##### Table of Contents

---

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 September 30, 2006.



| ̈ | 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 November 1, 2006 was 57,986,481.



---



---

##### Table of Contents

MCG CAPITAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2006

TABLE OF CONTENTS



|           |  |                                                                                                                    |  |   
|---------- |  | ------------------------------------------------------------------------------------------------------------------ |  | --
|PART I     |  | FINANCIAL INFORMATION                                                                                              |  | 1 
|           |  |                                                                                                                   
|           |  | Selected Financial Data                                                                                            |  | 1 
|           |  |                                                                                                                   
|Item 1.    |  | Financial Statements                                                                                               |  |   
|           |  |                                                                                                                   
|           |  | Consolidated Balance SheetsSeptember 30, 2006 (unaudited) and December 31, 2005                                   |  | 2 
|           |  |                                                                                                                   
|           |  | Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2006 and 2005  |  | 3 
|           |  |                                                                                                                   
|           |  | Consolidated Statements of Changes in Net Assets (unaudited) for the nine months ended September 30, 2006 and 2005 |  | 4 
|           |  |                                                                                                                   
|           |  | Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2006 and 2005            |  | 5 
|           |  |                                                                                                                   
|           |  | Consolidated Schedule of Investments as of September 30, 2006 (unaudited)                                          |  | 6 
|           |  |                                                                                                                   
|           |  | Consolidated Schedule of Investments as of December 31, 2005                                                       |  | 12
|           |  |                                                                                                                   
|           |  | Notes to Consolidated Financial Statements (unaudited)                                                             |  | 19
|           |  |                                                                                                                   
|           |  | Report of Independent Registered Public Accounting Firm                                                            |  | 32
|           |  |                                                                                                                   
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                              |  | 33
|           |  |                                                                                                                   
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                         |  | 58
|           |  |                                                                                                                   
|Item 4.    |  | Controls and Procedures                                                                                            |  | 58
|           |  |                                                                                                                   
|PART II    |  | OTHER INFORMATION                                                                                                  |  | 60
|           |  |                                                                                                                   
|Item 1.    |  | Legal Proceedings                                                                                                  |  | 60
|           |  |                                                                                                                   
|Item 1A.   |  | Risk Factors                                                                                                       |  | 60
|           |  |                                                                                                                   
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                        |  | 67
|           |  |                                                                                                                   
|Item 3.    |  | Defaults Upon Senior Securities                                                                                    |  | 67
|           |  |                                                                                                                   
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                |  | 67
|           |  |                                                                                                                   
|Item 5.    |  | Other Information                                                                                                  |  | 67
|           |  |                                                                                                                   
|Item 6.    |  | Exhibits                                                                                                           |  | 67
|           | 
|Signatures |  | 74                                                                                                                



---

##### Table of Contents

PART I. FINANCIAL INFORMATION

In this Quarterly Report, the Company, MCG,
we, us and our refer to MCG Capital Corporation and its wholly owned consolidated subsidiaries (including its affiliated securitization trusts) unless the context otherwise requires.

Selected Financial Data

The following table sets forth selected financial data from our unaudited consolidated
financial statements. The 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 EndedSeptember 30, |           | Nine Months EndedSeptember 30,
|(dollars in thousands except per share and other period-end data)                                                         |  | 2006                            |           | 2005                           |   | 2006      |  | 2005
|Income statement data:                                                                                                    |  |                                 |           |                                |   |           |  |      |         |  |   |       
|Operating income                                                                                                          |  | $                               | 40,864    |                                | $ | 28,374    |  | $    | 113,771 |  | $ | 86,647
|Net operating income before investment gains and losses and provision for income taxes                                    |  |                                 | 20,064    |                                |   | 12,887    |  |      | 59,713  |  |   | 43,808
|Net income                                                                                                                |  |                                 | 22,116    |                                |   | 16,695    |  |      | 71,428  |  |   | 49,633
|                                                                                                                          |  |                                 |           |                               
|Per common share data:                                                                                                    |  |                                 |           |                                |   |           |  |      |         |  |   |       
|Net operating income before investment gains and losses and provision for income taxes per common share basic and diluted |  | $                               | 0.38      |                                | $ | 0.26      |  | $    | 1.12    |  | $ | 0.93  
|Earnings per common sharebasic and diluted                                                                               |  |                                 | 0.42      |                                |   | 0.34      |  |      | 1.34    |  |   | 1.05  
|Cash dividends declared per common share                                                                                  |  |                                 | 0.42      |                                |   | 0.42      |  |      | 1.26    |  |   | 1.26  
|                                                                                                                          |  |                                 |           |                               
|Selected period-end balances:                                                                                             |  |                                 |           |                                |   |           |  |      |         |  |   |       
|Total investment portfolio                                                                                                |  | $                               | 1,207,186 |                                | $ | 938,920   |  |      |         |  |   |       
|Total assets                                                                                                              |  |                                 | 1,276,156 |                                |   | 1,087,183 |  |      |         |  |   |       
|Borrowings                                                                                                                |  |                                 | 554,679   |                                |   | 432,913   |  |      |         |  |   |       
|Total stockholders equity                                                                                                |  |                                 | 676,604   |                                |   | 620,108   |  |      |         |  |   |       
|Net asset value per common share (a)                                                                                      |  |                                 | 12.67     |                                |   | 12.42     |  |      |         |  |   |       
|                                                                                                                          |  |                                 |           |                               
|Other period-end data:                                                                                                    |  |                                 |           |                                |   |           |  |      |         |  |   |       
|Number of portfolio companies                                                                                             |  |                                 | 90        |                                |   | 92        |  |      |         |  |   |       
|Number of employees (b)                                                                                                   |  |                                 | 85        |                                |   | 131       |  |      |         |  |   |       



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

|(b) | At September 30, 2005, we had 59 employees in our consolidated entity Kagan Research, LLC (Kagan). Effective January 1, 2006, Kagan no longer qualified as a
consolidated entity.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



1



---

##### Table of Contents

MCG Capital Corporation

Consolidated Balance Sheets

(in thousands, except per share data)



|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                                                |  | September 30,2006 |           |   | December 31,2005 |  
|                                                                                                                                                                                                                |  | (unaudited)       |           |   |                  |  
|Assets                                                                                                                                                                                                          |  |                   |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                                                                                                       |  | $                 | 30,737    |   |                  | $ | 45,626    |  
|Cash, securitization accounts                                                                                                                                                                                   |  |                   | 20,718    |   |                  |   | 82,107    |  
|Cash, restricted                                                                                                                                                                                                |  |                   | 658       |   |                  |   | 1,977     |  
|Investments at fair value                                                                                                                                                                                       |  |                   |           |   |                  |   |           |  
|Non-affiliate investments (cost of $631,818 and $733,717, respectively)                                                                                                                                         |  |                   | 654,322   |   |                  |   | 745,757   |  
|Affiliate investments (cost of $68,526 and $46,168, respectively)                                                                                                                                               |  |                   | 68,271    |   |                  |   | 46,156    |  
|Control investments (cost of $506,808 and $337,372, respectively)                                                                                                                                               |  |                   | 484,593   |   |                  |   | 305,647   |  
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Total investments (cost of $1,207,152 and $1,117,257, respectively)                                                                                                                                             |  |                   | 1,207,186 |   |                  |   | 1,097,560 |  
|Unearned income on commercial loans                                                                                                                                                                             |  |                   | (8,057    | ) |                  |   | (9,062    | )
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Total investments net of unearned income                                                                                                                                                                        |  |                   | 1,199,129 |   |                  |   | 1,088,498 |  
|Interest receivable                                                                                                                                                                                             |  |                   | 10,665    |   |                  |   | 10,602    |  
|Other assets                                                                                                                                                                                                    |  |                   | 14,249    |   |                  |   | 15,677    |  
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Total assets                                                                                                                                                                                                    |  | $                 | 1,276,156 |   |                  | $ | 1,244,487 |  
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Liabilities                                                                                                                                                                                                     |  |                   |           |   |                  |   |           |  
|Borrowings (maturing within one year of $119,843 and $362,435, respectively)                                                                                                                                    |  | $                 | 554,679   |   |                  | $ | 541,119   |  
|Interest payable                                                                                                                                                                                                |  |                   | 5,970     |   |                  |   | 5,904     |  
|Dividends payable                                                                                                                                                                                               |  |                   | 22,420    |   |                  |   | 20,967    |  
|Other liabilities                                                                                                                                                                                               |  |                   | 16,483    |   |                  |   | 10,410    |  
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                                                               |  |                   | 599,552   |   |                  |   | 578,400   |  
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Stockholders equity                                                                                                                                                                                            |  |                   |           |   |                  |   |           |  
|Preferred stock, par value $.01, authorized 1 share, none issued and outstanding                                                                                                                                |  |                   |          |   |                  |   |          |  
|Common stock, par value $.01, authorized 200,000 shares on September 30, 2006 and December 31, 2005, 53,382 issued and outstanding
on September 30, 2006 and 53,372 issued and outstanding on December 31, 2005 |  |                   | 534       |   |                  |   | 534       |  
|Paid-in capital                                                                                                                                                                                                 |  |                   | 757,531   |   |                  |   | 758,433   |  
|Distributions in excess of earnings:                                                                                                                                                                            |  |                   |           |   |                  |   |           |  
|Paid-in capital                                                                                                                                                                                                 |  |                   | (39,219   | ) |                  |   | (39,219   | )
|Other                                                                                                                                                                                                           |  |                   | (41,378   | ) |                  |   | (26,784   | )
|Net unrealized appreciation (depreciation) on investments                                                                                                                                                       |  |                   | 34        |   |                  |   | (19,697   | )
|Stockholder loans                                                                                                                                                                                               |  |                   | (898      | ) |                  |   | (3,624    | )
|Unearned compensationrestricted stock                                                                                                                                                                          |  |                   |          |   |                  |   | (3,556    | )
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Total stockholders equity                                                                                                                                                                                      |  |                   | 676,604   |   |                  |   | 666,087   |  
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|                                                                                                                                                                                                                |  |                  
|Total liabilities and stockholders equity                                                                                                                                                                      |  | $                 | 1,276,156 |   |                  | $ | 1,244,487 |  
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Net asset value per common share at period end                                                                                                                                                                  |  | $                 | 12.67     |   |                  | $ | 12.48     |  

See notes to consolidated financial statements



2



---

##### Table of Contents

MCG Capital Corporation

Consolidated Statements of Operations (unaudited)

(in thousands, except per share data)



|                                                                                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                           |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                                                           |  | 2006                            |        |   | 2005                           |   |        | 2006 |  |   | 2005    |  
|Operating income                                                                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Interest and dividend income                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Non-affiliate investments (less than 5% owned)                                                             |  | $                               | 21,164 |   |                                | $ | 17,210 |      |  | $ | 66,382  |   |  | $ | 49,995  |  
|Affiliate investments (5% to 25% owned)                                                                    |  |                                 | 1,886  |   |                                |   | 1,513  |      |  |   | 3,847   |   |  |   | 4,337   |  
|Control investments (more than 25% owned)                                                                  |  |                                 | 11,289 |   |                                |   | 7,235  |      |  |   | 30,023  |   |  |   | 23,067  |  
|                                                                                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total interest and dividend income                                                                         |  |                                 | 34,339 |   |                                |   | 25,958 |      |  |   | 100,252 |   |  |   | 77,399  |  
|Advisory fees and other income                                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Non-affiliate investments (less than 5% owned)                                                             |  |                                 | 1,933  |   |                                |   | 2,404  |      |  |   | 6,493   |   |  |   | 8,588   |  
|Affiliate investments (5% to 25% owned)                                                                    |  |                                 | 495    |   |                                |   |       |      |  |   | 1,621   |   |  |   |        |  
|Control investments (more than 25% owned)                                                                  |  |                                 | 4,097  |   |                                |   | 12     |      |  |   | 5,405   |   |  |   | 660     |  
|                                                                                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total advisory fees and other income                                                                       |  |                                 | 6,525  |   |                                |   | 2,416  |      |  |   | 13,519  |   |  |   | 9,248   |  
|                                                                                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total operating income                                                                                     |  |                                 | 40,864 |   |                                |   | 28,374 |      |  |   | 113,771 |   |  |   | 86,647  |  
|                                                                                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Operating expenses                                                                                         |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Interest expense                                                                                           |  |                                 | 9,808  |   |                                |   | 5,571  |      |  |   | 27,415  |   |  |   | 15,208  |  
|Employee compensation:                                                                                     |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Salaries and benefits                                                                                      |  |                                 | 6,667  |   |                                |   | 5,207  |      |  |   | 16,243  |   |  |   | 14,442  |  
|Long-term incentive compensation                                                                           |  |                                 | 1,249  |   |                                |   | 2,096  |      |  |   | 3,481   |   |  |   | 5,422   |  
|                                                                                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total employee compensation                                                                                |  |                                 | 7,916  |   |                                |   | 7,303  |      |  |   | 19,724  |   |  |   | 19,864  |  
|General and administrative expense                                                                         |  |                                 | 3,076  |   |                                |   | 2,613  |      |  |   | 6,919   |   |  |   | 7,767   |  
|                                                                                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                                                   |  |                                 | 20,800 |   |                                |   | 15,487 |      |  |   | 54,058  |   |  |   | 42,839  |  
|                                                                                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net operating income before investment gains and losses and provision for income taxes on investment gains |  |                                 | 20,064 |   |                                |   | 12,887 |      |  |   | 59,713  |   |  |   | 43,808  |  
|                                                                                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net realized gains (losses) on investments                                                                 |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Non-affiliate investments (less than 5% owned)                                                             |  |                                 |       |   |                                |   | 1,920  |      |  |   | 693     |   |  |   | 7,720   |  
|Affiliate investments (5% to 25% owned)                                                                    |  |                                 |       |   |                                |   |       |      |  |   | 9       |   |  |   | (190    | )
|Control investments (more than 25% owned)                                                                  |  |                                 | (2,243 | ) |                                |   | (5,196 | )    |  |   | (5,149  | ) |  |   | 13,150  |  
|                                                                                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total net realized gains (losses) on investments                                                           |  |                                 | (2,243 | ) |                                |   | (3,276 | )    |  |   | (4,447  | ) |  |   | 20,680  |  
|                                                                                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net unrealized appreciation (depreciation) on investments                                                  |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Non-affiliate investments (less than 5% owned)                                                             |  |                                 | 4,563  |   |                                |   | 3,928  |      |  |   | 10,464  |   |  |   | 5,112   |  
|Affiliate investments (5% to 25% owned)                                                                    |  |                                 | (476   | ) |                                |   | 1,307  |      |  |   | (244    | ) |  |   | 3,495   |  
|Control investments (more than 25% owned)                                                                  |  |                                 | 185    |   |                                |   | 1,849  |      |  |   | 9,511   |   |  |   | (23,462 | )
|                                                                                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total net unrealized appreciation (depreciation) on investments                                            |  |                                 | 4,272  |   |                                |   | 7,084  |      |  |   | 19,731  |   |  |   | (14,855 | )
|                                                                                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net investment gains before income taxes on investment gains                                               |  |                                 | 2,029  |   |                                |   | 3,808  |      |  |   | 15,284  |   |  |   | 5,825   |  
|Provision for income taxes on investment gains                                                             |  |                                 | 23     |   |                                |   |       |      |  |   | (3,569  | ) |  |   |        |  
|                                                                                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net investment gains net of tax                                                                            |  |                                 | 2,052  |   |                                |   | 3,808  |      |  |   | 11,715  |   |  |   | 5,825   |  
|                                                                                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net income                                                                                                 |  | $                               | 22,116 |   |                                | $ | 16,695 |      |  | $ | 71,428  |   |  | $ | 49,633  |  
|                                                                                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Earnings per common share basic and diluted                                                                |  | $                               | 0.42   |   |                                | $ | 0.34   |      |  | $ | 1.34    |   |  | $ | 1.05    |  
|Cash dividends declared per common share                                                                   |  | $                               | 0.42   |   |                                | $ | 0.42   |      |  | $ | 1.26    |   |  | $ | 1.26    |  
|Weighted average common shares outstanding                                                                 |  |                                 | 53,281 |   |                                |   | 49,560 |      |  |   | 53,236  |   |  |   | 47,287  |  
|Weighted average common shares outstanding and dilutive common stock equivalents                           |  |                                 | 53,281 |   |                                |   | 49,563 |      |  |   | 53,236  |   |  |   | 47,315  |  

See notes to consolidated financial statements



3



---

##### Table of Contents

MCG Capital Corporation

Consolidated Statements of Changes in Net Assets (unaudited)

(in thousands, except per share data)



|                                                                     |  |                                |         |   |      |   |         |  
|-------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                     |  | Nine Months EndedSeptember 30, |        
|                                                                     |  | 2006                           |         |   | 2005 |  
|Operations:                                                          |  |                                |         |   |      |   |         |  
|Net operating income                                                 |  | $                              | 59,713  |   |      | $ | 43,808  |  
|Net realized (loss) gain on investments                              |  |                                | (4,447  | ) |      |   | 20,680  |  
|Net unrealized appreciation (depreciation) of investments            |  |                                | 19,731  |   |      |   | (14,855 | )
|Provision for income taxes on investment gains                       |  |                                | (3,569  | ) |      |   |        |  
|                                                                     |  |                                |         |   |      |   |         |  
|Net increase in net assets resulting from operations                 |  |                                | 71,428  |   |      |   | 49,633  |  
|                                                                     |  |                                |         |   |      |   |         |  
|                                                                     |  |                               
|Shareholder distributions:                                           |  |                                |         |   |      |   |         |  
|Distributions from net investment income                             |  |                                | (66,291 | ) |      |   | (58,304 | )
|                                                                     |  |                                |         |   |      |   |         |  
|Net decrease in net assets resulting from shareholder distributions  |  |                                | (66,291 | ) |      |   | (58,304 | )
|                                                                     |  |                                |         |   |      |   |         |  
|                                                                     |  |                               
|Capital share transactions:                                          |  |                                |         |   |      |   |         |  
|Issuance of common stock                                             |  |                                |        |   |      |   | 70,382  |  
|Issuance of common stock under dividend reinvestment plan            |  |                                | 139     |   |      |   | 95      |  
|Repayments of stockholder loans                                      |  |                                | 2,726   |   |      |   | 257     |  
|Amortization of restricted stock awards                              |  |                                | 2,515   |   |      |   | 3,832   |  
|                                                                     |  |                                |         |   |      |   |         |  
|Net increase in net assets resulting from capital share transactions |  |                                | 5,380   |   |      |   | 74,566  |  
|                                                                     |  |                                |         |   |      |   |         |  
|Total increase in net assets                                         |  |                                | 10,517  |   |      |   | 65,895  |  
|Net assets at beginning of period                                    |  |                                | 666,087 |   |      |   | 554,213 |  
|                                                                     |  |                                |         |   |      |   |         |  
|Net assets at end of period                                          |  | $                              | 676,604 |   |      | $ | 620,108 |  
|                                                                     |  |                                |         |   |      |   |         |  
|                                                                     |  |                               
|Net asset value per common share                                     |  | $                              | 12.67   |   |      | $ | 12.42   |  
|                                                                     |  |                               
|Common shares outstanding at end of period                           |  |                                | 53,382  |   |      |   | 49,920  |  

See notes to consolidated financial statements



4



---

##### Table of Contents

MCG Capital Corporation

Consolidated Statements of Cash Flows (unaudited)

(in thousands)



|                                                                                     |  |                                |          |   |      |   |          |  
|------------------------------------------------------------------------------------ |  | ------------------------------ | -------- | - | ---- | - | -------- | -
|                                                                                     |  | Nine Months EndedSeptember 30, |         
|                                                                                     |  | 2006                           |          |   | 2005 |  
|Operating activities                                                                 |  |                                |          |   |      |   |          |  
|Net income                                                                           |  | $                              | 71,428   |   |      | $ | 49,633   |  
|Adjustments to reconcile net income to net cash provided by operating activities:    |  |                                |          |   |      |   |          |  
|Depreciation and amortization                                                        |  |                                | 238      |   |      |   | 593      |  
|Restricted stock compensation expense                                                |  |                                | 2,515    |   |      |   | 3,832    |  
|Amortization of deferred debt issuance costs                                         |  |                                | 3,737    |   |      |   | 2,201    |  
|Net realized losses (gains) on investments                                           |  |                                | 4,447    |   |      |   | (20,680  | )
|Net unrealized (appreciation) depreciation on investments                            |  |                                | (19,731  | ) |      |   | 14,855   |  
|Decrease (increase) in cashsecuritization accounts from interest collections        |  |                                | 4,125    |   |      |   | (7,564   | )
|Increase in interest receivable                                                      |  |                                | (32      | ) |      |   | (2,169   | )
|Increase in accrued payment-in-kind interest and dividends                           |  |                                | (22,971  | ) |      |   | (8,303   | )
|Decrease in unearned income                                                          |  |                                | (1,216   | ) |      |   | (1,311   | )
|Decrease in other assets                                                             |  |                                | 2,289    |   |      |   | 2,305    |  
|Increase in interest payable                                                         |  |                                | 66       |   |      |   | 503      |  
|Increase in other liabilities                                                        |  |                                | 8,391    |   |      |   | 1,432    |  
|                                                                                     |  |                                |          |   |      |   |          |  
|Net cash provided by operating activities                                            |  |                                | 53,286   |   |      |   | 35,327   |  
|                                                                                     |  |                                |          |   |      |   |          |  
|Investing activities                                                                 |  |                                |          |   |      |   |          |  
|Originations, draws and advances on loans                                            |  |                                | (308,119 | ) |      |   | (265,932 | )
|Principal payments on loans                                                          |  |                                | 308,838  |   |      |   | 212,248  |  
|Purchase of equity investments                                                       |  |                                | (71,856  | ) |      |   | (18,963  | )
|Proceeds from sales of equity investments                                            |  |                                | 2,665    |   |      |   | 22,157   |  
|Purchase of premises, equipment and software                                         |  |                                | (424     | ) |      |   | (185     | )
|                                                                                     |  |                                |          |   |      |   |          |  
|Net cash used in investing activities                                                |  |                                | (68,896  | ) |      |   | (50,675  | )
|                                                                                     |  |                                |          |   |      |   |          |  
|Financing activities                                                                 |  |                                |          |   |      |   |          |  
|Net proceeds from (payments on) borrowings                                           |  |                                | 48,152   |   |      |   | (7,037   | )
|Decrease (increase) in cashsecuritization accounts for paydown of principal on debt |  |                                | 22,670   |   |      |   | (18,279  | )
|Payment of financing costs                                                           |  |                                | (7,163   | ) |      |   | (641     | )
|Dividends paid                                                                       |  |                                | (65,803  | ) |      |   | (57,975  | )
|Issuance of common stock, net of costs                                               |  |                                | 139      |   |      |   | 70,477   |  
|Repayment of stockholder loans                                                       |  |                                | 2,726    |   |      |   | 257      |  
|                                                                                     |  |                                |          |   |      |   |          |  
|Net cash provided by (used in) financing activities                                  |  |                                | 721      |   |      |   | (13,198  | )
|                                                                                     |  |                                |          |   |      |   |          |  
|Decrease in cash and cash equivalents                                                |  |                                | (14,889  | ) |      |   | (28,546  | )
|Cash and cash equivalents at beginning of period                                     |  |                                | 45,626   |   |      |   | 82,732   |  
|                                                                                     |  |                                |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                           |  | $                              | 30,737   |   |      | $ | 54,186   |  
|                                                                                     |  |                                |          |   |      |   |          |  
|Supplemental disclosures                                                             |  |                                |          |   |      |   |          |  
|Interest paid                                                                        |  | $                              | 23,612   |   |      | $ | 12,504   |  
|Income taxes paid                                                                    |  |                                | 268      |   |      |   |         |  

See notes to consolidated financial statements



5



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments (unaudited)

September 30, 2006

(in
thousands, except share data)



|                                                                                                |  |                                 |  |                                                                                                                                                                                    |  |                                                   |  |           |             |   |   |                     |   |   |                      
|----------------------------------------------------------------------------------------------- |  | ------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------- |  | --------- | ----------- | - | - | ------------------- | - | - | ---------------------
|Portfolio Company                                                                               |  | Industry                        |  | Investment (8)                                                                                                                                                                     |  | Percentage ofClass Held ona FullyDiluted Basis(1) |  |          
|                                                                                                |  |                                 |  | Principal                                                                                                                                                                          |  | Cost                                              |  | FairValue
|Control investments: Majority-owned (5):                                                        |  |                                 |  |                                                                                                                                                                                    |  |                                                   |  |           |            
|Broadview Networks Holdings, Inc. (2) (13)                                                      |  | Communications-CLEC             |  | Series A Preferred Stock (87,254 shares) Series A-1
Preferred Stock (100,702 shares)                                                                                               |  | 97.9%100.0%                                       |  | $         |             |   | $ | 61,20653,609        |   | $ | 61,20653,609         
|                                                                                                |  | Common Stock (4,698,987 shares) |  | 53.1%                                                                                                                                                                              |  |                                                   |  |           |             |  |   |                     | 
|Chesapeake Tower Holdings, LLC                                                                  |  | Communications-Other            |  | Senior Debt (11.4%, Due 5/10)Preferred LLC Interest (3,139 units)Common LLC Interest (4,000 units)                                                                                 |  | 100.0%80.0%                                       |  |           | 400         |   |   | 4003,139           |   |   | 4003,139            
|Cleartel Communications, Inc. (2)                                                               |  | Communications-CLEC             |  | Subordinated Debt (10.9%, Due 6/09)Preferred Stock (57,862 shares)Common Stock (9 shares)Guaranty ($7,219)                                                                         |  | 99.1%0.005%                                       |  |           | 52,131      |   |   | 52,13150,614540     |   |   | 52,13140,684        
|Helicon Cable Holdings, LLC (2)                                                                 |  | Cable                           |  | Senior Debt (10.4%, Due 12/12) (12)Subordinated Debt (14.3%, Due 6/13) (12)Preferred LLC Interest (82,500 units)Standby Letter of Credit
($300)                                    |  | 73.3%                                             |  |           | 11,1506,550 |   |   | 11,1506,5508,953    |   |   | 11,1506,5508,953     
|JupiterKagan, Inc. (2) (11)                                                                     |  | InformationServices             |  | Senior Debt (12.3%, Due 3/10) (12)Series A Preferred Stock (100,000 shares)Common Stock (100,000 shares)Guaranty ($1,418)                                                          |  | 100.0%100.0%                                      |  |           | 3,949       |   |   | 3,94910,000        |   |   | 3,94910,000         
|Midwest Tower Partners, LLC (2)                                                                 |  | Communications-Other            |  | Senior Debt (11.0%,8/07)Subordinated Debt (16.2%, Due 2/07) (12)Preferred LLC Interest (17,563 units)Common LLC Interest (79,117
units)                                            |  | 91.0%79.2%                                        |  |           | 8,88117,303 |   |   | 8,88117,3032,354201 |   |   | 8,88117,3032,3547,880
|New Jet Plastica, LLC (2)                                                                       |  | Plastic Products                |  | Subordinated Debt (14.0%, Due 3/13) (12)Preferred LLC Interest (301,595 units)                                                                                                     |  | 97.7%                                             |  |           | 26,025      |   |   | 26,02530,285        |   |   | 26,02530,285         
|New Superior Industries, LLC (2)                                                                |  | Sporting Goods                  |  | Subordinated Debt (14.0%, Due 3/13-3/15) (12) Preferred LLC Interest (125,400 units)                                                                                               |  | 94.7%                                             |  |           | 14,012      |   |   | 14,01212,584        |   |   | 14,01212,584         
|RadioPharmacy Investors, LLC (2)                                                                |  | Healthcare                      |  | Senior Debt (10.0%, Due 12/10) (12) Subordinated Debt (15.0%, Due 12/11) Preferred LLC Interest (70,000 units)                                                                     |  | 98.6%                                             |  |           | 7,0009,187  |   |   | 7,0009,1877,380     |   |   | 7,0009,1877,380      
|Superior Publishing Corporation (2)                                                             |  | Newspaper                       |  | Subordinated Debt (20.0%, Due 10/10) (12) Preferred Stock (7,999 shares) Common Stock (100 shares)                                                                                 |  | 100.0%100.0%                                      |  |           | 21,062      |   |   | 19,0227,999365      |   |   | 19,0229,300         
|West Coast Wireless Lines LLC (6)                                                               |  | Publishing                      |  | LLC Interest                                                                                                                                                                       |  | 100.0%                                            |  |           |             |   |   | 1,036               |   |   | 450                  
|Working Mother Media, Inc. (6)                                                                  |  | Publishing                      |  | Senior Debt (8.4%, Due 11/06) Class A Preferred Stock (12,497 shares) Class B Preferred Stock (1 share) Class C Preferred Stock (1 share) Common Stock (510 shares)Guaranty
($566) |  | 99.2%100.0%100.0%51.0%                            |  |           | 15,119      |   |   | 9,07612,497111      |   |   | 9,0764,618        
|Total Control investments: Majority-owned (represents 36.2% of total investments at
fair value) |  |                                 |  |                                                                                                                                                                                    |  | 447,451                                           |  |           | 437,128    

See notes to consolidated financial statements



6



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2005

(in thousands, except share data)



|                                                                                                   |  |                                                                                      |  |                                                                                                                                                                                      |  |                                                   |  |           |              |          |         |                   |          |   |                  
|-------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------- |  | --------- | ------------ | -------- | ------- | ----------------- | -------- | - | -----------------
|Portfolio Company                                                                                  |  | Industry                                                                             |  | Investment (8)                                                                                                                                                                       |  | Percentage ofClass Held ona FullyDiluted Basis(1) |  |          
|                                                                                                   |  |                                                                                      |  | Principal                                                                                                                                                                            |  | Cost                                              |  | FairValue
|Control investments: Non-majority owned (4):                                                       |  |                                                                                      |  |                                                                                                                                                                                      |  |                                                   |  |           |             
|Crystal Media Network, LLC (6) (14) (15)                                                           |  | Broadcasting                                                                         |  | LLC Interest                                                                                                                                                                         |  | 49.9%                                             |  | $         |              |          | $       | 3,059             |          | $ | 510              
|ETC Group, LLC (6)                                                                                 |  | Publishing                                                                           |  | Series A LLC InterestSeries C LLC Interest                                                                                                                                           |  | 100.0%100.0%                                      |  |           |              |          |         | 145100            |          |   |                
|Fawcette Technical Publications Holding (2) (6)                                                    |  | Publishing                                                                           |  | Senior Debt (16.4%, Due 12/06)Subordinated Debt (16.3%, Due 12/06)Series A Preferred Stock (8,473 shares)Common Stock (5,010,379
shares)                                             |  | 100.0%36.0%                                       |  |           | 14,9914,750  |          |         | 12,5794,6562,569 |          |   | 11,485        
|National Product Services, Inc. (2)                                                                |  | BusinessServices                                                                     |  | Senior Debt (13.1%, Due 6/09)Subordinated Debt (16.0%, Due 6/09)Common Stock (995,428 shares)                                                                                        |  | 31.5%                                             |  |           | 12,87110,225 |          |         | 5,60910,225      |          |   | 11,9833,393     
|Platinum Wireless, Inc. (6)                                                                        |  | Communications-Other                                                                 |  | Common Stock (2,937 shares)Option to purchase Common Stock(expire 12/31/13)                                                                                                          |  | 37.0%1.5%                                         |  |           |              |          |         | 4,640272          |          |   | 4,49497          
|PremierGarage Holdings, LLC (2)                                                                    |  | HomeFurnishings                                                                      |  | Senior Debt (10.2%, Due 6/10-12/10)Preferred LLC Units (445 units)Common LLC Units (356 units)                                                                                       |  | 35.6%31.7%                                        |  |           | 11,000       |          |         | 11,0004,503       |          |   | 11,0004,503      
|Total Control investments: Non-majority-owned (represents 3.9% of total investments at fair value) |  |                                                                                      |  |                                                                                                                                                                                      |  |                                                   |  | 59,357    |              |          | 47,465 
|Total Control Investments: (represents 40.1% of total investments at fair value)                   |  |                                                                                      |  |                                                                                                                                                                                      |  |                                                   |  | 506,808   |              |          | 484,593
|Affiliate investments (3):                                                                         |  |                                                                                      |  |                                                                                                                                                                                      |  |                                                   |  |           |              |          |         |                   |         
|Cherry Hill Holdings, Inc. (2)                                                                     |  | PhotographicStudio                                                                   |  | Senior Debt (13.0%, Due 8/11) (12)Series A Preferred Stock (750 Shares)                                                                                                              |  | 11.0%                                             |  |           | 12,029       |          |         | 12,029756         |          |   | 12,029756        
|iVerify. US Inc. (6)                                                                               |  | Communications-Other                                                                 |  | Preferred Stock (54 shares)Common Stock (20 shares)                                                                                                                                  |  | 15.5%11.6%                                        |  |           |              |          |         | 578550            |          |   | 65              
|NYL Brands Holdings, Inc. (2)                                                                      |  | Clothing &Accessories                                                                |  | Subordinated Debt (13.0%, Due 10/10-2/11) (12)                                                                                                                                       |  |                                                   |  |           | 10,000       |          |         | 10,000            |          |   | 10,000           
|                                                                                                   |  | Class A Common Stock (1,500 shares) Warrants to purchase Common Stock(expire 2/3/16) |  | 18.7%6.6%                                                                                                                                                                            |  |                                                   |  |           |              | 1,500331 |         |                   | 1,500340
|On Target Media, LLC (6)                                                                           |  | Publishing                                                                           |  | Class A LLC InterestClass B LLC Interest                                                                                                                                             |  | 6.8%5.7%                                          |  |           |              |          |         | 1,791            |          |   | 1,7911,182       
|Sunshine Media Delaware, LLC (2)                                                                   |  | Publishing                                                                           |  | Senior Debt (14.6%, Due 12/08)Class A LLC InterestWarrants to purchase Class B LLCinterest (expire 1/31/11)                                                                          |  | 12.8%100.0%                                       |  |           | 13,514       |          |         | 12,201564        |          |   | 12,201181       
|TNR Entertainment Corp LLC (2)                                                                     |  | DVD Rental                                                                           |  | Senior Debt (10.5%, Due 7/10) (12)Subordinated Debt (14.0%, Due 1/11) (12) Series D Preferred Stock (1,815,332 shares)Warrants to purchase
Series D Preferred Stock (expire 7/31/16) |  | 30.0%30.0%                                        |  |           | 12,50012,726 |          |         | 12,50012,7263,000 |          |   | 12,50012,7263,000
|Total Affiliate investments (represents 5.7% of total investments at fair value)                   |  |                                                                                      |  |                                                                                                                                                                                      |  |                                                   |  | 68,526    |              |          | 68,271 

See notes to consolidated financial statements



7



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2005

(in thousands, except share data)



|                                                |  |                        |  |                                                                                                                                 |  |                                                   |    |           |   |             |  |   |                |  |   |               
|----------------------------------------------- |  | ---------------------- |  | ------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------- | -- | --------- | - | ----------- |  | - | -------------- |  | - | --------------
|Portfolio Company                               |  | Industry               |  | Investment (8)                                                                                                                  |  | Percentage ofClass Held ona FullyDiluted Basis(1) |    |           |  
|                                                |  |                        |  | Principal                                                                                                                       |  | Cost                                              |    | FairValue
|Non-affiliate investments (less than 5% owned): |  |                        |  |                                                                                                                                 |  |                                                   |    |           |   |             |  |  
|Allens TV Cable Service, Inc.                  |  | Cable                  |  | Senior Debt (13.2%, Due 12/12) (12)Subordinated Debt (12.6%, Due 12/12) (12) Warrants to purchase Common Stock(expire 12/31/15) |  | 10.0                                              | %  |           | $ | 7,5332,063  |  | $ | 7,5332,063    |  | $ | 7,5332,063   
|Amerifit Nutrition, Inc. (2)                    |  | Drugs                  |  | Senior Debt (12.0%, Due 3/10) (12)                                                                                              |  |                                                   |    |           |   | 6,165       |  |   | 6,165          |  |   | 6,165         
|Auto Europe, LLC                                |  | Car Rental             |  | Subordinated Debt(12.3%, Due 10/12) (12)                                                                                        |  |                                                   |    |           |   | 13,500      |  |   | 13,500         |  |   | 13,500        
|B & H Education, Inc. (2)                       |  | Education              |  | Senior Debt (11.4%, Due 3/10) (12) Preferred Stock ( 5,384 shares)                                                              |  | 4.1                                               | %  |           |   | 4,000       |  |   | 4,0001,154     |  |   | 4,0001,349    
|Badoud Enterprises, Inc. (2)                    |  | Newspaper              |  | Senior Debt (10.6%, Due 9/11) (12)                                                                                              |  |                                                   |    |           |   | 4,999       |  |   | 4,999          |  |   | 4,999         
|BLI Holdings, Inc. (2)                          |  | Drugs                  |  | Subordinated Debt (13.1%, Due 3/10) (12)                                                                                        |  |                                                   |    |           |   | 10,000      |  |   | 10,000         |  |   | 10,000        
|Builders First Source, Inc.                     |  | Building & Development |  | Senior Debt (8.0%, Due 8/11) (12)                                                                                               |  |                                                   |    |           |   | 890         |  |   | 890            |  |   | 876           
|Cambridge Information Group, Inc. (2)           |  | Information Services   |  | Subordinated Debt(12.4%, Due 11/11) (12)                                                                                        |  |                                                   |    |           |   | 9,250       |  |   | 9,250          |  |   | 9,250         
|CEI Holdings, Inc.                              |  | Cosmetics              |  | Subordinated Debt(13.2%, Due 12/11) (12)                                                                                        |  |                                                   |    |           |   | 4,755       |  |   | 4,755          |  |   | 4,755         
|Communications & Power Industries, Inc.         |  | Aerospace & Defense    |  | Senior Debt (7.6%, Due 7/10) (12)                                                                                               |  |                                                   |    |           |   | 839         |  |   | 839            |  |   | 843           
|Communicom Broadcasting, LLC (2)                |  | Broadcasting           |  | Senior Debt (11.4%, Due 2/11) (12)                                                                                              |  |                                                   |    |           |   | 8,048       |  |   | 8,048          |  |   | 8,048         
|Community Media Group, Inc. (2)                 |  | Newspaper              |  | Senior Debt (9.9%, Due 9/10) (12)                                                                                               |  |                                                   |    |           |   | 20,883      |  |   | 20,883         |  |   | 20,883        
|Cornerstone Healthcare Group Holding, Inc.      |  | Healthcare             |  | Subordinated Debt (14.0%, Due 7/12) (12)                                                                                        |  |                                                   |    |           |   | 7,171       |  |   | 7,171          |  |   | 7,171         
|Country Road Communications LLC (2)             |  | Communications-Other   |  | Subordinated Debt (13.3%,Due 7/13) (12)                                                                                         |  |                                                   |    |           |   | 13,000      |  |   | 13,000         |  |   | 13,000        
|Creative Loafing, Inc. (2)                      |  | Newspaper              |  | Senior Debt (12.0%, Due 6/10) (12)                                                                                              |  |                                                   |    |           |   | 18,475      |  |   | 18,475         |  |   | 18,475        
|Crescent Publishing Company LLC (2)             |  | Newspaper              |  | Senior Debt (15.1%, Due 6/09-6/10) (12)                                                                                         |  |                                                   |    |           |   | 8,923       |  |   | 8,923          |  |   | 8,923         
|CWP/RMK Acquisition Corp                        |  | Home Furnishings       |  | Senior Debt (8.9%, Due 6/11) (12)Subordinated Debt (13.4%, Due 12/12) (12)Common Stock (500 Shares)                             |  | 3.8                                               | %  |           |   | 6,25011,750 |  |   | 6,25011,750500 |  |   | 6,25011,750500
|Dayton Parts Holdings, LLC (2)                  |  | Auto Parts             |  | Subordinated Debt (12.5%, Due 6/11) (12)Preferred LLC Interest ( 16,371 units)Class A LLC Interest (10,914 units)               |  | 2.72.7                                            | %% |           |   | 16,000      |  |   | 16,000615408   |  |   | 16,000615547  
|D&B Towers, LLC                                 |  | Communications-Other   |  | Senior Debt (15.5%, Due 6/08) (12)                                                                                              |  |                                                   |    |           |   | 5,365       |  |   | 5,365          |  |   | 5,018         
|dick clark productions, inc. (6)                |  | Broadcasting           |  | Common Stock (235,714 shares)Warrants to purchase Common Stock(expire 7/25/11)                                                  |  | 0.55.4                                            | %% |           |   |             |  |   | 210858         |  |   | 4794,733      

See notes to consolidated financial statements



8



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2005

(in thousands, except share data)



|                                                        |  |                        |  |                                                                                                                                    |  |                                                   |     |           |   |              |  |   |                   |  |   |                  
|------------------------------------------------------- |  | ---------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------- | --- | --------- | - | ------------ |  | - | ----------------- |  | - | -----------------
|Portfolio Company                                       |  | Industry               |  | Investment (8)                                                                                                                     |  | Percentage ofClass Held ona FullyDiluted Basis(1) |     |           |  
|                                                        |  |                        |  | Principal                                                                                                                          |  | Cost                                              |     | FairValue
|The e-Media Club, LLC (6)                               |  | Investment Fund        |  | LLC Interest                                                                                                                       |  | 0.8                                               | %   |           | $ |              |  | $ | 88                |  | $ | 34               
|EAS Group, Inc.                                         |  | Technology             |  | Subordinated Debt (16.0%, Due 4/11) (12)                                                                                           |  |                                                   |     |           |   | 11,186       |  |   | 11,186            |  |   | 11,186           
|Empower IT Holdings, Inc. (2)                           |  | Information Services   |  | Senior Debt (11.9%, Due 5/12) (12) Subordinated Debt (14.5%, Due 6/12) (12)                                                        |  |                                                   |     |           |   | 8,0845,114   |  |   | 8,0845,114        |  |   | 8,0845,114       
|Equibrand Holding Corporation (2)                       |  | Leisure Activities     |  | Senior Debt (12.4%, Due 3/10-9/10) (12) Subordinated Debt (16.0%, Due 3/11) (12)                                                   |  |                                                   |     |           |   | 4,6409,605   |  |   | 4,6409,605        |  |   | 4,6409,605       
|Flexsol Packaging Corp.                                 |  | Chemicals/Plastics     |  | Subordinated Debt (12.6%, Due 12/12) (12)                                                                                          |  |                                                   |     |           |   | 5,000        |  |   | 5,000             |  |   | 4,988            
|GoldenSource Holdings Inc. (2)                          |  | Technology             |  | Senior Debt (10.1%, Due 9/08)Warrants to purchase Common Stock (expire 10/31/08)                                                   |  | 4.2                                               | %   |           |   | 17,000       |  |   | 17,000           |  |   | 17,000          
|Home Interiors & Gifts, Inc.                            |  | Home Furnishings       |  | Senior Debt (10.4%, Due 3/11) (12)                                                                                                 |  |                                                   |     |           |   | 4,551        |  |   | 4,551             |  |   | 3,851            
|Images.com, Inc.                                        |  | Information Services   |  | Senior Debt (13.4%, Due 12/07) (12)                                                                                                |  |                                                   |     |           |   | 2,252        |  |   | 2,252             |  |   | 2,252            
|Instant Web, Inc.                                       |  | Direct Mail Advertiser |  | Senior Debt (8.6%, Due 2/11) (12)                                                                                                  |  |                                                   |     |           |   | 4,284        |  |   | 4,284             |  |   | 4,295            
|Jenzabar, Inc. (2)                                      |  | Technology             |  | Preferred Stock (5,000 shares)Subordinated Preferred Stock (109,800 shares) Warrants to purchase Common Stock(expire 4/30/16)      |  | 100.0100.019.5                                    | %%% |           |   |              |  |   | 6,2441,098422     |  |   | 6,2441,0988,286  
|The Joseph F. Biddle Publishing Company (2)             |  | Newspaper              |  | Senior Debt (8.8%, Due 12/11) (12)                                                                                                 |  |                                                   |     |           |   | 7,450        |  |   | 7,450             |  |   | 7,450            
|Jupitermedia Corporation (6)                            |  | Information Services   |  | Common Stock (148,373 shares)                                                                                                      |  | 0.4                                               | %   |           |   |              |  |   | 2,114             |  |   | 1,285            
|Legacy Cabinets, Inc                                    |  | Home Furnishings       |  | Subordinated Debt (12.9%, Due 8/13) (12)                                                                                           |  |                                                   |     |           |   | 3,000        |  |   | 3,000             |  |   | 3,000            
|Marietta Intermediate Holding Corporation               |  | Cosmetics              |  | Subordinated Debt (13.5%, Due 21/11) (12)                                                                                          |  |                                                   |     |           |   | 2,000        |  |   | 2,000             |  |   | 2,000            
|MD Beauty, Inc.                                         |  | Cosmetics              |  | Subordinated Debt (14.3%, Due 2/13) (12)                                                                                           |  |                                                   |     |           |   | 9,000        |  |   | 9,000             |  |   | 9,045            
|MCI Holdings, LLC (2)                                   |  | Healthcare             |  | Subordinated Debt (12.5%, Due 3/12) (12) Class A LLC Interest (4,712,042 units)                                                    |  | 5.2                                               | %   |           |   | 17,423       |  |   | 17,4233,000       |  |   | 17,4233,346      
|Metropolitan Telecommunications Holding Company (2) (9) |  | Communications-CLEC    |  | Senior Debt (12.5%, Due 6/07-9/10) (12)Subordinated Debt (16.4%, Due 12/10) (12) Warrants to purchase Common Stock(expire 9/30/13) |  | 20.4                                              | %   |           |   | 21,15010,929 |  |   | 21,15010,9291,843 |  |   | 21,15010,9295,454
|MicroCal Holdings, LLC (2)                              |  | Laboratory Instruments |  | Senior Debt (9.9%, Due 3/10-9/10) (12) Subordinated Debt (14.5%, Due 3/11) (12)                                                    |  |                                                   |     |           |   | 13,1009,115  |  |   | 13,1009,115       |  |   | 13,1009,115      

See notes to consolidated financial statements



9



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2005

(in thousands, except share data)



|                                    |  |                        |  |                                                                                                                               |  |                                                   |   |           |   |              |  |   |                   |  |   |                  
|----------------------------------- |  | ---------------------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------- | - | --------- | - | ------------ |  | - | ----------------- |  | - | -----------------
|Portfolio Company                   |  | Industry               |  | Investment (8)                                                                                                                |  | Percentage ofClass Held ona FullyDiluted Basis(1) |   |           |  
|                                    |  |                        |  | Principal                                                                                                                     |  | Cost                                              |   | FairValue
|MicroDental Laboratories (2)        |  | Healthcare             |  | Senior Debt (10.8%, Due 5/11-11/11) (12)Subordinated Debt (15.0%, Due 5/12) (12)                                              |  |                                                   |   |           | $ | 13,3966,946  |  | $ | 13,3966,946       |  | $ | 13,3966,946      
|Miles Media Holding, LLC (2)        |  | Publishing             |  | Senior Debt (11.0%, Due 6/12) (12)Subordinated Debt (16.4%, Due 12/12) (12)Warrants to purchase Units in LLC (expire 6/30/09) |  | 19.5                                              | % |           |   | 9,3634,000   |  |   | 9,3634,000439     |  |   | 9,3634,0001,315  
|National Display Holdings, LLC (2)  |  | Electronics            |  | Senior Debt (11.4%, Due 12/10-12/11) (12)Subordinated Debt (15.0%, Due 12/12) (12)Class A LLC Interest (1,000,000 units)      |  | 3.7                                               | % |           |   | 10,00013,680 |  |   | 10,00013,6801,000 |  |   | 10,00013,6801,000
|New Century Companies, Inc. (6)     |  | Industrial Equipment   |  | Warrants to purchase Common Stock(expire 6/30/10)                                                                             |  | 0.3                                               | % |           |   |              |  |   |                  |  |   |                 
|OMP, Inc.                           |  | Drugs                  |  | Senior Debt (9.5%, Due 1/10-1/11)                                                                                             |  |                                                   |   |           |   | 6,893        |  |   | 6,893             |  |   | 6,893            
|PartMiner, Inc. (2)                 |  | Information Services   |  | Senior Debt (11.9%, Due 6/09) (12)                                                                                            |  |                                                   |   |           |   | 3,841        |  |   | 3,841             |  |   | 3,841            
|Philadelphia Newspapers, LLC        |  | Newspapers             |  | Subordinated Debt (16.0%, Due 6/14) (12)                                                                                      |  |                                                   |   |           |   | 5,013        |  |   | 5,013             |  |   | 5,013            
|Powercom Corporation (2)            |  | Communications-CLEC    |  | Senior Debt (12.0%, Due 12/06)Warrants to purchase Class A Common Stock (expire 6/30/14)                                      |  | 22.7                                              | % |           |   | 1,798        |  |   | 1,798286          |  |   | 1,798343         
|Quantum Medical Holdings, LLC (2)   |  | Laboratory Instruments |  | Senior Debt (11.4%, Due 12/10- 5/11) (12)Subordinated Debt (15.0%, Due 12/11) (12)Preferred LLC Interest (1,000,000 units)    |  | 6.3                                               | % |           |   | 9,00010,500  |  |   | 9,00010,5001,073  |  |   | 9,00010,5001,492 
|Restaurant Technologies, Inc.       |  | Food Services          |  | Subordinated Debt (16.0%, Due 2/12) (12)Series A Preferred Stock (7,813 Shares)                                               |  | 0.3                                               | % |           |   | 20,663       |  |   | 20,663266         |  |   | 20,663266        
|Sagamore Hill Broadcasting, LLC (2) |  | Broadcasting           |  | Senior Debt (10.7%, Due 11/09) (12)                                                                                           |  |                                                   |   |           |   | 14,000       |  |   | 14,000            |  |   | 14,000           
|Sterigenics International, Inc.     |  | Healthcare             |  | Senior Debt (8.4%, Due 6/11) (12)                                                                                             |  |                                                   |   |           |   | 4,888        |  |   | 4,888             |  |   | 4,918            

See notes to consolidated financial statements



10



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2005

(in thousands, except share data)



|                                                                                      |  |                                                             |                                                   |                                                                  |     |                                                   |   |       |           |        |       |       |           |   |     |       |        | 
|------------------------------------------------------------------------------------- |  | ----------------------------------------------------------- | ------------------------------------------------- | ---------------------------------------------------------------- | --- | ------------------------------------------------- | - | ----- | --------- | ------ | ----- | ----- | --------- | - | --- | ----- | ------ | 
|Portfolio Company                                                                     |  | Industry                                                    |                                                   | Investment (8)                                                   |     | Percentage ofClass Held ona FullyDiluted Basis(1) |   |       |           |       
|                                                                                      |  |                                                             |                                                   | Principal                                                        |     | Cost                                              |   |       | FairValue |       
|Stratford School Holdings, Inc. (2)                                                   |  | Education                                                   |                                                   | Senior Debt (9.9%, Due 7/11-9/11) (12)                           |     |                                                   |   |       | $         | 14,500 |       | $     | 14,500    |   |     | $     | 14,500 | 
|                                                                                      |  |                                                             | Subordinated Debt (14.0%, Due 12/11) (12)         |                                                                  |     |                                                   |   |       | 6,854     |        |       | 6,854 |           |   |     | 6,854 |       
|                                                                                      |  |                                                             |                                                   | Preferred Stock (10,000 shares)                                  |     | 14.9                                              | % |       |           |        |       |       | 30        |   |     |       | 1,466  | 
|                                                                                      |  |                                                             |                                                   | Warrants to purchase Common Stock(expire 5/31/15)                |     | 100.0                                             | % |       |           |        |       |       | 68        |   |     |       | 502    | 
|Switch & Data Holdings, Inc.                                                          |  | Business Services                                           |                                                   | Subordinated Debt (12.7%, Due 4/11) (12)                         |     |                                                   |   |       |           | 12,000 |       |       | 12,000    |   |     |       | 12,000 | 
|SXC Health Solutions, Inc. (2)                                                        |  | Healthcare                                                  |                                                   | Common Stock (277,775 shares)                                    |     | 1.4                                               | % |       |           |        |       |       | 1,235     |   |     |       | 4,569  | 
|Talk America Holdings, Inc. (6)                                                       |  | Communications-CLEC                                         |                                                   | Common Stock (32,106 shares)                                     |     | 0.1                                               | % |       |           |        |       |       | 6         |   |     |       | 305    | 
|                                                                                      |  | Warrants to purchase Common Stock(expire 3/31/07)           |                                                   | 0.5                                                              | %   |                                                   |   |       |           |        | 19    |       |           |   |    |      
|Team Express, Inc. (2)                                                                |  | Retail                                                      |                                                   | Subordinated Debt (15.0%, Due 6/11) (12)                         |     |                                                   |   |       |           | 7,271  |       |       | 7,271     |   |     |       | 7,271  | 
|Teleguam Holdings, LLC (2)                                                            |  | Communications-Other                                        |                                                   | Subordinated Debt (12.4%, Due 10/12) (12)                        |     |                                                   |   |       |           | 20,000 |       |       | 20,000    |   |     |       | 20,000 | 
|Total Sleep Holdings, Inc. (2)                                                        |  | Healthcare                                                  |                                                   | Subordinated Debt (14.0%, Due 9/11) (12)                         |     |                                                   |   |       |           | 22,730 |       |       | 22,730    |   |     |       | 22,730 | 
|ValuePage, Inc. (6)                                                                   |  | Communications-Other                                        |                                                   | Senior Debt (12.8%, Due 6/08)                                    |     |                                                   |   |       |           | 1,136  |       |       | 1,095     |   |     |       | 1,095  | 
|VS&A-PBI Holding LLC (6)                                                              |  | Publishing                                                  |                                                   | LLC Interest                                                     |     | 0.8                                               | % |       |           |        |       |       | 500       |   |     |       |       | 
|VOX Communications Group Holdings, LLC (2)                                            |  | Broadcasting                                                |                                                   | Senior Debt (11.6%, Due 12/07-6/10) (12)                         |     |                                                   |   |       |           | 11,000 |       |       | 11,000    |   |     |       | 11,000 | 
|                                                                                      |  | Convertible Preferred Subordinated Notes (12.0%, Due 6/15 ) |                                                   | 16.5                                                             | %   |                                                   |   | 1,127 |           |        | 1,127 |       |           |   | 954 |      
|Wicks Business Information, LLC                                                       |  | Publishing                                                  |                                                   | Unsecured Note (10.3%, Due 2/08)                                 |     |                                                   |   |       |           | 231    |       |       | 231       |   |     |       | 231    | 
|Wiesner Publishing Company, LLC (6)                                                   |  | Publishing                                                  |                                                   | Warrants to purchase membership interest in LLC (expire 6/30/12) |     | 15.0                                              | % |       |           |        |       |       | 406       |   |     |       | 2,485  | 
|Wire Rope Corporation of America, Inc.                                                |  | Industrial Equipment                                        |                                                   | Senior Debt (13.2%, Due 6/11) (12)                               |     |                                                   |   |       |           | 6,000  |       |       | 6,000     |   |     |       | 6,150  | 
|WirelessLines II, Inc.                                                                |  | Communications-Other                                        |                                                   | Senior Debt (8.0%, Due 4/07)                                     |     |                                                   |   |       |           | 129    |       |       | 129       |   |     |       | 129    | 
|XFone, Inc (6)(10)                                                                    |  | Communications-Other                                        |                                                   | Common Stock (868,947 shares)                                    |     | 4.6                                               | % |       |           |        |       |       | 2,485     |   |     |       | 2,164  | 
|                                                                                      |  |                                                             | Warrants to purchase common stock (expire 3/3/11) |                                                                  | 0.8 | %                                                 |   |       |           |        |       |      |           |   |     |      |       
|Xpressdocs Holdings, Inc (2)                                                          |  | Business Services                                           |                                                   | Senior Debt (9.4%, Due 7/11-12/11) (12)                          |     |                                                   |   |       |           | 17,255 |       |       | 17,255    |   |     |       | 17,255 | 
|                                                                                      |  |                                                             | Subordinated Debt (14.0%, Due 7/12) (12)          |                                                                  |     |                                                   |   |       | 6,036     |        |       | 6,036 |           |   |     | 6,036 |       
|                                                                                      |  |                                                             |                                                   | Series A Preferred Stock (161,870 shares)                        |     | 1.7                                               | % |       |           |        |       |       | 500       |   |     |       | 500    | 
|Total Non-affiliate investments (represents 54.2% of total investments at fair value) |  |                                                             |                                                   |                                                                  |     |                                                   |   |       | 631,818   |        |       |       | 654,322   |  
|Total Investments                                                                     |  |                                                             |                                                   |                                                                  |     |                                                   |   |       | 1,207,152 |        |       |       | 1,207,186 |  
|Unearned income                                                                       |  |                                                             |                                                   |                                                                  |     |                                                   |   |       | (8,057    | )      |       |       | (8,057    | )
|Total Investments net of unearned income                                              |  |                                                             |                                                   |                                                                  |     |                                                   |   | $     | 1,199,095 |        |       | $     | 1,199,129 |  
|Call options written                                                                  |  |                                                             |                                                   |                                                                  |     |                                                   |   |       |           |        |       |       |           |  
|Crystal Media Network, LLC (15)                                                       |  | 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, 2005

(in thousands,
except share data)



|                                                                                                |  |                |                                           |                                                             |       |                                                   |   |           |         |        |  |         |        |  |        |       
|----------------------------------------------------------------------------------------------- |  | -------------- | ----------------------------------------- | ----------------------------------------------------------- | ----- | ------------------------------------------------- | - | --------- | ------- | ------ |  | ------- | ------ |  | ------ | ------
|Portfolio Company                                                                               |  | Industry       |                                           | Investment (8)                                              |       | Percentage ofClass Held ona FullyDiluted Basis(1) |   |           |        
|                                                                                                |  |                |                                           | Principal                                                   |       | Cost                                              |   | FairValue
|Control investments: majority-owned (5):                                                        |  |                |                                           |                                                             |       |                                                   |   |           |         |        |  |        
|Broadview Networks Holdings, Inc. (2) (7)                                                       |  | Communications |                                           | Subordinated Debt (12.0%, Due 12/09)                        |       |                                                   |   |           | $       | 42,993 |  | $       | 42,993 |  | $      | 42,993
|                                                                                                |  |                | Series A Preferred Stock (89,154 shares)  |                                                             | 49.1  | %                                                 |   |           |         |        |  | 52,137  |        |  | 52,137
|                                                                                                |  |                | Common Stock (2,228,937 shares)           |                                                             | 33.8  | %                                                 |   |           |         |        |  |        |        |  |      
|Cleartel Communications, Inc. (2)                                                               |  | Communications |                                           | Senior Debt (8.3%, Due 6/09)                                |       |                                                   |   |           |         | 28,850 |  |         | 28,850 |  |        | 28,850
|                                                                                                |  |                | Subordinated Debt (14.4%, Due 6/09)       |                                                             |       |                                                   |   |           | 9,356   |        |  | 9,356   |        |  | 9,356 
|                                                                                                |  |                | Preferred Stock (57,862 shares)           |                                                             | 99.1  | %                                                 |   |           |         |        |  | 50,613  |        |  | 40,684
|                                                                                                |  |                |                                           | Common Stock (9 shares)                                     |       | 0.005                                             | % |           |         |        |  |         | 540    |  |        |      
|                                                                                                |  |                |                                           | Guaranty ($8,092)                                           |       |                                                   |   |           |         |        |  |         |        |  |        |       
|Copperstate Technologies, Inc.                                                                  |  | Security Alarm |                                           | Senior Debt (11.0%, Due 9/07)                               |       |                                                   |   |           |         | 1,272  |  |         | 1,272  |  |        | 1,272 
|                                                                                                |  |                | Class A Common Stock (20,000 shares)      |                                                             | 93.0  | %                                                 |   |           |         |        |  | 2,000   |        |  | 946   
|                                                                                                |  |                | Class B Common Stock (10 shares)          |                                                             | 0.05  | %                                                 |   |           |         |        |  |        |        |  |      
|                                                                                                |  |                |                                           | Warrants to purchase Class B Common Stock (expire 12/20/12) |       | 93.7                                              | % |           |         |        |  |         |       |  |        |      
|                                                                                                |  |                |                                           | Standby Letter of Credit ($1,000)                           |       |                                                   |   |           |         |        |  |         |        |  |        |       
|Crystal Media Network, LLC (6)                                                                  |  | Broadcasting   |                                           | Senior Debt (11.4%, Due 5/06)                               |       |                                                   |   |           |         | 1,099  |  |         | 947    |  |        | 947   
|                                                                                                |  |                | LLC Interest                              |                                                             | 100.0 | %                                                 |   |           |         |        |  | 6,132   |        |  | 1,097 
|Helicon Cable Holdings, LLC (2)                                                                 |  | Cable          |                                           | Senior Debt (9.2%, Due 12/12)                               |       |                                                   |   |           |         | 10,072 |  |         | 10,072 |  |        | 10,072
|                                                                                                |  |                | Subordinated Debt (14.3%, Due 6/13)       |                                                             |       |                                                   |   |           | 5,750   |        |  | 5,750   |        |  | 5,750 
|                                                                                                |  |                |                                           | Preferred LLC Interest (82,500 units)                       |       | 57.9                                              | % |           |         |        |  |         | 8,316  |  |        | 8,316 
|                                                                                                |  |                |                                           | Standby Letter of Credit ($300)                             |       |                                                   |   |           |         |        |  |         |        |  |        |       
|Midwest Tower Partners, LLC (2)                                                                 |  | Communications |                                           | Subordinated Debt (14.1%, Due 2/07) (12)                    |       |                                                   |   |           |         | 16,813 |  |         | 16,813 |  |        | 16,813
|                                                                                                |  |                | Preferred LLC Interest                    |                                                             | 91.0  | %                                                 |   |           |         |        |  | 2,121   |        |  | 2,121 
|                                                                                                |  |                | Common LLC Interest                       |                                                             | 79.2  | %                                                 |   |           |         |        |  | 201     |        |  | 1,332 
|Superior Publishing Corporation (2)                                                             |  | Newspaper      |                                           | Senior Debt (9.0%, Due 12/06) (12)                          |       |                                                   |   |           |         | 20,759 |  |         | 20,759 |  |        | 20,759
|                                                                                                |  |                | Subordinated Debt (20.0%, Due 12/06) (12) |                                                             |       |                                                   |   |           | 22,692  |        |  | 20,141  |        |  | 20,141
|                                                                                                |  |                | Preferred Stock (7,999 shares)            |                                                             | 100.0 | %                                                 |   |           |         |        |  | 7,999   |        |  | 8,545 
|                                                                                                |  |                |                                           | Common Stock (100 shares)                                   |       | 100.0                                             | % |           |         |        |  |         | 365    |  |        |      
|Telecomm South, LLC (6)                                                                         |  | Communications |                                           | Senior Debt (13.4%, Due 12/05)                              |       |                                                   |   |           |         | 7,996  |  |         | 2,582  |  |        | 1,100 
|                                                                                                |  |                | LLC Interest                              |                                                             | 100.0 | %                                                 |   |           |         |        |  | 10      |        |  |      
|West Coast WirelessLines LLC                                                                    |  | Conferences    |                                           | LLC Interest                                                |       | 100.0                                             | % |           |         |        |  |         | 851    |  |        | 851   
|Working Mother Media, Inc. (6)                                                                  |  | Publishing     |                                           | Senior Debt (7.5%, Due 6/06)                                |       |                                                   |   |           |         | 10,452 |  |         | 8,576  |  |        | 8,576 
|                                                                                                |  |                | Class A Preferred Stock (12,497 shares)   |                                                             | 99.2  | %                                                 |   |           |         |        |  | 12,497  |        |  | 4,192 
|                                                                                                |  |                | Class B Preferred Stock (1 share)         |                                                             | 100.0 | %                                                 |   |           |         |        |  | 1       |        |  |      
|                                                                                                |  |                |                                           | Class C Preferred Stock (1 share)                           |       | 100.0                                             | % |           |         |        |  |         | 1      |  |        |      
|                                                                                                |  |                |                                           | Common Stock (510 shares)                                   |       | 51.0                                              | % |           |         |        |  |         | 1      |  |        |      
|                                                                                                |  |                |                                           | Guaranty ($834)                                             |       |                                                   |   |           |         |        |  |         |        |  |        |       
|Total control investments: majority-owned (represents 26.1% of total investments at fair value) |  |                |                                           |                                                             |       |                                                   |   |           | 311,896 |        |  | 286,850

See notes to consolidated financial statements



12



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2005

(in thousands, except share data)



|                                                                                                   |  |                |                                      |                                                    |      |                                                   |   |           |         |        |  |         |        |  |       |       
|-------------------------------------------------------------------------------------------------- |  | -------------- | ------------------------------------ | -------------------------------------------------- | ---- | ------------------------------------------------- | - | --------- | ------- | ------ |  | ------- | ------ |  | ----- | ------
|Portfolio Company                                                                                  |  | Industry       |                                      | Investment (8)                                     |      | Percentage ofClass Held ona FullyDiluted Basis(1) |   |           |        
|                                                                                                   |  |                |                                      | Principal                                          |      | Cost                                              |   | FairValue
|Control investments: non-majority owned (4):                                                       |  |                |                                      |                                                    |      |                                                   |   |           |         |        |  |        
|ETC Group, LLC (6)                                                                                 |  | Publishing     |                                      | Series A LLC Interest                              |      | 100.0                                             | % |           | $       |        |  | $       | 270    |  | $     | 123   
|                                                                                                   |  |                |                                      | Series C LLC Interest                              |      | 100.0                                             | % |           |         |        |  |         | 100    |  |       |      
|Fawcette Technical Publications Holding (2)                                                        |  | Publishing     |                                      | Senior Debt (14.5%, Due 12/06) (12)                |      |                                                   |   |           |         | 13,061 |  |         | 12,545 |  |       | 12,545
|                                                                                                   |  |                | Subordinated Debt (14.8%, Due 12/06) |                                                    |      |                                                   |   |           | 5,186   |        |  | 4,691   |        |  | 1,137
|                                                                                                   |  |                |                                      | Series A Preferred Stock (8,473 shares)            |      | 100.0                                             | % |           |         |        |  |         | 2,569  |  |       |      
|                                                                                                   |  |                |                                      | Common Stock (5,010,379 shares)                    |      | 36.0                                              | % |           |         |        |  |         |       |  |       |      
|Platinum Wireless, Inc.                                                                            |  | Communications |                                      | Senior Debt (8.0%, Due 6/06)                       |      |                                                   |   |           |         | 389    |  |         | 389    |  |       | 389   
|                                                                                                   |  |                |                                      | Common Stock (2,937 shares)                        |      | 37.0                                              | % |           |         |        |  |         | 4,640  |  |       | 4,505 
|                                                                                                   |  |                |                                      | Options to purchase Common Stock (expire 12/31/13) |      | 1.5                                               | % |           |         |        |  |         | 272    |  |       | 98    
|Total control investments: non-majority-owned (represents 1.7% of total investments at fair value) |  |                |                                      |                                                    |      |                                                   |   |           | 25,476  |        |  | 18,797 
|Total control investments: (represents 27.8% of total investments at fair value)                   |  |                |                                      |                                                    |      |                                                   |   |           | 337,372 |        |  | 305,647
|                                                                                                   |  |                |                                      |                                                    |      |                                                   |   |           |         |        |  |        
|Affiliate investments (3):                                                                         |  |                |                                      |                                                    |      |                                                   |   |           |         |        |  |        
|iVerify. US Inc.                                                                                   |  | Security Alarm |                                      | Senior Debt (8.0%, Due 4/06)                       |      |                                                   |   |           |         | 75     |  |         | 75     |  |       | 75    
|                                                                                                   |  |                |                                      | Common Stock (20 shares)                           |      | 12.0                                              | % |           |         |        |  |         | 550    |  |       |      
|On Target Media, LLC                                                                               |  | Publishing     |                                      | Senior Debt (10.5%, Due 9/09) (12)                 |      |                                                   |   |           |         | 20,000 |  |         | 20,000 |  |       | 20,000
|                                                                                                   |  |                |                                      | Subordinated Debt (17.0%, Due 3/10)                |      |                                                   |   |           |         | 11,266 |  |         | 11,266 |  |       | 11,266
|                                                                                                   |  |                |                                      | Class A LLC Interest                               |      | 6.8                                               | % |           |         |        |  |         | 1,508  |  |       | 2,610 
|                                                                                                   |  |                |                                      | Class B LLC Interest                               |      | 16.9                                              | % |           |         |        |  |         |       |  |       |      
|Sunshine MediaDelaware, LLC (2)                                                                    |  | Publishing     |                                      | Senior Debt (13.7%, Due 12/07)                     |      |                                                   |   |           |         | 12,739 |  |         | 12,205 |  |       | 12,205
|                                                                                                   |  |                | Class A LLC Interest                 |                                                    | 12.8 | %                                                 |   |           |         |        |  | 564     |        |  |     
|                                                                                                   |  |                |                                      | Warrants to purchase Class B                       |      | 100.0                                             | % |           |         |        |  |         |       |  |       |      
|                                                                                                   |  |                |                                      | LLC interest (expire 1/31/11)                      |      |                                                   |   |           |         |        |  |         |        |  |       |       
|Total affiliate investments (represents 4.2% of total investments at fair value)                   |  |                |                                      |                                                    |      |                                                   |   |           | 46,168  |        |  | 46,156 

See notes to consolidated financial statements



13



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2005

(in thousands, except share data)



|                                                |  |                                          |                                                    |                                                     |     |                                                   |   |           |        |        |       |        |        |       |        |       
|----------------------------------------------- |  | ---------------------------------------- | -------------------------------------------------- | --------------------------------------------------- | --- | ------------------------------------------------- | - | --------- | ------ | ------ | ----- | ------ | ------ | ----- | ------ | ------
|Portfolio Company                               |  | Industry                                 |                                                    | Investment (8)                                      |     | Percentage ofClass Held ona FullyDiluted Basis(1) |   |           |       
|                                                |  |                                          |                                                    | Principal                                           |     | Cost                                              |   | FairValue
|Non-affiliate investments (less than 5% owned): |  |                                          |                                                    |                                                     |     |                                                   |   |           |        |        |       |       
|Allens TV Cable Service, Inc.                  |  | Cable                                    |                                                    | Senior Debt (13.1%, Due 12/12) (12)                 |     |                                                   |   |           | $      | 7,130  |       | $      | 7,130  |       | $      | 7,130 
|                                                |  |                                          | Subordinated Debt (12.6%, Due 12/12) (12)          |                                                     |     |                                                   |   |           | 2,007  |        |       | 2,007  |        |       | 2,007 
|                                                |  |                                          |                                                    | Warrants to purchase Common Stock (expire 12/31/15) |     | 10.0                                              | % |           |        |        |       |        |       |       |        |      
|Amerifit Nutrition, Inc. (2)                    |  | Drugs                                    |                                                    | Senior Debt (13.9%, Due 3/10) (12)                  |     |                                                   |   |           |        | 6,623  |       |        | 6,623  |       |        | 6,623 
|Archway Broadcasting Group, LLC                 |  | Broadcasting                             |                                                    | Senior Debt (11.0%, Due 12/08) (12)                 |     |                                                   |   |           |        | 4,900  |       |        | 4,900  |       |        | 4,900 
|Auto Europe, LLC                                |  | Equipment Leasing                        |                                                    | Subordinated Debt (11.3%, Due 10/12) (12)           |     |                                                   |   |           |        | 13,500 |       |        | 13,500 |       |        | 13,500
|B & H Education, Inc. (2)                       |  | Education                                |                                                    | Senior Debt (10.5%, Due 3/10) (12)                  |     |                                                   |   |           |        | 4,000  |       |        | 4,000  |       |        | 4,000 
|                                                |  | Preferred Stock (5,384 shares)           |                                                    | 4.1                                                 | %   |                                                   |   |           |        |        | 1,060 |        |        | 1,078
|Badoud Enterprises, Inc. (2)                    |  | Newspaper                                |                                                    | Senior Debt (9.7%, Due 9/11)                        |     |                                                   |   |           |        | 5,449  |       |        | 5,449  |       |        | 5,449 
|BLI Holdings, Inc. (2)                          |  | Drugs                                    |                                                    | Subordinated Debt (12.2%, Due 3/10) (12)            |     |                                                   |   |           |        | 10,000 |       |        | 10,000 |       |        | 10,000
|Builders First Source, Inc.                     |  | Building & Development                   |                                                    | Senior Debt (6.2%, Due 8/11) (12)                   |     |                                                   |   |           |        | 889    |       |        | 889    |       |        | 894   
|Cambridge Information Group, Inc. (2)           |  | Information Services                     |                                                    | Senior Debt (8.7%, Due 6/07-6/11) (12)              |     |                                                   |   |           |        | 26,825 |       |        | 26,825 |       |        | 26,825
|CEI Holdings, Inc.                              |  | Cosmetics                                |                                                    | Subordinated Debt (11.1%, Due 12/11) (12)           |     |                                                   |   |           |        | 2,377  |       |        | 2,377  |       |        | 2,270 
|Communications & Power Industries, Inc.         |  | Aerospace & Defense                      |                                                    | Senior Debt (6.6%, Due 7/10) (12)                   |     |                                                   |   |           |        | 1,778  |       |        | 1,778  |       |        | 1,797 
|Community Media Group, Inc. (2)                 |  | Newspaper                                |                                                    | Senior Debt (8.9%, Due 9/10) (12)                   |     |                                                   |   |           |        | 22,365 |       |        | 22,365 |       |        | 22,365
|Cornerstone Healthcare Group Holding, Inc.      |  | Healthcare                               |                                                    | Subordinated Debt (14.0%, Due 7/12) (12)            |     |                                                   |   |           |        | 7,060  |       |        | 7,060  |       |        | 7,060 
|Country Road Communications LLC (2)             |  | Communications                           |                                                    | Subordinated Debt (11.6%, Due 7/13) (12)            |     |                                                   |   |           |        | 13,000 |       |        | 13,000 |       |        | 13,000
|Creative Loafing, Inc. (2)                      |  | Newspaper                                |                                                    | Senior Debt (11.1%, Due 6/10) (12)                  |     |                                                   |   |           |        | 19,400 |       |        | 19,400 |       |        | 19,400
|Crescent Publishing Company LLC (2)             |  | Newspaper                                |                                                    | Senior Debt (14.3%, Due 6/09-6/10) (12)             |     |                                                   |   |           |        | 8,942  |       |        | 8,942  |       |        | 8,942 
|Cruz Bay Publishing, Inc. (2)                   |  | Publishing                               |                                                    | Senior Debt (12.1%, Due 12/06) (12)                 |     |                                                   |   |           |        | 6,172  |       |        | 6,172  |       |        | 6,172 
|                                                |  |                                          | Subordinated Debt (20.5%, Due 12/06) (12)          |                                                     |     |                                                   |   |           | 11,417 |        |       | 11,417 |        |       | 11,417
|Dayton Parts Holdings, LLC (2)                  |  | Vehicle Parts & Supplies                 |                                                    | Subordinated Debt (12.5%, Due 6/11)                 |     |                                                   |   |           |        | 16,000 |       |        | 16,000 |       |        | 16,000
|                                                |  | Preferred LLC Interest (16,371 units)    |                                                    | 2.7                                                 | %   |                                                   |   |           |        |        | 602   |        |        | 602  
|                                                |  |                                          |                                                    | Class A LLC Interest (10,914 units)                 |     | 4.4                                               | % |           |        |        |       |        | 401    |       |        | 401   
|D&B Towers, LLC                                 |  | Communications                           |                                                    | Senior Debt (14.2%, Due 6/08) (12)                  |     |                                                   |   |           |        | 5,022  |       |        | 5,022  |       |        | 5,022 
|dick clark productions, inc. (6)                |  | Broadcasting                             |                                                    | Common Stock (235,714 shares)                       |     | 0.5                                               | % |           |        |        |       |        | 210    |       |        | 111   
|                                                |  |                                          | Warrants to purchase Common Stock (expire 7/25/11) |                                                     | 5.3 | %                                                 |   |           |        |        |       | 858    |        |       | 1,085 
|The e-Media Club, LLC (6)                       |  | Investment Fund                          |                                                    | LLC Interest                                        |     | 0.8                                               | % |           |        |        |       |        | 89     |       |        | 37    
|EAS Group, Inc.                                 |  | Communications Equipment                 |                                                    | Subordinated Debt (16.0%, Due 4/11) (12)            |     |                                                   |   |           |        | 10,227 |       |        | 10,227 |       |        | 10,227
|Empower IT Holdings, Inc. (2)                   |  | Information Services                     |                                                    | Senior Debt (11.0%, Due 5/12)                       |     |                                                   |   |           |        | 10,000 |       |        | 10,000 |       |        | 10,000
|                                                |  | Subordinated Debt (14.5%, Due 6/12)      |                                                    |                                                     |     |                                                   |   | 5,067     |        |        | 5,067 |        |        | 5,067
|Equibrand Holding Corporation (2)               |  | Leisure Activities                       |                                                    | Senior Debt (11.5%, Due 3/10-9/10) (12)             |     |                                                   |   |           |        | 4,640  |       |        | 4,640  |       |        | 4,640 
|                                                |  | Subordinated Debt (16.0%, Due 3/11) (12) |                                                    |                                                     |     |                                                   |   | 8,763     |        |        | 8,763 |        |        | 8,763
|Flexsol Packaging Corp.                         |  | Chemicals/Plastics                       |                                                    | Subordinated Debt (10.7%, Due 12/12) (12)           |     |                                                   |   |           |        | 5,000  |       |        | 5,000  |       |        | 5,000 

See notes to consolidated financial statements



14



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2005

(in thousands, except share data)



|                                            |  |                                          |                                                     |                                                                            |      |                                                   |   |           |        |        |       |        |             |       |        |            
|------------------------------------------- |  | ---------------------------------------- | --------------------------------------------------- | -------------------------------------------------------------------------- | ---- | ------------------------------------------------- | - | --------- | ------ | ------ | ----- | ------ | ----------- | ----- | ------ | -----------
|Portfolio Company                           |  | Industry                                 |                                                     | Investment (8)                                                             |      | Percentage ofClass Held ona FullyDiluted Basis(1) |   |           |       
|                                            |  |                                          |                                                     | Principal                                                                  |      | Cost                                              |   | FairValue
|GoldenSource Holdings Inc. (2)              |  | Technology                               |                                                     | Senior Debt (9.0%, Due 9/08)                                               |      |                                                   |   |           | $      | 17,000 |       | $      | 17,000      |       | $      | 17,000     
|                                            |  |                                          | Warrants to purchase Common Stock (expire 10/31/08) |                                                                            | 4.2  | %                                                 |   |           |        |        |       |       |             |       |      
|The Hillman Group, Inc.                     |  | Home Furnishings                         |                                                     | Senior Debt (7.7%, Due 3/11) (12)                                          |      |                                                   |   |           |        | 5,910  |       |        | 5,910       |       |        | 6,010      
|Home Interiors & Gifts, Inc.                |  | Home Furnishings                         |                                                     | Senior Debt (9.4%, Due 3/11) (12)                                          |      |                                                   |   |           |        | 4,668  |       |        | 4,668       |       |        | 4,290      
|I-55 Internet Services, Inc. (6)            |  | Communications                           |                                                     | Senior Debt (17.5%, Due 12/06)                                             |      |                                                   |   |           |        | 1,778  |       |        | 1,778       |       |        | 1,539      
|                                            |  |                                          | Warrants to purchase Common Stock (expire 4/30/10)  |                                                                            | 20.0 | %                                                 |   |           |        |        |       | 366    |             |       |      
|Images.com, Inc.                            |  | Information Services                     |                                                     | Senior Debt (12.5%, Due 12/07) (12)                                        |      |                                                   |   |           |        | 2,664  |       |        | 2,664       |       |        | 2,664      
|Information Today, Inc. (2)                 |  | Information Services                     |                                                     | Senior Debt (11.0%, Due 9/08) (12)                                         |      |                                                   |   |           |        | 6,915  |       |        | 6,915       |       |        | 6,915      
|Instant Web, Inc.                           |  | Direct Mail Advertiser                   |                                                     | Senior Debt (7.8%, Due 2/11) (12)                                          |      |                                                   |   |           |        | 4,962  |       |        | 4,962       |       |        | 5,037      
|Jenzabar, Inc. (2)                          |  | Technology                               |                                                     | Senior Debt (12.5%, Due 4/09) (12)                                         |      |                                                   |   |           |        | 12,000 |       |        | 12,000      |       |        | 12,000     
|                                            |  |                                          |                                                     | Subordinated Debt (18.0%, Due 4/09-4/12) (12)                              |      |                                                   |   |           |        | 7,467  |       |        | 7,467       |       |        | 7,467      
|                                            |  |                                          |                                                     | Senior Preferred Stock (5,000 shares)                                      |      | 100.0                                             | % |           |        |        |       |        | 5,831       |       |        | 5,831      
|                                            |  |                                          |                                                     | Subordinated Preferred Stock (109,800 shares)                              |      | 100.0                                             | % |           |        |        |       |        | 1,098       |       |        | 1,098      
|                                            |  |                                          |                                                     | Warrants to purchase Common Stock (expire 4/30/16)                         |      | 19.5                                              | % |           |        |        |       |        | 422         |       |        | 7,630      
|The Joseph F. Biddle Publishing Company (2) |  | Newspaper                                |                                                     | Senior Debt (7.4%, Due 12/11) (12)                                         |      |                                                   |   |           |        | 7,225  |       |        | 7,225       |       |        | 7,225      
|Jupitermedia Corporation                    |  | Information Services                     |                                                     | Common Stock (148,373 shares)                                              |      | 0.4                                               | % |           |        |        |       |        | 2,115       |       |        | 2,084      
|Managed Health Care Associates, Inc.        |  | Drugs                                    |                                                     | Senior Debt (10.3%, Due 6/09-6/10) (12)                                    |      |                                                   |   |           |        | 4,380  |       |        | 4,380       |       |        | 4,380      
|MD Beauty, Inc                              |  | Cosmetics                                |                                                     | Subordinated Debt (11.3%, Due 2/13) (12)                                   |      |                                                   |   |           |        | 9,000  |       |        | 9,000       |       |        | 9,079      
|MCI Holdings, LLC (2)                       |  | Management Consulting Service            |                                                     | Subordinated Debt (12.5%, Due 3/12) Class A LLC Interest (4,712,042 units) |      | 5.2                                               | % |           |        | 17,102 |       |        | 17,1023,000 |       |        | 17,1023,000
|Metropolitan                                |  | Communications                           |                                                     | Senior Debt (11.6%, Due 6/10-9/10) (12)                                    |      |                                                   |   |           |        | 22,000 |       |        | 22,000      |       |        | 22,000     
|Telecommunications                          |  |                                          |                                                     | Subordinated Debt (15.5%, Due 12/10) (12)                                  |      |                                                   |   |           |        | 10,929 |       |        | 10,929      |       |        | 10,929     
|Holding Company (2) (9)                     |  |                                          |                                                     | Warrants to purchase Common Stock (expire 9/30/13)                         |      | 20.4                                              | % |           |        |        |       |        | 1,843       |       |        | 3,897      
|Michael May                                 |  | Security Alarm                           |                                                     | Senior Debt (12.0%, Due 2/08)                                              |      |                                                   |   |           |        | 450    |       |        | 450         |       |        | 450        
|MicroCal Holdings, LLC (2)                  |  | Laboratory Instruments                   |                                                     | Senior Debt (9.0%, Due 3/10-9/10) (12)                                     |      |                                                   |   |           |        | 13,900 |       |        | 13,900      |       |        | 13,900     
|                                            |  | Subordinated Debt (14.5%, Due 3/11) (12) |                                                     |                                                                            |      |                                                   |   | 9,115     |        |        | 9,115 |        |             | 9,115
|MicroDental Laboratories (2)                |  | Healthcare                               |                                                     | Senior Debt (9.8%, Due 5/11-11/11) (12)                                    |      |                                                   |   |           |        | 11,767 |       |        | 11,767      |       |        | 11,767     
|                                            |  |                                          | Subordinated Debt (15.0%, Due 5/12) (12)            |                                                                            |      |                                                   |   |           | 6,113  |        |       | 6,113  |             |       | 6,113 
|Miles Media Holding, Inc. (2)               |  | Publishing                               |                                                     | Senior Debt (10.9%, Due 6/12) (12)                                         |      |                                                   |   |           |        | 8,287  |       |        | 8,287       |       |        | 8,287      
|                                            |  |                                          | Subordinated Debt (15.4%, Due 12/12) (12)           |                                                                            |      |                                                   |   |           | 4,000  |        |       | 4,000  |             |       | 4,000 
|                                            |  |                                          |                                                     | Warrants to purchase Common Stock (expire 6/3/15)                          |      | 19.5                                              | % |           |        |        |       |        | 439         |       |        | 837        
|Monotype Imaging Holdings Corp. (2)         |  | Technology                               |                                                     | Senior Debt (8.8%, Due 11/09) (12)                                         |      |                                                   |   |           |        | 4,850  |       |        | 4,850       |       |        | 4,850      
|MultiPlan, Inc.                             |  | Insurance                                |                                                     | Senior Debt (7.0%, Due 3/09) (12)                                          |      |                                                   |   |           |        | 3,194  |       |        | 3,194       |       |        | 3,234      
|Nalco Company                               |  | Ecological Services                      |                                                     | Senior Debt (6.32%, Due 11/10) (12)                                        |      |                                                   |   |           |        | 4,162  |       |        | 4,162       |       |        | 4,217      
|National Display Holdings, LLC (2)          |  | Electronics                              |                                                     | Senior Debt (9.7%, Due 12/10-12/11)                                        |      |                                                   |   |           |        | 20,087 |       |        | 20,087      |       |        | 20,087     
|                                            |  |                                          | Subordinated Debt (15.0%, Due 12/12)                |                                                                            |      |                                                   |   |           | 13,000 |        |       | 13,000 |             |       | 13,000
|                                            |  |                                          |                                                     | Class A LLC Interest (1,000,000 units)                                     |      | 3.7                                               | % |           |        |        |       |        | 1,000       |       |        | 1,000      

See notes to consolidated financial statements



15



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2005

(in thousands, except share data)



|                                      |             |                        |                                                            |                                                           |      |                                                   |   |           |        |        |  |        |        |  |        |       
|------------------------------------- | ----------- | ---------------------- | ---------------------------------------------------------- | --------------------------------------------------------- | ---- | ------------------------------------------------- | - | --------- | ------ | ------ |  | ------ | ------ |  | ------ | ------
|Portfolio Company                     |             | Industry               |                                                            | Investment (8)                                            |      | Percentage ofClass Held ona FullyDiluted Basis(1) |   |           |       
|                                      |             |                        |                                                            | Principal                                                 |      | Cost                                              |   | FairValue
|National Product Services, Inc.       |             | Business Services      |                                                            | Subordinated Debt (14.0%, Due 6/07) (12)                  |      |                                                   |   |           | $      | 10,225 |  | $      | 10,225 |  | $      | 10,225
|New Century Companies, Inc. (6)       |             | Industrial Equipment   |                                                            | Warrants to purchase Common Stock (expire 6/30/10)        |      | 0.4                                               | % |           |        |        |  |        |       |  |        |      
|OMP, Inc.                             |             | Drugs                  |                                                            | Senior Debt (8.3%, Due 1/10-1/11) (12)                    |      |                                                   |   |           |        | 7,714  |  |        | 7,714  |  |        | 7,714 
|PartMiner, Inc. (2)                   |             | Information Services   |                                                            | Senior Debt (15.0%, Due 6/09) (12)                        |      |                                                   |   |           |        | 5,240  |  |        | 5,240  |  |        | 5,240 
|Powercom Corporation (2)              |             | Communications         |                                                            | Senior Debt (12.0%, Due 12/06) (12)                       |      |                                                   |   |           |        | 1,861  |  |        | 1,861  |  |        | 1,861 
|                                      |             |                        | Warrants to purchase Class A Common Stock (expire 6/30/14) |                                                           | 30.7 | %                                                 |   |           |        |        |  | 286    |        |  | 341   
|Quantum Medical Holdings, LLC (2)     |             | Laboratory             |                                                            | Senior Debt (9.3%, Due 12/10-5/11)                        |      |                                                   |   |           |        | 17,535 |  |        | 17,535 |  |        | 17,535
|                                      | Instruments |                        | Subordinated Debt (15.0%, Due 12/11)                       |                                                           |      |                                                   |   |           | 10,502 |        |  | 10,502 |        |  | 10,502
|                                      |             |                        |                                                            | Preferred LLC Interest (1,000,000 units)                  |      | 3.3                                               | % |           |        |        |  |        | 1,001  |  |        | 1,001 
|R.R. Bowker, LLC (2)                  |             | Information Services   |                                                            | Senior Debt (11.4%, Due 12/08-12/09) (12)                 |      |                                                   |   |           |        | 16,650 |  |        | 16,650 |  |        | 16,650
|Republic National Cabinet Corporation |             | Home Furnishings       |                                                            | Senior Debt (9.2%, Due 6/09) (12)                         |      |                                                   |   |           |        | 3,578  |  |        | 3,578  |  |        | 3,578 
|                                      |             |                        | Subordinated Debt (13.1%, Due 6/09) (12)                   |                                                           |      |                                                   |   |           | 5,000  |        |  | 5,000  |        |  | 5,000 
|Sagamore Hill Broadcasting, LLC (2)   |             | Broadcasting           |                                                            | Senior Debt (11.9%, Due 11/09) (12)                       |      |                                                   |   |           |        | 12,400 |  |        | 12,400 |  |        | 12,400
|SCI Holdings, Inc                     |             | Communication Services |                                                            | Subordinated Debt (11.5%, Due 11/12) (12)                 |      |                                                   |   |           |        | 7,500  |  |        | 7,500  |  |        | 7,500 
|Sheridan Healthcare, Inc.             |             | Healthcare             |                                                            | Senior Debt (7.5%, Due 11/10) (12)                        |      |                                                   |   |           |        | 2,850  |  |        | 2,850  |  |        | 2,895 
|Sterigenics International, Inc.       |             | Healthcare             |                                                            | Senior Debt (7.5%, Due 6/11) (12)                         |      |                                                   |   |           |        | 4,925  |  |        | 4,925  |  |        | 4,993 
|Stratford School Holdings, Inc. (2)   |             | Education              |                                                            | Senior Debt (9.5%, Due 6/11) (12)                         |      |                                                   |   |           |        | 6,500  |  |        | 6,500  |  |        | 6,500 
|                                      |             |                        | Subordinated Debt (14.0%, Due 12/11) (12)                  |                                                           |      |                                                   |   |           | 6,651  |        |  | 6,651  |        |  | 6,651 
|                                      |             |                        |                                                            | Preferred Stock (10,000 shares)                           |      | 13.3                                              | % |           |        |        |  |        | 1,059  |  |        | 1,059 
|                                      |             |                        |                                                            | Warrants to purchase Common Stock(expire 5/31/15)         |      | 100.0                                             | % |           |        |        |  |        | 67     |  |        | 192   
|Survey Sampling International, LLC    |             | Research               |                                                            | Senior Debt (7.3%, Due 5/11) (12)                         |      |                                                   |   |           |        | 3,911  |  |        | 3,911  |  |        | 3,943 
|Switch & Data Holdings, Inc.          |             | Business Services      |                                                            | Subordinated Debt (11.6%, Due 4/11) (12)                  |      |                                                   |   |           |        | 12,000 |  |        | 12,000 |  |        | 12,000
|SXC Health Solutions, Inc. (2)        |             | Technology             |                                                            | Senior Debt (9.0%, Due 12/10) (12)                        |      |                                                   |   |           |        | 13,260 |  |        | 13,260 |  |        | 13,260
|                                      |             |                        | Common Stock (1,111,100 shares)                            |                                                           | 1.9  | %                                                 |   |           |        |        |  | 1,235  |        |  | 2,630 
|Talk America Holdings, Inc. (6)       |             | Communications         |                                                            | Warrants to purchase Common Stock(expire 8/17/06-3/31/07) |      | 0.7                                               | % |           |        |        |  |        | 25     |  |        | 330   
|Team Express, Inc.                    |             | Specialty Retail       |                                                            | Senior Debt (10.7%, Due 12/09-12/10) (12)                 |      |                                                   |   |           |        | 13,364 |  |        | 13,364 |  |        | 13,364
|                                      |             |                        |                                                            | Subordinated Debt (15.0%, Due 6/11) (12)                  |      |                                                   |   |           |        | 7,108  |  |        | 7,108  |  |        | 7,108 
|Teleguam Holdings, LLC                |             | Communications         |                                                            | Subordinated Debt (11.4%, Due 10/12)                      |      |                                                   |   |           |        | 20,000 |  |        | 20,000 |  |        | 20,000
|Tippmann Sports, LLC                  |             | Leisure Goods          |                                                            | Senior Debt (10.3%, Due 6/09) (12)                        |      |                                                   |   |           |        | 6,550  |  |        | 6,550  |  |        | 6,550 
|Total Sleep Holdings, Inc. (2)        |             | Healthcare             |                                                            | Subordinated Debt (14.0%, Due 9/11) (12)                  |      |                                                   |   |           |        | 22,220 |  |        | 22,220 |  |        | 22,220
|U. S. I. Holdings Corporation         |             | Insurance              |                                                            | Senior Debt (6.7%, Due 8/08) (12)                         |      |                                                   |   |           |        | 2,970  |  |        | 2,970  |  |        | 2,982 
|VS&A-PBI Holding LLC (6)              |             | Publishing             |                                                            | LLC Interest                                              |      | 0.8                                               | % |           |        |        |  |        | 500    |  |        |      

See notes to consolidated financial statements



16



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2005

(in thousands, except share data)



|                                                                                        |  |                      |                                                            |                                                                  |      |                                                   |   |   |           |        |  |       |           |   |  |       |        | 
|--------------------------------------------------------------------------------------- |  | -------------------- | ---------------------------------------------------------- | ---------------------------------------------------------------- | ---- | ------------------------------------------------- | - | - | --------- | ------ |  | ----- | --------- | - |  | ----- | ------ | 
|Portfolio Company                                                                       |  | Industry             |                                                            | Investment (8)                                                   |      | Percentage ofClass Held ona FullyDiluted Basis(1) |   |   |           |       
|                                                                                        |  |                      |                                                            | Principal                                                        |      | Cost                                              |   |   | FairValue |       
|VOX Communications Group Holdings, LLC (2)                                              |  | Broadcasting         |                                                            | Senior Debt (10.8%, Due 12/07-6/10) (12)                         |      |                                                   |   |   | $         | 10,350 |  | $     | 10,350    |   |  | $     | 10,350 | 
|                                                                                        |  |                      | Convertible Preferred Subordinated Notes (12.0%, Due 6/15) |                                                                  | 16.5 | %                                                 |   |   | 1,062     |        |  | 1,062 |           |   |  | 1,062 |       
|Wicks Business Information, LLC                                                         |  | Publishing           |                                                            | Unsecured Notes (9.3%, Due 2/08)                                 |      |                                                   |   |   |           | 215    |  |       | 215       |   |  |       | 215    | 
|Wiesner Publishing Company, LLC (2)                                                     |  | Publishing           |                                                            | Warrants to purchase membership interest in LLC (expire 6/30/12) |      | 15.0                                              | % |   |           |        |  |       | 406       |   |  |       | 1,723  | 
|Wire Rope Corporation of America, Inc.                                                  |  | Industrial Equipment |                                                            | Senior Debt (11.9%, Due 6/11) (12)                               |      |                                                   |   |   |           | 6,000  |  |       | 6,000     |   |  |       | 6,180  | 
|WirelessLines II, Inc.                                                                  |  | Communications       |                                                            | Senior Debt (8.0%, Due 4/07)                                     |      |                                                   |   |   |           | 185    |  |       | 185       |   |  |       | 185    | 
|Total non-affiliate investments (represents 68.0% of total investments at fair value)   |  |                      |                                                            |                                                                  |      |                                                   |   |   | 733,717   |        |  |       | 745,757   |  
|Total investments                                                                       |  |                      |                                                            |                                                                  |      |                                                   |   |   | 1,117,257 |        |  |       | 1,097,560 |  
|Unearned income                                                                         |  |                      |                                                            |                                                                  |      |                                                   |   |   | (9,062    | )      |  |       | (9,062    | )
|Total investments net of unearned income                                                |  |                      |                                                            |                                                                  |      |                                                   |   | $ | 1,108,195 |        |  | $     | 1,088,498 |  
|Call options written (included in other liabilities in the Consolidated Balance Sheets) |  |                      |                                                            |                                                                  |      |                                                   |   |   |           |        |  |       |           |  
|Metropolitan Telecommunications Holding Company (9)                                     |  | Communications       |                                                            | Call options written                                             |      |                                                   |   |   |           |        |  | $     | 575       |   |  | $     | 575    | 
|                                                                                        |  |                      |                                                            |                                                                  |      |                                                   |   |   |           |        |  |       |           |   |  |       |       
|                                                                                        |  |                      |                                                            |                                                                  |      |                                                   |   |   |           |        |  |       |           |   |  |       |       
|Total call options written                                                              |  |                      |                                                            |                                                                  |      |                                                   |   | $ | 575       |        |  | $     | 575       |  

See notes to consolidated financial statements



17



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedules of Investments (unaudited)

September 30, 2006 and
December 31, 2005



|(1) | The percentage of class held on a fully diluted basis represents the percentage of the class of security MCG may own assuming MCG exercises its warrants or options
(whether or not they are in-the-money) and assuming that warrants, options or convertible securities held by others are not exercised or converted. MCG has not included any security which is subject to significant vesting contingencies. Common
stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted. The percentage was calculated based on the most current outstanding share information available to us (i) in the case of private
companies, provided by that company, and (ii) in the case of public companies, provided by that companys most recent public filings with the SEC.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(5) | Majority owned investments are generally defined under the Investment Company Act of 1940 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) | In January 2005, MCG IH II, Inc., the sole owner of one of the Companys majority-owned controlled portfolio companies, Bridgecom Holdings, Inc., completed a merger with and
into BV-BC Acquisition Corporation, a wholly-owned subsidiary of Broadview Networks, Inc. The Companys economic ownership in the new merged entity dropped below 50%; however, the Company retained greater than 50% of the voting control of the
merged entity. Accordingly, our investment will continue to be reflected as a majority-owned control portfolio company.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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) | In June 2005, MCG granted Metropolitan Telecommunication Holding Company an option to repurchase all of the warrants to purchase their common stock currently held by MCG at a
specified price. This option expired on March 31, 2006.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | In March 2006, I-55 Internet Services, Inc. merged with XFone, Inc.
|---- | -------------------------------------------------------------------

|(11) | In March 2006, a subsidiary of JupiterKagan, Inc., a majority-owned controlled portfolio company, purchased the JupiterResearch division of Jupitermedia Corporation. At
December 31, 2005, Kagan Research, LLC was a consolidated subsidiary of MCG.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | 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.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) | In September 2006, Broadview Networks Holdings, Inc. (Broadview) acquired ATX Communications, Inc. (ATX). In connection with the acquisition of ATX, MCG
converted its Broadview subordinated debt to Broadview preferred stock. See Note 2 to the Consolidated Financial Statements for more detail on the ATX acquisition and its impact on the Companys investment in Broadview.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) | In August 2006, MCG sold 50.1% of its equity in Crystal Media Network, LLC (Crystal Media). As part of the same transaction, Crystal Medias outstanding debt was
paid off.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(15) | At September 30, 2006 MCG had a written call option outstanding on up to a 10% interest in Crystal Media. The option expires January 31, 2008.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------

See notes to consolidated financial statements



18



---

##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited)

(in thousands, except per share amounts)

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 financing and advisory services to middle market, growth oriented companies throughout the United States. The Company is a non-diversified
internally managed closedend investment company that has elected to be regulated 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, 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. Prior to January 1, 2006, Kagan Research, LLC was one of the Companys consolidated subsidiaries. As of January 1, 2006, Kagan Research, LLC no longer qualifies to be a consolidated subsidiary because it is held
for investment. During the first quarter of 2006, Kagan Research, LLC and Jupiter Research, LLC merged to create JupiterKagan, Inc., which is reflected on the Companys schedule of investments.

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 and nine months ended September 30, 2006 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, 2005, as filed with the SEC.

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,



19



---

##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



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.

Note 2Investments

At September 30, 2006 and December 31, 2005, the Companys investments consisted of the following:



|                                         |  |                    |           |   |                   |   |           |      |  |   |            |   |  |   |           |  
|---------------------------------------- |  | ------------------ | --------- | - | ----------------- | - | --------- | ---- |  | - | ---------- | - |  | - | --------- | -
|                                         |  | September 30, 2006 |           |   | December 31, 2005 |  
|                                         |  | Cost               |           |   | Fair Value        |   |           | Cost |  |   | Fair Value |  
|Commercial loans                         |  | $                  | 893,162   |   |                   | $ | 885,948   |      |  | $ | 939,086    |   |  | $ | 934,036   |  
|Investments in equity securities         |  |                    | 313,990   |   |                   |   | 321,238   |      |  |   | 178,171    |   |  |   | 163,524   |  
|                                         |  |                    |           |   |                   |   |           |      |  |   |            |   |  |   |           |  
|Total investments                        |  |                    | 1,207,152 |   |                   |   | 1,207,186 |      |  |   | 1,117,257  |   |  |   | 1,097,560 |  
|Unearned income                          |  |                    | (8,057    | ) |                   |   | (8,057    | )    |  |   | (9,062     | ) |  |   | (9,062    | )
|                                         |  |                    |           |   |                   |   |           |      |  |   |            |   |  |   |           |  
|Total investments net of unearned income |  | $                  | 1,199,095 |   |                   | $ | 1,199,129 |      |  | $ | 1,108,195  |   |  | $ | 1,088,498 |  
|                                         |  |                    |           |   |                   |   |           |      |  |   |            |   |  |   |           |  

The composition of MCGs investments as of September 30, 2006 and December 31,
2005, at cost, was as follows, excluding unearned income:



|                                        |  |                    |           |                              |                   |   |                    |   |                              |  |       |  
|--------------------------------------- |  | ------------------ | --------- | ---------------------------- | ----------------- | - | ------------------ | - | ---------------------------- |  | ----- | -
|                                        |  | September 30, 2006 |           |                              | December 31, 2005 |  
|                                        |  | Investments atCost |           | Percentage ofTotal Portfolio |                   |   | Investments atCost |   | Percentage ofTotal Portfolio | 
|Secured senior debt                     |  | $                  | 404,413   |                              | 33.5              | % |                    | $ | 544,449                      |  | 48.7  | %
|Subordinated debt                       |  |                    |           |                              |                   |   |                    |   |                              |  |       |  
|Secured                                 |  |                    | 464,021   |                              | 38.4              |   |                    |   | 333,080                      |  | 29.8  |  
|Unsecured                               |  |                    | 24,728    |                              | 2.1               |   |                    |   | 61,557                       |  | 5.5   |  
|Preferred equity                        |  |                    | 283,008   |                              | 23.4              |   |                    |   | 146,905                      |  | 13.1  |  
|Common equity/Common equity equivalents |  |                    | 30,982    |                              | 2.6               |   |                    |   | 31,266                       |  | 2.9   |  
|                                        |  |                    |           |                              |                   |   |                    |   |                              |  |       |  
|Total                                   |  | $                  | 1,207,152 |                              | 100.0             | % |                    | $ | 1,117,257                    |  | 100.0 | %
|                                        |  |                    |           |                              |                   |   |                    |   |                              |  |       |  

The composition of MCGs investments as of September 30, 2006 and December 31,
2005, at fair value, was as follows, excluding unearned income:



|                                        |  |                          |           |                              |                   |   |                          |   |                              |  |       |  
|--------------------------------------- |  | ------------------------ | --------- | ---------------------------- | ----------------- | - | ------------------------ | - | ---------------------------- |  | ----- | -
|                                        |  | September 30, 2006       |           |                              | December 31, 2005 |  
|                                        |  | Investments atFair Value |           | Percentage ofTotal Portfolio |                   |   | Investments atFair Value |   | Percentage ofTotal Portfolio | 
|Secured senior debt                     |  | $                        | 408,827   |                              | 33.9              | % |                          | $ | 542,981                      |  | 49.5  | %
|Subordinated debt                       |  |                          |           |                              |                   |   |                          |   |                              |  |       |  
|Secured                                 |  |                          | 452,566   |                              | 37.5              |   |                          |   | 329,498                      |  | 30.0  |  
|Unsecured                               |  |                          | 24,555    |                              | 2.0               |   |                          |   | 61,557                       |  | 5.6   |  
|Preferred equity                        |  |                          | 265,466   |                              | 22.0              |   |                          |   | 126,664                      |  | 11.5  |  
|Common equity/Common equity equivalents |  |                          | 55,772    |                              | 4.6               |   |                          |   | 36,860                       |  | 3.4   |  
|                                        |  |                          |           |                              |                   |   |                          |   |                              |  |       |  
|Total                                   |  | $                        | 1,207,186 |                              | 100.0             | % |                          | $ | 1,097,560                    |  | 100.0 | %
|                                        |  |                          |           |                              |                   |   |                          |   |                              |  |       |  



20



---

##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



The Companys debt instruments provide for a contractual interest rate generally ranging from
approximately 8% to 20%, a portion of which may be deferred. At September 30, 2006, approximately 63% 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 37% were at fixed rates. In addition, at September 30, 2006 approximately 32% of the loan portfolio, based on amounts outstanding at fair value, has floors of between 1.25% and 3.0% on the LIBOR base index. The
Companys loans have stated maturities at origination that generally range from 2 to 8 years. Customers typically pay an origination fee based on a percentage of the commitment amount and often pay a fee based on any undrawn commitments.

When one of the Companys loans becomes 90 days or more 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 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
loans on non-accrual status and loans greater than 60 days past due, at fair value, at September 30, 2006 and December 31, 2005:



|                                                             |  |                    |        |                    |                   |   |                     |      |   |            |   |                    |  |      |                     |  |      |  
|------------------------------------------------------------ |  | ------------------ | ------ | ------------------ | ----------------- | - | ------------------- | ---- | - | ---------- | - | ------------------ |  | ---- | ------------------- |  | ---- | -
|                                                             |  | September 30, 2006 |        |                    | December 31, 2005 |  
|                                                             |  | Fair Value         |        | % of LoanPortfolio |                   |   | % of TotalPortfolio |      |   | Fair Value |   | % of LoanPortfolio |  |      | % of TotalPortfolio | 
|Loans greater than 60 days past due                          |  |                    |        |                    |                   |   |                     |      |   |            |   |                    |  |      |                     |  |      |  
|On non-accrual status                                        |  | $                  | 12,580 |                    | 1.42              | % |                     | 1.04 | % |            | $ | 3,218              |  | 0.34 | %                   |  | 0.29 | %
|Not on non-accrual status                                    |  |                    | 1,927  |                    | 0.22              | % |                     | 0.16 | % |            |   | 13,553             |  | 1.45 | %                   |  | 1.23 | %
|                                                             |  |                    |        |                    |                   |   |                     |      |   |            |   |                    |  |      |                     |  |      |  
|Total loans greater than 60 days past due                    |  | $                  | 14,507 |                    | 1.64              | % |                     | 1.20 | % |            | $ | 16,771             |  | 1.79 | %                   |  | 1.52 | %
|                                                             |  |                    |        |                    |                   |   |                     |      |   |            |   |                    |  |      |                     |  |      |  
|Loans on non-accrual status                                  |  |                    |        |                    |                   |   |                     |      |   |            |   |                    |  |      |                     |  |      |  
|0 to 60 days past due                                        |  | $                  | 13,422 |                    | 1.51              | % |                     | 1.11 | % |            | $ | 9,522              |  | 1.02 | %                   |  | 0.87 | %
|Greater than 60 days past due                                |  |                    | 12,580 |                    | 1.42              | % |                     | 1.04 | % |            |   | 3,218              |  | 0.34 | %                   |  | 0.29 | %
|                                                             |  |                    |        |                    |                   |   |                     |      |   |            |   |                    |  |      |                     |  |      |  
|Total loans on non-accrual status                            |  | $                  | 26,002 |                    | 2.93              | % |                     | 2.15 | % |            | $ | 12,740             |  | 1.36 | %                   |  | 1.16 | %
|                                                             |  |                    |        |                    |                   |   |                     |      |   |            |   |                    |  |      |                     |  |      |  
|Loans on non-accrual status or greater than 60 days past due |  | $                  | 27,929 |                    | 3.15              | % |                     | 2.31 | % |            | $ | 26,293             |  | 2.81 | %                   |  | 2.39 | %
|                                                             |  |                    |        |                    |                   |   |                     |      |   |            |   |                    |  |      |                     |  |      |  

At September 30, 2006, the Companys ten largest customers represented approximately 39.1% of
the total fair value of the Companys investments. These ten customers accounted for approximately 33.9% of the Companys operating income during the nine months ended September 30, 2006. At September 30, 2006, approximately 27.7% of the
Companys portfolio at fair value was invested in companies in the communications industry, of which 20.5% were in competitive local exchange carriers, or CLECs. The Companys two largest customers, Broadview Networks Holdings, Inc.
(Broadview) and Cleartel Communications, Inc. (Cleartel) are CLECs. The Companys remaining investments in the communications industry include telecommunications tower companies, rural local exchange carriers,
Internet service providers, wireless companies and security alarm companies.

On September 29, 2006, Broadview completed the acquisition of
ATX Communications, Inc. (ATX), an integrated communications provider serving business customers in the Mid-Atlantic region. Broadview financed the ATX acquisition using a portion of the proceeds from a $210,000 offering of 113/8% Senior Secured Notes due 2012, which were offered through Rule 144A under the Securities Act of 1933, as amended (the Bond
Offering). The Bond Offering closed on August 23, 2006. At the time of the Bond Offering, the Company invested an additional $5,488 into Broadview and converted all of its subordinated debt investments, which had a fair value of approximately
$51,114 (including $9,654 of payment-in-kind interest), to preferred equity.



21



---

##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



At September 30, 2006, the Company holds preferred stock in Broadview which had an aggregate fair
value of $114,815. The preferred stock is convertible into common stock and represents a 58% ownership of the preferred stock and a 52% ownership interest on an as-if converted basis. As of September 30, 2006, the Companys preferred stock
investment entitles it to aggregate claims of approximately $230,800, prior to any claims by Broadview common shareholders. The Company is also entitled to accumulating dividends on its preferred stock investment, which accumulate and compound
quarterly at an annual rate of 12% on $230,800. Any amounts outstanding on the Bond Offering and Broadviews $25,000 revolving credit facility from a third party, which Broadview also obtained during the third quarter of 2006, are payable prior
to any payments of preferred claims. At September 30, 2006, the Company did not hold any debt investments in Broadview.

At September 30,
2006, the Companys Broadview investment represented approximately 9.5% of the fair value of its total investments compared to 8.7% of the fair value of its total investments at December 31, 2005. Additionally, the Companys investment in
Broadview accounted for $6,849 and $15,462, or 16.8% and 13.6%, of its total operating income for the three months and nine months ended September 30, 2006, respectively, compared to $4,019 and $13,320, or 14.2% and 15.4%, of its total operating
income for the three months and nine months ended September 30, 2005, respectively.

At September 30, 2006, Cleartel, the Companys
second largest customer and one of the Companys control investments, represented approximately 7.7% of the fair value of the Companys investments compared to 7.2% of the fair value of its investments at December 31, 2005. Additionally,
the Companys investment in Cleartel accounted for $1,325 and $3,452, or 3.2% and 3.0% , of its total operating income for the three and nine months ended September 30, 2006, respectively, compared to $861 and $2,738, or 3.0% and 3.2% of its
total operating income for the three and nine months ended September 30, 2005, respectively.



22



---

##### 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 September 30, 2006 and December 31, 2005:



|                       |  |                    |           |                              |                   |   |                        |   |                              |  |       |  
|---------------------- |  | ------------------ | --------- | ---------------------------- | ----------------- | - | ---------------------- | - | ---------------------------- |  | ----- | -
|                       |  | September 30, 2006 |           |                              | December 31, 2005 |  
|                       |  | Investments atCost |           | Percentage ofTotal Portfolio |                   |   | Investments atCost (a) |   | Percentage ofTotal Portfolio | 
|Communications  CLEC  |  | $                  | 254,131   |                              | 21.1              | % |                        | $ | 221,434                      |  | 19.8  | %
|Healthcare             |  |                    | 100,356   |                              | 8.3               |   |                        |   | 89,533                       |  | 8.0   |  
|Newspaper              |  |                    | 93,129    |                              | 7.7               |   |                        |   | 112,646                      |  | 10.1  |  
|Communications  Other |  |                    | 80,392    |                              | 6.7               |   |                        |   | 71,725                       |  | 6.4   |  
|Publishing             |  |                    | 70,365    |                              | 5.8               |   |                        |   | 86,308                       |  | 7.7   |  
|Plastic Products       |  |                    | 56,310    |                              | 4.7               |   |                        |   |                             |  |      |  
|Business Services      |  |                    | 51,625    |                              | 4.3               |   |                        |   | 22,225                       |  | 2.0   |  
|Information Services   |  |                    | 44,604    |                              | 3.7               |   |                        |   | 75,475                       |  | 6.8   |  
|Laboratory Instruments |  |                    | 42,788    |                              | 3.6               |   |                        |   | 52,052                       |  | 4.7   |  
|Home Furnishings       |  |                    | 41,554    |                              | 3.4               |   |                        |   | 19,156                       |  | 1.7   |  
|Broadcasting           |  |                    | 38,302    |                              | 3.2               |   |                        |   | 36,859                       |  | 3.3   |  
|Cable                  |  |                    | 36,249    |                              | 3.0               |   |                        |   | 33,275                       |  | 3.0   |  
|Technology             |  |                    | 35,950    |                              | 3.0               |   |                        |   | 58,894                       |  | 5.3   |  
|DVD Rental             |  |                    | 28,226    |                              | 2.3               |   |                        |   |                             |  |      |  
|Education              |  |                    | 26,606    |                              | 2.2               |   |                        |   | 19,337                       |  | 1.7   |  
|Sporting Goods         |  |                    | 26,596    |                              | 2.2               |   |                        |   |                             |  |      |  
|Electronics            |  |                    | 24,680    |                              | 2.0               |   |                        |   | 34,087                       |  | 3.0   |  
|Drugs                  |  |                    | 23,058    |                              | 1.9               |   |                        |   | 28,717                       |  | 2.6   |  
|Food Services          |  |                    | 20,929    |                              | 1.7               |   |                        |   |                             |  |      |  
|Retail                 |  |                    | 19,102    |                              | 1.6               |   |                        |   | 20,472                       |  | 1.8   |  
|Auto Parts             |  |                    | 17,023    |                              | 1.4               |   |                        |   | 17,003                       |  | 1.5   |  
|Cosmetics              |  |                    | 15,755    |                              | 1.3               |   |                        |   | 11,377                       |  | 1.0   |  
|Leisure Activities     |  |                    | 14,245    |                              | 1.2               |   |                        |   | 13,403                       |  | 1.2   |  
|Car Rental             |  |                    | 13,500    |                              | 1.1               |   |                        |   | 13,500                       |  | 1.2   |  
|Photographic Studio    |  |                    | 12,785    |                              | 1.1               |   |                        |   |                             |  |      |  
|Other Media            |  |                    | 1,791     |                              | 0.1               |   |                        |   | 32,773                       |  | 2.9   |  
|Other (b)              |  |                    | 17,101    |                              | 1.4               |   |                        |   | 47,006                       |  | 4.3   |  
|                       |  |                    |           |                              |                   |   |                        |   |                              |  |       |  
|Total                  |  | $                  | 1,207,152 |                              | 100.0             | % |                        | $ | 1,117,257                    |  | 100.0 | %
|                       |  |                    |           |                              |                   |   |                        |   |                              |  |       |  



|(a) | Certain amounts have been reclassified into different industries to conform to the current period industry breakdowns.
|--- | ----------------------------------------------------------------------------------------------------------------------

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



23



---

##### 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 September 30, 2006 and December 31, 2005:



|                       |  |                          |           |                              |                   |   |                              |   |                              |  |       |  
|---------------------- |  | ------------------------ | --------- | ---------------------------- | ----------------- | - | ---------------------------- | - | ---------------------------- |  | ----- | -
|                       |  | September 30, 2006       |           |                              | December 31, 2005 |  
|                       |  | Investments atFair Value |           | Percentage ofTotal Portfolio |                   |   | Investments atFair Value (a) |   | Percentage ofTotal Portfolio | 
|Communications  CLEC  |  | $                        | 247,609   |                              | 20.5              | % |                              | $ | 213,379                      |  | 19.4  | %
|Healthcare             |  |                          | 104,066   |                              | 8.6               |   |                              |   | 91,040                       |  | 8.4   |  
|Newspaper              |  |                          | 94,065    |                              | 7.8               |   |                              |   | 112,826                      |  | 10.3  |  
|Communications  Other |  |                          | 86,019    |                              | 7.2               |   |                              |   | 68,846                       |  | 6.3   |  
|Plastic Products       |  |                          | 56,310    |                              | 4.7               |   |                              |   |                             |  |      |  
|Publishing             |  |                          | 55,405    |                              | 4.6               |   |                              |   | 72,280                       |  | 6.6   |  
|Business Services      |  |                          | 51,167    |                              | 4.2               |   |                              |   | 22,225                       |  | 2.1   |  
|Technology             |  |                          | 43,814    |                              | 3.6               |   |                              |   | 66,103                       |  | 6.0   |  
|Information Services   |  |                          | 43,775    |                              | 3.6               |   |                              |   | 75,444                       |  | 6.9   |  
|Laboratory Instruments |  |                          | 43,207    |                              | 3.6               |   |                              |   | 52,052                       |  | 4.7   |  
|Home Furnishings       |  |                          | 40,854    |                              | 3.4               |   |                              |   | 18,878                       |  | 1.7   |  
|Broadcasting           |  |                          | 39,724    |                              | 3.3               |   |                              |   | 31,953                       |  | 2.9   |  
|Cable                  |  |                          | 36,249    |                              | 3.0               |   |                              |   | 33,275                       |  | 3.0   |  
|Education              |  |                          | 28,671    |                              | 2.4               |   |                              |   | 19,479                       |  | 1.8   |  
|DVD Rental             |  |                          | 28,226    |                              | 2.3               |   |                              |   |                             |  |      |  
|Sporting Goods         |  |                          | 26,596    |                              | 2.2               |   |                              |   |                             |  |      |  
|Electronics            |  |                          | 24,680    |                              | 2.0               |   |                              |   | 34,087                       |  | 3.1   |  
|Drugs                  |  |                          | 23,058    |                              | 1.9               |   |                              |   | 28,717                       |  | 2.6   |  
|Food Services          |  |                          | 20,929    |                              | 1.7               |   |                              |   |                             |  |      |  
|Retail                 |  |                          | 19,111    |                              | 1.6               |   |                              |   | 20,472                       |  | 1.9   |  
|Auto Parts             |  |                          | 17,162    |                              | 1.4               |   |                              |   | 17,003                       |  | 1.5   |  
|Cosmetics              |  |                          | 15,800    |                              | 1.3               |   |                              |   | 11,349                       |  | 1.0   |  
|Leisure Activities     |  |                          | 14,245    |                              | 1.2               |   |                              |   | 13,403                       |  | 1.2   |  
|Car Rental             |  |                          | 13,500    |                              | 1.1               |   |                              |   | 13,500                       |  | 1.2   |  
|Photographic Studio    |  |                          | 12,785    |                              | 1.1               |   |                              |   |                             |  |      |  
|Other Media            |  |                          | 2,973     |                              | 0.3               |   |                              |   | 33,876                       |  | 3.1   |  
|Other (b)              |  |                          | 17,186    |                              | 1.4               |   |                              |   | 47,373                       |  | 4.3   |  
|                       |  |                          |           |                              |                   |   |                              |   |                              |  |       |  
|Total                  |  | $                        | 1,207,186 |                              | 100.0             | % |                              | $ | 1,097,560                    |  | 100.0 | %
|                       |  |                          |           |                              |                   |   |                              |   |                              |  |       |  



|(a) | Certain amounts have been reclassified into different industries to conform to the current period industry breakdowns.
|--- | ----------------------------------------------------------------------------------------------------------------------

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



24



---

##### 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 at September 30, 2006 and December 31, 2005:



|                                           |  |                    |         |                   |   |                |  |                   |         |  |   |        
|------------------------------------------ |  | ------------------ | ------- | ----------------- | - | -------------- |  | ----------------- | ------- |  | - | -------
|                                           |  | September 30, 2006 |         | December 31, 2005
|                                           |  | Facilityamount     |         | Amountoutstanding |   | Facilityamount |  | Amountoutstanding
|Unsecured Notes                            |  | $                  | 50,000  |                   | $ | 50,000         |  | $                 | 50,000  |  | $ | 50,000 
|Commercial Loan Trust 2005-2               |  |                    |        |                   |   |               |  |                   | 250,000 |  |   | 159,181
|Commercial Loan Trust 2006-2               |  |                    | 200,000 |                   |   | 67,436         |  |                   |        |  |   |       
|Commercial Loan Funding Trust Facility     |  |                    | 250,000 |                   |   | 102,343        |  |                   | 250,000 |  |   | 160,000
|Term Securitizations                       |  |                    |         |                   |   |                |  |                   |         |  |   |        
|Series 2004-1 Class A-1 Asset Backed Bonds |  |                    |        |                   |   |               |  |                   | 81,138  |  |   | 81,138 
|Series 2004-1 Class A-2 Asset Backed Bonds |  |                    |        |                   |   |               |  |                   | 31,500  |  |   | 31,500 
|Series 2004-1 Class B Asset Backed Bonds   |  |                    |        |                   |   |               |  |                   | 43,500  |  |   | 43,500 
|Series 2004-1 Class C Asset Backed Bonds   |  |                    |        |                   |   |               |  |                   | 15,800  |  |   | 15,800 
|Series 2006-1 Class A-1 Notes              |  |                    | 106,250 |                   |   | 106,250        |  |                   |        |  |   |       
|Series 2006-1 Class A-2 Notes              |  |                    | 50,000  |                   |   | 44,900         |  |                   |        |  |   |       
|Series 2006-1 Class A-3 Notes              |  |                    | 85,000  |                   |   | 15,000         |  |                   |        |  |   |       
|Series 2006-1 Class B Notes                |  |                    | 58,750  |                   |   | 58,750         |  |                   |        |  |   |       
|Series 2006-1 Class C Notes                |  |                    | 45,000  |                   |   | 45,000         |  |                   |        |  |   |       
|Series 2006-1 Class D Notes                |  |                    | 47,500  |                   |   | 47,500         |  |                   |        |  |   |       
|Revolving Unsecured Credit Facility        |  |                    | 75,000  |                   |   | 17,500         |  |                   | 50,000  |  |   |       
|                                           |  |                    |         |                   |   |                |  |                   |         |  |   |        
|Total                                      |  | $                  | 967,500 |                   | $ | 554,679        |  | $                 | 771,938 |  | $ | 541,119
|                                           |  |                    |         |                   |   |                |  |                   |         |  |   |        

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. For additional discussion of our credit facilities please refer to Note C in our 2005 Annual Report on Form 10K filed with the SEC on March 3, 2006.

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 2005-2. On June 9, 2005, the Company established, through MCG Commercial Loan Trust 2005-2, a $250,000
warehouse credit facility with Merrill Lynch Capital Corp. On April 18, 2006, this facility terminated in connection with the Companys Term Securitization 2006-1. The warehouse credit facility allowed MCG Commercial Loan Trust 2005-2 to borrow
up to $250,000 subject to certain covenants, concentration limitations and other restrictions. The warehouse credit facility was primarily secured by the assets of MCG Commercial Loan Trust 2005-2, including cash and commercial loans transferred by
us to the trust. Under the terms of the credit and warehouse agreement, the loans could be senior secured loans, second lien loans or unsecured loans, as defined in the agreement, subject to certain limitations, including the requirement that at
least 50% of the overall warehouse facility amount be senior secured commercial loans. Advances under the facility bore interest based on LIBOR plus 0.75% and interest was payable monthly.



25



---

##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



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 September 30, 2006 the Company had $67,436 outstanding under this facility.

Commercial Loan Funding Trust Facility. On November 10, 2004, the Company established, through MCG Commercial Loan Funding Trust, a $150,000
warehouse financing facility funded through Three Pillars Funding LLC, an asset-backed commercial paper program administered by SunTrust Bank. 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. Through July 29, 2005, advances under the facility bore interest based on a commercial paper rate plus 1.15%.

On July 29, 2005, the Company amended the Commercial Loan Funding Trust Facility. Pursuant to this amendment, the total facility amount was increased
from $150,000 to $250,000, the interest rate was changed from commercial paper rate plus 1.15% to commercial paper rate plus 0.95%, the concentration criteria were modified to allow, among other things, for an increase in the allowable percentage of
certain secured subordinated loans in the collateral pool from 25% to 35%, and other minor modifications were made. On April 17, 2006 the Company amended this facility to allow, among other things, for an increase in the allowable percentage of
certain secured subordinated loans in the collateral pool from 35% to 50% and the inclusion of additional industry segments. 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 September 30, 2006, the Company had $102,343 outstanding under this credit facility.

Term Securitization 2004-1. On September 30, 2004, the Company established MCG Commercial Loan Trust 2004-1 (the 2004-1 Trust), which
issued three classes of series 2004-1 Notes. The facility was structured to hold up to $397,700 of loans. The facility was secured by all of the 2004-1 Trusts commercial loans and cash in securitization accounts. On July 20, 2006, the Company
repaid the 2004-1 Notes using approximately $61,868 of cash from the Commercial Loan Trust 2004-1 and its Commercial Loan Trust 2006-1 securitization and $15,000 of new borrowings from its Commercial Loan Trust 2006-1 securitization. This facility
was scheduled to terminate July 20, 2016 or sooner upon the full repayment of the Class A-1, Class A-2, Class B and Class C Notes.

The
2004-1 Trust issued $250,500 of Class A-1 Notes rated Aaa/AAA, $31,500 of Class A-2 Notes rated Aa1/AAA, $43,500 of Class B Notes rated A2/A and $15,800 of Class C Notes rated Baa2/BBB as rated by Moodys and Fitch, respectively. On June 1,
2005, the Company sold the Class C securities, which had



26



---

##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



previously been retained by the Company. The Series 2004-1 Class A-1 Notes, Class A-2 Notes, Class B Notes and Class C Notes bore interest of LIBOR plus
0.43%, 0.65%, 1.30%, and 2.50%, respectively.

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 retained 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 $417,733 as
of September 30, 2006, 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 September 30, 2006, a total of $317,400 of these notes were outstanding.

Revolving Unsecured Credit Facility.This facility
was established on September 20, 2005 as a result of an amendment to the Companys Senior Secured Credit facility with Bayerische Hypo-Und Vereinsbank, AG, New York Branch (HVB). Pursuant to that amendment the facility was no longer
secured by the Companys assets and was committed up to $50,000. On June 19, 2006, the Company made a second amendment to this facility. Pursuant to this amendment, the aggregate revolving commitment amount under this credit facility was
increased from $50,000 to $60,000, the maturity date was extended from September 19, 2006 to June 18, 2007, and an additional lender was added to this facility. HVB maintained its $50,000 commitment, and the additional $10,000 was committed by Chevy
Chase Bank. Other minor modifications were also made to this facility. On August 7, 2006, the Company again amended this facility. Pursuant to this amendment, the aggregate revolving commitment amount under this credit facility was increased from
$60,000 to $75,000, and an additional lender was added to this facility. HVB and Chevy Chase Bank maintained their $50,000 and $10,000 commitments, respectively, and the additional $15,000 was committed by Sovereign Bank. As of September 30, 2006,
the Company had $17,500 outstanding under this credit facility.

This credit facility is unsecured and is committed up to $75,000 on a
revolving basis. In addition, this Revolving Unsecured Credit Facility allows for additional lenders with HVB acting as the agent. 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, and minimum cash net investment income. 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.



27



---

##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



The weighted average borrowings and the weighted average interest rate on all of the Companys
borrowings, including amortization of deferred debt issuance costs and commitment fees, for the three and nine months ended September 30, 2006 and 2005 were as follows:



|                                             |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|-------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                             |  | Three months endedSeptember 30, |         |   | Nine months endedSeptember 30, |  
|                                             |  | 2006                            |         |   | 2005                           |   |         | 2006 |  |   | 2005    |  
|Weighted average borrowings                  |  | $                               | 498,353 |   |                                | $ | 398,283 |      |  | $ | 506,720 |   |  | $ | 426,680 |  
|Weighted average interest rate on borrowings |  |                                 | 7.7     | % |                                |   | 5.5     | %    |  |   | 7.1     | % |  |   | 4.7     | %

The weighted average interest rate on borrowings for the three and nine months ended September 30,
2006 includes approximately $1,173 of deferred debt issuance cost-amortization associated with the Companys Series 2004-1 Notes which were redeemed during the quarter ended September 30, 2006.

Borrowings outstanding, by interest rate benchmark, as of September 30, 2006 and December 31, 2005 were as follows:



|                      |  |                    |         |                   |   |        
|--------------------- |  | ------------------ | ------- | ----------------- | - | -------
|                      |  | September 30, 2006 |         | December 31, 2005
|90-day LIBOR          |  | $                  | 402,336 |                   | $ | 331,119
|Commercial paper rate |  |                    | 102,343 |                   |   | 160,000
|Fixed rate            |  |                    | 50,000  |                   |   | 50,000 
|                      |  |                    |         |                   |   |        
|                      |  | $                  | 554,679 |                   | $ | 541,119
|                      |  |                    |         |                   |   |        

Note 4Share Based Payments

Prior to January 1, 2006, the Company accounted for share based compensation in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. Effective January 1, 2006, the Company 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 the Companys 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. Effective January 1, 2006, unearned compensation amounts previously recorded as a separate component of equity on the Companys balance sheet are
included in paid-in capital.

In accordance with FAS 123R, the Company recognizes compensation cost related to share based awards that are
expected to vest. The Company uses its historical forfeiture rate as a basis for its estimate of awards that will vest. The grant date is generally the date on which MCG and the employee reach a mutual understanding of the key terms and conditions
of a share based award. The grant date fair value of the restricted share awards is based on the closing price of the Companys common stock as reported on the Nasdaq market on that date. For those awards subject to service conditions, the
Company uses the straight line method over the entire service period.

In 2001, MCG terminated its stock option plan and the option grants
made thereunder. In connection with the termination of its stock option plan, MCG issued approximately 1,540 shares of restricted stock. During June 2006, the 2006 Employee Restricted Stock Plan (2006 Plan) and the 2006 Non-employee
Restricted Stock Plan (2006 Non-employee Plan) were approved by the Companys shareholders. The Company may issue up to 3,500 shares under the 2006 Plan and up to 100 shares under the 2006 Non-employee Plan. Awards granted under
these plans may be subject to service, performance, or market conditions as specified in the award agreements.

On September 18, 2006
the Company executed certain new and amended employment agreements with certain executives. Pursuant to these agreements, these executives will receive restricted share awards under the 2006 Plan, 400 of which are based on continued employment with
the Company and 200 of which are based on both continued employment and certain performance conditions to be established by the Board of Directors. The 400 shares stated in



28



---

##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



these agreements that are subject only to the service condition of continued employment with the Company vest quarterly or annually from December 31,
2006 through December 31, 2009. The 200 shares stated in these agreements that are subject to both continued employment and certain performance conditions vest ratably each February 28 from 2007 to 2010. The shares subject to both service
conditions and performance conditions are not yet considered granted under FAS 123R because the performance conditions have not yet been established. Therefore, the Company has not recorded any compensation expense related to these 200 shares and
these 200 shares are not reflected in the summary table shown below or the total unrecognized compensation cost disclosed below.

The
following table summarizes the Companys restricted stock award activity during the nine months ended September 30, 2006:



|                                 |  |        |   |  |                                       |      
|-------------------------------- |  | ------ | - |  | ------------------------------------- | -----
|                                 |  | Shares |   |  | Weighted AverageGrant Date Fair Value
|Non-vested at January 1, 2006    |  | 206    |   |  | $                                     | 17.01
|Granted                          |  | 400    |   |  |                                       | 16.27
|Vested                           |  | (132   | ) |  |                                       | 17.01
|Forfeited/expired                |  |       |   |  |                                       |     
|                                 |  |        |   |  |                                       |      
|Non-vested at September 30, 2006 |  | 474    |   |  |                                       | 16.39
|                                 |  |        |   |  |                                       |      

During the three months ended September 30, 2006 and 2005, the Company recognized
compensation expense related to share-based awards in the amount of $1,249 and $2,096, respectively. During the nine months ended September 30, 2006 and 2005, the Company recognized compensation expense related to share-based awards in the
amount of $3,481 and $5,422, respectively. Compensation expense related to share based awards for the three and nine months ended September 30, 2006 includes a charge of $713 related to the accelerated vesting of certain restricted shares held by
our former CEO. At September 30, 2006, $7,544 of total unrecognized compensation cost related to restricted stock is expected to be recognized over a weighted average remaining requisite service period of approximately 2.7 years.

At September 30, 2006, all the unvested restricted share awards carried non-forfeitable dividend rights to the holder of the restricted shares.
Dividends paid on restricted shares that vest are charged to retained earnings while dividends paid on restricted shares that do not vest are charged to compensation expense.

Note 5Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per common share for the three and nine months ended September 30, 2006 and 2005:



|                                                                                   |  |                                 |        |                                |   |        |  |      |        |  |   |       
|---------------------------------------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                                                                                   |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                                                                                   |  | 2006                            |        | 2005                           |   | 2006   |  | 2005
|Basic                                                                              |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Net income                                                                         |  | $                               | 22,116 |                                | $ | 16,695 |  | $    | 71,428 |  | $ | 49,633
|Weighted average common shares outstanding                                         |  |                                 | 53,281 |                                |   | 49,560 |  |      | 53,236 |  |   | 47,287
|Earnings per common share-basic                                                    |  | $                               | 0.42   |                                | $ | 0.34   |  | $    | 1.34   |  | $ | 1.05  
|Diluted                                                                            |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Net income                                                                         |  | $                               | 22,116 |                                | $ | 16,695 |  | $    | 71,428 |  | $ | 49,633
|Weighted average common shares outstanding                                         |  |                                 | 53,281 |                                |   | 49,560 |  |      | 53,236 |  |   | 47,287
|Dilutive effect of restricted stock on which forfeiture provisions have not lapsed |  |                                 |       |                                |   | 3      |  |      |       |  |   | 28    
|                                                                                   |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Weighted average common shares and common stock equivalents                        |  |                                 | 53,281 |                                |   | 49,563 |  |      | 53,236 |  |   | 47,315
|Earnings per common share-diluted                                                  |  | $                               | 0.42   |                                | $ | 0.34   |  | $    | 1.34   |  | $ | 1.05  



29



---

##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



For purposes of calculating earnings per common share, unvested restricted common shares are included
in diluted earnings per common share using the treasury stock method to the extent these shares are dilutive.

Note 6Income Tax Provision

As a regulated investment company (RIC) under Subchapter M of the Internal Revenue Code, the Companys income
generally will not be subject to Federal 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 nine months ended September 30, 2006, the Company recorded a provision for income taxes of $3,569 primarily related to the unrealized gains on
one of our investments, that if ultimately realized will result in taxable income of approximately $8,595.

Note 7Financial Highlights

Following is a schedule of financial highlights for the nine months ended September 30, 2006, and 2005:



|                                                                            |  |      |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                            |  | 2006 |         |   | 2005 |  
|Per share data:                                                             |  |      |         |   |      |   |         |  
|Net asset value at beginning of period (a)                                  |  | $    | 12.48   |   |      | $ | 12.22   |  
|                                                                            |  |     
|Net operating income before investment gains and losses (b)                 |  |      | 1.12    |   |      |   | 0.93    |  
|Net realized (losses) gains on investments (b)                              |  |      | (0.08   | ) |      |   | 0.44    |  
|Net change in unrealized appreciation (depreciation) on investments (b)     |  |      | 0.37    |   |      |   | (0.31   | )
|Provision for income taxes on investment gains                              |  |      | (0.07   | ) |      |   |        |  
|                                                                            |  |      |         |   |      |   |         |  
|                                                                            |  |     
|Net income                                                                  |  |      | 1.34    |   |      |   | 1.06    |  
|                                                                            |  |     
|Distributions from net investment income                                    |  |      | (1.26   | ) |      |   | (1.26   | )
|Effect on distributions of stock offerings after record dates (c)           |  |      |        |   |      |   | 0.04    |  
|Effect of distributions recorded as compensation expense (b)                |  |      | 0.02    |   |      |   | 0.03    |  
|                                                                            |  |      |         |   |      |   |         |  
|Net decrease in stockholders equity resulting from distributions           |  |      | (1.24   | ) |      |   | (1.19   | )
|                                                                            |  |     
|Net increase in stockholders equity from reduction in stockholder loans    |  |      | 0.05    |   |      |   |        |  
|Issuance of shares                                                          |  |      |        |   |      |   | 3.16    |  
|Dilutive effect of share issuances and unvested restricted stock (d)        |  |      |        |   |      |   | (2.91   | )
|Net increase in stockholders equity from restricted stock amortization (b) |  |      | 0.04    |   |      |   | 0.08    |  
|                                                                            |  |      |         |   |      |   |         |  
|Net increase in stockholders equity relating to share issuances            |  |      | 0.09    |   |      |   | 0.33    |  
|                                                                            |  |      |         |   |      |   |         |  
|Net asset value at end of period (a)                                        |  | $    | 12.67   |   |      | $ | 12.42   |  
|                                                                            |  |      |         |   |      |   |         |  
|Per share market value at end of period                                     |  | $    | 16.33   |   |      | $ | 16.87   |  
|Total return (e)                                                            |  |      | 20.56   | % |      |   | 5.84    | %
|Shares outstanding at end of period                                         |  |      | 53,382  |   |      |   | 49,920  |  
|                                                                            |  |     
|Ratio/Supplemental data:                                                    |  |      |         |   |      |   |         |  
|Net assets at end of period                                                 |  | $    | 676,604 |   |      | $ | 620,108 |  
|Ratio of operating expenses to average net assets (annualized)              |  |      | 10.89   | % |      |   | 9.72    | %
|Ratio of net operating income to average net assets (annualized)            |  |      | 12.03   | % |      |   | 9.94    | %



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



30



---

##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



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

|(c) | The effect on distributions of stock offerings after record dates represents the effect on net asset value of issuing additional shares after the record date of a distribution.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | The Dilutive effect of share issuances and unvested restricted stock represents the effect of shares issued during the period and the effect of the lapsing of forfeiture provisions
on restricted stock on earnings per share.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(e) | 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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 will be effective as of the beginning of an entitys first fiscal year that begins after December 15, 2006. The Company will adopt this Interpretation effective January 1, 2007. The
Company is currently evaluating the impact of FIN No. 48 on its financial position and results of operations.

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.

Note 9Subsequent Events

During October 2006, the Company raised approximately $72,450 of gross proceeds by selling 4,600 shares of newly issued common stock.

During October 2006, the Companys second largest portfolio company, Cleartel Communications, Inc. (Cleartel), a competitive local exchange carrier (CLEC), acquired Supra Telecom, a
Florida-based CLEC. As of September 30, 2006, the Company held subordinated debt with a fair value of $52,131 and preferred equity with a fair value of $40,684. In conjunction with this acquisition, the Company invested an additional $18,100 in
Cleartel in the form of subordinated debt and restructured its existing debt investments in Cleartel by extending the maturity dates and modifying the interest rates.



31



---

##### 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 September 30, 2006, including the consolidated schedule of investments, and the related consolidated statements of operations for the three- and nine-month periods ended
September 30, 2006 and 2005, the consolidated statements of changes in net assets, cash flows, and financial highlights for the nine-month periods ended September 30, 2006 and 2005. 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, 2005, 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 17, 2006 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, 2005, 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

October 27, 2006



32



---

##### 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.

This Quarterly Report, 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 cause us to suffer 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 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. 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
financing and advisory services to middle market, growth oriented companies throughout the United States. We primarily make secured debt, unsecured debt, and equity investments 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



33



---

##### Table of Contents

a business development company, we are required to meet various regulatory tests. A business development company is required to invest at least 70% of its
total assets in private or thinly traded public U.S.-based companies. A business development company also must meet a coverage ratio 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. A RIC is required to meet certain requirements in order to continue to qualify as a RIC for federal income tax purposes, including certain minimum distribution requirements. Pursuant to this election, 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 portfolio value of our investments, exclusive of unearned income,
was $1,207.2 million and $1,097.6 million at September 30, 2006 and December 31, 2005, respectively. During the nine months ended September 30, 2006, we originated investments in 13 portfolio companies (some of which were new
customers and some of which were existing customers) and made advances to existing customers pursuant to contractual terms. Our gross originations and advances totaled $262.5 million and $467.8 million during the three and nine months ended
September 30, 2006, respectively. During the nine months ended September 30, 2006, the total value of newly originated investments, additional investments in existing portfolio companies, accrual of payment-in-kind interest and dividends,
and unrealized appreciation on investments, net of sales and repayments of securities, resulted in a $109.6 million increase in the total portfolio value of our investments, exclusive of unearned income.

Total portfolio investment activity (exclusive of unearned income) for the nine months ended September 30, 2006 was as follows:



|                                              |  |   |         |  
|--------------------------------------------- |  | - | ------- | -
|(dollars in millions)                         |  |   |        
|Investment portfolio at December 31, 2005     |  | $ | 1,097.6 |  
|Originations and advances                     |  |   | 467.8   |  
|Gross payments/reductions/sales of securities |  |   | (373.3  | )
|Net unrealized gains                          |  |   | 14.2    |  
|Net realized losses                           |  |   | (4.4    | )
|Reversals of unrealized depreciation          |  |   | 5.3     |  
|                                              |  |   |         |  
|Investment portfolio at September 30, 2006    |  | $ | 1,207.2 |  
|                                              |  |   |         |  

During the nine months ended September 30, 2006, our gross originations and advances included:



|                                 |  |   |      
|-------------------------------- |  | - | -----
|Secured senior debt              |  | $ | 139.2
|Subordinated debt                |  |   |      
|Secured                          |  |   | 178.0
|Unsecured                        |  |   | 5.7  
|Preferred equity                 |  |   | 136.9
|Common/Common equivalents equity |  |   | 8.0  
|                                 |  |   |      
|Total                            |  | $ | 467.8
|                                 |  |   |      



34



---

##### Table of Contents

During the nine months ended September 30, 2006, our gross payments, reductions, and sales of equity
securities by asset class were as follows:



|                                 |  |   |      
|-------------------------------- |  | - | -----
|Secured senior debt              |  | $ | 258.4
|Subordinated                     |  |   |      
|Secured                          |  |   | 57.8 
|Unsecured                        |  |   | 51.1 
|Preferred equity                 |  |   | 1.2  
|Common/Common equivalents equity |  |   | 4.8  
|                                 |  |   |      
|Total                            |  | $ | 373.3
|                                 |  |   |      

During the nine months ended September 30, 2006, gross originations and advances and gross
repayments and sales of equity securities by asset class included $51.1 million of Broadview unsecured debt which was converted to preferred equity during the third quarter 2006.

During the nine months ended September 30, 2006, our gross payments, reductions, and sales of equity securities included:



|                                               |  |   |      
|---------------------------------------------- |  | - | -----
|Principal repayments                           |  | $ | 167.3
|Secured senior loan sales                      |  |   | 114.1
|Scheduled principal amortization               |  |   | 75.8 
|Payments on accrued PIK interest and dividends |  |   | 11.3 
|Sales of equity securities                     |  |   | 4.8  
|                                               |  |   |      
|Total                                          |  | $ | 373.3
|                                               |  |   |      

The majority of our secured senior loan sales during the nine months ended September 30, 2006 were
due to our efforts to reduce the percentage of the portfolio that is comprised of secured senior debt.

The following table shows the fair
value of our portfolio of investments by asset class as of September 30, 2006 and December 31, 2005 (excluding unearned income):



|                                 |  |                           |         |                               |                   |   |                           |   |                               |  |       |  
|-------------------------------- |  | ------------------------- | ------- | ----------------------------- | ----------------- | - | ------------------------- | - | ----------------------------- |  | ----- | -
|                                 |  | September 30, 2006        |         |                               | December 31, 2005 |  
|(dollars in millions)            |  | Investments at Fair Value |         | Percentage of Total Portfolio |                   |   | Investments at Fair Value |   | Percentage of Total Portfolio | 
|Secured Senior Debt              |  | $                         | 408.8   |                               | 33.9              | % |                           | $ | 543.0                         |  | 49.5  | %
|Subordinated debt                |  |                           |         |                               |                   |   |                           |   |                               |  |       |  
|Secured                          |  |                           | 452.6   |                               | 37.5              |   |                           |   | 329.5                         |  | 30.0  |  
|Unsecured                        |  |                           | 24.5    |                               | 2.0               |   |                           |   | 61.6                          |  | 5.6   |  
|Preferred equity                 |  |                           | 265.5   |                               | 22.0              |   |                           |   | 126.7                         |  | 11.5  |  
|Common/Common equivalents equity |  |                           | 55.8    |                               | 4.6               |   |                           |   | 36.8                          |  | 3.4   |  
|                                 |  |                           |         |                               |                   |   |                           |   |                               |  |       |  
|Total                            |  | $                         | 1,207.2 |                               | 100.0             | % |                           | $ | 1,097.6                       |  | 100.0 | %
|                                 |  |                           |         |                               |                   |   |                           |   |                               |  |       |  

During the nine months ended September 30, 2006, we continued to reduce the percentage of our
portfolio that is comprised of secured senior debt. We accomplished this through specific reductions in our secured senior debt investments, and through the origination of more subordinated debt and equity investments. During the nine months ended
September 30, 2006, our increase in equity investments was driven by the increase in our investments in control companies. At September 30, 2006, our control investments totaled approximately $484.6 million, compared to approximately $305.6 million
at December 31, 2005. Another component of the increase in equity investments during the nine months ended September 30, 2006 was the conversion of our subordinated unsecured debt in Broadview to preferred shares in Broadview. At September 30, 2006,
approximately $217.3 million, or 67%, of our equity investments had been held by us for 2 years or less, and approximately $296.1 million, or 92%, of our equity investments had been held by us for 3 years or less.



35



---

##### Table of Contents

The following table shows our portfolio of investments by industry at fair value, as of
September 30, 2006 and December 31, 2005 (excluding unearned income):



|                                                            |  |                           |         |                               |                   |   |                               |   |                               |  |       |  
|----------------------------------------------------------- |  | ------------------------- | ------- | ----------------------------- | ----------------- | - | ----------------------------- | - | ----------------------------- |  | ----- | -
|                                                            |  | September 30, 2006        |         |                               | December 31, 2005 |  
|(dollars in millions)                                       |  | Investments at Fair Value |         | Percentage of Total Portfolio |                   |   | Investments at Fair Value (a) |   | Percentage of Total Portfolio | 
|Communications  CLEC (competitive local exchange carriers) |  | $                         | 247.6   |                               | 20.5              | % |                               | $ | 213.4                         |  | 19.4  | %
|Healthcare                                                  |  |                           | 104.1   |                               | 8.6               |   |                               |   | 91.1                          |  | 8.4   |  
|Newspaper                                                   |  |                           | 94.1    |                               | 7.8               |   |                               |   | 112.8                         |  | 10.3  |  
|Communications  Other                                      |  |                           | 86.0    |                               | 7.2               |   |                               |   | 68.8                          |  | 6.3   |  
|Plastic Products                                            |  |                           | 56.3    |                               | 4.7               |   |                               |   |                              |  |      |  
|Publishing                                                  |  |                           | 55.4    |                               | 4.6               |   |                               |   | 72.3                          |  | 6.6   |  
|Business Services                                           |  |                           | 51.2    |                               | 4.2               |   |                               |   | 22.2                          |  | 2.1   |  
|Information Services                                        |  |                           | 43.8    |                               | 3.6               |   |                               |   | 75.4                          |  | 6.9   |  
|Technology                                                  |  |                           | 43.8    |                               | 3.6               |   |                               |   | 66.1                          |  | 6.0   |  
|Laboratory Instruments                                      |  |                           | 43.2    |                               | 3.6               |   |                               |   | 52.1                          |  | 4.7   |  
|Home Furnishings                                            |  |                           | 40.8    |                               | 3.4               |   |                               |   | 18.9                          |  | 1.7   |  
|Broadcasting                                                |  |                           | 39.7    |                               | 3.3               |   |                               |   | 31.9                          |  | 2.9   |  
|Cable                                                       |  |                           | 36.2    |                               | 3.0               |   |                               |   | 33.3                          |  | 3.0   |  
|Education                                                   |  |                           | 28.7    |                               | 2.4               |   |                               |   | 19.5                          |  | 1.8   |  
|DVD Rental                                                  |  |                           | 28.2    |                               | 2.3               |   |                               |   |                              |  |      |  
|Sporting Goods                                              |  |                           | 26.6    |                               | 2.2               |   |                               |   |                              |  |      |  
|Electronics                                                 |  |                           | 24.7    |                               | 2.0               |   |                               |   | 34.1                          |  | 3.1   |  
|Drugs                                                       |  |                           | 23.1    |                               | 1.9               |   |                               |   | 28.7                          |  | 2.6   |  
|Food Services                                               |  |                           | 20.9    |                               | 1.7               |   |                               |   |                              |  |      |  
|Retail                                                      |  |                           | 19.1    |                               | 1.6               |   |                               |   | 20.5                          |  | 1.9   |  
|Auto Parts                                                  |  |                           | 17.2    |                               | 1.4               |   |                               |   | 17.0                          |  | 1.5   |  
|Cosmetics                                                   |  |                           | 15.8    |                               | 1.3               |   |                               |   | 11.3                          |  | 1.0   |  
|Leisure Activities                                          |  |                           | 14.2    |                               | 1.2               |   |                               |   | 13.4                          |  | 1.2   |  
|Car Rental                                                  |  |                           | 13.5    |                               | 1.1               |   |                               |   | 13.5                          |  | 1.2   |  
|Photographic Studio                                         |  |                           | 12.8    |                               | 1.1               |   |                               |   |                              |  |      |  
|Other Media                                                 |  |                           | 3.0     |                               | 0.3               |   |                               |   | 33.9                          |  | 3.1   |  
|Other (b)                                                   |  |                           | 17.2    |                               | 1.4               |   |                               |   | 47.4                          |  | 4.3   |  
|                                                            |  |                           |         |                               |                   |   |                               |   |                               |  |       |  
|                                                            |  | $                         | 1,207.2 |                               | 100.0             | % |                               | $ | 1,097.6                       |  | 100.0 | %
|                                                            |  |                           |         |                               |                   |   |                               |   |                               |  |       |  



|(a) | Certain amounts have been reclassified into different industries to conform to the current period industry breakdowns.
|--- | ----------------------------------------------------------------------------------------------------------------------

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

At September 30, 2006, our ten largest customers represented approximately 39.1% of the total fair value of our investments. These ten customers accounted for approximately 33.9% of our operating income during the nine months ended
September 30, 2006. At September 30, 2006, approximately 27.7% of our portfolio at fair value was invested in companies in the communications industry, of which 20.5% were in CLECs. Our two largest customers, Broadview Networks Holdings, Inc.
(Broadview) and Cleartel Communications, Inc. (Cleartel) are CLECs. Our remaining investments in the communications industry include telecommunications tower companies, rural local exchange carriers, Internet service
providers, wireless companies and security alarm companies.



36



---

##### Table of Contents

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 September 30, 2006 and December 31, 2005:



|                      |  |                           |         |                               |                   |   |                           |   |         |                               |  |       |  
|--------------------- |  | ------------------------- | ------- | ----------------------------- | ----------------- | - | ------------------------- | - | ------- | ----------------------------- |  | ----- | -
|(dollars in millions) |  |                           |         |                               |                   |   |                           |   |         |                               | 
|                      |  | September 30, 2006        |         |                               | December 31, 2005 |  
|Investment Rating     |  | Investments at Fair Value |         | Percentage of Total Portfolio |                   |   | Investments at Fair Value |   |         | Percentage of Total Portfolio | 
|1                     |  | $                         | 671.8   |                               | 55.7              | % |                           | $ | 459.0   | (a)                           |  | 41.8  | %
|2                     |  |                           | 308.2   |                               | 25.5              |   |                           |   | 429.9   |                               |  | 39.2  |  
|3                     |  |                           | 135.1   |                               | 11.2              |   |                           |   | 128.0   |                               |  | 11.7  |  
|4                     |  |                           | 91.1    |                               | 7.5               |   |                           |   | 77.4    |                               |  | 7.0   |  
|5                     |  |                           | 1.0     |                               | 0.1               |   |                           |   | 3.3     |                               |  | 0.3   |  
|                      |  |                           |         |                               |                   |   |                           |   |         |                               |  |       |  
|                      |  | $                         | 1,207.2 |                               | 100.0             | % |                           | $ | 1,097.6 |                               |  | 100.0 | %
|                      |  |                           |         |                               |                   |   |                           |   |         |                               |  |       |  



|(a) | Of this amount, $16.7 million at December 31, 2005 related to debt instruments in companies for which we had already realized a gain through the sale of equity instruments.
While these debt instruments were still outstanding at December 31, 2005, all of the related equity instruments had already been sold at a gain and, therefore, we did not expect any further realized gain.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



37



---

##### Table of Contents

When one of our loans 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 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 60 days past due, at fair value, at September 30, 2006 and December 31, 2005:



|                                                             |  |                    |      |                   |                   |   |                    |      |   |           |   |                   |  |      |                    |  |      |  
|------------------------------------------------------------ |  | ------------------ | ---- | ----------------- | ----------------- | - | ------------------ | ---- | - | --------- | - | ----------------- |  | ---- | ------------------ |  | ---- | -
|                                                             |  | September 30, 2006 |      |                   | December 31, 2005 |  
|(dollars in millions)                                        |  | FairValue          |      | % ofLoanPortfolio |                   |   | % ofTotalPortfolio |      |   | FairValue |   | % ofLoanPortfolio |  |      | % ofTotalPortfolio | 
|Loans greater than 60 days past due                          |  |                    |      |                   |                   |   |                    |      |   |           |   |                   |  |      |                    |  |      |  
|On non-accrual status                                        |  | $                  | 12.6 |                   | 1.42              | % |                    | 1.04 | % |           | $ | 3.2               |  | 0.34 | %                  |  | 0.29 | %
|Not on non-accrual status                                    |  |                    | 1.9  |                   | 0.22              | % |                    | 0.16 | % |           |   | 13.6              |  | 1.45 | %                  |  | 1.23 | %
|                                                             |  |                    |      |                   |                   |   |                    |      |   |           |   |                   |  |      |                    |  |      |  
|Total loans greater than 60 days past due                    |  | $                  | 14.5 |                   | 1.64              | % |                    | 1.20 | % |           | $ | 16.8              |  | 1.79 | %                  |  | 1.52 | %
|                                                             |  |                    |      |                   |                   |   |                    |      |   |           |   |                   |  |      |                    |  |      |  
|Loans on non-accrual status                                  |  |                    |      |                   |                   |   |                    |      |   |           |   |                   |  |      |                    |  |      |  
|0 to 60 days past due                                        |  | $                  | 13.4 |                   | 1.51              | % |                    | 1.11 | % |           | $ | 9.5               |  | 1.02 | %                  |  | 0.87 | %
|Greater than 60 days past due                                |  |                    | 12.6 |                   | 1.42              | % |                    | 1.04 | % |           |   | 3.2               |  | 0.34 | %                  |  | 0.29 | %
|                                                             |  |                    |      |                   |                   |   |                    |      |   |           |   |                   |  |      |                    |  |      |  
|Total loans on non-accrual status                            |  | $                  | 26.0 |                   | 2.93              | % |                    | 2.15 | % |           | $ | 12.7              |  | 1.36 | %                  |  | 1.16 | %
|                                                             |  |                    |      |                   |                   |   |                    |      |   |           |   |                   |  |      |                    |  |      |  
|Loans on non-accrual status or greater than 60 days past due |  | $                  | 27.9 |                   | 3.15              | % |                    | 2.31 | % |           | $ | 26.3              |  | 2.81 | %                  |  | 2.39 | %
|                                                             |  |                    |      |                   |                   |   |                    |      |   |           |   |                   |  |      |                    |  |      |  

The increase in loans on non-accrual status from $12.7 million at December 31, 2005 to $26.0
million at September 30, 2006 is primarily due to two portfolio companies that we placed on non-accrual status during the nine months ended September 30, 2006.



38



---

##### Table of Contents

Results of Operations

Comparison of the Three Months Ended September 30, 2006 and 2005

The following table shows the
components of our net income for the three months ended September 30, 2006 and 2005:



|                                                                                                |  |      |      |      |   |        |  |   |                  |   |  |     |   
|----------------------------------------------------------------------------------------------- |  | ---- | ---- | ---- | - | ------ |  | - | ---------------- | - |  | --- | --
|(dollars in millions)                                                                           |  | 2006 |      | 2005 |   | Change |  |   | PercentageChange |  
|Operating income                                                                                |  |      |      |      |   |        |  |   |                  |   |  |     |   
|Interest and dividend income                                                                    |  | $    | 33.3 |      | $ | 24.3   |  | $ | 9.0              |   |  | 37  | % 
|Loan fees                                                                                       |  |      | 1.1  |      |   | 1.6    |  |   | (0.5             | ) |  | (31 | %)
|                                                                                                |  |      |      |      |   |        |  |   |                  |   |  |     |   
|Total interest and dividend income                                                              |  |      | 34.4 |      |   | 25.9   |  |   | 8.5              |   |  | 33  | % 
|Advisory fees and other income                                                                  |  |      | 6.5  |      |   | 2.4    |  |   | 4.1              |   |  | 171 | % 
|                                                                                                |  |      |      |      |   |        |  |   |                  |   |  |     |   
|Total operating income                                                                          |  |      | 40.9 |      |   | 28.3   |  |   | 12.6             |   |  | 45  | % 
|                                                                                                |  |      |      |     
|Operating expenses                                                                              |  |      |      |      |   |        |  |   |                  |   |  |     |   
|Interest expense                                                                                |  |      | 9.8  |      |   | 5.6    |  |   | 4.2              |   |  | 75  | % 
|Employee compensation:                                                                          |  |      |      |      |   |        |  |   |                  |   |  |     |   
|Salaries and benefits                                                                           |  |      | 6.7  |      |   | 5.2    |  |   | 1.5              |   |  | 29  | % 
|Long-term incentive compensation                                                                |  |      | 1.2  |      |   | 2.1    |  |   | (0.9             | ) |  | (43 | %)
|                                                                                                |  |      |      |      |   |        |  |   |                  |   |  |     |   
|Total employee compensation                                                                     |  |      | 7.9  |      |   | 7.3    |  |   | 0.6              |   |  | 8   | % 
|                                                                                                |  |      |      |     
|General and administrative expense                                                              |  |      | 3.1  |      |   | 2.5    |  |   | 0.6              |   |  | 24  | % 
|                                                                                                |  |      |      |      |   |        |  |   |                  |   |  |     |   
|Total operating expenses                                                                        |  |      | 20.8 |      |   | 15.4   |  |   | 5.4              |   |  | 35  | % 
|                                                                                                |  |      |      |      |   |        |  |   |                  |   |  |     |   
|Net operating income before investment gains and provision for income taxes on investment gains |  |      | 20.1 |      |   | 12.9   |  |   | 7.2              |   |  | 56  | % 
|                                                                                                |  |      |      |     
|Net investment gains before income taxes on investment gains                                    |  |      | 2.0  |      |   | 3.8    |  |   | (1.8             | ) |  | (47 | %)
|                                                                                                |  |      |      |     
|Provision for income taxes on investment gains                                                  |  |      |     |      |   |       |  |   |                 |   |  |    |   
|                                                                                                |  |      |      |      |   |        |  |   |                  |   |  |     |   
|Net income                                                                                      |  | $    | 22.1 |      | $ | 16.7   |  | $ | 5.4              |   |  | 32  | % 
|                                                                                                |  |      |      |      |   |        |  |   |                  |   |  |     |   

Total Operating Income

Total operating income includes interest and dividend income, loan fees and 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.

The increase of $9.0 million in
interest and dividend income for the three months ended September 30, 2006, as compared to the three months ended September 30, 2005, is due to an increase in LIBOR, which had an impact of $3.6 million, growth in the size of our loan
portfolio, which had an impact of $2.7 million, an increase in dividend income, primarily attributable to an increase in dividends declared by our portfolio companies and an increase in accruing preferred dividends, which had an impact of $3.1
million, partially offset by a decrease in the spread to LIBOR in our loan portfolio which had an impact of ($0.4) million. The majority of the decrease in the spread to LIBOR in our loan portfolio is related to holding fixed rate loans in a rising
interest rate environment as well as fluctuations due to payoff and origination activity.



39



---

##### Table of Contents

On September 29, 2006, Broadview Networks Holdings, Inc. (Broadview), a competitive local
exchange carrier and our largest portfolio company, completed the acquisition of ATX Communications, Inc. (ATX), an

integrated communications
provider serving business customers in the Mid-Atlantic region. Broadview financed the ATX acquisition using a portion of the proceeds from a $210.0 million offering of 113/8% Senior Secured Notes due 2012, which were offered through Rule 144A under the Securities Act of 1933, as amended (the Bond Offering). The Bond Offering closed on August 23, 2006.
At the time of the Bond Offering, we invested an additional $5.5 million into Broadview and converted all of our subordinated debt investments, which had a fair value of approximately $51.1 million to preferred equity.

As a result of the transactions discussed above, we hold preferred stock in Broadview which had an aggregate fair value of $114.8 million at September
30, 2006. The preferred stock is convertible into common stock and represents a 58% ownership of the preferred stock and a 52% ownership interest on an as-if converted basis. As of September 30, 2006, our preferred stock investment entitles us to
aggregate claims of approximately $230.8 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 $230.8 million. In future periods, our ability to recognize income related to the accumulating dividends on our preferred stock will be dependent upon the performance and value of Broadview. Any amounts outstanding on the Bond Offering and
Broadviews $25.0 million revolving credit facility from a third party, which Broadview also obtained during the third quarter of 2006, are payable prior to any payments of preferred claims. We currently do not hold any debt investments in
Broadview.

At September 30, 2006, our Broadview investment represented approximately 9.5% of the fair value of our total investments
compared to 8.7% of the fair value of our total investments at December 31, 2005. Additionally, our investment in Broadview accounted for $6.8 million, or 16.8%, of our total operating income for the three months ended September 30, 2006,
compared to $4.0 million, or 14.2%, of our operating income for the three months ended September 30, 2005.

Based upon our current
investments in Broadview, our future earnings from this investment will all be in the form of accumulating dividend income. These dividends are not payable in cash on a current basis and our ability to recognize these dividends as income on an
ongoing basis will be dependent upon the performance and value of Broadview. 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.

At September 30, 2006, Cleartel, our
second largest customer and one of our control investments, represented approximately 7.7% of the fair value of our investments compared to 7.2% of the fair value of our investments at December 31, 2005. Additionally, our investment in Cleartel
accounted for $1.3 million, or 3.2%, of our total operating income for the three months ended September 30, 2006, compared to $0.8 million, or 3.0% of our total operating income for the three months ended September 30, 2005.

Loan fees for the three months ended September 30, 2006 and 2005, included fees relating to the following:



|                      |  |      |     |      |   |    
|--------------------- |  | ---- | --- | ---- | - | ---
|(dollars in millions) |  | 2006 |     | 2005
|Amortizing fee income |  | $    | 0.6 |      | $ | 0.7
|Fee accelerations     |  |      | 0.5 |      |   | 0.9
|                      |  |      |     |      |   |    
|Total loan fees       |  | $    | 1.1 |      | $ | 1.6
|                      |  |      |     |      |   |    

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 into loan fee income of previously unamortized loan origination fees. 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.



40



---

##### Table of Contents

The total yield on our debt portfolio at fair value for the three months ended September 30, 2006
and 2005 was 12.7% and 11.6%, respectively. The average LIBOR for the three months ended September 30, 2006 was 5.4%, an increase of 1.6% from 3.8% for the three months ended September 30, 2005. The average spread to LIBOR for the three
months ended September 30, 2006 was 7.3%, a decrease of approximately 0.5% from 7.8% for the three months ended September 30, 2005, primarily due to an increase in the level of fixed rate loans as well as a decrease in amortizing fee
income and fee accelerations.

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 increase in fees and other income of $4.1 million for the three months ended September 30, 2006 as compared to the three months ended September 30, 2005 was primarily due to increases in equity structuring
fees of $3.5 million, advisory and management fees of $1.0 million and prepayment fees of $1.0 million, partially offset by decreases in research fees of ($1.3) million due to the deconsolidation of Kagan Research, LLC effective January 1,
2006, and bank interest income of ($0.1) million.

Total Operating Expenses

Operating expenses include interest, employee compensation and general and administrative expenses. The increase in interest expense during the three
months ended September 30, 2006 as compared to the three months ended September 30, 2005, is primarily attributable to an increase of $1.9 million due to increases in LIBOR, an increase of $0.9 million due to increases in the spread to
LIBOR, and an increase of $1.4 million due to higher average borrowings. Of the $0.9 million increase due to increases in the spread to LIBOR, $0.6 million is attributable to the amortization of deferred debt issuance costs. The increase in deferred
debt issuance cost amortization is primarily attributable to the expenses associated with the redemption of our Series 2004-1 Notes during the quarter ending September 30, 2006.

Employee compensation includes base salaries and benefits, variable annual incentive compensation, and long-term incentive compensation. The increase in
salaries and benefits expense of $1.5 million during the three months ended September 30, 2006 as compared to the three months ended September 30, 2005 is primarily due to $1.5 million of severance costs related to our former CEO, and
increased variable annual incentive compensation, partially offset by a decrease due to the deconsolidation of Kagan Research, LLC. Long-term incentive compensation expense is made up of non-cash amortization of restricted stock awards granted in
2001 and 2006 and dividends on certain restricted shares and shares securing employee loans. Long-term incentive compensation decreased $0.9 million for the three months ended September 30, 2006 compared to the three months ended
September 30, 2005 due to a fewer number of restricted shares vesting during the three months ended September 30, 2006 compared to the three months ended September 30, 2005, partially offset by a charge of $0.7 million related to the
accelerated vesting of certain restricted shares held by our former CEO.

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 September 30, 2006 compared to the three months ended September 30, 2005 due
to professional fees of approximately $1.0 million incurred in conjunction with the independent review of certain tax withholding reimbursements and loan repayments by certain current and former executive officers, as previously disclosed, partially
offset by the deconsolidation of Kagan Research, LLC.

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

Net operating income before investment gains and losses and provision for income taxes on investment gains (NOI) for
the three months ended September 30, 2006 totaled $20.1 million, an increase of approximately $7.2 million compared with $12.9 million for the three months ended September 30, 2005. This increase is due to the items discussed above. During
the three months ended September 30, 2005, our wholly owned subsidiary, Kagan Research, LLC, accounted for losses of ($0.8) million. Effective January 1, 2006, Kagan Research, LLC no longer qualifies to be a consolidated subsidiary of the
Company.



41



---

##### Table of Contents

Net Investment Gains and Losses Before Income Taxes on Investment Gains

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 September 30, 2006:



|                                        |  |                        |  |               |  |                     |        |   |                       |   |        |                                   |  |   |                |   |  |   |        |  
|--------------------------------------- |  | ---------------------- |  | ------------- |  | ------------------- | ------ | - | --------------------- | - | ------ | --------------------------------- |  | - | -------------- | - |  | - | ------ | -
|(dollars in thousands)                  |  |                        |  |               |  |                     |        |   |                       |   |        |                                   |  |   |                |  
|Portfolio Company                       |  | Industry               |  | Type          |  | RealizedGain/(Loss) |        |   | UnrealizedGain/(Loss) |   |        | Reversal ofUnrealized (Gain)/Loss |  |   | NetGain/(Loss) |  
|Crystal Media Network, LLC              |  | Broadcasting           |  | Control       |  | $                   | (2,245 | ) |                       | $ |       |                                   |  | $ | 2,561          |   |  | $ | 316    |  
|SXC Health Solutions, Inc.              |  | Healthcare             |  | Non-affiliate |  |                     |       |   |                       |   | 1,343  |                                   |  |   |               |   |  |   | 1,343  |  
|Fawcette Technical Publications Holding |  | Publishing             |  | Control       |  |                     |       |   |                       |   | (462   | )                                 |  |   |               |   |  |   | (462   | )
|Jupitermedia Corporation                |  | Information Services   |  | Non-affiliate |  |                     |       |   |                       |   | (644   | )                                 |  |   |               |   |  |   | (644   | )
|Quantum Medical Holdings, LLC           |  | Laboratory Instruments |  | Non-affiliate |  |                     |       |   |                       |   | 420    |                                   |  |   |               |   |  |   | 420    |  
|Midwest Tower Partners, LLC             |  | Communications         |  | Control       |  |                     |       |   |                       |   | (865   | )                                 |  |   |               |   |  |   | (865   | )
|National Product Services, Inc.         |  | Business Services      |  | Control       |  |                     |       |   |                       |   | (1,143 | )                                 |  |   |               |   |  |   | (1,143 | )
|dick clark productions, inc.            |  | Broadcasting           |  | Non-affiliate |  |                     |       |   |                       |   | 3,541  |                                   |  |   |               |   |  |   | 3,541  |  
|Other                                   |  |                        |  |               |  |                     | 2      |   |                       |   | (453   | )                                 |  |   | (26            | ) |  |   | (477   | )
|                                        |  |                        |  |               |  |                     |        |   |                       |   |        |                                   |  |   |                |   |  |   |        |  
|Total                                   |  |                        |  |               |  | $                   | (2,243 | ) |                       | $ | 1,737  |                                   |  | $ | 2,535          |   |  | $ | 2,029  |  
|                                        |  |                        |  |               |  |                     |        |   |                       |   |        |                                   |  |   |                |   |  |   |        |  

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 September 30, 2005:



|                                        |  |                |  |               |  |                     |        |   |                       |   |        |                                   |  |   |                |   |  |   |        |  
|--------------------------------------- |  | -------------- |  | ------------- |  | ------------------- | ------ | - | --------------------- | - | ------ | --------------------------------- |  | - | -------------- | - |  | - | ------ | -
|(dollars in thousands)                  |  |                |  |               |  |                     |        |   |                       |   |        |                                   |  |   |                |  
|Portfolio Company                       |  | Industry       |  | Type          |  | RealizedGain/(Loss) |        |   | UnrealizedGain/(Loss) |   |        | Reversal ofUnrealized (Gain)/Loss |  |   | NetGain/(Loss) |  
|Boucher Communications, Inc.            |  | Publishing     |  | Non-affiliate |  | $                   | 930    |   |                       | $ |       |                                   |  | $ | (409           | ) |  | $ | 521    |  
|nii communications, inc.                |  | Communications |  | Non-affiliate |  |                     | 900    |   |                       |   |       |                                   |  |   | (901           | ) |  |   | (1     | )
|National Systems Integration, Inc.      |  | Security Alarm |  | Control       |  |                     | (5,177 | ) |                       |   |       |                                   |  |   | 5,319          |   |  |   | 142    |  
|Working Mother Media, Inc.              |  | Publishing     |  | Control       |  |                     |       |   |                       |   | 843    |                                   |  |   |               |   |  |   | 843    |  
|Telecomm South, LLC                     |  | Communications |  | Control       |  |                     |       |   |                       |   | 638    |                                   |  |   |               |   |  |   | 638    |  
|SXC Health Solutions, Inc.              |  | Healthcare     |  | Non-affiliate |  |                     |       |   |                       |   | 866    |                                   |  |   |               |   |  |   | 866    |  
|Superior Publishing Corporation         |  | Newspaper      |  | Control       |  |                     |       |   |                       |   | (1,029 | )                                 |  |   |               |   |  |   | (1,029 | )
|On Target Media, LLC                    |  | Publishing     |  | Affiliate     |  |                     |       |   |                       |   | 925    |                                   |  |   |               |   |  |   | 925    |  
|Midwest Tower Partners, LLC             |  | Communications |  | Control       |  |                     |       |   |                       |   | (1,818 | )                                 |  |   |               |   |  |   | (1,818 | )
|Jenzabar, Inc.                          |  | Technology     |  | Non-affiliate |  |                     |       |   |                       |   | 5,019  |                                   |  |   |               |   |  |   | 5,019  |  
|Fawcette Technical Publications Holding |  | Publishing     |  | Control       |  |                     |       |   |                       |   | (1,226 | )                                 |  |   |               |   |  |   | (1,226 | )
|Crystal Media Network, LLC              |  | Broadcasting   |  | Control       |  |                     |       |   |                       |   | (1,170 | )                                 |  |   |               |   |  |   | (1,170 | )
|Other                                   |  |                |  |               |  |                     | 71     |   |                       |   | 183    |                                   |  |   | (156           | ) |  |   | 98     |  
|                                        |  |                |  |               |  |                     |        |   |                       |   |        |                                   |  |   |                |   |  |   |        |  
|Total                                   |  |                |  |               |  | $                   | (3,276 | ) |                       | $ | 3,231  |                                   |  | $ | 3,853          |   |  | $ | 3,808  |  
|                                        |  |                |  |               |  |                     |        |   |                       |   |        |                                   |  |   |                |   |  |   |        |  

Net investment gains before income taxes on investment gains totaled $2.0 million for the three
months ended September 30, 2006, compared to $3.8 million for the three months ended September 30, 2005. These amounts represent the total of net realized gains and losses, net unrealized appreciation and depreciation and reversals of
unrealized appreciation and depreciation as summarized in the tables above. Reversals of unrealized appreciation and depreciation occur when a gain or loss becomes realized.

Provision for Income Taxes on Investment Gains

Through September 30, 2006, we recorded a $3.6
million provision for income taxes. This tax provision is primarily related to unrealized gains on one of our investments, which, if ultimately realized will result in a taxable income of approximately $8.6 million.



42



---

##### Table of Contents

Net Income

Net income totaled $22.1 million for the three months ended September 30, 2006, compared to $16.7 million for the three months ended September 30, 2005. The increase in net income is due to the items discussed above.

Comparison of the Nine Months Ended September 30, 2006 and 2005

The following table shows the components of our net income for the nine months ended September 30, 2006, and 2005:



|                                                                                                |  |      |       |   |      |   |        |  |   |                  |   |  |     |   
|----------------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ------ |  | - | ---------------- | - |  | --- | --
|(dollars in millions)                                                                           |  | 2006 |       |   | 2005 |   | Change |  |   | PercentageChange |  
|Operating income                                                                                |  |      |       |   |      |   |        |  |   |                  |   |  |     |   
|Interest and dividend income                                                                    |  | $    | 95.6  |   |      | $ | 69.0   |  | $ | 26.6             |   |  | 39  | % 
|Loan fees                                                                                       |  |      | 4.6   |   |      |   | 8.4    |  |   | (3.8             | ) |  | (45 | %)
|                                                                                                |  |      |       |   |      |   |        |  |   |                  |   |  |     |   
|Total interest and dividend income                                                              |  |      | 100.2 |   |      |   | 77.4   |  |   | 22.8             |   |  | 29  | % 
|Advisory fees and other income                                                                  |  |      | 13.5  |   |      |   | 9.2    |  |   | 4.3              |   |  | 47  | % 
|                                                                                                |  |      |       |   |      |   |        |  |   |                  |   |  |     |   
|Total operating income                                                                          |  |      | 113.7 |   |      |   | 86.6   |  |   | 27.1             |   |  | 31  | % 
|Operating expenses                                                                              |  |      |       |   |      |   |        |  |   |                  |   |  |     |   
|Interest expense                                                                                |  |      | 27.4  |   |      |   | 15.2   |  |   | 12.2             |   |  | 80  | % 
|Employee compensation:                                                                          |  |      |       |   |      |   |        |  |   |                  |   |  |     |   
|Salaries and benefits                                                                           |  |      | 16.2  |   |      |   | 14.4   |  |   | 1.8              |   |  | 13  | % 
|Long-term incentive compensation                                                                |  |      | 3.5   |   |      |   | 5.4    |  |   | (1.9             | ) |  | (35 | %)
|                                                                                                |  |      |       |   |      |   |        |  |   |                  |   |  |     |   
|Total employee compensation                                                                     |  |      | 19.7  |   |      |   | 19.8   |  |   | (0.1             | ) |  | (1  | %)
|General and administrative expense                                                              |  |      | 6.9   |   |      |   | 7.8    |  |   | (0.9             | ) |  | (12 | %)
|                                                                                                |  |      |       |   |      |   |        |  |   |                  |   |  |     |   
|Total operating expenses                                                                        |  |      | 54.0  |   |      |   | 42.8   |  |   | 11.2             |   |  | 26  | % 
|                                                                                                |  |      |       |   |      |   |        |  |   |                  |   |  |     |   
|Net operating income before investment gains and provision for income taxes on investment gains |  |      | 59.7  |   |      |   | 43.8   |  |   | 15.9             |   |  | 36  | % 
|Net investment gains before income taxes on investment gains                                    |  |      | 15.3  |   |      |   | 5.8    |  |   | 9.5              |   |  | 164 | % 
|Provision for income taxes on investment gains                                                  |  |      | (3.6  | ) |      |   |       |  |   | (3.6             | ) |  | 100 | % 
|                                                                                                |  |      |       |   |      |   |        |  |   |                  |   |  |     |   
|Net income                                                                                      |  | $    | 71.4  |   |      | $ | 49.6   |  | $ | 21.8             |   |  | 44  | % 
|                                                                                                |  |      |       |   |      |   |        |  |   |                  |   |  |     |   

Total Operating Income

The increase of $26.6 million in interest and dividend income for the nine months ended September 30, 2006, as compared to the nine months ended September 30, 2005, is due to an increase in LIBOR, which had
an impact of $11.6 million, growth in the size of our loan portfolio, which had an impact of $9.9 million, and an increase in dividend income, primarily attributable to an increase in dividends declared by our portfolio companies and an increase in
accruing preferred dividends, which had an impact of $5.7 million. These increases were partially offset by a decrease in the spread to LIBOR in our loan portfolio, which had an impact of ($0.6) million. The majority of the decrease in the spread to
LIBOR in our loan portfolio is related to holding fixed rate loans and loans with LIBOR floors in a rising interest rate environment, as well as fluctuations due to payoff and origination activity. During the nine months ended September 30,
2006, we recognized approximately $1.7 million of previously unaccrued paid-in-kind (PIK) interest that was paid in cash by one of our portfolio companies.



43



---

##### Table of Contents

Our investment in Broadview accounted for approximately $15.5 million, or 13.6%, of our total operating
income for the nine months ended September 30, 2006, compared to $13.3 million, or 15.4%, of our total operating income for the nine months ended September 30, 2005. Our operating income related to Broadview was comprised of interest and
dividends on our loan and equity investments. See our discussion of the three months ending September 30, 2006 for more information on our investment in Broadview, including a discussion of Broadviews recent acquisition of ATX and its
impact on our investment in Broadview. Our investment in Cleartel accounted for approximately $3.5 million, or 3.0% of our total operating income for the nine months ended September 30, 2006, compared to $2.7 million, or 3.2% for the nine months
ended September 30, 2005.

Loan fees for the nine months ended September 30, 2006 and 2005, included fees relating to the following:



|                      |  |      |     |      |   |    
|--------------------- |  | ---- | --- | ---- | - | ---
|(dollars in millions) |  | 2006 |     | 2005
|Amortizing fee income |  | $    | 2.0 |      | $ | 3.0
|Fee accelerations     |  |      | 2.6 |      |   | 5.4
|                      |  |      |     |      |   |    
|Total loan fees       |  | $    | 4.6 |      | $ | 8.4
|                      |  |      |     |      |   |    

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 into loan fee income of previously unamortized loan origination fees. 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. The decrease in amortizing fee income for the nine months ended September 30, 2006 as compared to the nine months ended September 30, 2005 is primarily related to having a higher component of equity in our asset
origination mix.

The total yield on our debt portfolio at fair value for the nine months ended September 30, 2006 and 2005 was 12.8%
and 11.9%, respectively. The average LIBOR for the nine months ended September 30, 2006 was 5.1%, an increase of 1.8% from 3.3% for the nine months ended September 30, 2005. The average spread to LIBOR for the nine months ended
September 30, 2006 was 7.7%, a decrease of approximately 0.9% from 8.6% for the nine months ended September 30, 2005, primarily due to an increase in the level of fixed rate loans as well as a decrease in amortizing fee income and fee
accelerations.

Advisory fees and other income primarily include fees related to advisory and management services, equity structuring fees,
prepayment fees, research revenues, 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 increase in fees and other income of $4.3 million for the nine months ended September 30, 2006 as compared to the nine months ended September 30, 2005 was primarily due to increases in equity structuring fees of $3.5 million,
advisory and management fees of $1.3 million, prepayment fees of approximately $2.8 million and bank interest of $0.5 million, partially offset by a decrease in research fees of ($3.8) million due to the deconsolidation of Kagan Research, LLC
effective January 1, 2006.

Total Operating Expenses

Operating expenses include interest, employee compensation and general and administrative expenses. The increase in interest expense during the nine months ended September 30, 2006 as compared to the nine months
ended September 30, 2005, is primarily attributable to an increase of $6.8 million due to increases in LIBOR, an increase of $2.6 million due to increases in the spread to LIBOR, and an increase of $2.8 million due to higher average borrowings.
Of the $2.6 million increase due to increases in the spread to LIBOR, $1.5 million is attributable to an increase in the amortization of deferred debt issuance costs. The increase in deferred debt issuance cost amortization is primarily attributable
to $1.2 million of amortization related to our Series 2004-1 Notes, which were redeemed during the nine months ended September 30, 2006, and to loan repayments, which, in certain instances, require us to accelerate amortization of deferred debt
issuance costs.



44



---

##### Table of Contents

Employee compensation includes base salaries and benefits, variable annual incentive compensation, and
long-term incentive compensation. The increase in salaries and benefits expense during the nine months ended September 30, 2006 as compared to the nine months ended September 30, 2005 is primarily due to $1.5 million of severance costs
related to our former CEO, and increased variable annual incentive compensation, partially offset by a decrease due to the deconsolidation of Kagan Research, LLC. Long-term incentive compensation expense is made up of non-cash amortization of
restricted stock awards granted in 2001 and 2006 and dividends on certain restricted shares and shares securing employee loans. Long-term incentive compensation decreased $1.9 million for the nine months ended September 30, 2006 compared to the
nine months ended September 30, 2005 due to a fewer number of restricted shares vesting during the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005, partially offset by additional compensation
cost related to the extension of certain non-executive level employee loans which are collateralized by restricted stock and by a charge of $0.7 million related to the accelerated vesting of certain restricted share awards held by our former CEO.

General and administrative expenses include legal and accounting fees, insurance premiums, rent and various other expenses. General and
administrative expenses decreased approximately $0.9 million during the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005 due to the deconsolidation of Kagan Research LLC, partially offset by
professional fees of approximately $1.0 million incurred in conjunction with the independent review of certain tax withholding reimbursements and loan repayments by our current and former executive officers, as previously disclosed.

Net Operating Income Before Investment Gains and Losses and Provision for Income Taxes on Investment Gains

Net operating income before investment gains and losses and provision for income taxes on investment gains (NOI) for the nine months ended
September 30, 2006 totaled $59.7 million, an increase of approximately $15.9 million compared with $43.8 million for the nine months ended September 30, 2005. This increase is due to the items discussed above. During the nine months ended
September 30, 2005, our wholly owned subsidiary, Kagan Research, LLC, accounted for losses of ($1.5) million. Effective January 1, 2006 Kagan Research, LLC no longer qualifies to be a consolidated subsidiary of the Company.



45



---

##### Table of Contents

Net Investment Gains and Losses Before Income Taxes on Investment Gains

The following table summarizes our gains and (losses) on investments and the changes in our unrealized appreciation and depreciation on investments for
the nine months ended September 30, 2006:



|                                                |  |                     |  |               |  |                     |        |   |                       |   |        |                                   |  |   |                |   |  |   |        |  
|----------------------------------------------- |  | ------------------- |  | ------------- |  | ------------------- | ------ | - | --------------------- | - | ------ | --------------------------------- |  | - | -------------- | - |  | - | ------ | -
|(dollars in thousands)                          |  |                     |  |               |  |                     |        |   |                       |   |        |                                   |  |   |                |  
|Portfolio Company                               |  | Industry            |  | Type          |  | RealizedGain/(Loss) |        |   | UnrealizedGain/(Loss) |   |        | Reversal ofUnrealized (Gain)/Loss |  |   | NetGain/(Loss) |  
|Metropolitan Telecommunications Holding Company |  | Communications      |  | Non-affiliate |  | $                   | 583    |   |                       | $ | 1,557  |                                   |  | $ |               |   |  | $ | 2,140  |  
|Copperstate Technologies, Inc.                  |  | Security Alarm      |  | Control       |  |                     | (1,483 | ) |                       |   |       |                                   |  |   | 1,053          |   |  |   | (430   | )
|Telecomm South, LLC                             |  | Communications      |  | Control       |  |                     | (1,493 | ) |                       |   |       |                                   |  |   | 1,493          |   |  |   |       |  
|Crystal Media Network, LLC                      |  | Broadcasting        |  | Control       |  |                     | (2,245 | ) |                       |   | (77    | )                                 |  |   | 2,561          |   |  |   | 239    |  
|Stratford Schools Holdings, Inc.                |  | Education           |  | Non-affiliate |  |                     |       |   |                       |   | 1,746  |                                   |  |   |               |   |  |   | 1,746  |  
|SXC Health Solutions, Inc.                      |  | Healthcare          |  | Non-affiliate |  |                     |       |   |                       |   | 1,940  |                                   |  |   |               |   |  |   | 1,940  |  
|Fawcette Technical Publications Holding         |  | Publishing          |  | Control       |  |                     |       |   |                       |   | (2,197 | )                                 |  |   |               |   |  |   | (2,197 | )
|Jenzabar, Inc.                                  |  | Technology          |  | Non-affiliate |  |                     |       |   |                       |   | 655    |                                   |  |   |               |   |  |   | 655    |  
|Wiesner Publishing Company, LLC                 |  | Publishing          |  | Non-affiliate |  |                     |       |   |                       |   | 762    |                                   |  |   |               |   |  |   | 762    |  
|Miles Media Holding, Inc.                       |  | Publishing          |  | Non-affiliate |  |                     |       |   |                       |   | 478    |                                   |  |   |               |   |  |   | 478    |  
|Midwest Tower Partners, LLC                     |  | Communications      |  | Control       |  |                     |       |   |                       |   | 6,548  |                                   |  |   |               |   |  |   | 6,548  |  
|National Product Services, Inc.                 |  | BusinessServices    |  | Control       |  |                     |       |   |                       |   | (458   | )                                 |  |   |               |   |  |   | (458   | )
|iVerify, US Inc.                                |  | Communications      |  | Affiliate     |  |                     |       |   |                       |   | (512   | )                                 |  |   |               |   |  |   | (512   | )
|Jupitermedia Corporation                        |  | InformationServices |  | Non-affiliate |  |                     |       |   |                       |   | (798   | )                                 |  |   |               |   |  |   | (798   | )
|West Coast Wireless                             |  | Publishing          |  | Control       |  |                     |       |   |                       |   | (586   | )                                 |  |   |               |   |  |   | (586   | )
|Superior Publishing Corporation                 |  | Newspaper           |  | Control       |  |                     |       |   |                       |   | 755    |                                   |  |   |               |   |  |   | 755    |  
|dick clark productions, inc.                    |  | Broadcasting        |  | Non-affiliate |  |                     |       |   |                       |   | 4,016  |                                   |  |   |               |   |  |   | 4,016  |  
|i-55 Internet Services, Inc.                    |  | Communications      |  | Non-affiliate |  |                     |       |   |                       |   |       |                                   |  |   | 606            |   |  |   | 606    |  
|Other                                           |  |                     |  |               |  |                     | 191    |   |                       |   | 371    |                                   |  |   | (182           | ) |  |   | 380    |  
|                                                |  |                     |  |               |  |                     |        |   |                       |   |        |                                   |  |   |                |   |  |   |        |  
|Total                                           |  |                     |  |               |  | $                   | (4,447 | ) |                       | $ | 14,200 |                                   |  | $ | 5,531          |   |  | $ | 15,284 |  
|                                                |  |                     |  |               |  |                     |        |   |                       |   |        |                                   |  |   |                |   |  |   |        |  



46



---

##### Table of Contents

The following table summarizes our gains and (losses) on investments and the changes in our unrealized
appreciation and depreciation on investments for the nine months ended September 30, 2005:



|                                                |  |                     |  |               |  |                     |        |   |                       |   |        |                                   |  |   |                |   |  |   |        |  
|----------------------------------------------- |  | ------------------- |  | ------------- |  | ------------------- | ------ | - | --------------------- | - | ------ | --------------------------------- |  | - | -------------- | - |  | - | ------ | -
|(dollars in thousands) Portfolio Company        |  | Industry            |  | Type          |  | RealizedGain/(Loss) |        |   | UnrealizedGain/(Loss) |   |        | Reversal ofUnrealized (Gain)/Loss |  |   | NetGain/(Loss) |  
|Creatas, L.L.C.                                 |  | InformationServices |  | Control       |  | $                   | 20,431 |   |                       | $ |       |                                   |  | $ | (22,138        | ) |  | $ | (1,707 | )
|Jupitermedia Corporation                        |  | InformationServices |  | Non-affiliate |  |                     | 2,321  |   |                       |   | 807    |                                   |  |   | (425           | ) |  |   | 2,703  |  
|Metropolitan Telecommunications Holding Company |  | Communications      |  | Non-affiliate |  |                     | 2,038  |   |                       |   | 648    |                                   |  |   | (989           | ) |  |   | 1,697  |  
|Talk America Holdings, Inc.                     |  | Communications      |  | Non-affiliate |  |                     | 1,354  |   |                       |   |       |                                   |  |   | (892           | ) |  |   | 462    |  
|Boucher Communications, Inc.                    |  | Publishing          |  | Non-affiliate |  |                     | 930    |   |                       |   |       |                                   |  |   | (409           | ) |  |   | 521    |  
|nii communications, inc.                        |  | Communications      |  | Non-affiliate |  |                     | 900    |   |                       |   |       |                                   |  |   | (901           | ) |  |   | (1     | )
|Corporate Legal Times                           |  | Publishing          |  | Control       |  |                     | (306   | ) |                       |   |       |                                   |  |   | 339            |   |  |   | 33     |  
|Interactive Business Solutions, Inc.            |  | Security Alarm      |  | Control       |  |                     | (1,750 | ) |                       |   |       |                                   |  |   | 1,826          |   |  |   | 76     |  
|National Systems Integration, Inc.              |  | Security Alarm      |  | Control       |  |                     | (5,177 | ) |                       |   |       |                                   |  |   | 5,319          |   |  |   | 142    |  
|Midwest Tower Partners, LLC                     |  | Communications      |  | Control       |  |                     |       |   |                       |   | 994    |                                   |  |   |               |   |  |   | 994    |  
|On Target Media, LLC                            |  | Publishing          |  | Affiliate     |  |                     |       |   |                       |   | 902    |                                   |  |   |               |   |  |   | 902    |  
|Sunshine Media Delaware, LLC                    |  | Publishing          |  | Affiliate     |  |                     |       |   |                       |   | 1,997  |                                   |  |   |               |   |  |   | 1,997  |  
|Wiesner Publishing Company, LLC                 |  | Publishing          |  | Non-affiliate |  |                     |       |   |                       |   | 1,728  |                                   |  |   |               |   |  |   | 1,728  |  
|Jenzabar, Inc.                                  |  | Technology          |  | Non-affiliate |  |                     |       |   |                       |   | 6,532  |                                   |  |   |               |   |  |   | 6,532  |  
|ETC Group, LLC                                  |  | Publishing          |  | Control       |  |                     |       |   |                       |   | 484    |                                   |  |   |               |   |  |   | 484    |  
|IDS Telcom LLC                                  |  | Communications      |  | Non-affiliate |  |                     |       |   |                       |   | (692   | )                                 |  |   | 583            |   |  |   | (109   | )
|Telecomm South, LLC                             |  | Communications      |  | Control       |  |                     |       |   |                       |   | 519    |                                   |  |   |               |   |  |   | 519    |  
|Superior Publishing Corporation                 |  | Newspaper           |  | Control       |  |                     |       |   |                       |   | (1,159 | )                                 |  |   |               |   |  |   | (1,159 | )
|SXC Health Solutions, Inc.                      |  | Healthcare          |  | Non-affiliate |  |                     |       |   |                       |   | 948    |                                   |  |   |               |   |  |   | 948    |  
|Bridgecom Holdings, Inc. after acquisition      |  | Communications      |  | Control       |  |                     |       |   |                       |   |       |                                   |  |   | (497           | ) |  |   | (497   | )
|Cleartel                                        |  | Communications      |  | Control       |  |                     |       |   |                       |   | (733   | )                                 |  |   |               |   |  |   | (733   | )
|CCG Consulting, LLC                             |  | BusinessServices    |  | Non-affiliate |  |                     |       |   |                       |   | (1,269 | )                                 |  |   |               |   |  |   | (1,269 | )
|Working Mother Media, Inc.                      |  | Publishing          |  | Control       |  |                     |       |   |                       |   | (1,225 | )                                 |  |   |               |   |  |   | (1,225 | )
|Crystal Media Network, LLC                      |  | Broadcasting        |  | Control       |  |                     |       |   |                       |   | (3,687 | )                                 |  |   |               |   |  |   | (3,687 | )
|Fawcette Technical Publications Holding         |  | Publishing          |  | Control       |  |                     |       |   |                       |   | (4,165 | )                                 |  |   |               |   |  |   | (4,165 | )
|Other                                           |  |                     |  |               |  |                     | (61    | ) |                       |   | 835    |                                   |  |   | (135           | ) |  |   | 639    |  
|                                                |  |                     |  |               |  |                     |        |   |                       |   |        |                                   |  |   |                |   |  |   |        |  
|Total                                           |  |                     |  |               |  | $                   | 20,680 |   |                       | $ | 3,464  |                                   |  | $ | (18,319        | ) |  | $ | 5,825  |  
|                                                |  |                     |  |               |  |                     |        |   |                       |   |        |                                   |  |   |                |   |  |   |        |  

Net investment gains before income taxes on investment gains totaled $15.3 million for the nine
months ended September 30, 2006, compared to $5.8 million for the nine months ended September 30, 2005. These amounts represent the total of net realized gains and losses, net unrealized appreciation and depreciation and reversals of
unrealized appreciation and depreciation as summarized in the tables above. Reversals of unrealized appreciation and depreciation occur when a gain or loss becomes realized.



47



---

##### Table of Contents

Provision for Income Taxes on Investment Gains

Through September 30, 2006, we recorded a $3.6 million provision for income taxes. This tax provision is related primarily to unrealized gains on one of
our investments, which, if ultimately realized will result in a taxable income of approximately $8.6 million.

Net
Income

Net income totaled $71.4 million for the nine months ended September 30, 2006, compared to $49.6 million for the nine
months ended September 30, 2005. 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 September 30, 2006 and December 31, 2005, we had $30.7 million and $45.6 million, respectively, in cash and cash equivalents. In addition, at
September 30, 2006 and December 31, 2005, we had $20.7 million and $82.1 million, respectively, in cash, securitization accounts. We also had $0.7 million and $2.0 million of restricted cash as of September 30, 2006 and
December 31, 2005, respectively. We primarily invest cash on hand in interest bearing deposit accounts. Cash, securitization accounts include 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 first nine months of 2006, net cash provided by operating activities totaled $53.3 million, an increase of approximately $18.0 million from the
first nine months of 2005. This increase was due primarily to an increase in net operating income, and an increase in other liabilities primarily associated with accrued income taxes and accrued severance costs, and a reduction in
cash-securitization accounts from interest collections, partially offset by an increase in paid-in-kind interest and dividends. Cash used in investing activities totaled $68.9 million for the nine months ended September 30, 2006 compared with
$50.7 million for the nine months ended September 30, 2005. This change is primarily the result of an increase in originations, draws and advances on loans and purchases of equity investments, partially offset by an increase in proceeds from
sales of equity investments and payments of loans. Cash provided by financing activities was $0.7 million for the nine months ended September 30, 2006, compared to net cash used in financing activities of $(13.2) million for the nine months
ended September 30, 2005. This change is due to net proceeds from borrowings during the nine months ended September 30, 2006 as opposed to net payments on borrowing during the nine months ended September 30, 2005 and a decrease in
cash-securitization accounts for paydown of principal on debt. This was offset by the reduction in proceeds raised from common stock, which was $0.1 million during the nine months ended September 30, 2006, compared to $70.5 million during the
nine months ended September 30, 2005.

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. In order to fund new originations, we intend to use 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 limitations limit our ability to fund certain new originations with
advances under such facilities, in which case we fund originations using unsecured debt or equity financings.



48



---

##### Table of Contents

During the first nine months of 2006 we did not raise any proceeds through the sale of newly issued
common stock. During the first nine months of 2005 we raised $74.1 million of gross proceeds by selling 4,579,000 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 September 30, 2006, this ratio was
217%. 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. We intend to maintain a current shelf registration statement pursuant to which we may issue common stock from time to time.

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.

As of September 30, 2006, we had unused commitments to extend credit to our customers of $83.5 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 September 30, 2006, we had guarantees and standby letters of credit of approximately $9.5 million.

Contractual Obligations

The following table shows
our contractual obligations as of September 30, 2006:



|                                                  |  |                        |       |                  |   |           |  |           |      |               |   |      |  |   |      
|------------------------------------------------- |  | ---------------------- | ----- | ---------------- | - | --------- |  | --------- | ---- | ------------- | - | ---- |  | - | -----
|                                                  |  | Payments Due by Period
|(dollars in millions) Contractual Obligations (a) |  | Total                  |       | Less than 1 year |   | 1-3 years |  | 4-5 years |      | After 5 years
|Borrowings (b)                                    |  | $                      | 554.7 |                  | $ | 119.9     |  | $         | 67.4 |               | $ | 50.0 |  | $ | 317.4
|Future minimum rental obligations                 |  |                        | 9.5   |                  |   | 1.4       |  |           | 3.0  |               |   | 3.0  |  |   | 2.1  
|                                                  |  |                        |       |                  |   |           |  |           |      |               |   |      |  |   |      
|Total contractual obligations                     |  | $                      | 564.2 |                  | $ | 121.3     |  | $         | 70.4 |               | $ | 53.0 |  | $ | 319.5
|                                                  |  |                        |       |                  |   |           |  |           |      |               |   |      |  |   |      



|(a) | This excludes the unused commitments to extend credit to our customers of $83.5 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



49



---

##### Table of Contents

Borrowings

The following table shows the facility amounts and outstanding borrowings at September 30, 2006 and December 31, 2005:



|                                           |  |                    |       |                   |   |                |  |                   |       |  |   |      
|------------------------------------------ |  | ------------------ | ----- | ----------------- | - | -------------- |  | ----------------- | ----- |  | - | -----
|                                           |  | September 30, 2006 |       | December 31, 2005
|(dollars in millions)                      |  | Facilityamount     |       | Amountoutstanding |   | Facilityamount |  | Amountoutstanding
|Unsecured Notes                            |  | $                  | 50.0  |                   | $ | 50.0           |  | $                 | 50.0  |  | $ | 50.0 
|Commercial Loan Trust 2005-2               |  |                    |      |                   |   |               |  |                   | 250.0 |  |   | 159.2
|Commercial Loan Trust 2006-2               |  |                    | 200.0 |                   |   | 67.4           |  |                   |      |  |   |     
|Commercial Loan Funding Trust Facility     |  |                    | 250.0 |                   |   | 102.4          |  |                   | 250.0 |  |   | 160.0
|Term Securitizations                       |  |                    |       |                   |   |                |  |                   |       |  |   |      
|Series 2004-1 Class A-1 Asset Backed Bonds |  |                    |      |                   |   |               |  |                   | 81.1  |  |   | 81.1 
|Series 2004-1 Class A-2 Asset Backed Bonds |  |                    |      |                   |   |               |  |                   | 31.5  |  |   | 31.5 
|Series 2004-1 Class B Asset Backed Bonds   |  |                    |      |                   |   |               |  |                   | 43.5  |  |   | 43.5 
|Series 2004-1 Class C Asset Backed Bonds   |  |                    |      |                   |   |               |  |                   | 15.8  |  |   | 15.8 
|Series 2006-1 Class A-1 Notes              |  |                    | 106.2 |                   |   | 106.2          |  |                   |      |  |   |     
|Series 2006-1 Class A-2 Notes              |  |                    | 50.0  |                   |   | 44.9           |  |                   |      |  |   |     
|Series 2006-1 Class A-3 Notes              |  |                    | 85.0  |                   |   | 15.0           |  |                   |      |  |   |     
|Series 2006-1 Class B Notes                |  |                    | 58.8  |                   |   | 58.8           |  |                   |      |  |   |     
|Series 2006-1 Class C Notes                |  |                    | 45.0  |                   |   | 45.0           |  |                   |      |  |   |     
|Series 2006-1 Class D Notes                |  |                    | 47.5  |                   |   | 47.5           |  |                   |      |  |   |     
|Revolving Unsecured Credit Facility        |  |                    | 75.0  |                   |   | 17.5           |  |                   | 50.0  |  |   |     
|                                           |  |                    |       |                   |   |                |  |                   |       |  |   |      
|Total                                      |  | $                  | 967.5 |                   | $ | 554.7          |  | $                 | 771.9 |  | $ | 541.1
|                                           |  |                    |       |                   |   |                |  |                   |       |  |   |      

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 and nine
months ended September 30, 2006 and 2005:



|                                             |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|-------------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                             |  | Three months endedSeptember 30, |       |   | Nine months endedSeptember 30, |  
|                                             |  | 2006                            |       |   | 2005                           |   |       | 2006 |  |   | 2005  |  
|Weighted average borrowings                  |  | $                               | 498.4 |   |                                | $ | 398.3 |      |  | $ | 506.7 |   |  | $ | 426.7 |  
|Weighted average interest rate on borrowings |  |                                 | 7.7   | % |                                |   | 5.5   | %    |  |   | 7.1   | % |  |   | 4.7   | %
|Average LIBOR                                |  |                                 | 5.4   | % |                                |   | 3.8   | %    |  |   | 5.1   | % |  |   | 3.3   | %
|Average spread to LIBOR                      |  |                                 | 2.3   | % |                                |   | 1.7   | %    |  |   | 2.0   | % |  |   | 1.4   | %

The increase of approximately 2.2% in the weighted average interest rate for the three months
ended September 30, 2006 compared to the three months ended September 30, 2005 was primarily attributable to an increase in average LIBOR of 1.6%, as well as increases in the average spread to LIBOR of 0.3% and increases in deferred debt
issuance cost amortization of 0.3%. The increase in deferred debt issuance cost amortization is primarily attributable to amortization related to our Series 2004-1 Notes, which were redeemed during the three months ended September 30, 2006, and to
loan repayments, which, in certain instances, require us to accelerate amortization of these costs. The increase of approximately 2.4% in the weighted average interest rate for the nine months ended September 30, 2006 compared to the nine
months ended September 30, 2005 was primarily attributable to an increase in average LIBOR of 1.8%, as well as increases in the average spread to LIBOR of 0.3% and increases in deferred debt issuance cost amortization of 0.3%. The increase in
deferred debt issuance cost amortization is primarily attributable to amortization related to our Series 2004-1 Notes, which were redeemed during the nine months ended September 30, 2006 and to loan repayments, which, in certain instances, require
us to accelerate amortization of these costs.



50



---

##### Table of Contents

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.

Commercial Loan Trust
2006-2. On May 2, 2006 we established, through MCG Commercial Loan Trust 2006-2, a $200 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 million of commercial loans with borrowings of up to $200 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 September 30, 2006 we had $67.4 million outstanding under this facility.

Commercial Loan Trust 2006-1. On April 18, 2006, we completed a $500 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.

We retained 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 $417.7 million as of September 30, 2006, 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 September 30, 2006, we had $317.4 million of these notes outstanding.

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.



51



---

##### Table of Contents

Commercial Loan Trust 2005-2. On June 9, 2005, we established, through MCG Commercial
Loan Trust 2005-2, a $250.0 million warehouse credit facility with Merrill Lynch Capital Corp. On April 18, 2006, this facility terminated in connection with our Term Securitization 2006-1. The warehouse credit facility allowed MCG Commercial
Loan Trust 2005-2 to borrow up to $250.0 million subject to certain covenants, concentration limitations and other restrictions. The warehouse credit facility was primarily secured by the assets of MCG Commercial Loan Trust 2005-2, including cash
and commercial loans transferred by us to the trust. Under the terms of the credit and warehouse agreement, the loans could be senior secured loans, second lien loans or unsecured loans, as defined in the agreement, subject to certain limitations,
including the requirement that at least 50% of the overall warehouse facility amount be senior secured commercial loans. Advances under the facility bore interest based on LIBOR plus 0.75% and interest was payable monthly.

Commercial Loan Funding Trust Facility. On November 10, 2004, we established, through MCG Commercial Loan Funding Trust, a $150.0
million warehouse financing facility funded through Three Pillars Funding LLC, an asset-backed commercial paper program administered by SunTrust Bank. 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. Through July 29, 2005, advances under the facility bore interest based on a commercial paper rate plus 1.15%.

On July 29, 2005, we amended the Commercial Loan Funding Trust Facility. Pursuant to this amendment, the total facility amount was increased from
$150.0 million to $250.0 million, the interest rate was changed from commercial paper rate plus 1.15% to commercial paper rate plus 0.95%, the concentration criteria were modified to allow, among other things, for an increase in the allowable
percentage of certain secured subordinated loans in the collateral pool from 25% to 35%, and other minor modifications were made. On April 17, 2006 we amended this facility to allow, among other things, for an increase in the allowable
percentage of certain secured subordinated loans in the collateral pool from 35% to 50% and the inclusion of additional industry segments. 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 September 30, 2006, we had $102.4 million outstanding under this credit facility.

Term Securitization 2004-1. On September 30, 2004, we established MCG Commercial Loan Trust 2004-1 (the 2004-1 Trust), which
issued three classes of series 2004-1 Notes. The facility was structured to hold up to $397.7 million of loans. The facility was secured by all of the 2004-1 Trusts commercial loans and cash in securitization accounts, which totaled $228.0
million as of December 31, 2005, respectively. On July 20, 2006 we repaid the 2004-1 Notes using approximately $61.9 million of cash from the Commercial Loan Trust 2004-1 and our Commercial Loan Trust 2006-1 securitization and $15.0
million of new borrowings from our Commercial Loan Trust 2006-1 securitization. This facility was scheduled to terminate July 20, 2016 or sooner upon the full repayment of the Class A-1, Class A-2, Class B and Class C Notes.

The 2004-1 Trust issued $250.5 million of Class A-1 Notes rated Aaa/AAA, $31.5 million of Class A-2 Notes rated Aa1/AAA, $43.5
million of Class B Notes rated A2/A and $15.8 million of Class C Notes rated Baa2/BBB as rated by Moodys and Fitch, respectively. On June 1, 2005, we sold the Class C securities, which had previously been retained by MCG. The Series
2004-1 Class A-1 Notes, Class A-2 Notes, Class B Notes and Class C Notes bore interest of LIBOR plus 0.43%, 0.65%, 1.30%, and 2.50%, respectively.

Revolving Unsecured Credit Facility. This facility was established on September 20, 2005 as a result of an amendment to our Senior Secured Credit facility with Bayerische Hypo-Und Vereinsbank, AG, New York
Branch (HVB). Pursuant to that amendment the facility was no longer secured by our assets and was



52



---

##### Table of Contents

committed up to $50.0 million. On June 19, 2006, we made a second amendment to this facility. Pursuant to this amendment, the aggregate revolving commitment
under this credit facility was increased from $50.0 million to $60.0 million, the maturity date was extended from September 19, 2006 to June 18, 2007, and an additional lender was added to the facility. Other minor modifications were also made to
the facility. HVB maintained its $50.0 million commitment, and the additional $10.0 million was committed by Chevy Chase Bank. On August 7, 2006, we again amended this facility. Pursuant to this amendment, the aggregate revolving commitment under
this facility was increased form $60.0 million to $75.0 million and an additional lender was added to the facility. HVB and Chevy Chase bank maintained their $50.0 million and $10.0 million commitments, respectively, and the additional $15.0 million
was committed by Sovereign Bank.

This credit facility is unsecured and is committed up to $75.0 million on a revolving basis. In addition,
this Revolving Unsecured Credit Facility allows for additional lenders with HVB acting as the agent. 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,
and minimum cash net investment income. 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 September 30, 2006, the Company had approximately $17.5 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 fourth quarter of 2006. 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. 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 regulated investment company, we generally are required to (1) distribute at least 90% of our investment company taxable income and 90% of any ordinary pre-RIC built in gains that we recognize and (2) distribute (actually
or on a deemed basis) at least 98% of our income (both ordinary income and net capital gains) 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 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 our status as a regulated investment company. 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, 2005:



|                  |  |                   |  |                  |  |        |     
|----------------- |  | ----------------- |  | ---------------- |  | ------ | ----
|Date Declared     |  | Record Date       |  | Payment Date     |  | Amount
|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
|October 26, 2005  |  | November 23, 2005 |  | January 30, 2006 |  |        | 0.42
|July 27, 2005     |  | August 25, 2005   |  | October 28, 2005 |  |        | 0.42
|April 27, 2005    |  | May 26, 2005      |  | July 28, 2005    |  |        | 0.42
|February 23, 2005 |  | March 14, 2005    |  | April 28, 2005   |  |        | 0.42



53



---

##### Table of Contents

Each year a statement on Form 1099-DIV identifying the source of the distributions (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, 2005, 2004, and 2003, a portion of the distributions to our stockholders was deemed a return of capital. Because the determination of tax return of capital is done on an annual basis and our taxable income fluctuates from
quarter to quarter, we have not determined the amount, if any, of tax return of capital there may be for the year ended December 31, 2006.

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 on commercial loans is recognized when earned and is computed by methods that generally result in level rates of return on principal amounts outstanding. We monitor individual customers financial trends
in order to assess the collectibility of interest with respect to each customer. We closely monitor the status and performance of each individual investment.

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
will generally cease recognizing interest income on that loan until all past due principal and interest has been paid to date or otherwise restructured such that the interest income is determined to be collectible. However, we may make exceptions to
this policy if the loan has sufficient collateral value and is in the process of collection.

Paid-in-Kind Interest

We include in income certain amounts that we have not yet received in cash, such as contractual paid-in-kind (PIK) interest, which represents
contractually deferred interest added to the loan balance that may be prepaid either by contract or the portfolio companys choice, but is generally due at the end of the loan term. We will cease accruing PIK interest if we do not expect the
customer to be able to pay all principal and interest due. In certain cases, a customer makes principal payments on its loan prior to making payments to reduce the PIK loan balances and, therefore, the PIK interest portion of a customers loan
can increase while the total outstanding amount of the loan to that customer may stay the same or decrease. The PIK loan balance represented $14.9 million or 1.2% of our portfolio of investments as of September 30, 2006 and $13.5 million or
1.2% of our portfolio of investments as of December 31, 2005.

PIK related activity for the nine months ended September 30, 2006
was as follows:



|                                        |  |   |      |  
|--------------------------------------- |  | - | ---- | -
|(dollars in millions)                   |  |   |     
|Beginning PIK loan balance              |  | $ | 13.5 |  
|PIK interest earned during the period   |  |   | 12.1 |  
|Principal payments of cash on PIK loans |  |   | (7.4 | )
|PIK loans converted to other securities |  |   | (9.9 | )
|Interest receivable converted to PIK    |  |   | 6.6  |  
|                                        |  |   |      |  
|Ending PIK loan balance                 |  | $ | 14.9 |  
|                                        |  |   |      |  

As noted above, in certain cases, a customer may make principal payments on its loan that are
contractually applied first to the non-PIK loan balance instead of the PIK loan balance. If all principal payments from these customers had been applied first to any PIK loan balance outstanding at the time of the payment, and any remainder applied
to the non-PIK loan balance, an additional $3.9 million and $3.4 million of payments would



54



---

##### Table of Contents

have been applied against the September 30, 2006 and December 31, 2005 PIK loan balances, respectively, resulting in a PIK loan balance of $11.0
million and $10.1 million as of September 30, 2006 and December 31, 2005, respectively.

Dividends

Certain of our equity investments have stated accruing dividend rates. We accrue dividends on our equity investments as they are earned to the extent
there is sufficient value, liquidity and estimated financial wherewithal based on financial results, projections and other factors to support the ultimate payment of those dividends. The accrued dividend balance represented $25.0 million, or 2.1% or
our portfolio of investments as of September 30, 2006 and $12.4 million, or 1.1%, of our portfolio of investments at December 31, 2005.

Dividend activity for the nine months ended September 30, 2006 was as follows:



|                                         |  |   |      |  
|---------------------------------------- |  | - | ---- | -
|(dollars in millions)                    |  |   |     
|Beginning accrued dividend balance       |  | $ | 12.4 |  
|Dividend income earned during the period |  |   | 14.9 |  
|Payment of previously accrued dividends  |  |   | (2.3 | )
|                                         |  |   |      |  
|Ending accrued dividend balance          |  | $ | 25.0 |  
|                                         |  |   |      |  

Loan Origination Fees

Loan origination fees are deferred and amortized as adjustments to the related loans yield over the contractual life of the loan. 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 attempt to 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. We had $8.1 million
and $9.1 million of unearned income as of September 30, 2006 and December 31, 2005, respectively.

Unearned income activity for
the nine months ended September 30, 2006 was as follows:



|                                  |  |              |      |   |                                      |   |      |       |  |   |      |  
|--------------------------------- |  | ------------ | ---- | - | ------------------------------------ | - | ---- | ----- |  | - | ---- | -
|(dollars in millions)             |  | CashReceived |      |   | Equity Interestand FutureReceivables |   |      | Total | 
|Beginning unearned income balance |  | $            | 6.9  |   |                                      | $ | 2.2  |       |  | $ | 9.1  |  
|Additional fees                   |  |              | 3.2  |   |                                      |   | 0.4  |       |  |   | 3.6  |  
|Unearned income recognized        |  |              | (2.9 | ) |                                      |   | (1.7 | )     |  |   | (4.6 | )
|                                  |  |              |      |   |                                      |   |      |       |  |   |      |  
|Ending unearned income balance    |  | $            | 7.2  |   |                                      | $ | 0.9  |       |  | $ | 8.1  |  
|                                  |  |              |      |   |                                      |   |      |       |  |   |      |  

Equity Structuring Fees

Equity structuring fees are fees earned in connection with structuring our equity investments and are recognized in income when earned. During the nine months ended September 30, 2006 and 2005, we recognized
approximately $3.5 million and zero in equity structuring fees, respectively.

Other Fees

In certain investment transactions, we may perform consulting or advisory services. For services that are separately identifiable and external evidence
exists to substantiate fair value, income is recognized as earned which is generally when the investment transaction closes.

Valuation of Investments

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



55



---

##### Table of Contents

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 September 30, 2006, approximately 95% 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 September 30, 2006. 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 must determine the fair value of each individual investment on a quarterly basis
and record unrealized depreciation on investments when we believe that an investment has decreased in value, including where collection of a loan or realization of an equity security is doubtful. Conversely, where appropriate, we will record
unrealized appreciation if we believe that the underlying portfolio company has appreciated in value and, therefore, our investment has also appreciated in value.

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.

Each debt and equity investment is valued using industry valuation benchmarks. The investment value is discounted if it is illiquid in nature and/or a minority, non-control position. 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 will be used to corroborate our private debt or equity valuation. 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.



56



---

##### Table of Contents

Securitization Transactions

Periodically, we transfer pools of loans to bankruptcy remote special purpose entities for use in securitization transactions. 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 $666.6 million at September 30, 2006 and $596.9 million at December 31, 2005.

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 shall be effective as of the beginning of an entitys first fiscal year that begins after December 15, 2006. The Company will adopt this Interpretation effective January 1, 2007. The Company is currently
evaluating the impact of FIN No. 48 on its financial position and results of operations.

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.

Recent Developments

In October 2006 we raised approximately $72.5 million of gross proceeds through the sale of 4.6 million shares of our common stock.

During October 2006, our second largest portfolio company, Cleartel Communications, Inc. (Cleartel), a competitive local exchange carrier (CLEC), acquired Supra Telecom, a Florida-based CLEC.
As of September 30, 2006, we held subordinated debt with a fair value of $52.1 million and preferred equity with a fair value of $40.7 million. In conjunction with the acquisition, we invested an additional $18.1 million in Cleartel in the form of
subordinated debt and restructured our existing debt investments in Cleartel by extending the maturity dates and modifying the interest rates.

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 staff of the Securities and Exchange Commission (the SEC Staff). On September 21, 2006, we reported that the review by the Independent Committee had been substantially
completed, although the SEC Staff has requested that we furnish additional information. The Independent Committee believes it has fully cooperated with the SEC Staff and it will continue to do so. The SEC Staff may also require additional
information in the future, the nature and scope of which cannot be determined at this time. As part of its review, the Independent Committee considered whether there were any violations of the Companys code of business conduct and ethics and
the federal securities laws, including but not limited to, Section 402 of the Sarbanes-Oxley Act of 2002 (Section 13(k) of the Securities Exchange Act of 1934). Based upon its review, the Independent Committee concluded that certain
violations of our code of business conduct and ethics did occur and reached no conclusion regarding Section 402 of the Sarbanes-Oxley Act of 2002. We continue to believe that there will be no impact on previously reported earnings as a result
of these matters. We have instituted procedures to ensure concurrent payment to the Company of all future obligations of executive officers resulting from tax withholding paid by the Company on behalf of its executive officers, and we have taken
other actions as disclosed in our Form 8-K dated September 21, 2006. In addition, our former Chief Executive Officer has been required to pay total imputed interest of approximately $18,000, rather than $31,205 as disclosed in our
Form 8-K filed on September 21, 2006. As of November 6, 2006, a payment for this amount has been delivered to the Company.



57



---

##### Table of Contents

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
September 30, 2006, approximately 63% of our loan portfolio, at cost, bears interest at a spread to LIBOR, 36% at a fixed rate, and 1% a spread to prime rate. As of September 30, 2006, approximately 32% of our loan portfolio, at cost, has
LIBOR floors, at various levels.

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 September 30, 2006, we were not a party to any hedging arrangements. Certain of our interest bearing investments contain LIBOR floors 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 September 30, 2006 and December 31, 2005:



|                          |  |                                          |       |                   |   |                                          |  |            |         |  |   |      
|------------------------- |  | ---------------------------------------- | ----- | ----------------- | - | ---------------------------------------- |  | ---------- | ------- |  | - | -----
|                          |  | September 30, 2006                       |       | December 31, 2005
|(dollars in millions)     |  | Interest BearingCash andCommercial Loans |       | Borrowings        |   | Interest BearingCash andCommercial Loans |  | Borrowings
|Repurchase Agreement Rate |  | $                                        | 51.3  |                   | $ |                                         |  | $          | 120.7   |  | $ |     
|Money Market Rate         |  |                                          | 0.7   |                   |   |                                         |  |            | 2.0     |  |   |     
|Prime Rate                |  |                                          | 9.4   |                   |   |                                         |  |            | 36.1    |  |   |     
|30-Day LIBOR              |  |                                          | 36.0  |                   |   |                                         |  |            | 36.0    |  |   |     
|60-Day LIBOR              |  |                                          | 3.1   |                   |   |                                         |  |            |        |  |   |     
|90-Day LIBOR              |  |                                          | 488.4 |                   |   | 402.3                                    |  |            | 562.6   |  |   | 331.1
|180-Day LIBOR             |  |                                          | 29.7  |                   |   |                                         |  |            | 30.9    |  |   |     
|270-Day LIBOR             |  |                                          | 1.3   |                   |   |                                         |  |            |        |  |   |     
|Commercial Paper          |  |                                          |      |                   |   | 102.4                                    |  |            |        |  |   | 160.0
|Fixed Rate                |  |                                          | 325.3 |                   |   | 50.0                                     |  |            | 273.5   |  |   | 50.0 
|                          |  |                                          |       |                   |   |                                          |  |            |         |  |   |      
|Total                     |  | $                                        | 945.2 |                   | $ | 554.7                                    |  | $          | 1,061.8 |  | $ | 541.1
|                          |  |                                          |       |                   |   |                                          |  |            |         |  |   |      

Based on our September 30, 2006 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    |  | Interest Income |  | Interest Expense |  | Net Income |  | 
|(300)                 |  | $(18.3)         |  | $(15.1)          |  | $(3.2)     |  | 
|(200)                 |  | (12.4)          |  | (10.1)           |  | (2.3)      |  | 
|(100)                 |  | (6.2)           |  | (5.0)            |  | (1.2)      |  | 
|100                   |  | 6.2             |  | 5.0              |  | 1.2        |  | 
|200                   |  | 12.4            |  | 10.1             |  | 2.3        |  | 
|300                   |  | 18.6            |  | 15.1             |  | 3.5        |  | 

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



58



---

##### Table of Contents

Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer have concluded that our disclosure controls and procedures are not 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 due to the matter relating to certain tax withholding reimbursements and
loan repayments by our executive officers and the results of the review of these matters conducted by the independent members of our board of directors (the Independent Committee). See our Forms 8-K filed with the Securities and Exchange
Commission on July 27, 2006 and September 21, 2006.

As a result of the review conducted by the Independent Committee and the conclusions
reached by the Independent Committee, we have taken certain actions to address these matters, including instituting procedures to ensure concurrent payment to the Company of any future obligations of the executive officers resulting from
withholdings paid by the Company on behalf of its executive officers, and are taking other actions as also disclosed in our Form 8-K dated September 21, 2006.

There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2006 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.



59



---

##### Table of Contents

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.

Risks Related to Our Business and Financial Results

Because there is generally no established market for 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 loans and equity securities of the companies in which
we invest, our board will determine the fair value of these loans and equity 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.

We make loans to and invest in primarily privately owned middle market companies, which may default on their loans,
thereby reducing or eliminating the return on our investments.

Our portfolio primarily consists of investments in privately owned
middle market businesses in the form of secured debt, unsecured debt, and equity. Compared to larger publicly owned firms, these 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. These
conditions may also make it difficult for us to obtain repayment of our loans.



60



---

##### Table of Contents

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 September 30, 2006, approximately 27.8% of our portfolio, at cost, consisted of customers in the communications industry. 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
portfolios 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 September 30, 2006, our largest portfolio investment was Broadview Networks Holdings, Inc.
(Broadview), which totaled $114.8 million at fair value, or 9.5% of the fair value of our investments. Broadview accounted for approximately 13.6% of our operating income during the nine months ended September 30, 2006. We own
preferred securities of Broadview, which entitle us to a preferred claim of approximately $230.8 million, plus dividends, which accumulate at an annual rate of 12% 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.

Economic downturns or recessions could impair our
customers ability to repay our loans, harm our operating results and reduce our volume of new loans.

Many of our customers may be
susceptible to economic downturns or recessions and may be unable to repay our loans during these periods. 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 loan originations and investments 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



61



---

##### Table of Contents

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 distribute at least 98% of our income, we generally will be subject to a 4% excise tax.

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 September 30, 2006, we had $554.7 million of outstanding borrowings under our debt facilities. As of September 30, 2006, the weighted
average annual interest rate on all of our outstanding borrowings was 6.33%. In order for us to make our annual interest payments on indebtedness, we must achieve annual returns on our September 30, 2006 total assets of at least 2.75%. 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 we do not 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 $192.1 million as of September 30, 2006.

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.

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



62



---

##### Table of Contents

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.

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 September 30,
2006, this ratio was approximately 217%.

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 terminate 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, 2007, but is subject to annual renewal 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.

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.

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

In accordance with tax regulations, we include in taxable income certain
amounts that we have not yet received in cash, such as contracted 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 taxable income in advance of receiving cash payment. Since we may recognize taxable 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.



63



---

##### Table of Contents

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.

Our future success depends to a significant extent on the continued services 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, as well as other key personnel. The loss of any of these key employees would likely have a significant detrimental effect on our business. In
addition, if any Mr. Saville, Mr. Tunney or Mr. Merrick cease to be actively involved in our management, the lender under one of our warehouse financing facilities could, absent a waiver or cure, replace us as the servicer of the
loans and declare a default. In addition, if either of Mr. Tunney or Mr. Saville cease to be an executive officer of MCG actively involved in the management of MCG, the lender of our $75.0 million revolving unsecured credit facility could,
absent a waiver or cure, declare a default. We currently have employment agreements with Messrs. Tunney, Saville, and Merrick that are effective through February 28, 2010 subject to automatic extension for successive one-year periods
thereafter.

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 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 64% of the loans in our portfolio, based on amounts outstanding at cost as of
September 30, 2006, were at variable rates determined on the basis of a benchmark LIBOR or prime rate and approximately 36% were at fixed rates. From January 1, 2004 to September 30, 2006, the three-month LIBOR has increased from
1.15% to 5.37%.



64



---

##### Table of Contents

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 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 Staff is in the process of reviewing the appropriateness of our consolidation of certain of our subsidiaries (the Subsidiaries). In the event that
the 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 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.

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.

On July 27, 2006, we reported that the independent members of our Board of Directors formed a special committee (the Independent
Committee) to conduct a review of the timeliness of certain loan payments and tax withholding reimbursements involving six current and former executive officers of MCG. On September 21, 2006, we reported that the review by the Independent
Committee was substantially complete. See Managements Discussion and Analysis of Financial Condition and Results of Operations-Recent Developments. The Independent Committee has retained independent counsel to assist in its review.



65



---

##### Table of Contents

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 staff of the Securities and Exchange Commission (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 the Sarbanes-Oxley Act of
2002. 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 enforcement actions 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 enforcement action 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.



66



---

##### Table of Contents

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

During the
nine months ended September 30, 2006, we issued a total of 10,131 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
proceeds for the shares of common stock sold under the dividend reinvestment plan were approximately $146 thousand. Proceeds were used for general corporate purposes.

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

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          |  | Sale and Servicing Agreement by and among MCG Commercial Loan Trust 2001-1, MCG Finance III, LLC, MCG Capital Corporation and Wells Fargo
Bank Minnesota, National Association, dated as of December 1, 2001 (incorporated by reference to Exhibit 10.13 filed with MCG Capitals Form 10-K for the year ended December 31, 2001).      
|              | 
|10.3          |  | Note Purchase Agreement among MCG Commercial Loan Trust 2001-1, MCG Capital Corporation, MCG Finance III, LLC and Wachovia Securities, Inc.
(formerly First Union Securities, Inc.), dated as of December 19, 2001 (incorporated by reference to Exhibit 10.14 filed with MCG Capitals Form 10-K for the year ended December 31, 2001).
|              | 
|10.4          |  | Trust Agreement between MCG Finance III, LLC and Wilmington Trust Company, dated as of December 1, 2001 (incorporated by reference to
Exhibit 10.15 filed with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                                                           
|              | 
|10.5          |  | MCG Commercial Loan Trust 2001-1 Trust Certificate, dated as of December 27, 2001 (incorporated by reference to Exhibit 10.16 filed with
MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                                                                                 



67



---

##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                         
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                 
|10.6          |  | MCG Commercial Loan Trust 2001-1 Class A Note, dated as of December 27, 2001 (incorporated by reference to Exhibit 10.17 filed with MCG
Capitals Form 10-K for the year ended December 31, 2001).                                                                                                      
|              | 
|10.7          |  | MCG Commercial Loan Trust 2001-1 Class B Note, dated as of December 27, 2001 (incorporated by reference to Exhibit 10.18 filed with MCG
Capitals Form 10-K for the year ended December 31, 2001).                                                                                                      
|              | 
|10.8          |  | MCG Commercial Loan Trust 2001-1 Class C Note issued to MCG Finance III, LLC, dated as of December 27, 2001 (incorporated by reference to
Exhibit 10.19 filed with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                       
|              | 
|10.9          |  | Indenture between MCG Commercial Loan Trust 2001-1 and Wells Fargo Bank Minnesota, National Association, dated as of December 1, 2001
(incorporated by reference to Exhibit 10.20 filed with MCG Capitals Form 10-K for the year ended December 31, 2001).                                             
|              | 
|10.10         |  | Commercial Loan Sale Agreement between MCG Capital Corporation and MCG Finance III, LLC, dated as of December 1, 2001 (incorporated by
reference to Exhibit 10.21 filed with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                             
|              | 
|10.11         |  | 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).                                                                                              
|              | 
|10.12         |  | 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).                                                                               
|              | 
|10.13         |  | 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).                                                    
|              | 
|10.14         |  | Form of Restricted Stock Agreement for administrative personnel (incorporated by reference to Exhibit i.3 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).             
|              | 
|10.15         |  | Form of Restricted Stock Agreement for staff professionals (incorporated by reference to Exhibit i.4 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).                   
|              | 
|10.16         |  | Form of Restricted Stock Agreement for senior management (incorporated by reference to Exhibit i.6 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).                    
|              | 
|10.17         |  | 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).                                 
|              | 
|10.18         |  | 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).
|              | 
|10.19         |  | Restricted Stock Agreement between the Company and Robert J. Merrick, dated November 28, 2001 (incorporated by reference to Exhibit 10.30
filed with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                                     



68



---

##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                        
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                
|10.20         |  | 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).
|              | 
|10.21         |  | 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).
|              | 
|10.22         |  | Form of Restricted Stock Agreement for directors (incorporated by reference to Exhibit 99.i.7 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).                        
|              | 
|10.23         |  | 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).                                                                                                       
|              | 
|10.24         |  | 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).                                                                                                        
|              | 
|10.25         |  | 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).                                                                                                        
|10.26         |  | 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).                        
|              | 
|10.27         |  | 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).                                
|              | 
|10.28         |  | 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).                                                                                        
|              | 
|10.29         |  | 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).                                                                                         
|              | 
|10.30         |  | 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).                                                                                         
|              | 
|10.31         |  | 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).                 
|              | 
|10.32         |  | 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).  



69



---

##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.33         |  | 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).                                                                                                                                                    
|              | 
|10.34         |  | 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).                                                                                                                                                                                                                                                              
|              | 
|10.35         |  | Employment Agreement between the Company and Robert J. Merrick, dated November 28, 2001 (incorporated by reference to Exhibit 10.47 filed
with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                                                                                                                                                                                   
|              | 
|10.36         |  | Employment Agreement between the Company and B. Hagen Saville, dated November 28, 2001 (incorporated by reference to Exhibit 10.48 filed
with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                                                                                                                                                                                    
|              | 
|10.37         |  | Employment Agreement between the Company and Steven F. Tunney, dated November 28, 2001 (incorporated by reference to Exhibit 10.49 filed
with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                                                                                                                                                                                    
|              | 
|10.38         |  | 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).                                                                                                                                                       
|              | 
|10.39         |  | 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).                                                                                                                                                                                                
|              | 
|10.40         |  | MCG Capital Corporation Swingline Note issued to Wachovia Bank, National Association (formerly First Union National Bank), dated as of
February 12, 2004 (incorporated by reference to Exhibit f.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).                                                                                              
|              | 
|10.41         |  | 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).                                                                                                                                                                                                                                     
|              | 
|10.42         |  | Sale and Servicing Agreement by and among MCG Commercial Loan Trust 2004-1, MCG Finance IV, LLC, MCG Capital Corporation and Wells Fargo
Bank, National Association, dated as of September 30, 2004 (incorporated by reference to Exhibit 10.66 filed with MCG Capitals Form 10-Q for quarter ended September 30, 2004).                                                                                                                       
|              | 
|10.43         |  | Indenture between MCG Commercial Loan Trust 2004-1 and Wells Fargo Bank, National Association, dated as of September 30, 2004 (incorporated
by reference to Exhibit 10.67 filed with MCG Capitals Form 10-Q for quarter ended September 30, 2004).                                                                                                                                                                                             
|              | 
|10.44         |  | 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).
|              | 
|10.45         |  | 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).                                                                                                                                                                   



70



---

##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.46         |  | 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).                                                                                       
|              | 
|10.47         |  | 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).                                                                                                                                                                        
|              | 
|10.48         |  | 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).                                                                    
|              | 
|10.49         |  | 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).                                                                                                                                                                
|              | 
|10.50         |  | 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).                                                                        
|              | 
|10.51         |  | 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).                                                                                                                             
|              | 
|10.52         |  | 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).                                                                                                                                                                                                                                                                      
|              | 
|10.53         |  | 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).                                                                  
|              | 
|10.54         |  | 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).
|              | 
|10.55         |  | 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).                                                                                                                
|              | 
|10.56         |  | 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).                                                                                                        



71



---

##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                      
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                                              
|10.57         |  | 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).                                                                     
|              | 
|10.58         |  | 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).
|              | 
|10.59         |  | 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).                                            
|              | 
|10.60         |  | 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).                                                                                                                                       
|              | 
|10.61         |  | 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).                                                                                     
|              | 
|10.62         |  | 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).                                                                                                                                                                                                                       
|              | 
|10.63         |  | 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).                                                                                                                                                                                                                                    
|              | 
|10.64         |  | Amendment No. 1 to the Second Amended and Restated Revolving Credit Agreement, dated as of August 7, 2006, by and among NCG 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).                                                                       
|              | 
|10.65         |  | 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).                                                                                                                                                                  
|              | 
|10.66         |  | 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).                                                                                                                                                                        
|              | 
|10.67         |  | 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).                                                                                                                                                                        
|              | 
|10.68         |  | 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).                                                                                                                                                                       
|              | 
|10.69         |  | 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).                                                                                                                                               
|              | 
|10.70++       |  | MCG Capital Corporation Supplemental Non-Qualified Retirement Plan Amended and Restated as of January 1, 2005.                                                                                                                                                                                                                                                                                                       



72



---

##### Table of Contents

|              |  |                                                                                                                        
|------------- |  | -----------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                
|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.         
|              | 
|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
|-- | --------------



73



---

##### Table of Contents

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 November 6, 2006.



MCG CAPITAL CORPORATIONBy:

/s/    STEVEN F. TUNNEYSteven F. TunneyChief Executive OfficerBy:

/s/    MICHAEL R. MCDONNELLMichael R. McDonnellChief Financial OfficerBy:

/s/    JOHN C. WELLONSJohn C. WellonsChief Accounting Officer




74