, 2006 was primarily due to an increase in accrued preferred dividends from our
investment in Broadview. We recognized dividend income equal to the contractual accruing dividend on our preferred equity investment in Broadview of approximately $7.1 million and $2.9 million for the three months ended March 31, 2007 and 2006,
respectively. Our dividend activity for the three months ended March 31, 2007 and 2006 was as follows:



|                                         |  |      |      |   |      |   |     
|---------------------------------------- |  | ---- | ---- | - | ---- | - | ----
|(dollars in millions)                    |  | 2007 |      |   | 2006
|Beginning accrued dividend balance       |  | $    | 33.6 |   |      | $ | 12.4
|Dividend income earned during the period |  |      | 9.3  |   |      |   | 3.5 
|Payment of previously accrued dividends  |  |      | (0.7 | ) |      |   |    
|                                         |  |      |      |   |      |   |     
|Ending accrued dividend balance          |  | $    | 42.2 |   |      | $ | 15.9
|                                         |  |      |      |   |      |   |     

Loan fees include origination fees on loans that are deferred and amortized into interest income
over the life of the loan. When repayments or restructurings with other than minor modifications occur, we accelerate the recognition of previously unamortized loan origination fees into loan fee income. These accelerations have the effect of
increasing current period income and may reduce future amortizable income. Because these repayments and restructurings may vary from period to period, the amount of loan origination fees that are recognized as interest income may also vary from
period to period. Loan fees decreased approximately $(1.3) million for the three months ended March 31, 2007 compared to the three months ended March 31, 2006 due to lower fee accelerations.

The following table shows our loan fee activity during the three months ended March 31, 2007 and 2006:



|                                  |  |      |      |   |      |   |      |  
|--------------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|(dollars in millions)             |  | 2007 |      |   | 2006 |  
|Beginning unearned income balance |  | $    | 9.5  |   |      | $ | 9.1  |  
|Additional deferred fees          |  |      | 1.9  |   |      |   | 1.7  |  
|Unearned income recognized        |  |      | (1.1 | ) |      |   | (2.4 | )
|                                  |  |      |      |   |      |   |      |  
|Ending unearned income balance    |  | $    | 10.3 |   |      | $ | 8.4  |  
|                                  |  |      |      |   |      |   |      |  

The total yield on our average debt portfolio at fair value for the three months ended
March 31, 2007 and 2006 was 12.1% and 12.7%, respectively. The average LIBOR for the three months ended March 31, 2007 was 5.4%, an increase of 0.6% from 4.8% for the three months ended March 31, 2006. The spread to average LIBOR on
our average loan portfolio at fair value for the three months ended March 31, 2007 was 6.5%, a decrease of approximately (0.8)% from 7.3% for the three months ended March 31, 2006, primarily the result of the placement of our Cleartel
investment on non-accrual status, as well as, an increase in the level of fixed rate loans and a decrease in amortizing fee income and fee accelerations.



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Advisory fees and other income primarily include fees related to advisory and management services, equity
structuring fees, syndication fees, prepayment fees, bank interest and other income. Advisory fees and other income are generally related to specific transactions or services and therefore may vary from period to period depending on the level and
types of services provided. The decrease in advisory fees and other income of $(1.8) million for the three months ended March 31, 2007 as compared to the three months ended March 31, 2006 was primarily due decreases in prepayment fees
of $(1.9) million and bank interest and other fees of approximately $(0.7) million partially offset by an increase in advisory and management fees of $0.8 million.

For the three months ended March 31, 2007, our largest portfolio company, Broadview, accounted for approximately $7.1 million, or 17.8%, of our total revenue compared to approximately $4.2 million, or 11.3%, of
our total revenue for the three months ended March 31, 2006. During the three months ended March 31, 2006, our revenue from our Broadview investment was comprised of interest and dividend income. During the third quarter of 2006, we
converted all our debt investments in Broadview to preferred stock, therefore during the three months ended March 31, 2007, our revenue from our Broadview investment was all in the form of dividend income. As of March 31, 2007, our
preferred stock investment in Broadview entitles us to a preferred claim of approximately $244.2 million, prior to claims by Broadview common shareholders. We are also entitled to accumulating dividends on our preferred stock investment, which
accumulate and compound quarterly at an annual rate of 12% on $244.2 million but are not payable in cash on a current basis. Based on our current investments in Broadview our future earnings will all be in the form of accumulating dividend income.
Further, because accumulating dividends are typically not considered part of taxable income until they are received in cash, it is possible that our GAAP earnings may exceed our taxable earnings by a significant amount until such time as this
investment is liquidated. Our ability to recognize income from our investment in Broadview on an ongoing basis will be dependent on the performance and value of Broadview.

During the three months ended March 31, 2007, we placed our investment in Cleartel, our second largest portfolio company, on non-accrual status and
did not recognize any revenue from this investment during the quarter, compared to $1.0 million, or 2.6%, of our total revenue for the three months ended March 31, 2006. As of March 31, 2007, we held Cleartel subordinated debt with a fair
value of $80.5 million and Cleartel preferred stock with a fair value of $0.6 million, which includes a decrease in the fair value of the preferred stock of $40.1 million, which was recorded during the fourth quarter of 2006. Cleartels
underperformance during the quarter reduced our first quarter 2007 revenue, distributable net operating income, net operating income, and net income by approximately $(3.0) million. Our ability to recognize income from our investment in Cleartel in
future periods will be dependent on the performance and value of Cleartel. See Net Investment Gains and Losses Before Provision for Income Taxes for additional discussion regarding our investment in Cleartel.

Total Operating Expenses

Operating expenses include
interest, employee compensation and general and administrative expenses. The increase in interest expense of approximately $0.2 million during the three months ended March 31, 2007 as compared to the three months ended March 31, 2006, is
primarily attributable to higher average borrowings.

Employee compensation includes base salaries and benefits, variable annual incentive
compensation, and amortization of employee restricted stock awards. Total salaries and benefits was approximately $5.5 million during the three months ended March 31, 2007 and March 31, 2006. Amortization of employee restricted stock awards is
non-cash compensation related to restricted stock awards granted in 2001, 2006, and 2007. During the quarter ended March 31, 2007, we recognized compensation expense related to restricted stock awards of approximately $3.0 million, compared to
approximately $0.6 million for the quarter ended March 31, 2006. We granted approximately 981,000 shares of restricted stock during the first quarter of 2007 pursuant to our 2006 Employee Restricted Stock Plan. The forfeiture provisions will
lapse quarterly with respect to 781,000 of these shares through December 31, 2010. The remaining 200,000 of the shares of restricted stock that were granted are subject to both time- and performance- based forfeiture provisions. The forfeiture
provisions lapsed for 50,000 of



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these shares during the quarter ended March 31, 2007. As a result, we recognized all of the compensation expense with respect to the remaining 150,000
performance-based shares over the next three years.

General and administrative expenses include legal and accounting fees, insurance
premiums, rent and various other expenses. General and administrative expenses increased approximately $0.6 million during the three months ended March 31, 2007 compared to the three months ended March 31, 2006, due to increases in amortization of
restricted stock for non-employee directors of approximately $0.2 million and increases in other general and administrative costs resulting from the growth of our business of approximately $0.4 million.

Net Operating Income Before Investment Gains and Losses and Provision For Income Taxes

Net operating income before investment gains and losses and provision for income taxes for the three months ended March 31, 2007 totaled $20.0 million, a
decrease of approximately $(0.8) million compared with $20.8 million for the three months ended March 31, 2006. This decrease is due to the items discussed above.

Distributable Net Operating Income (DNOI)

DNOI is net operating income before investment gains and losses and
provision for income taxes, as determined in accordance with GAAP, adjusted for amortization of employee restricted stock awards. We view DNOI and the related per share measures as useful and appropriate supplements to net operating income, net
income, earnings per share and cash flows from operating activities. DNOI serves as an additional measure of our operating performance exclusive of employee restricted stock amortization, which represents an expense of MCG but does not require
settlement in cash. DNOI should not be considered as an alternative to net operating income, net income, earnings per share or cash flows from operating activities (each computed in accordance with GAAP). Instead, DNOI should be reviewed in
connection with net operating income, net income, earnings per share and cash flows from operating activities in our consolidated financial statements, to help analyze how our business is performing.

DNOI for the three months ended March 31, 2007 was $23.0 million, or $0.40 per share, compared to $21.4 million, or $0.40 per share, for the three months
ended March 31, 2006. The following table shows a reconciliation of our reported net operating income before investment gains and losses and provision for income taxes to DNOI for the quarter ended March 31, 2007 and 2006:



|                                                                                                                            |  |      |        |      |   |       
|--------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------
|(in thousands, except per share data)                                                                                       |  |      |        |     
|                                                                                                                            |  | 2007 |        | 2006
|Net operating income before investment gains and losses and provision for income taxes                                      |  | $    | 20,046 |      | $ | 20,764
|Amortization of employee restricted stock awards                                                                            |  |      | 2,982  |      |   | 610   
|                                                                                                                            |  |      |        |      |   |       
|DNOI                                                                                                                        |  | $    | 23,028 |      | $ | 21,374
|                                                                                                                            |  |      |        |      |   |       
|Weighted average common shares outstanding                                                                                  |  |      | 58,067 |      |   | 53,197
|Weighted average common shares outstanding and dilutive common stock equivalents                                            |  |      | 58,134 |      |   | 53,197
|Earnings per common share - basic and diluted                                                                               |  | $    | 0.52   |      | $ | 0.50  
|Net operating income before investment gains and losses and provision for income taxes per common share - basic and diluted |  | $    | 0.35   |      | $ | 0.39  
|DNOI per share - basic and diluted                                                                                          |  | $    | 0.40   |      | $ | 0.40  

Net Investment Gains and Losses Before Provision for Income Taxes

Net investment gains before provision for income taxes totaled approximately $10.8 million for the three months ended March 31, 2007, compared to $5.6
million for the three months ended March 31, 2006. These amounts represent the total of net realized gains and losses, net unrealized appreciation and depreciation and reversals of unrealized appreciation and depreciation. Reversals of unrealized
appreciation and depreciation occur when a gain or loss becomes realized.



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The following table summarizes our gains and (losses) on investments and the change in our unrealized
appreciation and depreciation on investments for the three months ended March 31, 2007:

|                                   |  |                                   |  |               |  |                      |        |   |                        |   |        |                                    |  |   |                |   |  |   |        |  
|---------------------------------- |  | --------------------------------- |  | ------------- |  | -------------------- | ------ | - | ---------------------- | - | ------ | ---------------------------------- |  | - | -------------- | - |  | - | ------ | -
|                                   |  | Three Months Ended March 31, 2007 | 
|(dollars in thousands)             |  | Industry                          |  | Type          |  | Realized Gain/(Loss) |        |   | Unrealized Gain/(Loss) |   |        | Reversal of Unrealized (Gain)/Loss |  |   | NetGain/(Loss) |  
|Portfolio Company                  |  |                                   |  |               |  |                     
|Jet Plastica Investors, LLC        |  | Plastic Products                  |  | Control       |  | $                    | -      |   |                        | $ | 7,766  |                                    |  | $ | -              |   |  | $ | 7,766  |  
|Superior Industries Investors, LLC |  | Sporting Goods                    |  | Control       |  |                      | -      |   |                        |   | 2,415  |                                    |  |   | -              |   |  |   | 2,415  |  
|PremierGarage Holdings, LLC        |  | HomeFurnishings                   |  | Control       |  |                      | -      |   |                        |   | 1,419  |                                    |  |   | -              |   |  |   | 1,419  |  
|National Product Services, Inc.    |  | BusinessServices                  |  | Control       |  |                      | -      |   |                        |   | 949    |                                    |  |   | -              |   |  |   | 949    |  
|Platinum Wireless, Inc.            |  | Communications                    |  | Control       |  |                      | (1,149 | ) |                        |   | -      |                                    |  |   | 1,149          |   |  |   | -      |  
|Midwest Tower Partners, LLC        |  | Communications                    |  | Control       |  |                      | 3,642  |   |                        |   | (32    | )                                  |  |   | (3,642         | ) |  |   | (32    | )
|Flexsol Packaging Corp.            |  | Chemicals/Plastics                |  | Non-affiliate |  |                      | -      |   |                        |   | (315   | )                                  |  |   | -              |   |  |   | (315   | )
|Xfone, Inc                         |  | Communications                    |  | Affiliate     |  |                      | -      |   |                        |   | (369   | )                                  |  |   | -              |   |  |   | (369   | )
|D&B Towers, LLC                    |  | Communications                    |  | Non-affiliate |  |                      | -      |   |                        |   | (802   | )                                  |  |   | -              |   |  |   | (802   | )
|Other                              |  |                                   |  |               |  |                      | 34     |   |                        |   | (170   | )                                  |  |   | (120           | ) |  |   | (256   | )
|                                   |  |                                   |  |               |  |                      |        |   |                        |   |        |                                    |  |   |                |   |  |   |        |  
|Total                              |  |                                   |  |               |  | $                    | 2,527  |   |                        | $ | 10,861 |                                    |  | $ | (2,613         | ) |  | $ | 10,775 |  
|                                   |  |                                   |  |               |  |                      |        |   |                        |   |        |                                    |  |   |                |   |  |   |        |  

The following table summarizes our gains and (losses) on investments and the change in our
unrealized appreciation and depreciation on investments for the three months ended March 31, 2006:



|                                                |  |                |  |               |  |                                   |        |   |                       |   |       |                                  |  |   |                |   |  |   |       |  
|----------------------------------------------- |  | -------------- |  | ------------- |  | --------------------------------- | ------ | - | --------------------- | - | ----- | -------------------------------- |  | - | -------------- | - |  | - | ----- | -
|                                                |  |                |  |               |  | Three Months Ended March 31, 2006 |       
|(dollars in thousands) Portfolio Company        |  | Industry       |  | Type          |  | RealizedGain/(Loss)               |        |   | UnrealizedGain/(Loss) |   |       | Reversal ofUnrealized(Gain)/Loss |  |   | NetGain/(Loss) |  
|Stratford Schools Holdings, Inc.                |  | Education      |  | Affiliate     |  | $                                 |       |   |                       | $ | 2,005 |                                  |  | $ |               |   |  | $ | 2,005 |  
|Metropolitan Telecommunications Holding Company |  | Communications |  | Non-affiliate |  |                                   | 575    |   |                       |   | 795   |                                  |  |   |               |   |  |   | 1,370 |  
|SXC Health Solutions, Inc.                      |  | Healthcare     |  | Non-affiliate |  |                                   |       |   |                       |   | 1,179 |                                  |  |   |               |   |  |   | 1,179 |  
|Jenzabar, Inc.                                  |  | Technology     |  | Non-affiliate |  |                                   |       |   |                       |   | 631   |                                  |  |   |               |   |  |   | 631   |  
|I-55 Internet Services, Inc.                    |  | Communications |  | Non-affiliate |  |                                   |       |   |                       |   |      |                                  |  |   | 606            |   |  |   | 606   |  
|Jupitermedia Corporation                        |  | Technology     |  | Non-affiliate |  |                                   |       |   |                       |   | 451   |                                  |  |   |               |   |  |   | 451   |  
|Wiesner Publishing Company, LLC                 |  | Publishing     |  | Non-affiliate |  |                                   |       |   |                       |   | 450   |                                  |  |   |               |   |  |   | 450   |  
|Telecomm South, LLC                             |  | Communications |  | Control       |  |                                   | (1,493 | ) |                       |   |      |                                  |  |   | 1,493          |   |  |   |      |  
|Copperstate Technologies, Inc.                  |  | Security Alarm |  | Control       |  |                                   | (1,483 | ) |                       |   |      |                                  |  |   | 1,053          |   |  |   | (430  | )
|Fawcette Technical Publications Holding         |  | Publishing     |  | Control       |  |                                   |       |   |                       |   | (874  | )                                |  |   |               |   |  |   | (874  | )
|Other                                           |  |                |  |               |  |                                   | 185    |   |                       |   | 210   |                                  |  |   | (145           | ) |  |   | 250   |  
|                                                |  |                |  |               |  |                                   |        |   |                       |   |       |                                  |  |   |                |   |  |   |       |  
|Total                                           |  |                |  |               |  | $                                 | (2,216 | ) |                       | $ | 4,847 |                                  |  | $ | 3,007          |   |  | $ | 5,638 |  
|                                                |  |                |  |               |  |                                   |        |   |                       |   |       |                                  |  |   |                |   |  |   |       |  



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Our board of directors is responsible for determining the fair value of our portfolio investments on a
quarterly basis. As part of our process for determining the fair value of our portfolio of investments as of December 31, 2006 and March 31, 2007, we retained independent valuation firms to perform independent valuations on certain of our
portfolio companies and review certain of our fair value determinations. The independent valuations and the reviews were considered by our board of directors in its determination of the fair value of our portfolio companies as of
December 31, 2006 and March 31, 2007. We intend to continue to obtain independent valuations or reviews of our fair value determinations and to periodically update those valuations and reviews. The following table summarizes the
independent valuations and reviews that have been performed:



|                                                                                                                                                                       |  |                 |         |   |                  |   |       |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | - | ---------------- | - | ----- | -
|(dollars in millions)                                                                                                                                                  |  | TotalInvestment |         |   | EquityInvestment |  
|Total portfolio value at March 31, 2007                                                                                                                                |  | $               | 1,352.4 |   |                  | $ | 381.8 |  
|Number of companies in our portfolio as of March 31, 2007 for which independent valuations or reviews of our fair value determinations
were obtained                   |  |                 | 21      |   |                  |   | 19    |  
|Total value of companies in our portfolio as of March 31, 2007 for which independent valuations or reviews of our fair value
determinations were obtained              |  | $               | 736.7   |   |                  | $ | 306.8 |  
|% of portfolio value as of March 31, 2007 for which independent valuations or reviews of our fair value determinations were
obtained                                   |  |                 | 54      | % |                  |   | 80    | %
|% of portfolio value that is greater than one year old as of March 31, 2007 for which independent valuations or reviews of our fair value
determinations were obtained |  |                 | 63      | % |                  |   | 93    | %
|% of loans on non-accrual status as of March 31, 2007 for which independent valuations or reviews of our fair value determinations were
obtained                       |  |                 | 98      | % |                  |   | N/A   |  

We hold preferred stock in Broadview, a CLEC serving primarily business customers and our largest
portfolio company, with an aggregate fair value of $166.9 million at March 31, 2007, which includes an increase in the fair value of the preferred stock of $38.1 million, which was recorded during the fourth quarter of 2006. In February 2007,
Broadview signed a definitive agreement to acquire InfoHighway Communications Corp., a New York-based integrated provider of hosted and managed communications solutions serving more than 12,000 business customers in the Mid-Atlantic and Northeast
regions of the U.S. The transaction is expected to close in the second quarter of 2007 and is subject to regulatory approvals and other closing conditions. MCGs investment in Broadviews preferred stock is convertible into common stock
and represents approximately a 52% ownership of the preferred stock and approximately a 51% ownership interest on an as-if converted basis. As of March 31, 2007, our preferred stock investment entitles us to aggregate claims of approximately
$244.2 million, prior to any claims by Broadview common shareholders. We are also entitled to accumulating dividends on our preferred stock investment, which accumulate and compound quarterly at an annual rate of 12% on $244.2 million but are not
payable in cash on a current basis. Further, because accumulating dividends are typically not considered as part of taxable income until they are received in cash, it is possible that our GAAP earnings may exceed our taxable earnings by a
significant amount until such time as this investment is liquidated. Any amounts outstanding on Broadviews $210 million senior secured notes and $25 million revolving credit facility with a third party are payable prior to any payments of
preferred claims. Broadview was one of the portfolio companies for which an independent valuation was obtained as of December 31, 2006. At March 31, 2007, our Broadview investment represented approximately 12.3% of the fair value of our
total investments compared to 12.7% of the fair value of our total investments at December 31, 2006. Additionally, our investment in Broadview accounted for $7.1 million, or 17.8%, of our total revenue for the three months ended March 31,
2007, compared to $4.2 million, or 11.3%, of our total revenue for the three months ended March 31, 2006. Our ability to recognize income from our investment in Broadview on an ongoing basis will be dependent on the performance and value of
Broadview.

During the first quarter of 2007, we invested $8.6 million of subordinated debt in our second largest portfolio company,
Cleartel, a CLEC serving primarily residential customers, and made changes to Cleartels debt structure, including changes to the interest rates and classes of subordinated debt. The amount we invested during the first quarter of 2007 is in
addition to the $19.8 million of subordinated debt that we invested in



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Cleartel during the fourth quarter of 2006 in connection with Cleartels acquisition of Supra Telecom (Supra), a Florida-based CLEC. As of
March 31, 2007, we held multiple tranches of Cleartel subordinated debt with an aggregate fair value of $80.5 million and Cleartel preferred stock with a fair value of $0.6 million, which includes a decrease in the fair value of the preferred
stock of $40.1 million, which was recorded during the fourth quarter of 2006. During the first quarter of 2007, Cleartels progress on the integration of Supra did not meet our expectations. As a result, the realization of expected synergies
has not occurred as timely as expected and Cleartel incurred an estimated EBITDA loss of $0.8 million during the first quarter of 2007 which was not anticipated. No further reductions were recorded to the fair value of our Cleartel investments
during the first quarter of 2007 since, at this time, we believe the expected synergies will be achieved over the next several quarters. At March 31, 2007, Cleartel represented approximately 6.0% of the fair value of our investments compared to
5.8% of the fair value of our investments at December 31, 2006. Cleartel was one of the portfolio companies for which an independent valuation was obtained as of December 31, 2006. Our ability to recognize income from our investment in
Cleartel in future periods will be dependent on the performance and value of Cleartel.

Provision for Income Taxes

During the three months ended March 31, 2007, we recorded a provision for income taxes of $0.4 million primarily related to unrealized gains on our
investments which are owned by our taxable subsidiaries.

Net Income

Net income totaled approximately $30.5 million for the three months ended March 31, 2007, compared to $26.4 million for the three months ended March 31, 2006. The increase in net income is due to the items
discussed above.

Financial Condition, Liquidity and Capital Resources

Cash and Cash Equivalents, Cash, Securitization Accounts, and Cash, Restricted

At March 31,
2007 and December 31, 2006, we had $17.6 million and $21.7 million, respectively, in cash and cash equivalents. In addition, at March 31, 2007 and December 31, 2006, we had $20.9 million and $15.9 million, respectively, in cash,
securitization accounts. We also had $2.6 million of restricted cash as of March 31, 2007 and December 31, 2006. We primarily invest cash on hand in interest bearing deposit accounts. Cash, securitization accounts include principal and
interest payments received on securitized loans, which in certain cases are held in designated bank accounts until monthly or quarterly disbursements are made from the securitization trusts. In certain cases, we are required to use a portion of
these amounts to pay interest expense, reduce borrowings, or pay other amounts in accordance with the related securitization agreements, while in other cases we are permitted to use these amounts to acquire new loans into the securitization trusts.
Cash in securitization accounts negatively impacts our earnings since the interest we pay on borrowings typically exceeds the rate of return that we are able to earn on temporary cash investments. Our objective is to maintain sufficient cash on hand
to cover current funding requirements and operational needs.

For the three months ended March 31, 2007, net cash provided by
operating activities totaled $17.2 million, a decrease of approximately $(5.5) million from $22.7 million for the three months ended March 31, 2006. This decrease was due primarily to higher paid-in-kind interest and dividends and realized
gains on investments which are included in net income, an increase in cash securitization accounts from interest collections, and an increase in interest receivable, partially offset by higher net income and increases in amortization of restricted
stock awards, interest payable and unearned income. During the three months ended March 31, 2007, net cash used in investing activities was $(75.8) million compared to cash provided by investing activities of $2.3 million during the three
months ended March 31, 2006. This change is primarily the result of a decrease in cash received from principal payments on loans of approximately $42.9 million, an increase of approximately $38.2 million of originations, draws and advances on
loans, an increase of approximately $5.8 million in equity investments made



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and an increase of approximately $0.3 million in fixed asset purchases, partially offset by an increase in the proceeds from the sales of equity investments
of approximately $9.1 million. During the three months ended March 31, 2007, cash provided by financing activities was approximately $54.5 million compared to cash used in financing activities of $(28.5) million during the three months ended
March 31, 2006. This change is mainly due to an increase in proceeds from borrowings of approximately $59.1 million and a reduction in cash in securitization accounts for paydown of principal on debt of approximately $28.3 million, partially
offset by an increase in dividends paid of approximately $3.7 million.

Liquidity and Capital Resources

We expect our cash on hand and cash generated from operations, including the portion of the cash in securitization accounts that will be released to us or
used to purchase additional loans, will be adequate to meet our cash needs at our current level of operations. We intend to fund new investments using cash on hand, advances under our borrowing facilities and equity issuances. Our secured borrowing
facilities generally contain collateral requirements, including, but not limited to, asset mix, minimum diversity and rating and limitations on loan size. These collateral requirements limit our ability to fund certain new investments with advances
under such facilities, in which case we fund these investments using unsecured debt or equity financings.

During the three months ended
March 31, 2007 and 2006 we did not raise any proceeds by selling shares of newly issued common stock.

In order to satisfy the
requirements applicable to a regulated investment company, we intend to distribute to our stockholders substantially all of our income. In addition, as a business development company, we generally will be required to meet a coverage ratio of total
assets to total senior securities, which include all of our borrowings and any preferred stock we may issue in the future, of at least 200%. As of March 31, 2007, this ratio was 219%. This requirement limits the amount that we may borrow.

To fund growth in our investment portfolio in the future, we anticipate needing to raise additional capital from various sources,
including the equity markets and various debt markets.

Off-Balance Sheet Arrangements

We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our customers. These
instruments include commitments to extend credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. We attempt to limit our credit risk by conducting extensive due diligence and
obtaining collateral where appropriate.

Commitments to extend credit include the unused portions of commitments that obligate us to extend
credit in the form of loans, participations in loans or similar transactions. Commitments to extend credit would also include loan proceeds we are obligated to advance, such as loan draws, rotating or revolving credit arrangements, or similar
transactions. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the counterparty. Since many of the commitments are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.

As of March 31, 2007, we had unused commitments to extend credit to
our customers of $156.5 million, which are not reflected on our balance sheet. From time to time, we provide guarantees or standby letters of credit on behalf of our portfolio companies. As of March 31, 2007, we had guarantees and standby
letters of credit of approximately $13.3 million.



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Contractual Obligations

The following table shows our contractual obligations as of March 31, 2007:



|                                                  |  |                        |       |                 |   |           |  |           |     |              |   |      |  |   |      
|------------------------------------------------- |  | ---------------------- | ----- | --------------- | - | --------- |  | --------- | --- | ------------ | - | ---- |  | - | -----
|                                                  |  | Payments Due by Period
|(dollars in millions) Contractual Obligations (a) |  | Total                  |       | Less than1 year |   | 1-3 years |  | 4-5 years |     | After 5years
|Borrowings (b)                                    |  | $                      | 606.1 |                 | $ | 206.6     |  | $         |    |              | $ | 50.0 |  | $ | 349.5
|Future minimum rental obligations                 |  |                        | 11.6  |                 |   | 1.7       |  |           | 4.0 |              |   | 4.1  |  |   | 1.8  
|                                                  |  |                        |       |                 |   |           |  |           |     |              |   |      |  |   |      
|Total contractual obligations                     |  | $                      | 617.7 |                 | $ | 208.3     |  | $         | 4.0 |              | $ | 54.1 |  | $ | 351.3
|                                                  |  |                        |       |                 |   |           |  |           |     |              |   |      |  |   |      



|(a) | This excludes the unused commitments to extend credit to our customers of $156.5 million as discussed above.
|--- | ------------------------------------------------------------------------------------------------------------

|(b) | Borrowings under the MCG Commercial Loan Funding Trust Facility, the Commercial Loan Trust 2006-2, and the Revolving Unsecured Credit Facility are listed based on the contractual
maturity of the respective facility due to the revolving nature of the facilities.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Borrowings

The following table shows our borrowings as of March 31, 2007 and December 31, 2006:



|                                       |  |                 |       |                    |   |                 |  |                    |       |  |   |      
|-------------------------------------- |  | --------------- | ----- | ------------------ | - | --------------- |  | ------------------ | ----- |  | - | -----
|                                       |  | March 31, 2007  |       | December 31, 2006 
|(dollars in millions)                  |  | Facility Amount |       | Amount Outstanding |   | Facility Amount |  | Amount Outstanding
|Unsecured Notes                        |  | $               | 50.0  |                    | $ | 50.0            |  | $                  | 50.0  |  | $ | 50.0 
|Commercial Loan Trust 2006-2           |  |                 | 200.0 |                    |   | 82.9            |  |                    | 200.0 |  |   | 84.0 
|Commercial Loan Funding Trust Facility |  |                 |      |                    |   |                |  |                    | 250.0 |  |   | 84.0 
|Class A Variable Funding Certificates  |  |                 | 218.8 |                    |   | 89.7            |  |                    |      |  |   |     
|Class B Variable Funding Certificates  |  |                 | 31.2  |                    |   | 7.0             |  |                    |      |  |   |     
|Term Securitization                    |  |                 |       |                    |   |                 |  |                    |       |  |   |      
|Series 2006-1 Class A-1 Notes          |  |                 | 106.2 |                    |   | 106.2           |  |                    | 106.2 |  |   | 106.2
|Series 2006-1 Class A-2 Notes          |  |                 | 50.0  |                    |   | 32.0            |  |                    | 50.0  |  |   | 11.4 
|Series 2006-1 Class A-3 Notes          |  |                 | 85.0  |                    |   | 60.0            |  |                    | 85.0  |  |   | 35.0 
|Series 2006-1 Class B Notes            |  |                 | 58.8  |                    |   | 58.8            |  |                    | 58.8  |  |   | 58.8 
|Series 2006-1 Class C Notes            |  |                 | 45.0  |                    |   | 45.0            |  |                    | 45.0  |  |   | 45.0 
|Series 2006-1 Class D Notes            |  |                 | 47.5  |                    |   | 47.5            |  |                    | 47.5  |  |   | 47.5 
|Revolving Unsecured Credit Facility    |  |                 | 100.0 |                    |   | 27.0            |  |                    | 100.0 |  |   |     
|                                       |  |                 |       |                    |   |                 |  |                    |       |  |   |      
|Total                                  |  | $               | 992.5 |                    | $ | 606.1           |  | $                  | 992.5 |  | $ | 521.9
|                                       |  |                 |       |                    |   |                 |  |                    |       |  |   |      

For the above borrowings, the fair value of the borrowings approximates cost. The following table
shows our weighted average borrowings, the weighted average interest rate on all of our borrowings, including amortization of deferred debt issuance costs and commitment fees, the average LIBOR, and the average spread to LIBOR for the three months
ended March 31, 2007 and 2006:



|                                                                                |  |      |       |   |      |   |       |  
|------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|(dollars in millions)                                                           |  | 2007 |       |   | 2006 |  
|Weighted average borrowings                                                     |  | $    | 546.2 |   |      | $ | 533.9 |  
|Average LIBOR                                                                   |  |      | 5.4   | % |      |   | 4.8   | %
|Average spread to LIBOR, excluding amortization of deferred debt issuance costs |  |      | 1.0   | % |      |   | 1.0   | %
|Impact of amortization of deferred debt issuance costs                          |  |      | 0.3   | % |      |   | 0.9   | %
|                                                                                |  |      |       |   |      |   |       |  
|Total cost of funds                                                             |  |      | 6.7   | % |      |   | 6.7   | %
|                                                                                |  |      |       |   |      |   |       |  



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All of our debt facilities, except the Revolving Unsecured Credit Facility and the Unsecured Notes, are
funded through our bankruptcy remote, special purpose, wholly owned subsidiaries and, therefore, their assets may not be available to our creditors. In some cases, advances under our debt facilities are subject to certain other covenants, including
having sufficient levels of collateral and various restrictions on which loans we may leverage as collateral. We borrow directly, as well as indirectly, through credit facilities maintained by our subsidiaries.

Unsecured Notes. On October 11, 2005, we issued $50.0 million of investment grade five-year unsecured notes in a private placement. The notes
were rated BBB- by Fitch Ratings, Inc. and have a fixed interest rate of 6.73% per year payable semi-annually. Bayerische Hypo-Und Vereinsbank, AG, New York Branch (HVB) acted as the placement agent for the issuance.

Commercial Loan Trust 2006-2. On May 2, 2006 we established, through MCG Commercial Loan Trust 2006-2, a $200.0 million
warehouse credit facility with Merrill Lynch Capital Corp. The warehouse credit facility allows MCG Commercial Loan Trust 2006-2 to acquire up to $250.0 million of commercial loans with borrowings of up to $200.0 million subject to certain
covenants, concentration limitations and other restrictions. The warehouse credit facility is primarily secured by the assets of MCG Commercial Loan Trust 2006-2, including the commercial loans purchased by the trust from us. Under the terms of the
credit and warehouse agreement, the loans may be senior secured loans, second lien loans or unsecured loans, as defined in the agreement, subject to certain limitations. Up to 60% of the collateral in this warehouse facility may be non-senior
secured loans, and the remaining 40% must be senior secured loans.

We use this warehouse credit facility to fund the origination of loans
that will collateralize a future term securitization. Advances under the facility, equal to 80% of the value of commercial loans purchased by the trust, bear interest based on LIBOR plus 0.75% and interest is payable monthly. The facility is
scheduled to terminate on the earlier of November 30, 2007 or the completion of a term securitization and may be extended under certain circumstances. As of March 31, 2007 we had $82.9 million outstanding under this facility.

MCG Commercial Loan Funding Trust. We have, through MCG Commercial Loan Funding Trust, a $250.0 million warehouse financing facility funded
through Three Pillars Funding LLC, an asset-backed commercial paper conduit administered by SunTrust Capital Markets, Inc. The warehouse financing facility operates like a revolving credit facility that is primarily secured by the assets of MCG
Commercial Loan Funding Trust, including commercial loans sold by us to the trust. The pool of commercial loans in the trust must meet certain requirements, including, but not limited to, term, average life, investment rating, agency rating and
industry diversity requirements. There are also certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs. Such limitations, requirements, and associated
defined terms are as provided for in the documents governing the facility. This facility is funded through two separate Variable Funding Certificates, or VFCs, a $218.8 million Class A VFC and a $31.2 million Class B VFC. Advances under the
Class A VFC may be up to 70% of eligible collateral and bear interest at the commercial paper rate plus 0.95%. Advances under the Class B VFC may be up to 10% of eligible collateral and bear interest at the commercial paper rate plus 1.75%. The
facility is scheduled to terminate on November 7, 2007, but is subject to annual renewal and may be extended under certain circumstances. During July 2006, the facility was renewed until July 27, 2007. As of March 31, 2007, we had
$89.7 million Class A VFC and $7.0 million Class B VFC outstanding under this credit facility. See Recent Developments for further discussion.

Commercial Loan Trust 2006-1. On April 18, 2006, we completed a $500.0 million debt securitization through MCG Commercial Loan Trust 2006-1, our wholly owned subsidiary. The 2006-1 Trust issued $106.2
million of Class A-1 Notes rated AAA / Aaa, $50.0 million of Class A-2 Notes rated AAA / Aaa, $85.0 million of Class A-3 Notes rated AAA / Aaa, $58.8 million of Class B Notes rated AA / Aa2, $45.0 million of Class C Notes rated A / A2
and $47.5 million of Class D Notes rated BBB / Baa2 as rated by Moodys and S&P, respectively. The Series 2006-1 Class A-1 Notes, Class A-2 Notes, Class A-3 Notes, Class B Notes, Class C Notes and Class D Notes bear interest
of LIBOR plus 0.33%, 0.35%, 0.33%, 0.58%, 1.05% and 2.25%, respectively.



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We retain all of the equity in the securitization. The securitization includes a reinvestment period of
five years, during which principal collections received on the underlying collateral may be used to purchase new collateral from us. Under the terms of the securitization, up to 55% of the collateral may be non-senior secured commercial loans and
the remaining 45% must be senior secured commercial loans.

The Class A-1, Class B, Class C and Class D Notes are term notes. The
Class A-2 Notes are a revolving class of secured notes and have a revolving period of five years. The Class A-3 Notes are a delayed draw class of secured notes and are required to be drawn by April 2007. All of the notes are secured by the
assets of MCG Commercial Loan Trust 2006-1, including commercial loans totaling $449.2 million as of March 31, 2007, which were purchased by the trust from us. Additional commercial loans will be purchased by the trust from us primarily using
the proceeds from the Class A-3 delayed draw notes and the Class A-2 revolving notes. The pool of commercial loans in the trust must meet certain requirements, including, but not limited to, asset mix and concentration, collateral
coverage, term, agency rating, minimum coupon, minimum spread and sector diversity requirements. As of March 31, 2007, we had $349.5 million of these notes outstanding.

Revolving Unsecured Credit Facility. This facility is a $100.0 million unsecured revolving credit facility established with HVB. The facility
allows for additional lenders with HVB acting as the agent. The $100.0 million commitment is maintained by four lenders. HVB, Chevy Chase Bank, Sovereign Bank and Royal Bank of Canada maintain $50.0 million, $10.0 million, $15.0 million, and $25.0
million commitments, respectively. Advances under this credit facility bear interest at LIBOR plus 2.00% or the prime rate plus 0.50%, and there is a commitment fee of 0.25% per annum on undrawn amounts. The credit facility contains customary
terms and conditions, including, without limitation, affirmative and negative covenants such as information reporting, minimum stockholders equity, minimum asset coverage ratio, minimum cash net operating income and a minimum ratio of earnings
before interest and taxes to interest expense. The credit facility also contains customary events of default with customary cure and notice, including, without limitation, nonpayment, misrepresentation in a material respect, breach of covenant,
cross-default to other indebtedness, bankruptcy, change of control, change of management, and material adverse change. As of March 31, 2007, we had approximately $27.0 million outstanding under this credit facility.

On December 13, 2004, we formed a subsidiary, Solutions Capital I, LP, which has applied to the United States Small Business Administration
(SBA) for a license to operate as a small business investment company (SBIC) under the Small Business Investment Act of 1958, as amended. We are currently in the pre-licensure phase of the licensing process and anticipate
completion of the licensing process during the spring of 2007. Upon receipt of the SBA license, we intend to apply for exemptive relief from the SEC to permit us to exclude senior securities issued by the SBA to Solutions Capital I, LP from our
consolidated asset coverage ratio, which will enable us to fund more investments with debt capital. There can be no assurance that we will be granted an SBIC license or receive the exemptive relief from the SEC.

Distributions

We intend to make distributions on a
quarterly basis to our stockholders of substantially all of our income. We may make deemed distributions to our stockholders of certain net capital gains.

As a business development company that has elected to be treated as a RIC, we generally are required to (1) timely distribute at least 90% of our investment company taxable income and 90% of any ordinary pre-RIC
built-in gains that we recognize in order to deduct distributions made (or deemed made) to our shareholders and (2) timely distribute (actually or on a deemed basis) at least 98% of our income (both ordinary income and net capital gains) in
order to avoid an excise tax.

We may not be able to achieve operating results that will allow us to make distributions at a specific level
or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a business development



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company under the Investment Company Act of 1940 and due to provisions in our credit facilities. If we do not distribute a certain percentage of our income
annually, we will suffer adverse tax consequences, including possible loss of favorable regulated investment company tax treatment. We cannot assure shareholders that they will receive any distributions or distributions at a particular level.

The following table summarizes our distributions declared since January 1, 2006:



|                  |  |                   |  |                  |  |        |     
|----------------- |  | ----------------- |  | ---------------- |  | ------ | ----
|Date Declared     |  | Record Date       |  | Payment Date     |  | Amount
|April 17, 2007    |  | May 24, 2007      |  | July 30, 2007    |  | $      | 0.44
|February 15, 2007 |  | March 15, 2007    |  | April 27, 2007   |  |        | 0.44
|October 26, 2006  |  | November 22, 2006 |  | January 30, 2007 |  |        | 0.42
|July 27, 2006     |  | August 24, 2006   |  | October 30, 2006 |  |        | 0.42
|April 27, 2006    |  | May 25, 2006      |  | July 28, 2006    |  |        | 0.42
|February 16, 2006 |  | March 16, 2006    |  | April 27, 2006   |  |        | 0.42

Since December 2001, we have declared distributions of $10.19 per share totaling over $427.5
million. For 2007, we currently estimate that our dividends will be at least $1.76 per share. This estimate takes into consideration our estimates of distributable net operating income, net income, capital gains and taxable income for 2007.

Each year a statement on Form 1099-DIV identifying the source of the distribution (i.e., paid from ordinary income, paid from net capital
gains on the sale of securities, and/or a return of paid-in-capital surplus which is a nontaxable distribution) is mailed to our stockholders. To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year,
a portion of those distributions may be deemed a tax return of capital to our stockholders. For the fiscal years ended December 31, 2006, 2005, 2004, and 2003 a portion of the distributions to our stockholders was deemed a return of capital.
For the quarter ended March 31, 2007, we declared a distribution of $0.44 per share. The determination of the tax attributes of our distributions is made annually as of the end of our fiscal year based upon our taxable income for the full year
and distributions paid for the full year, therefore a determination made on a quarterly basis may not be representative of the actual tax attributes of our distributions for a full year. If we determined the tax attributes of our distributions
year-to-date as of March 31, 2007, 70.4% would be from ordinary income and 29.6% would be a return of capital for shareholders, however there can be no certainty to shareholders that this determination is representative of what the tax
attributes of our 2007 distributions to shareholders will actually be.

The following table is a reconciliation of GAAP net income to
taxable net income for the three-month period ended March 31, 2007 and the year ended December 31, 2006:



|                                                                                |  |                                  |      |   |                              |   |       |  
|------------------------------------------------------------------------------- |  | -------------------------------- | ---- | - | ---------------------------- | - | ----- | -
|(dollars in millions)                                                           |  | Three Months EndedMarch 31, 2007 |      |   | Year Ended December 31, 2006 |  
|Net income                                                                      |  | $                                | 30.5 |   |                              | $ | 100.9 |  
|Net change in unrealized appreciation on investments not taxable until realized |  |                                  | (8.2 | ) |                              |   | (34.6 | )
|Timing difference related to deductibility of long-term incentive compensation  |  |                                  | 0.3  |   |                              |   | 2.5   |  
|Interest income on non-accrual loans that is taxable                            |  |                                  | 5.4  |   |                              |   | 3.6   |  
|Dividend income accrued for GAAP purposes which is not yet taxable              |  |                                  | (8.6 | ) |                              |   | (21.6 | )
|Federal tax expense                                                             |  |                                  | 0.3  |   |                              |   | 2.7   |  
|Other, net                                                                      |  |                                  | (2.6 | ) |                              |   | (0.1  | )
|                                                                                |  |                                  |      |   |                              |   |       |  
|Taxable income before deductions for distributions                              |  | $                                | 17.1 |   |                              | $ | 53.4  |  
|                                                                                |  |                                  |      |   |                              |   |       |  



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Critical Accounting Policies

The consolidated financial statements are based on the selection and application of significant accounting policies, which require management to make
significant estimates and assumptions. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations.

Income Recognition

Interest and Dividend Income

Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected. When a loan becomes 90 days or more past
due, or if we otherwise do not expect the customer to be able to service its debt and other obligations, we will, as a general matter, place the loan on non-accrual status and cease recognizing interest income on that loan until all principal has
been paid. However, we may make exceptions to this policy if the investment has sufficient collateral value and is in the process of collection.

Dividend income on equity investments that have stated accruing dividend rates is recorded on the accrual basis to the extent that such amounts are expected to be collected. Dividend income on common equity investments is recorded when
declared and paid.

Contractual paid-in-kind (PIK) interest, which represents contractually deferred interest added to the loan balance
that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. We will generally cease accruing PIK interest if there is insufficient value to support the
accrual or we do not expect the customer to be able to pay all principal and interest due.

Loan origination fees are capitalized and then
amortized into interest income using the effective interest rate method. In certain loan arrangements, warrants or other equity interests are received from the borrower as additional origination fees. The borrowers granting these interests are
typically non-publicly traded companies. We record the financial instruments received at fair value as determined by our board of directors. Fair values are determined using various valuation models which estimate the underlying value of the
associated entity. These models are then applied to our ownership share considering any discounts for transfer restrictions or other terms which impact the value. Changes in these values are recorded through our statement of operations. Any
resulting discount on the loan from recordation of warrant and other equity instruments are accreted into income over the term of the loan.

Other Fee
Income

Other fee income is related to advisory and management services, equity structuring fees, prepayment fees, research revenues,
bank interest, and other fees. Advisory and management services fees are recognized when earned. Equity structuring fees are recognized as earned, which is generally when the investment transaction closes. Prepayment fees are recognized upon
receipt.

Valuation of Investments

We
determine the value of each investment in our portfolio on a quarterly basis. Value, as defined in Section 2(a)(41) of the Investment Company Act of 1940, is (i) the market price for those securities for which a market quotation is readily
available and (ii) for all other securities and assets, fair value is as determined in good faith by the board of directors. Since there is typically no readily available market value for the investments in our portfolio, we value substantially
all of our investments at fair value as determined in good faith by the board of directors pursuant to a valuation policy and a consistent valuation process. At March 31, 2007, approximately 96% of our total assets represented investments of
which approximately 96% are valued at fair value and approximately 4% are valued at market value based on readily ascertainable public market quotes at March 31,



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2007. Because of the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of
our investments determined in good faith by the board of directors may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.

There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the
specific facts and circumstances of each portfolio investment. Unlike banks, we are not permitted to provide a general reserve for anticipated loan losses. Instead, we determine the fair value of each individual investment on a quarterly basis and
record changes in fair value as unrealized appreciation or depreciation on investments in our statement of operations.

As a business
development company, we invest primarily in illiquid securities including debt and equity securities of private companies. The structure of each debt and equity security is specifically negotiated to enable us to protect our investment and maximize
our returns. We generally include many terms governing interest rate, repayment terms, prepayment penalties, financial covenants, operating covenants, ownership and corporate governance parameters, dilution parameters, liquidation preferences,
voting rights, and put or call rights. In some cases, our loan agreements also allow for increases in the spread to the base index rate if the financial or operational performance of the customer deteriorates or shows negative variances from the
customers business plan and, in some cases, allow for decreases in the spread if financial or operational performance improves or exceeds the customers plan. Our investments are generally subject to some restrictions on resale and
generally have no established trading market. Because of the type of investments that we make and the nature of our business, our valuation process requires an analysis of various factors. Our fair value methodology includes the examination of,
among other things, the underlying investment performance, financial condition and market changing events that impact valuation.

We base
the fair value of our investments on the enterprise value of the portfolio companies in which we invest. The enterprise value is the value at which an enterprise could be sold in a transaction between two willing parties other than through a forced
or liquidation sale. Typically, private companies are bought and sold based on multiples of EBITDA, cash flows, net income, revenues, or in limited cases, book value. There is no single methodology for determining enterprise value and for any one
portfolio company enterprise value is generally described as a range of values from which we derive a single estimate of enterprise value. In determining the enterprise value of a portfolio company, we analyze its historical and projected financial
results. We generally prepare discounted cash flow models based on our projections of the future free cash flows of the business and industry derived capital costs. We review external events, including private mergers and acquisitions, and include
these events in our enterprise valuation process. We also use industry valuation benchmarks and review public market comparables. In certain cases, we retain independent valuation firms to perform valuations that we consider as part of our
determination of portfolio company value. When an external event such as a purchase transaction, public offering, or subsequent debt or equity sale occurs, the pricing indicated by the external event may be used to corroborate our estimate of
enterprise value.

Using the estimated enterprise value of the portfolio company, we estimate the value of each investment we own in the
portfolio company. For our loans and debt securities, if there is adequate enterprise value to support the repayment of our debt then the fair value of our loan or debt security typically corresponds to cost unless the borrowers condition or
other factors lead to a determination of fair value at a different amount. The fair value of our equity investments is determined based on various factors including the enterprise value remaining for equity holders after the repayment of the
portfolio companys debt and other preference capital, as well as other pertinent factors such as recent offers to purchase a portfolio company, recent sales of the portfolio companys equity securities, recent liquidation events or other
events. The investment value is discounted if it is illiquid in nature and/or a minority, non-control position.

We also retain independent
valuation firms to perform independent valuations of certain of our portfolio companies and perform reviews of our fair value determinations. The independent valuations and reviews are



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considered by our Board of Directors in its determination of the fair value of our portfolio companies. We intend to continue to utilize independent
valuation firms to obtain additional support in the preparation of our internal valuation analyses each quarter.

Securities that are
traded in the over-the-counter market or on a stock exchange generally will be valued at the prevailing bid price on the date of the relevant period end. However, restricted or thinly traded public securities may be valued at discounts from the
public market value due to the restrictions on sale.

Share-based Compensation

Prior to January 1, 2006, we accounted for share based compensation in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. Effective January 1, 2006, we adopted the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment,
(SFAS No. 123R) using the modified prospective method. The adoption of SFAS No. 123R did not impact our net operating income before investment gains and losses, net income, cash flows from operations, cash flows from financing
activities, or basic and diluted earnings per share during that period. See Note 4 to the Consolidated Financial Statements for further discussion of our share-based compensation.

Securitization Transactions

Periodically, we transfer pools of loans to bankruptcy remote, special
purpose entities for use in securitization transactions. These transfers of loans are treated as secured borrowing financing arrangements in accordance with FASB SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. These on-balance sheet securitization transactions comprise a significant source of our overall funding, with the total face amount of the assets assumed by our consolidated bankruptcy remote special purpose
entities equaling $714.8 million at March 31, 2007 and $677.4 million at December 31, 2006.

Recent Accounting Pronouncements

In June 2006, the FASB issued FASB Interpretation No. 48 (FIN No. 48), Accounting for Uncertainty in
Income Taxesan interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also
provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 became effective as of January 1, 2007.

We conducted a review of all open tax years income recognition and expense deduction filing positions and income tax returns filed (federal and
state) for determination of any uncertain tax positions that may require recognition of a tax liability. This review encompassed an analysis of all book/tax difference adjustments as well as the timing of income and expense recognition for all tax
years still open under the statute of limitations. As a result, we determined that it is more likely than not that each tax position taken on a previously filed return or to be taken on current tax returns will be sustained on examination based on
the technical merits of the positions and therefore, no recognition of a tax liability on an uncertain tax position for FIN No. 48 purposes is anticipated.

In September 2006, the FASB issued SFAS No. 157 (SFAS No. 157), Fair Value Measurements. Among other requirements, SFAS No. 157 defines fair value and establishes a framework for
measuring fair value and also expands disclosure about the use of fair value to measure assets and liabilities. SFAS No. 157 is effective for the first fiscal year that begins after November 15, 2007. The Company is currently evaluating
the impact of SFAS No. 157 on its financial position and results of operations.



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Recent Developments

On April 3, 2007, we entered into the sixth amendment to our MCG Commercial Loan Funding Trust facility, funded by Three Pillars Funding LLC, an asset-backed commercial paper conduit administered by SunTrust
Capital Markets, Inc. Pursuant to this amendment, the scheduled termination date has been extended from November 2007 to November 2010. This facility remains subject to annual renewal by the lender. The next annual renewal date is July 27,
2007.

On April 24, 2007, we raised approximately $53.4 million in net proceeds from the sale of 3,000,000 shares of our common stock.
We expect to use the net proceeds from this offering to reduce borrowings under our Revolving Unsecured Credit Facility and our Commercial Loan Funding Trust Facility, to originate investments in primarily middle market private companies and for
general corporate purposes.



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

Interest rate sensitivity refers to the change in earnings that may result from changes in the level of interest rates. Our net interest income is affected by changes in various interest rates, including LIBOR, prime rates and commercial
paper rates. As of March 31, 2007, approximately 61% of our loan portfolio, at cost, bears interest at a spread to LIBOR or Prime, and 39% at a fixed rate. As of March 31, 2007, approximately 32% of our loan portfolio, at cost, has LIBOR
floors between 1.50% and 3.00% on the LIBOR base index.

We regularly measure exposure to interest rate risk. We assess interest rate risk
and we manage our interest rate exposure on an ongoing basis by comparing our interest rate sensitive assets to our interest rate sensitive liabilities. Based on this review, we determine whether or not any hedging transactions are necessary to
mitigate exposure to changes in interest rates. At March 31, 2007, we were not a party to any hedging arrangements. Certain of our interest bearing investments contain LIBOR floors between 1.50% and 3.00% on the LIBOR base index to minimize our
exposure to significant decreases in interest rates.

The following table shows a comparison of the interest rate base for our interest
bearing cash, outstanding commercial loans and our outstanding borrowings at March 31, 2007 and December 31, 2006:



|                          |  |                                          |         |                   |   |                                           |  |            |       |  |   |      
|------------------------- |  | ---------------------------------------- | ------- | ----------------- | - | ----------------------------------------- |  | ---------- | ----- |  | - | -----
|                          |  | March 31, 2007                           |         | December 31, 2006
|(dollars in millions)     |  | Interest BearingCash andCommercial Loans |         | Borrowings        |   | Interest Bearing Cash andCommercial Loans |  | Borrowings
|Repurchase Agreement Rate |  | $                                        | 38.3    |                   | $ |                                          |  | $          | 37.5  |  | $ |     
|Money Market Rate         |  |                                          | 2.6     |                   |   |                                          |  |            | 2.6   |  |   |     
|Prime Rate                |  |                                          | 0.9     |                   |   | 27.0                                      |  |            | 0.4   |  |   |     
|30-Day LIBOR              |  |                                          | 13.7    |                   |   |                                          |  |            | 14.5  |  |   |     
|60-Day LIBOR              |  |                                          |        |                   |   |                                          |  |            | 0.8   |  |   |     
|90-Day LIBOR              |  |                                          | 546.6   |                   |   | 432.4                                     |  |            | 522.0 |  |   | 388.0
|180-Day LIBOR             |  |                                          | 33.0    |                   |   |                                          |  |            | 42.6  |  |   |     
|9 month LIBOR             |  |                                          |        |                   |   |                                          |  |            | 1.3   |  |   |     
|Commercial Paper          |  |                                          |        |                   |   | 96.7                                      |  |            |      |  |   | 83.9 
|Fixed Rate                |  |                                          | 383.0   |                   |   | 50.0                                      |  |            | 334.8 |  |   | 50.0 
|                          |  |                                          |         |                   |   |                                           |  |            |       |  |   |      
|Total                     |  | $                                        | 1,018.1 |                   | $ | 606.1                                     |  | $          | 956.5 |  | $ | 521.9
|                          |  |                                          |         |                   |   |                                           |  |            |       |  |   |      



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Based on our March 31, 2007 balance sheet, the following table shows the impact to net income of
base rate changes in interest rates assuming no changes in our investment and borrowing structure:



|                      |  |                |       |   |                 |   |       |            |  |   |      |  
|--------------------- |  | -------------- | ----- | - | --------------- | - | ----- | ---------- |  | - | ---- | -
|(dollars in millions) |  |                |       |   |                 |   |       |            | 
|Basis Point Change    |  | InterestIncome |       |   | InterestExpense |   |       | Net Income | 
|(300)                 |  | $              | (18.6 | ) |                 | $ | (16.7 | )          |  | $ | (1.9 | )
|(200)                 |  |                | (12.7 | ) |                 |   | (11.1 | )          |  |   | (1.6 | )
|(100)                 |  |                | (6.4  | ) |                 |   | (5.6  | )          |  |   | (0.8 | )
|100                   |  |                | 6.4   |   |                 |   | 5.6   |            |  |   | 0.8  |  
|200                   |  |                | 12.7  |   |                 |   | 11.1  |            |  |   | 1.6  |  
|300                   |  |                | 19.1  |   |                 |   | 16.7  |            |  |   | 2.4  |  



|Item 4. | Controls and Procedures
|------- | -----------------------

As of the end of the
period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer have
concluded that our current disclosure controls and procedures are effective in timely alerting them of material information relating to us that is required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of
1934.

There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31,
2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

From time to time, we are a
party to certain legal proceedings incidental to the normal course of our business including the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot at this time be predicted
with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.



|Item 1A. | Risk Factors
|-------- | ------------

Investing in our common
stock involves a high degree of risk. You should consider carefully the risks described below and all other information contained in this Quarterly Report, including our financial statements and the related notes and the schedules and exhibits to
this Quarterly Report.

Because there is generally no established market from which to value most of our investments, our board of directors
determination of the value of our investments may differ materially from the values that a ready market or third party would attribute to these investments.

Under the 1940 Act, we are required to carry our portfolio investments at market value or, if there is no readily available market value, at fair value as determined by our board. We are not permitted to maintain a
general reserve for anticipated loan losses. Instead, we are required by the 1940 Act to specifically value each individual investment and to record any unrealized depreciation for any asset that we believe has decreased in value. Because there is
typically no public market for the securities of the companies in which we invest, our board will determine the fair value of these securities on a quarterly basis pursuant to our valuation policy. Because of the inherent uncertainty of determining
the fair value of investments that do not have a readily available market value, the fair value of our investments determined in good faith by the board of directors may differ significantly from the values that would have been used had a ready
market existed for the investments and the differences could be material.



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We primarily make investments in privately owned middle market companies, which may default on their loans or fail to
perform as we expect, thereby reducing or eliminating the return on our investments.

Our portfolio primarily consists of debt and
equity investments in privately owned middle market businesses. Compared to larger publicly owned companies, these middle market companies may be more vulnerable to economic downturns, may have more limited access to capital and higher funding
costs, may have a weaker financial position, and may need more capital to expand or compete. These businesses also may experience substantial variations in operating results. They may face intense competition, including from companies with greater
financial, technical and marketing resources. Typically, their success depends on the management talents and efforts of an individual or a small group of persons. The death, disability or resignation of any of their key employees could harm their
financial condition. Furthermore, some of these companies do business in regulated industries and could be affected by changes in government regulation. Accordingly, these factors could impair their cash flow or result in other events, such as
bankruptcy, which could limit their ability to repay their obligations to us, and may adversely affect the return on, or the recovery of, our investment in these businesses. Deterioration in a borrowers financial condition and prospects may be
accompanied by deterioration in any collateral for the loan.

Some of these companies may be unable to obtain financing from public capital
markets or from traditional credit sources, such as commercial banks. Accordingly, advances made to these types of customers may entail a higher risk of loss than advances made to customers who are able to utilize traditional credit sources,
including the risk that our loans may not be repaid.

Furthermore, there is generally no publicly available information about such
companies and we must rely on the diligence of our employees to obtain information in connection with our investment decisions. If we are unable to uncover all material information about these companies, we may not make a fully informed investment
decision and we may lose money on our investments.

If the industries in which we invest on a recurring basis, including the communications industry,
experience adverse economic or business conditions, our operating results may be negatively impacted.

From time to time we target
specific industries in which to invest on a recurring basis, which could cause a high concentration of our portfolio in a specific industry. At March 31, 2007, approximately 24.8% of our portfolio at fair value was invested in companies in the
communications industry. Of the 24.8% in the communications industry, 21.4% represents our investments in CLECs, and 3.4% represents our investments in other communications companies. If our customers in the communications industry, or any other
industry in which our portfolio is or may become concentrated, suffer due to adverse business conditions or due to economic slowdowns or downturns, we will be more vulnerable to losses in our portfolio and our operating results may be negatively
impacted.

Our financial results could be negatively affected if Broadview Networks Holdings, Inc. fails to perform as expected.

At March 31, 2007, our largest portfolio investment was Broadview Networks Holdings, Inc. (Broadview), which totaled $166.9 million at
fair value, or 12.3% of the fair value of our investments, and accounted for approximately $7.1 million, or 17.8% of our revenue during the three months ended March 31, 2007. We own preferred securities of Broadview, which entitle us to a
preferred claim of approximately $244.2 million, plus dividends, which accumulate at an annual rate of 12%, compounded quarterly, on our preferred claim. We currently recognize these dividends as income on a quarterly basis; however, our ability to
record income related to these accumulating dividends will be dependent upon the performance and value of Broadview. Our financial results could be negatively affected if this portfolio company fails to perform as expected or if we are unable to
recognize these dividends as income on a quarterly basis.



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Our ability to recognize income from our investment in Cleartel Communications, Inc. in future periods is dependent on
Cleartels performance and value.

Cleartel Communications, Inc. (Cleartel) is our second largest portfolio investment
and one of our control investments. We placed our investment in Cleartel on non-accrual status during the quarter ended March 31, 2007 because, at the time, Cleartel was not generating sufficient earnings to service its capital structure.
Cleartel represents approximately 6.0% of the fair value of our investments at March 31, 2007. As of March 31, 2007, we held Cleartel subordinated debt with a fair value of $80.5 million and Cleartel preferred stock with a fair value of
$0.6 million, which includes a decrease in the fair value of the preferred stock of $40.1 million, which was recorded during the fourth quarter of 2006. Cleartels future performance and value is largely dependent on the realization of
synergies in connection with Cleartels acquisition of Supra Telecom, a Florida-based CLEC, which Cleartel acquired during the fourth quarter of 2006. Our ability to recognize income from our Cleartel investment in future periods will be
dependent upon the performance, including the underlying financial results and cash flows, and value of Cleartel.

Economic downturns or recessions
could impair our customers financial position and operating results, which could, in turn, harm our operating results and reduce our volume of new investments.

Many of the companies in which we have made or will make investments may be susceptible to economic downturns or recessions. An economic downturn or recession may affect the ability of a company to repay our loans or
engage in a liquidity event, such as a sale, recapitalization or initial public offering. Therefore, our non-performing assets are likely to increase and the value of our portfolio is likely to decrease during these periods. Adverse economic
conditions also may decrease the value of collateral securing some of our loans and the value of our equity investments. Economic downturns or recessions could lead to financial losses in our portfolio and decreases in revenue, net income and
assets.

An economic downturn could disproportionately impact the industries in which we invest, causing us to be more vulnerable to losses
in our portfolio, which could negatively impact our financial results.

Unfavorable economic conditions also could increase our funding
costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing our investment originations and negatively impact our financial results.

If we fail to qualify as a regulated investment company, we will have to pay corporate-level taxes on our income and our income available for distribution would be
reduced.

We have elected to be taxed for federal income tax purposes as a regulated investment company under Subchapter M of the
Internal Revenue Code. If we can meet certain requirements, including source of income, asset diversification and distribution requirements, as well as if we continue to qualify as a business development company, we will qualify to be a regulated
investment company and will not have to pay corporate-level taxes on any income we distribute to our stockholders as dividends, allowing us to substantially reduce or eliminate our corporate-level tax liability. Covenants and provisions in our
credit facilities limit the ability of our subsidiaries and our securitization trusts to make distributions to us, which could affect our ability to make distributions to our stockholders and to maintain our status as a regulated investment company.
In addition, we may have difficulty meeting the requirement to make distributions to our stockholders because in certain cases we may recognize income before or without receiving cash representing such income. If we fail to qualify as a regulated
investment company, we will have to pay corporate-level taxes on all of our income whether or not we distribute it, which would substantially reduce the amount of income available for distribution to our stockholders. Even if we qualify as a
regulated investment company, we generally will be subject to a corporate-level income tax on the income we do not distribute. Moreover, if we do not timely distribute at least 98% of our income, we generally will be subject to a 4% excise tax.



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Because we will distribute substantially all of our income to our stockholders, we will continue to need additional
capital to finance our growth. If additional capital is unavailable or not available on favorable terms, our ability to grow will be impaired.

In order to satisfy the requirements applicable to a regulated investment company, we intend to distribute to our stockholders substantially all of our income. We may elect to make deemed distributions to our stockholders of certain net
capital gains. In addition, as a business development company, we generally will be required to meet a coverage ratio of total assets to total senior securities, which includes all of our borrowings and any preferred stock we may issue in the
future, of at least 200%. This requirement limits the amount that we may borrow. Because we will continue to need capital to grow our loan and investment portfolio, this limitation may prevent us from incurring debt and require us to raise
additional equity at a time when it may be disadvantageous to do so. Additional financing may not be available on favorable terms, if at all, or may be restricted by the terms of our debt facilities. If additional funds are not available to us, we
could be forced to curtail or cease our new lending and investment activities, and our net asset value could decrease.

We have substantial indebtedness
and servicing our indebtedness could reduce funds available to grow our business or make new investments.

As of March 31, 2007, we
had $606.1 million of outstanding borrowings under our debt facilities. As of March 31, 2007, the weighted average annual interest rate on all of our outstanding borrowings was 6.32%, excluding the amortization of deferred debt issuance costs.
In order for us to make our annual interest payments on indebtedness, we must achieve annual returns on our March 31, 2007 total assets of at least 2.72%. Our ability to service our debt depends largely on our financial performance and will be
subject to prevailing economic conditions and competitive pressures.

In addition, our subsidiaries have sold some of our loans to trusts
that serve as the vehicles for our securitization facilities, and these trusts, which are bankruptcy remote, hold legal title to these assets. However, we bear losses of principal and interest from defaults on these loans held by the trusts up to
the amount of our retained interest in the trusts, which was approximately $198.6 million as of March 31, 2007.

Our securitization
facilities impose financial and operating covenants that restrict our business activities, including limitations that could hinder our ability to finance additional loans and investments or to make the distributions required to maintain our status
as a regulated investment company under Subchapter M of the Internal Revenue Code. In addition, some of our debt facilities, including our unsecured notes, contain cross-default provisions, whereby a default under one of our debt facilities could
constitute a default under other debt facilities. In addition, if any two of Steven F. Tunney, our President and Chief Executive Officer, B. Hagen Saville, one of our Executive Vice Presidents, and Robert J. Merrick, our Chief Investment Officer
ceases to be an executive officer of MCG or a member of its board of directors, the lender of our $100.0 million revolving unsecured credit facility could, absent a waiver or cure, declare a default.

Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with
investing in our securities. Leverage is generally considered a speculative investment technique. If the value of our consolidated assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more
than it otherwise would have had we not utilized leverage. Conversely, if the value of our consolidated assets decreases, leveraging would cause net asset value attributable to our common stock to decline more than it otherwise would have had we not
utilized leverage. Similarly, any increase in our consolidated revenue in excess of consolidated interest expense on our borrowed funds would cause our net income to increase more than it would without the use of leverage. Any decrease in our
consolidated revenue would cause net income to decline more than it would have had we not borrowed funds and could negatively affect our ability to make distributions on our common stock.



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As a business development company, we generally are required to meet a coverage ratio of total assets to
total borrowings and other senior securities, which include all of our borrowings and any preferred stock we may issue in the future, of at least 200%. If this ratio declines below 200%, we may not be able to incur additional debt and may need to
sell a portion of our investments to repay some debt when it is disadvantageous to do so, and we may not be able to make distributions. At March 31, 2007, this ratio was approximately 219%.

In addition, because substantially all of our assets and liabilities are priced using various short-term rate indices, including one-month to six-month
LIBOR, commercial paper rates and the prime rate, the timing of changes in market interest rates or in the relationship between interest rate indices could affect the interest rates earned on interest-earning assets differently than the interest
rates paid on interest-bearing liabilities, which could result in a decrease in net income.

If we are not able to refinance our debt or able to do so
on favorable terms, we would not be able to operate our business in the ordinary course.

Our Revolving Unsecured Credit Facility is
scheduled to expire on June 18, 2007. Our Commercial Loan Funding Trust Facility $250.0 million warehouse financing facility through Three Pillars Funding, LLC is scheduled to terminate on November 7, 2010, but is subject to annual renewal
by the lender and may be extended under certain circumstances. The next renewal date for this facility is July 27, 2007.

We cannot
assure you that we will be able to extend the terms of these facilities or obtain sufficient funds to repay any amounts outstanding under these facilities before they expire or terminate either from a replacement facility or alternative debt or
equity financing. If we are unable to repay amounts outstanding under these facilities and are declared in default or are unable to refinance these facilities, we would not be able to operate our business in the regular course. Even if we are able
to refinance our debt, we may not be able to do so on favorable terms.

When we are a debt or minority equity investor in a portfolio company, we may
not be in a position to control the entity, and management of the company may make decisions that could decrease the value of our portfolio holdings.

We make both debt and minority equity investments. For these investments we are subject to the risk that a portfolio company may make business decisions with which we disagree, and the stockholders and management of
that company may take risks or otherwise act in ways that do not serve our interests. As a result, a portfolio company may make decisions that could decrease the value of our portfolio holdings.

Investments in equity securities involve a substantial degree of risk.

We may purchase common stock and other equity securities, including warrants. Although equity securities have historically generated higher average total returns than debt securities over the long term, equity
securities may experience more volatility in those returns than debt securities. The equity securities we acquire may fail to appreciate and may decline in value or lose all value, and our ability to recover our investment will depend on our
portfolio companys success. Investments in equity securities involve a number of significant risks, including the risk of further dilution as a result of additional issuances. Investments in preferred securities involve special risks, such as
the risk of deferred distributions, illiquidity and limited voting rights.

You may not receive distributions.

We intend to make distributions on a quarterly basis to our stockholders. We may not be able to achieve operating results that will allow us to make
distributions at a specific level or to increase the amount of these distributions from time to time. In addition, due to the asset coverage test applicable to us as a business development company, we may be limited in our ability to make
distributions. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of our status as a regulated investment company. We cannot assure you that you will receive any
distributions or distributions at a particular level.



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We may have difficulty paying our required distributions if we recognize income before or without receiving cash
representing such income.

In accordance with generally accepted accounting principles and tax regulations, we include in income certain
amounts that we have not yet received in cash, such as contractual payment-in-kind interest, which represents contractual interest added to the loan balance and due at the end of the loan term. The increases in loan balances as a result of
contracted payment-in-kind arrangements are included in income in advance of receiving cash payment, and are separately identified on our consolidated statements of cash flows. Since we may recognize income before or without receiving cash
representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our investment company taxable income to maintain regulated investment company tax treatment. See Managements Discussion and Analysis
of Financial Condition and Results of OperationsCritical Accounting Policies.

If we fail to manage our growth, our financial results could
be adversely affected.

We have expanded our operations significantly since purchasing our business from First Union National Bank in
1998. Our growth has placed and could continue to place significant strain on our management systems and resources. We must continue to refine and expand our marketing capabilities, our management of the investment process, our access to financing
resources and our technology. As we grow, we must continue to hire, train, supervise and manage new employees. We may not develop sufficient lending and administrative personnel and management and operating systems to manage our expansion
effectively. If we are unable to manage our growth, our operations could be adversely affected and our financial results could be adversely affected.

If we need to sell any of our investments, we may not be able to do so at a favorable price and, as a result, we may suffer losses.

Our investments are usually subject to contractual or legal restrictions on resale or are otherwise illiquid because there is usually no established trading market for such investments. The illiquidity of most of our investments may make it
difficult for us to dispose of them at a favorable price, and, as a result, we may suffer losses. In addition, if we were forced to immediately liquidate some or all of the investments in our portfolio, the proceeds of such liquidation could be
significantly less than the current value of such investments. We may be required to liquidate some or all of our portfolio to meet our debt service obligations or to maintain our qualification as a business development company and as a regulated
investment company if we do not satisfy one or more of the applicable criteria under the respective regulatory frameworks.

Our business depends on our
key personnel.

We depend on the continued services of our executive officers and other key management personnel. The loss of any of our
executive officers or key management personnel could result in inefficiencies in our operations and lost business opportunities, which could have a negative impact on our business.

Fluctuations in interest rates could adversely affect our income.

Because we sometimes borrow to
make investments, our net income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. A significant increase in market interest rates could harm our ability to attract new customers
and originate new loans and investments, our non-performing assets could increase and the value of our portfolio could decrease because our floating-rate loan customers may be unable to meet higher payment obligations. Due to the nature of the
portfolio companies to which we provide fixed rate financing, fluctuations in market rates have a limited impact on rates charged. As a result, an increase in market interest rates would generally have no effect on the existing fixed rate loans in
our



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portfolio. Conversely, a significant decrease in interest rates would reduce our net income, all other things being equal. A decrease in interest rates may
reduce net income despite the increased demand for our capital that the decrease in interest rates may produce. Approximately 61% of the loans in our portfolio, based on amounts outstanding at cost as of March 31, 2007, were at variable rates
determined on the basis of a benchmark LIBOR or prime rate and approximately 39% were at fixed rates. From January 1, 2006 to March 31, 2007, the three-month LIBOR has increased from 4.54% to 5.35%.

Regulations governing our operation as a business development company will affect our ability to, and the way in which we, raise additional capital.

We have issued debt securities and may issue debt securities and/or borrow money from banks or other financial institutions, which we refer to
collectively as senior securities, up to the maximum amount permitted by the 1940 Act. Under the provisions of the 1940 Act, we are permitted, as a business development company, to issue senior securities only in amounts such that our
asset coverage, as defined in the 1940 Act, equals at least 200% after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our
investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous.

We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the current net
asset value of the common stock if our board of directors determines that such sale is in the best interests of MCG and its stockholders, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued
and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any distributing commission or discount).

Any change in regulation of our business could negatively affect the profitability of our operations.

Changes in the laws, regulations or interpretations of the laws and regulations that govern business development companies, regulated investment companies
or non-depository commercial lenders could significantly affect our operations and our cost of doing business. We are subject to federal, state and local laws and regulations and are subject to judicial and administrative decisions that affect our
operations. If these laws, regulations or decisions change, or if we expand our business into jurisdictions that have adopted more stringent requirements than those in which we currently conduct business, we may have to incur significant expenses in
order to comply or we might have to restrict our operations.

Interpretations of the staff of the Securities and Exchange Commission regarding the
appropriateness of the consolidation of certain of our subsidiaries may have an impact on our financial statements.

The staff of the
Securities and Exchange Commission (the SEC Staff) is reviewing the appropriateness of the consolidation of certain types of subsidiaries on an industry wide basis under generally accepted accounting principles (GAAP) and
Rule 6-03 of Regulation S-X. In connection with such review, the SEC Staff is in the process of reviewing the appropriateness of our consolidation of certain of our subsidiaries (the Subsidiaries). In the event that the SEC Staff
disagrees with our position with respect to the appropriateness of consolidation of any of the Subsidiaries, then we will make such additional disclosures and prospective changes in accounting methods as the SEC Staff requires on a prospective basis
which will be discussed and reviewed with us.

Although we believe that our consolidation of the Subsidiaries conforms with GAAP, there can
be no assurance that the Staff will ultimately concur with our position. Such events could have a material impact on our future reported results.



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Certain loan payments and tax withholding reimbursements involving six of our current and former executive officers
may have violated Section 402 of the Sarbanes-Oxley Act of 2002.

As previously reported, the independent members of our Board of
Directors (the Independent Committee) have reviewed the timeliness of certain loan payments and tax withholding reimbursements involving six of our current and former executive officers and have reported these matters to the SEC Staff.

Section 402 of the Sarbanes-Oxley Act of 2002, which became effective on June 30, 2002, prohibits us from directly or indirectly
extending or maintaining credit, arranging for the extension of credit, or renewing an extension of credit, in the form of a personal loan to or for any of our directors or executive officers. An extension of credit maintained by us on June 30,
2002 is not subject to these prohibitions so long as there is no renewal or material modification to any such loan after that date.

The
Independent Committee has reported these matters to the SEC Staff and has also reported the results of the review to date to the SEC Staff. The review by the Independent Committee has now been substantially completed, although the SEC Staff has
requested that we furnish additional information. Based upon the facts known to the Independent Committee as of the present date, the Independent Committee has concluded that certain violations of our code of business conduct and ethics did occur
and reached no conclusion regarding Section 402 of Sarbanes-Oxley. The Independent Committee believes that it has fully cooperated with the SEC Staff and will continue to do so. The SEC Staff may also require further information in the future,
the nature and scope of which cannot be determined at this time.

As a result of our internal review, we may become subject to SEC
investigations and/or litigation, which may not be resolved favorably and will require significant management time and attention, and we could incur costs, which could negatively affect our business, results of operations and cash flows. There are
no assurances that an investigation or litigation will not commence, and if commenced, that it will result in the same conclusions as those reached in the Independent Committees review.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

During the three months ended March 31, 2007, we issued a total of 5,627 shares of common stock under our dividend reinvestment plan pursuant to an exemption from the registration requirements of the Securities Act of 1933. The
aggregate offering price for the shares of common stock sold under the dividend reinvestment plan was approximately $103,000.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

Not Applicable



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

Not Applicable

Item 5. Other Information

Not Applicable



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|Item 6. | Exhibits
|------- | --------

Listed below are the exhibits which are
filed as part of this report (according to the number assigned to them in Item 601 of Regulation S-K):



|              |  |                                                                                                                                                                                                                                                                                                         
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                 
|3.1           |  | Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 filed with MCG Capitals Current Report on Form 8-K
filed on May 31, 2005).                                                                                                                                             
|              | 
|3.2           |  | Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 filed with MCG Capitals Current Report on Form 8-K filed on
March 28, 2005).                                                                                                                                                     
|              | 
|4.1           |  | Specimen Common Stock Certificate (incorporated by reference to Exhibit D.1 to Pre-effective Amendment No. 2 to MCG Capitals
registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 1, 2001).                                           
|              | 
|10.1          |  | Third Amended and Restated Registration Rights Agreement by and among MCG Capital Corporation and certain stockholders (incorporated by
reference to Exhibit 10.1 filed with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                             
|              | 
|10.2          |  | 401(k) Plan (incorporated by reference to Exhibit i.1 filed with MCG Capitals registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission
on July 5, 2001).                                                                                              
|              | 
|10.3          |  | Deferred Compensation Plan (incorporated by reference to Exhibit i.2 filed with MCG Capitals registration statement on Form N-2 [File
No. 333-64596] filed with the Securities and Exchange Commission on July 5, 2001).                                                                               
|              | 
|10.4          |  | Dividend Reinvestment Plan (incorporated by reference to Exhibit e to Pre-effective Amendment No. 2 to MCG Capitals registration
statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 1, 2001).                                                    
|              | 
|10.5          |  | Form of Amended and Restated Restricted Stock Agreement for senior management (incorporated by reference to Exhibit i.26 to MCG
Capitals registration statement on Form N-2 [File No. 333-113236] filed with the Securities and Exchange Commission on March 3, 2004).                                 
|              | 
|10.6          |  | Amended and Restated Restricted Stock Agreement between the Company and Bryan J. Mitchell, dated March 1, 2004 (incorporated by reference
to Exhibit i.27 to MCG Capitals registration statement on Form N-2 [File No. 333-113236] filed with the Securities and Exchange Commission on March 3, 2004).
|              | 
|10.7          |  | Amended and Restated Restricted Stock Agreement between the Company and B. Hagen Saville, dated March 1, 2004 (incorporated by reference to
Exhibit i.29 to MCG Capitals registration statement on Form N-2 [File No. 333-113236] filed with the Securities and Exchange Commission on March 3, 2004). 
|              | 
|10.8          |  | Amended and Restated Restricted Stock Agreement between the Company and Steven F. Tunney, dated March 1, 2004 (incorporated by reference to
Exhibit i.28 to MCG Capitals registration statement on Form N-2 [File No. 333-113236] filed with the Securities and Exchange Commission on March 3, 2004). 
|              | 
|10.9          |  | Promissory Note issued to Bryan J. Mitchell, dated as of November 28, 2001 (incorporated by reference to Exhibit 10.34 filed with MCG
Capitals Form 10-K for the year ended December 31, 2001).                                                                                                        
|              | 
|10.10         |  | Promissory Note issued to B. Hagen Saville, dated as of November 28, 2001 (incorporated by reference to Exhibit 10.35 filed with MCG Capitals Form 10-K for the year ended
December 31, 2001).                                                                                                         



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|              |  |                                                                                                                                                                                                                                                                                                      
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                              
|10.11         |  | Promissory Note issued to Steven F. Tunney, dated as of November 28, 2001 (incorporated by reference to Exhibit 10.36 filed with MCG
Capitals Form 10-K for the year ended December 31, 2001).                                                                                                      
|              | 
|10.12         |  | Form of Promissory Note issued to senior management (incorporated by reference to Exhibit i.8 to Pre-effective Amendment No. 3 to MCG
Capitals registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 6, 2001).                      
|              | 
|10.13         |  | Form of Promissory Note issued to employees (incorporated by reference to Exhibit i.9 to Pre-effective Amendment No. 3 to MCG
Capitals registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 6, 2001).                              
|              | 
|10.14         |  | Pledge Agreement between the Company and Bryan J. Mitchell, dated as of November 28, 2001 (incorporated by reference to Exhibit 10.39 filed
with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                                      
|              | 
|10.15         |  | Pledge Agreement between the Company and B. Hagen Saville, dated as of November 28, 2001 (incorporated by reference to Exhibit 10.40 filed
with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                                       
|              | 
|10.16         |  | Pledge Agreement between the Company and Steven F. Tunney, dated as of November 28, 2001 (incorporated by reference to Exhibit 10.41 filed
with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                                       
|              | 
|10.17         |  | Form of Pledge Agreement between the Company and employee (incorporated by reference to Exhibit i.10 to Pre-effective Amendment No. 3 to
MCG Capitals registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 6, 2001).               
|              | 
|10.18         |  | Form of Amended and Restated Promissory Note issued to senior management (incorporated by reference to Exhibit I.10 to Pre-effective
Amendment No. 2 to MCG Capitals registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 1, 2001).
|              | 
|10.19         |  | Form of Pledge Agreement between the Company and senior management, dated as of June 24, 1998 (incorporated by reference to Exhibit i.7
filed with MCG Capitals registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on July 5, 2001).         
|              | 
|10.20         |  | Custodial Agreement between the Company and Riggs Bank, N.A. (incorporated by reference to Exhibit 10.45 filed with MCG Capitals Form
10-K for the year ended December 31, 2001).                                                                                                                   
|              | 
|10.21         |  | Deed of Lease by and between Twin Towers II Associates Limited Partnership, as landlord, and MCG Capital Corporation, as tenant, dated as
of September 24, 2002 (incorporated by reference to Exhibit 10.50 filed with MCG Capitals Form 10-Q for the quarter ended September 30, 2002).            
|              | 
|10.22         |  | Amended and Restated Employment Agreement between MCG Capital Corporation and Bryan J. Mitchell dated November 3, 2002 (incorporated by
reference to Exhibit 10.51 filed with MCG Capitals Form 10-Q for the quarter ended September 30, 2002).                                                     
|              | 
|10.23         |  | Employment Agreement between the Company and Michael R. McDonnell, dated July 14, 2004 (incorporated by reference to Exhibit 10.65 filed
with MCG Capitals Form 10-Q for the quarter ended June 30, 2004).                                                                                          



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.24         |  | Sale and Servicing Agreement by and among MCG Capital Corporation, MCG Commercial Loan Funding Trust, Three Pillars Funding, LLC, SunTrust
Capital Markets, Inc. and Wells Fargo Bank, National Association, dated as of November 10, 2004 (incorporated by reference to Exhibit f.37 filed with MCG Capitals registration statement on Form N-2 [File No. 333-121358] filed with the
Securities and Exchange Commission on December 17, 2004).
|              | 
|10.25         |  | Credit and Warehouse Agreement, dated as of April 21, 2005, among UBS AG, Stamford Branch, MCG Commercial Loan Trust 2005-1 and MCG Capital
Corporation (incorporated by reference to Exhibit 10.71 filed with MCG Capitals Form 10-Q for the quarter ended March 31, 2005).                                                                                                                                                                   
|              | 
|10.26         |  | Pledge, Security and Custody Agreement by and among MCG Commercial Loan Trust 2005-1, MCG Finance VI, LLC, MCG Capital Corporation, UBS AG,
Stamford Branch, and Wells Fargo Bank, National Association, dated as of April 21, 2005 (incorporated by reference to Exhibit 10.72 filed with MCG Capitals Form 10-Q for the quarter ended March 31, 2005).                                                                                       
|              | 
|10.27         |  | Master Conveyance Assignment, dated as of April 21, 2005, among MCG Capital Corporation, MCG Finance VI, LLC, and MCG Commercial Loan Trust
2005-1 (incorporated by reference to Exhibit 10.73 filed with MCG Capitals Form 10-Q for the quarter ended March 31, 2005).                                                                                                                                                                        
|              | 
|10.28         |  | First Amendment to Sale and Servicing Agreement by and among MCG Commercial Loan Funding Trust, MCG Capital Corporation, Three Pillars
Funding LLC, SunTrust Capital Markets, Inc. and Wells Fargo Bank, National Association, dated as of May 2, 2005 (incorporated by reference to Exhibit 10.74 filed with MCG Capitals Form 10-Q for the quarter ended March 31,
2005).                                                                    
|              | 
|10.29         |  | Credit and Warehouse Agreement, dated as of June 9, 2005, among Merrill Lynch Capital Corp., MCG Commercial Loan Trust 2005-2 and MCG
Capital Corporation (incorporated by reference to Exhibit 99.1 filed with MCG Capitals Current Report on Form 8-K filed on June 9, 2005).                                                                                                                                                                
|              | 
|10.30         |  | Second Amendment to Sale and Servicing Agreement, dated as of July 29, 2005 among MCG Commercial Loan Funding Trust, MCG Capital Corporation, Three Pillars Funding LLC, SunTrust Capital
Markets, Inc., and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.76 filed with MCG Capitals Form 10-Q for the quarter ended June 30, 2005).                                                                        
|              | 
|10.31         |  | Amended and Restated Revolving Credit Agreement dated as of September 20, 2005 among MCG Capital Corporation, Bayerische Hypo-Und
Vereinsbank, AG, New York Branch and Various Lenders (incorporated by reference to Exhibit 99.1 filed with MCG Capitals Current Report on Form 8-K filed on September 21, 2005).                                                                                                                             
|              | 
|10.32         |  | Note Purchase Agreement, dated October 11, 2005 (incorporated by reference to Exhibit 99.1 filed with MCG Capitals Current Report on
Form 8-K filed on October 12, 2005).                                                                                                                                                                                                                                                                      
|              | 
|10.33         |  | Third Amendment to Sale and Servicing Agreement, dated as of December 7, 2005 among MCG Commercial Loan Funding Trust, MCG Capital
Corporation, Three Pillars Funding LLC, SunTrust Capital Markets, Inc., and Wells Fargo Bank, National Association (incorporated by reference Exhibit 99.1 filed with MCG Capitals Current Report on Form 8-K filed on December 13,
2005).                                                                  
|              | 
|10.34         |  | Fourth Amendment to Sale and Servicing Agreement, dated as of April 17, 2006, among MCG Commercial Loan Funding Trust, MCG Capital
Corporation, Three Pillars Funding LLC, SunTrust Capital Markets, Inc., and Wells Fargo, National Association (incorporated by reference to Exhibit f.23 filed with MCG Capitals registration statement on Form N-2 [File No. 333-133669] filed
with the Securities and Exchange Commission on May 1, 2006).



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                      
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                                              
|10.35         |  | Indenture by and between MCG Commercial Loan Trust 2006-1 and Wells Fargo Bank, National Association, dated as of April 18, 2006
(incorporated by reference to Exhibit f.24 filed with MCG Capitals registration statement on Form N-2 [File No. 333-133669] filed with the Securities and Exchange Commission on May 1, 2006).                                                                                     
|              | 
|10.36         |  | Collateral Management Agreement, dated as of April 18, 2006, by and between MCG Commercial Loan Trust 2006-1 and MCG Capital Corporation
(incorporated by reference to Exhibit f.25 filed with MCG Capitals registration statement on Form N-2 [File No. 333-133669] filed with the Securities and Exchange Commission on May 1, 2006).                                                                             
|              | 
|10.37         |  | Class A-2 Note Purchase Agreement, dated as of April 18, 2006, among MCG Commercial Loan Trust 2006-1 and Wells Fargo Bank, National
Association (incorporated by reference to Exhibit f.26 filed with MCG Capitals registration statement on Form N-2 [File No. 333-133669] filed with the Securities and Exchange Commission on May 1, 2006).                                                                     
|              | 
|10.38         |  | Class A-3 Note Purchase Agreement, dated as of April 18, 2006, by and among MCG Commercial Loan Trust 2006-1, North Sea Funding Europe
Asset Purchasing Company No. 1 B.V. and Wells Fargo Bank, National Association (incorporated by reference to Exhibit f.27 filed with MCG Capitals registration statement on Form N-2 [File No. 333-133669] filed with the Securities and Exchange
Commission on May 1, 2006).
|              | 
|10.39         |  | Class A-3 Note Purchase Agreement, dated as of April 18, 2006 by and among MCG Commercial Loan Trust 2006-1, Barclays Bank PLC and Wells
Fargo Bank, National Association (incorporated by reference to Exhibit f.28 filed with MCG Capitals registration statement on Form N-2 [File No. 333-133669] filed with the Securities and Exchange Commission on May 1,
2006).                                            
|              | 
|10.40         |  | Credit and Warehouse Agreement, dated as of May 2, 2006, among Merrill Lynch Capital Corp., MCG Commercial Loan Trust 2006-2 and MCG
Capital Corporation (incorporated by reference to exhibit 10.60 filed with MCG Capitals Form 10-Q for the quarter ended March 31, 2006).                                                                                                                                       
|              | 
|10.41         |  | Custody Agreement, dated as of May 2, 2006, among MCG Capital Corporation, MCG Finance VIII, LLC, MCG Commercial Loan Trust 2006-2, Wells Fargo Bank, National Association and Merrill Lynch
Capital Corp. (incorporated by reference to exhibit 10.61 filed with MCG Capitals Form 10-Q for the quarter ended March 31, 2006).                                                                                     
|              | 
|10.42         |  | MCG Capital Corporation 2006 Non-Employee Director Restricted Stock Plan. (incorporated by reference to exhibit 10.62 filed with MCG
Capitals Form 10-Q for the quarter ended June 30, 2006).                                                                                                                                                                                                                       
|              | 
|10.43         |  | MCG Capital Corporation 2006 Employee Restricted Stock Plan. (incorporated by reference to exhibit 10.63 filed with MCG Capitals Form
10-Q for the quarter ended June 30, 2006).                                                                                                                                                                                                                                    
|              | 
|10.44         |  | Amendment No. 1 to the Second Amended and Restated Revolving Credit Agreement, dated as of August 7, 2006, by and among MCG Capital
Corporation, Bayerische Hypo-Und Vereinsbank AG, New York Branch and various lenders. (incorporated by reference to exhibit 10.64 filed with MCG Capitals Form 10-Q for the quarter ended June 30, 2006).                                                                       
|              | 
|10.45         |  | Severance Agreement and Release by and between Bryan J. Mitchell and MCG Capital Corporation, dated as of August 24, 2006 (incorporated by
reference to exhibit 10.1 filed with MCG Capitals Current Report on Form 8-K filed on August 28, 2006).                                                                                                                                                                  
|              | 
|10.46         |  | Employment Agreement by and between MCG Capital Corporation and Steven F. Tunney, dated as of September 18, 2006 (incorporated by reference
to exhibit 10.1 filed with MCG Capitals Current Report on Form 8-K filed on September 19, 2006).                                                                                                                                                                        



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|              |  |                                                                                                                                                                                                                                                                                                                                                                             
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                                                                     
|              | 
|10.47         |  | Employment Agreement by and between MCG Capital Corporation and B. Hagen Saville, dated as of September 18, 2006 (incorporated by reference
to exhibit 10.2 filed with MCG Capitals Current Report on Form 8-K filed on September 19, 2006).                                                                                                                               
|              | 
|10.48         |  | Employment Agreement by and between MCG Capital Corporation and Robert J. Merrick, dated as of September 18, 2006 (incorporated by
reference to exhibit 10.3 filed with MCG Capitals Current Report on Form 8-K filed on September 19, 2006).                                                                                                                              
|              | 
|10.49         |  | Amended and Restated Employment Agreement by and between MCG Capital Corporation and Michael R. McDonnell, dated as of September 18, 2006
(incorporated by reference to exhibit 10.4 filed with MCG Capitals Current Report on Form 8-K filed on September 19, 2006).                                                                                                      
|              | 
|10.50         |  | MCG Capital Corporation Supplemental Non-Qualified Retirement Plan Amended and Restated as of January 1, 2005 (incorporated by reference to
exhibit 10.70 filed with MCG Capitals Form 10-Q for the quarter ended September 30, 2006).                                                                                                                                     
|              | 
|10.51         |  | Third Amended and Restated Revolving Credit Agreement dated as of November 29, 2006 among MCG Capital Corporation, Bayerische Hypo Und
Vereinsbank, AG, New York Branch and Various Lenders (incorporated by reference to Exhibit 99.1 filed with MCG Capitals Current Report on Form 8-K filed on November 30, 2006).                                                     
|              | 
|10.52         |  | Fifth Amendment to Sale and Servicing Agreement, dated as of February 1, 2007, among MCG Commercial Loan Funding Trust, MCG Capital
Corporation, Three Pillars Funding LLC, SunTrust Capital Markets, Inc., and Wells Fargo, National Association (incorporated by reference to Exhibit 99.1 filed with MCG Capitals Current Report on Form 8-K filed on February 1,
2007).
|              | 
|10.53         |  | First Amendment to Deed of Lease by and between Twin Towers II Property Associates, LLC, as landlord and MCG Capital Corporation, as
tenant, dated as of November 30, 2006 (incorporated by reference to Exhibit 10.73 filed with MCG Capitals Form 10-K for the year ended December 31, 2006).                                                                            
|              | 
|10.54         |  | Employment Agreement by and between MCG Capital Corporation and Samuel G. Rubenstein, dated as of March 1, 2007 (incorporated by reference
to Exhibit 10.74 filed with MCG Capitals Form 10-K for the year ended December 31, 2006).                                                                                                                                       
|              | 
|10.55         |  | Form of Restricted Stock Agreement for Non-Employee Directors Pursuant to 2006 Non-Employee Director Restricted Stock Plan (incorporated by
reference to Exhibit 10.75 filed with MCG Capitals Form 10-K for the year ended December 31, 2006).                                                                                                                            
|              | 
|10.56         |  | Form of Restricted Stock Agreement for Employees Pursuant to 2006 Employee Restricted Stock Plan (incorporated by reference to Exhibit
10.76 filed with MCG Capitals Form 10-K for the year ended December 31, 2006).                                                                                                                                                      
|              | 
|10.57         |  | Sixth Amendment to Sale and Servicing Agreement, dated as of April 3, 2007, among MCG Commercial Loan Funding Trust, MCG Capital
Corporation, Three Pillars Funding LLC, SunTrust Capital Markets, Inc., and Wells Fargo, National Association (incorporated by reference to Exhibit 99.1 filed with MCG Capitals Current Report on Form 8-K filed on April 4,
2007).      
|              | 
|11            |  | Statement regarding computation of per share earnings is included in Note 6 to the Companys Notes to the Consolidated Financial
Statements.                                                                                                                                                                                                                                
|              | 
|31.1++        |  | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.                                                                                                                                                                                                                                                              
|              | 
|31.2++        |  | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.                                                                                                                                                                                                                                                              



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|              |  |                                                                                                                        
|------------- |  | -----------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                
|31.3++        |  | Certification of Chief Accounting Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.        
|              | 
|32.1++        |  | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350). 
|              | 
|32.2++        |  | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350). 
|              | 
|32.3++        |  | Certification of Chief Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U. S. C.
1350).

---

|++ | Filed Herewith
|-- | --------------



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on April 30, 2007.



MCG CAPITAL CORPORATIONBy:

/s/    STEVEN F.
TUNNEYSteven F. Tunney Chief Executive OfficerBy:

/s/    MICHAEL R. MCDONNELLMichael R. McDonnell Chief Financial OfficerBy:

/s/    JOHN C. WELLONSJohn C. Wellons Chief Accounting Officer




67