##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

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

For the quarterly period ended March 31, 2009

OR



| ̈ | 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 offices)                       |  | (Zip Code)                          

(703) 247-7500

(Registrants telephone number, including area code)

None

(Former name, former address, and former fiscal year, if changed since last report)





Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).     Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  | x
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

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

As of May 5, 2009, there were 76,019,889 shares of the registrants $0.01 par value Common Stock outstanding.









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##### Table of Contents

MCG CAPITAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2009

TABLE OF CONTENTS



|                                                                                               |  |   
|---------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION                                                                  |  | 1 
|                                                                                               | 
|ITEM1. FINANCIAL STATEMENTS                                                                    |  | 1 
|                                                                                               | 
|Consolidated Balance Sheets                                                                    |  | 1 
|                                                                                               | 
|Consolidated Statements of Operations                                                          |  | 2 
|                                                                                               | 
|Consolidated Statements of Changes in Net Assets                                               |  | 3 
|                                                                                               | 
|Consolidated Statements of Cash Flows                                                          |  | 4 
|                                                                                               | 
|Consolidated Schedule of Investments                                                           |  | 5 
|                                                                                               | 
|Notes to the Condensed Consolidated Financial Statements (Unaudited)                           |  | 15
|                                                                                               | 
|Report of Independent Registered Public Accounting Firm                                        |  | 39
|                                                                                               | 
|Selected Financial Data                                                                        |  | 40
|                                                                                               | 
|ITEM 
2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 42
|                                                                                               | 
|ITEM 
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 69
|                                                                                               | 
|ITEM 4. CONTROLS AND PROCEDURES                                                                |  | 70
|                                                                                               | 
|PART II. OTHER INFORMATION                                                                     |  | 71
|                                                                                               | 
|ITEM 1. LEGAL PROCEEDINGS                                                                      |  | 71
|                                                                                               | 
|ITEM 1A. RISK FACTORS                                                                          |  | 71
|                                                                                               | 
|ITEM 
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                           |  | 80
|                                                                                               | 
|ITEM 3. DEFAULTS UPON SENIOR
SECURITIES                                                        |  | 80
|                                                                                               | 
|ITEM 
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 80
|                                                                                               | 
|ITEM 5. OTHER INFORMATION                                                                      |  | 80
|                                                                                               | 
|ITEM 6. EXHIBITS                                                                               |  | 81
|                                                                                               | 
|SIGNATURES                                                                                     |  | 82



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|ITEM1. | FINANCIAL STATEMENTS
|------ | --------------------

MCG Capital Corporation

Consolidated Balance Sheets



|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|(in thousands, except per share amounts)                                                                                                                                                                |  | March 31,2009 |           |   | December 31,2008 |  
|                                                                                                                                                                                                        |  | (unaudited)   |           |   |                  |  
|Assets                                                                                                                                                                                                  |  |               |           |   |                  |   |           |  
|                                                                                                                                                                                                        |  |              
|Cash and cash equivalents                                                                                                                                                                               |  | $             | 50,330    |   |                  | $ | 46,149    |  
|Cash, securitization accounts                                                                                                                                                                           |  |               | 41,801    |   |                  |   | 37,493    |  
|Cash, restricted                                                                                                                                                                                        |  |               | 20,101    |   |                  |   | 979       |  
|Investments at fair value                                                                                                                                                                               |  |               |           |   |                  |   |           |  
|Non-affiliate investments (cost of $632,909 and $605,906, respectively)                                                                                                                                 |  |               | 591,747   |   |                  |   | 584,336   |  
|Affiliate investments (cost of $41,890 and $45,141, respectively)                                                                                                                                       |  |               | 54,492    |   |                  |   | 56,126    |  
|Control investments (cost of $789,399and $819,076, respectively)                                                                                                                                        |  |               | 468,753   |   |                  |   | 562,686   |  
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|Total investments (cost of $1,464,198and $1,470,123, respectively)                                                                                                                                      |  |               | 1,114,992 |   |                  |   | 1,203,148 |  
|                                                                                                                                                                                                        |  |              
|Interest receivable                                                                                                                                                                                     |  |               | 9,810     |   |                  |   | 8,472     |  
|                                                                                                                                                                                                        |  |              
|Other assets                                                                                                                                                                                            |  |               | 18,306    |   |                  |   | 16,193    |  
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|Total assets                                                                                                                                                                                            |  | $             | 1,255,340 |   |                  | $ | 1,312,434 |  
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|                                                                                                                                                                                                        |  |              
|Liabilities                                                                                                                                                                                             |  |               |           |   |                  |   |           |  
|                                                                                                                                                                                                        |  |              
|Borrowings (maturing within one year of $32,552 and $44,500, respectively)                                                                                                                              |  | $             | 631,245   |   |                  | $ | 636,649   |  
|Interest payable                                                                                                                                                                                        |  |               | 3,731     |   |                  |   | 5,367     |  
|Other liabilities                                                                                                                                                                                       |  |               | 10,833    |   |                  |   | 11,507    |  
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                                                       |  |               | 645,809   |   |                  |   | 653,523   |  
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|                                                                                                                                                                                                        |  |              
|Stockholders equity                                                                                                                                                                                    |  |               |           |   |                  |   |           |  
|Preferred stock, par value $0.01, authorized 1 share, none issued and outstanding                                                                                                                       |  |               |          |   |                  |   |          |  
|Common stock, par value $0.01, authorized 200,000 shares on March 31, 2009 and December 31, 2008, 76,027issued and
outstanding on March 31, 2009 and 76,075 issued and outstanding on December 31, 2008 |  |               | 760       |   |                  |   | 761       |  
|Paid-in capital                                                                                                                                                                                         |  |               | 998,894   |   |                  |   | 997,318   |  
|                                                                                                                                                                                                        |  |              
|Undistributed (distributions in excess of) earnings                                                                                                                                                     |  |               |           |   |                  |   |           |  
|Paid-in capital                                                                                                                                                                                         |  |               | (162,783  | ) |                  |   | (162,783  | )
|Other                                                                                                                                                                                                   |  |               | 121,936   |   |                  |   | 90,651    |  
|                                                                                                                                                                                                        |  |              
|Net unrealized depreciation on investments                                                                                                                                                              |  |               | (349,206  | ) |                  |   | (266,975  | )
|                                                                                                                                                                                                        |  |              
|Stockholder loans                                                                                                                                                                                       |  |               | (70       | ) |                  |   | (61       | )
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|Total stockholders equity                                                                                                                                                                              |  |               | 609,531   |   |                  |   | 658,911   |  
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|Total liabilities and stockholders equity                                                                                                                                                              |  | $             | 1,255,340 |   |                  | $ | 1,312,434 |  
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|                                                                                                                                                                                                        |  |              
|Net asset value per common share at end of period                                                                                                                                                       |  | $             | 8.02      |   |                  | $ | 8.66      |  

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements



1



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##### Table of Contents

MCG Capital Corporation

Consolidated Statements of Operations

(unaudited)



|                                                                                                                     |  |                             |         |   |      |   |         |    
|-------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | ---
|                                                                                                                     |  | Three months endedMarch 31, |        
|(in thousands, except per share amounts)                                                                             |  | 2009                        |         |   | 2008 |  
|Revenue                                                                                                              |  |                             |         |   |      |   |         |    
|Interest and dividend income                                                                                         |  |                             |         |   |      |   |         |    
|Non-affiliate investments (less than 5% owned)                                                                       |  | $                           | 15,667  |   |      | $ | 19,874  |    
|Affiliate investments (5% to 25% owned)                                                                              |  |                             | 1,141   |   |      |   | 1,873   |    
|Control investments (more than 25% owned)                                                                            |  |                             | 9,789   |   |      |   | 20,652  |    
|                                                                                                                     |  |                             |         |   |      |   |         |    
|Total interest and dividend income                                                                                   |  |                             | 26,597  |   |      |   | 42,399  |    
|                                                                                                                     |  |                             |         |   |      |   |         |    
|                                                                                                                     |  |                            
|Advisory fees and other income                                                                                       |  |                             |         |   |      |   |         |    
|Non-affiliate investments (less than 5% owned)                                                                       |  |                             | 725     |   |      |   | 353     |    
|Control investments (more than 25% owned)                                                                            |  |                             | 484     |   |      |   | 244     |    
|                                                                                                                     |  |                             |         |   |      |   |         |    
|Total advisory fees and other income                                                                                 |  |                             | 1,209   |   |      |   | 597     |    
|                                                                                                                     |  |                             |         |   |      |   |         |    
|Total revenue                                                                                                        |  |                             | 27,806  |   |      |   | 42,996  |    
|                                                                                                                     |  |                             |         |   |      |   |         |    
|Operating expenses                                                                                                   |  |                             |         |   |      |   |         |    
|Interest expense                                                                                                     |  |                             | 6,558   |   |      |   | 10,300  |    
|Employee compensation                                                                                                |  |                             |         |   |      |   |         |    
|Salaries and benefits                                                                                                |  |                             | 3,798   |   |      |   | 6,206   |    
|Amortization of employee restricted stock awards                                                                     |  |                             | 1,537   |   |      |   | 1,742   |    
|                                                                                                                     |  |                             |         |   |      |   |         |    
|Total employee compensation                                                                                          |  |                             | 5,335   |   |      |   | 7,948   |    
|General and administrative expense                                                                                   |  |                             | 3,975   |   |      |   | 3,482   |    
|                                                                                                                     |  |                             |         |   |      |   |         |    
|Total operating expenses                                                                                             |  |                             | 15,868  |   |      |   | 21,730  |    
|                                                                                                                     |  |                             |         |   |      |   |         |    
|Net operating income before net investment losses, gain on extinguishment of debt and income tax (benefit) provision |  |                             | 11,938  |   |      |   | 21,266  |    
|                                                                                                                     |  |                             |         |   |      |   |         |    
|Net realized gains (losses) on investments                                                                           |  |                             |         |   |      |   |         |    
|Non-affiliate investments (less than 5% owned)                                                                       |  |                             | (65     | ) |      |   |        |    
|Affiliate investments (5% to 25% owned)                                                                              |  |                             | (1,947  | ) |      |   |        |    
|Control investments (more than 25% owned)                                                                            |  |                             | 16,265  |   |      |   | 200     |    
|                                                                                                                     |  |                             |         |   |      |   |         |    
|Total net realized gains on investments                                                                              |  |                             | 14,253  |   |      |   | 200     |    
|                                                                                                                     |  |                             |         |   |      |   |         |    
|Net unrealized (depreciation) appreciation on investments                                                            |  |                             |         |   |      |   |         |    
|Non-affiliate investments (less than 5% owned)                                                                       |  |                             | (18,932 | ) |      |   | (9,567  | )  
|Affiliate investments (5% to 25% owned)                                                                              |  |                             | 1,618   |   |      |   | 472     |    
|Control investments (more than 25% owned)                                                                            |  |                             | (65,270 | ) |      |   | (9,703  | )  
|                                                                                                                     |  |                             |         |   |      |   |         |    
|Total net unrealized depreciation on investments                                                                     |  |                             | (82,584 | ) |      |   | (18,798 | )  
|                                                                                                                     |  |                             |         |   |      |   |         |    
|Net investment losses before gain on extinguishment of debt and income tax (benefit) provision                       |  |                             | (68,331 | ) |      |   | (18,598 | )  
|Gain on extinguishment of debt                                                                                       |  |                             | 5,275   |   |      |   |        |    
|Income tax (benefit) provision                                                                                       |  |                             | (172    | ) |      |   | 170     |    
|                                                                                                                     |  |                             |         |   |      |   |         |    
|Net (loss) income                                                                                                    |  | $                           | (50,946 | ) |      | $ | 2,498   |    
|                                                                                                                     |  |                             |         |   |      |   |         |    
|(Loss) earnings per basic and diluted common share                                                                   |  | $                           | (0.68   | ) |      | $ | 0.04    | (a)
|Cash distributions declared per common share                                                                         |  | $                           |        |   |      | $ | 0.44    |    
|Weighted-average common shares outstanding                                                                           |  |                             |         |   |      |   |         |    
|Basic                                                                                                                |  |                             | 74,498  |   |      |   | 68,847  | (a)
|Diluted                                                                                                              |  |                             | 74,498  |   |      |   | 68,847  | (a)





|(a) | In accordance with FSP EITF 03-06-1Determining Whether Instruments Granted in Share-based Payment Transactions
are Participating Securities, we adjusted the weighted-average basic and diluted common shares outstanding for the three months ended March 31, 2008 to include participating restricted shares of common stock that received non-forfeitable
dividends. See Note 9(Loss) Earnings Per Share in the Notes to Condensed Consolidated Financial Statements for additional information. The implementation of this standard did not change our previously reported earnings per share.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements



2



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##### Table of Contents

MCG Capital Corporation

Consolidated Statements of Changes in Net Assets

(unaudited)



|                                                                                                                     |  |                             |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                     |  | Three months endedMarch 31, |        
|(in thousands, except per share amounts)                                                                             |  | 2009                        |         |   | 2008 |  
|(Decrease) increase in net assets from operations                                                                    |  |                             |         |   |      |   |         |  
|Net operating income before net investment losses, gain on extinguishment of debt and income tax benefit (provision) |  | $                           | 11,938  |   |      | $ | 21,266  |  
|Net realized gains on investments                                                                                    |  |                             | 14,253  |   |      |   | 200     |  
|Net unrealized depreciation on investments                                                                           |  |                             | (82,584 | ) |      |   | (18,798 | )
|Gain on extinguishment of debt                                                                                       |  |                             | 5,275   |   |      |   |        |  
|Income tax benefit (provision)                                                                                       |  |                             | 172     |   |      |   | (170    | )
|                                                                                                                     |  |                             |         |   |      |   |         |  
|Net (loss) income                                                                                                    |  |                             | (50,946 | ) |      |   | 2,498   |  
|                                                                                                                     |  |                             |         |   |      |   |         |  
|                                                                                                                     |  |                            
|Distributions to stockholders                                                                                        |  |                             |         |   |      |   |         |  
|Distributions declared                                                                                               |  |                             |        |   |      |   | (28,802 | )
|                                                                                                                     |  |                             |         |   |      |   |         |  
|Net decrease in net assets resulting from stockholder distributions                                                  |  |                             |        |   |      |   | (28,802 | )
|                                                                                                                     |  |                             |         |   |      |   |         |  
|                                                                                                                     |  |                            
|Capital share transactions                                                                                           |  |                             |         |   |      |   |         |  
|Amortization of restricted stock awards                                                                              |  |                             |         |   |      |   |         |  
|Employee                                                                                                             |  |                             | 1,537   |   |      |   | 1,742   |  
|Non-employee director                                                                                                |  |                             | 60      |   |      |   | 76      |  
|Unrealized appreciation on shareholder loans                                                                         |  |                             | (31     | ) |      |   |        |  
|Repayment of stockholder loans                                                                                       |  |                             | 22      |   |      |   |        |  
|Cancellation of common stock held as collateral for stockholder loans                                                |  |                             | (22     | ) |      |   |        |  
|                                                                                                                     |  |                             |         |   |      |   |         |  
|Net increase in net assets resulting from capital share transactions                                                 |  |                             | 1,566   |   |      |   | 1,818   |  
|                                                                                                                     |  |                             |         |   |      |   |         |  
|                                                                                                                     |  |                            
|Total decrease in net assets                                                                                         |  |                             | (49,380 | ) |      |   | (24,486 | )
|                                                                                                                     |  |                            
|Net assets                                                                                                           |  |                             |         |   |      |   |         |  
|                                                                                                                     |  |                            
|Beginning of period                                                                                                  |  |                             | 658,911 |   |      |   | 834,689 |  
|                                                                                                                     |  |                             |         |   |      |   |         |  
|End of period                                                                                                        |  | $                           | 609,531 |   |      | $ | 810,203 |  
|                                                                                                                     |  |                             |         |   |      |   |         |  
|                                                                                                                     |  |                            
|Net asset value per common share at end of period                                                                    |  | $                           | 8.02    |   |      | $ | 12.36   |  
|                                                                                                                     |  |                            
|Common shares outstanding at end of period                                                                           |  |                             | 76,027  |   |      |   | 65,570  |  

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements



3



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##### Table of Contents

MCG Capital Corporation

Consolidated Statements of Cash Flows

(unaudited)



|                                                                                        |  |                             |         |   |      |   |         |  
|--------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                        |  | Three months endedMarch 31, |        
|(in thousands)                                                                          |  | 2009                        |         |   | 2008 |  
|Cash flows from operating activities                                                    |  |                             |         |   |      |   |         |  
|Net (loss) income                                                                       |  | $                           | (50,946 | ) |      | $ | 2,498   |  
|Adjustments to reconcile net (loss) income to net cash provided by operating activities |  |                             |         |   |      |   |         |  
|Investments in portfolio companies                                                      |  |                             | (45,648 | ) |      |   | (19,454 | )
|Principal collections related to investment repayments or sales                         |  |                             | 67,102  |   |      |   | 46,972  |  
|Increase in interest receivable, accrued payment-in-kind interest and dividends         |  |                             | (2,644  | ) |      |   | (11,793 | )
|Amortization of restricted stock awards                                                 |  |                             |         |   |      |   |         |  
|Employee                                                                                |  |                             | 1,537   |   |      |   | 1,742   |  
|Non-employee director                                                                   |  |                             | 60      |   |      |   | 76      |  
|(Increase) decrease in cash in restricted and securitization accounts                   |  |                             |         |   |      |   |         |  
|Restricted cash                                                                         |  |                             | (19,122 | ) |      |   | 1,220   |  
|Securitization accounts from interest collections                                       |  |                             | 3,776   |   |      |   | (176    | )
|Depreciation and amortization                                                           |  |                             | 1,441   |   |      |   | 765     |  
|Unrealized appreciation on stockholder loans                                            |  |                             | (31     | ) |      |   |        |  
|Decrease (increase) in other assets                                                     |  |                             | 628     |   |      |   | (1,031  | )
|Decrease in other liabilities                                                           |  |                             | (2,663  | ) |      |   | (7,235  | )
|Net realized gains on investments                                                       |  |                             | (14,253 | ) |      |   | (200    | )
|Net change in unrealized depreciation on investments                                    |  |                             | 82,584  |   |      |   | 18,798  |  
|Gain on extinguishment of debt                                                          |  |                             | (5,275  | ) |      |   |        |  
|                                                                                        |  |                             |         |   |      |   |         |  
|Net cash provided by operating activities                                               |  |                             | 16,546  |   |      |   | 32,182  |  
|                                                                                        |  |                             |         |   |      |   |         |  
|                                                                                        |  |                            
|Cash flows from financing activities                                                    |  |                             |         |   |      |   |         |  
|Net payments on borrowings                                                              |  |                             | (129    | ) |      |   | (30,699 | )
|(Increase) decrease in cashsecuritization accounts for repayment of principal on debt  |  |                             | (8,084  | ) |      |   | 16,685  |  
|Payment of financing costs                                                              |  |                             | (4,152  | ) |      |   | (579    | )
|Distributions paid                                                                      |  |                             |        |   |      |   | (28,858 | )
|                                                                                        |  |                             |         |   |      |   |         |  
|Net cash used in by financing activities                                                |  |                             | (12,365 | ) |      |   | (43,451 | )
|                                                                                        |  |                             |         |   |      |   |         |  
|Increase (decrease) in cash and cash equivalents                                        |  |                             | 4,181   |   |      |   | (11,269 | )
|                                                                                        |  |                            
|Cash and cash equivalents                                                               |  |                             |         |   |      |   |         |  
|Beginning balance                                                                       |  |                             | 46,149  |   |      |   | 23,297  |  
|                                                                                        |  |                             |         |   |      |   |         |  
|Ending balance                                                                          |  | $                           | 50,330  |   |      | $ | 12,028  |  
|                                                                                        |  |                             |         |   |      |   |         |  
|                                                                                        |  |                            
|Supplemental disclosure of cash flow information                                        |  |                             |         |   |      |   |         |  
|Interest paid                                                                           |  | $                           | 7,094   |   |      | $ | 9,928   |  
|Income taxes paid                                                                       |  |                             | 99      |   |      |   | 331     |  
|Payment-in-kind interest collected                                                      |  |                             | 365     |   |      |   | 2,643   |  
|Dividend income collected                                                               |  |                             | 5,196   |   |      |   | 345     |  

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements



4



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

March 31, 2009 (unaudited)

(dollars in thousands)



|                                                                                |  |                       |  |                                                         |  |           |        |      |         |            |  |   |       
|------------------------------------------------------------------------------- |  | --------------------- |  | ------------------------------------------------------- |  | --------- | ------ | ---- | ------- | ---------- |  | - | ------
|Portfolio Company                                                               |  | Industry              |  | Investment(8)                                           |  | Principal |        | Cost |         | Fair Value
|Control Investments(4):                                                         |  |                       |  |                                                         |  |           |        |      |        
|Avenue Broadband LLC(2)                                                         |  | Cable                 |  | Subordinated Debt (14.0%, Due 3/14-12/14)(1)            |  | $         | 13,898 |      | $       | 13,795     |  | $ | 13,795
|                                                                                |  |                       |  | Preferred Units (10.0%, 17,100 units)(1)                |  |           |        |      |         | 19,423     |  |   | 24,370
|                                                                                |  |                       |  | Warrants to purchase Class B Common Stock               |  |           |        |      |         |           |  |   |      
|Broadview Networks Holdings, Inc.(6)                                            |  | Communications- CLEC  |  | Series A Preferred Stock (12.0%, 87,254 shares)         |  |           |        |      |         | 81,984     |  |   | 68,456
|                                                                                |  |                       |  | Series A-1 Preferred Stock (12.0%, 100,702 shares)      |  |           |        |      |         | 77,495     |  |   | 67,047
|                                                                                |  |                       |  | Class A Common Stock (4,698,987 shares)                 |  |           |        |      |         |           |  |   |      
|Cleartel Communications, Inc.(2)(6)(20)                                         |  | Communications- CLEC  |  | Subordinated Debt (11.2%, Due 5/09-3/11)(7)             |  |           | 43,898 |      |         | 36,298     |  |   |      
|                                                                                |  |                       |  | Series B Preferred Stock (8.0%, 57,862 shares)          |  |           |        |      |         | 50,613     |  |   |      
|                                                                                |  |                       |  | Common Stock (744,777 shares)                           |  |           |        |      |         | 62,125     |  |   |      
|                                                                                |  |                       |  | Guaranty ($5,000)                                       |  |           |        |      |         |            |  |   |       
|Coastal Sunbelt, LLC(2)                                                         |  | Food Services         |  | Senior Debt (8.4%, Due 1/12-7/12)(1)                    |  |           | 21,886 |      |         | 21,778     |  |   | 21,778
|                                                                                |  |                       |  | Subordinated Debt (14.8%, Due 1/13)(1)                  |  |           | 8,285  |      |         | 8,184      |  |   | 8,184 
|                                                                                |  |                       |  | Preferred LLC Interest (12.0%, 123,250 units)           |  |           |        |      |         | 15,027     |  |   | 15,573
|                                                                                |  |                       |  | Warrants to purchase Class B Common Stock               |  |           |        |      |         |           |  |   |      
|Crystal Media Network, LLC(6)(5)                                                |  | Broadcasting          |  | LLC Interest                                            |  |           |        |      |         | 2,447      |  |   | 2,556 
|GMC Television Broadcasting, LLC(2)(6)                                          |  | Broadcasting          |  | Senior Debt (8.0%, Due 4/12-6/12)(1)(7)                 |  |           | 23,712 |      |         | 22,520     |  |   | 21,766
|                                                                                |  |                       |  | Subordinated Debt (14.0%, Due 6/13)(1)(7)               |  |           | 8,000  |      |         | 7,076      |  |   |      
|                                                                                |  |                       |  | Class B Voting Units (8.0%, 86,700 units)               |  |           |        |      |         | 9,071      |  |   |      
|Intran Media, LLC                                                               |  | Other Media           |  | Senior Debt (9.5%, Due 12/11)(1)                        |  |           | 9,300  |      |         | 9,197      |  |   | 9,197 
|                                                                                |  |                       |  | Series A Preferred Units (10.0%, 86,000 units)          |  |           |        |      |         | 9,095      |  |   | 2,216 
|                                                                                |  |                       |  | Series B Preferred Units (10.0%, 30,000 units)          |  |           |        |      |         | 3,000      |  |   | 1,013 
|Jet Plastica Investors, LLC(2)                                                  |  | Plastic Products      |  | Senior Debt (10.2%, Due 12/12)(1)                       |  |           | 12,301 |      |         | 12,186     |  |   | 12,186
|                                                                                |  |                       |  | Subordinated Debt (16.4%, Due 3/13)(1)                  |  |           | 34,556 |      |         | 34,317     |  |   | 27,568
|                                                                                |  |                       |  | Preferred LLC Interest (8.0%, 301,595 units)            |  |           |        |      |         | 34,014     |  |   |      
|JetBroadband Holdings, LLC(2)                                                   |  | Cable                 |  | Subordinated Unsecured Debt (14.8%, Due 8/15-2/16)      |  |           | 25,880 |      |         | 25,695     |  |   | 25,695
|                                                                                |  |                       |  | Series A Preferred Units (10.0%, 133,204 units)         |  |           |        |      |         | 18,470     |  |   | 11,132
|                                                                                |  |                       |  | Series B Preferred Units (24,441 units)                 |  |           |        |      |         | 5,000      |  |   | 10,000
|MTP Holding, LLC(6)                                                             |  | Communications- Other |  | Common LLC Interest (79,171 units)                      |  |           |        |      |         | 3          |  |   | 28    
|National Product Services, Inc.(2)(5)                                           |  | Business Services     |  | Senior Debt (8.6%, Due 6/09)                            |  |           | 14,082 |      |         | 11,137     |  |   | 10,484
|                                                                                |  |                       |  | Subordinated Debt (16.0%, Due 6/09)(7)                  |  |           | 16,659 |      |         | 12,305     |  |   |      
|                                                                                |  |                       |  | Common Stock (995,428 shares)                           |  |           |        |      |         |           |  |   |      
|Orbitel Holdings, LLC(2)                                                        |  | Cable                 |  | Senior Debt (9.0%, Due 3/12)(1)                         |  |           | 16,300 |      |         | 16,200     |  |   | 16,200
|                                                                                |  |                       |  | Preferred LLC Interest (10.0%, 120,000 units)           |  |           |        |      |         | 13,324     |  |   | 12,278
|PremierGarage Holdings, LLC(2)(5)                                               |  | Home Furnishings      |  | Senior Debt (9.7%, Due 6/10-12/10)(1)                   |  |           | 8,982  |      |         | 8,916      |  |   | 8,133 
|                                                                                |  |                       |  | Preferred LLC Units (8.0%, 445 units)                   |  |           |        |      |         | 4,971      |  |   |      
|                                                                                |  |                       |  | Common LLC Units (356 units)                            |  |           |        |      |         |           |  |   |      
|RadioPharmacy Investors, LLC(2)                                                 |  | Healthcare            |  | Senior Debt (7.0%, Due 12/10)(1)                        |  |           | 8,500  |      |         | 8,473      |  |   | 8,473 
|                                                                                |  |                       |  | Subordinated Debt (15.0%, Due 12/11)(1)                 |  |           | 9,911  |      |         | 9,870      |  |   | 9,870 
|                                                                                |  |                       |  | Preferred LLC Interest (8.0%, 70,000 units)             |  |           |        |      |         | 8,123      |  |   | 3,399 
|Superior Industries Investors, LLC(2)                                           |  | Sporting Goods        |  | Subordinated Debt (14.0%, Due 3/13)(1)                  |  |           | 18,123 |      |         | 18,016     |  |   | 18,016
|                                                                                |  |                       |  | Preferred Units (8.0%, 125,400 units)                   |  |           |        |      |         | 14,978     |  |   | 13,656
|TNR Holdings Corp.(2)(6)(19)                                                    |  | Entertainment         |  | Senior Debt (12.0%, Due 7/13)(7)                        |  |           | 2,167  |      |         | 1,708      |  |   | 1,708 
|                                                                                |  |                       |  | Series A Preferred Stock (8.0%, 43,264 shares)          |  |           |        |      |         | 28,770     |  |   | 9,861 
|                                                                                |  |                       |  | Legacy Series A Preferred Stock (12.5%, 585,939 shares) |  |           |        |      |         | 15,000     |  |   | 19    
|                                                                                |  |                       |  | Legacy Common Stock (1,806 shares)                      |  |           |        |      |         | 3,000      |  |   |      
|                                                                                |  |                       |  | Warrants to purchase Common Stock (expire 7/18)         |  |           |        |      |         |           |  |   |      
|                                                                                |  |                       |  | Warrants to purchase Legacy Common Stock (expire 9/17)  |  |           |        |      |         |           |  |   |      
|Total Sleep Holdings, Inc.(2)                                                   |  | Healthcare            |  | Subordinated Debt (15.0%, Due 9/11-3/12)                |  |           | 33,509 |      |         | 30,670     |  |   | 14,096
|                                                                                |  |                       |  | Unsecured Note (0.0%, Due 6/11)                         |  |           | 375    |      |         | 332        |  |   |      
|                                                                                |  |                       |  | Series A Preferred Stock (10.0%, 3,700 shares)          |  |           |        |      |         | 3,793      |  |   |      
|                                                                                |  |                       |  | Common Stock (4,046,875 shares)                         |  |           |        |      |         | 1,000      |  |   |      
|WMAC II, Inc.(6)(10)                                                            |  | Publishing            |  | Guaranty ($677)                                         |  |           |        |      |         |            |  |   |       
|                                                                                |  |                       |  |                                                         |  |           |        |      |         |            |  |   |       
|Total Control Investments (represents 42.0% of total investments at fair value) |  |                       |  |                                                         |  | 789,399   |        |      | 468,753
|                                                                                |  |                       |  |                                                         |  |           |        |      |         |            |  |   |       

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements



5



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

March 31, 2009 (unaudited)

(dollars in thousands)



|                                                                                 |  |                   |  |                                                                            |  |           |        |      |        |           |  |   |       
|-------------------------------------------------------------------------------- |  | ----------------- |  | -------------------------------------------------------------------------- |  | --------- | ------ | ---- | ------ | --------- |  | - | ------
|Portfolio Company                                                                |  | Industry          |  | Investment(8)                                                              |  | Principal |        | Cost |        | FairValue
|Affiliate Investments(3):                                                        |  |                   |  |                                                                            |  |           |        |      |       
|Advanced Sleep Concepts, Inc.(2)                                                 |  | Home Furnishings  |  | Senior Debt (13.3%, Due 10/11)(1)                                          |  | $         | 6,195  |      | $      | 6,044     |  | $ | 5,481 
|                                                                                 |  |                   |  | Subordinated Debt (16.0%, Due 4/12)(1)                                     |  |           | 4,971  |      |        | 4,850     |  |   | 4,530 
|                                                                                 |  |                   |  | Series A Preferred Stock (20.0%, 49 shares)                                |  |           |        |      |        | 298       |  |   |      
|                                                                                 |  |                   |  | Common Stock (423 shares)                                                  |  |           |        |      |        | 525       |  |   |      
|                                                                                 |  |                   |  | Warrants to purchase Common Stock (expire 10/16)                           |  |           |        |      |        | 348       |  |   |      
|Cherry Hill Holdings, Inc.(2)(6)                                                 |  | Entertainment     |  | Series A Preferred Stock (10.0%, 750 shares)                               |  |           |        |      |        | 907       |  |   | 628   
|Stratford School Holdings, Inc.(2)                                               |  | Education         |  | Senior Debt (6.8%, Due 7/11-9/11)(1)                                       |  |           | 3,700  |      |        | 3,643     |  |   | 3,643 
|                                                                                 |  |                   |  | Subordinated Debt (14.0%, Due 12/11)(1)                                    |  |           | 6,717  |      |        | 6,686     |  |   | 6,686 
|                                                                                 |  |                   |  | Series A Convertible Preferred Stock (12.0%, 10,000 shares)                |  |           |        |      |        | 150       |  |   | 12,842
|                                                                                 |  |                   |  | Warrants to purchase Common Stock (expire 5/15)(1)                         |  |           |        |      |        | 67        |  |   | 3,903 
|Sunshine Media Delaware, LLC(2)(6)                                               |  | Publishing        |  | Common Stock (145 shares)                                                  |  |           |        |      |        | 581       |  |   |      
|                                                                                 |  |                   |  | Class A LLC Interest (8.0%, 563,808 units)                                 |  |           |        |      |        | 564       |  |   |      
|                                                                                 |  |                   |  | Options to acquire Warrants to purchase Class B LLC Interest (expire 5/14) |  |           |        |      |        |          |  |   |      
|Velocity Technology Enterprises, Inc.(2)                                         |  | Business Services |  | Senior Debt (8.0%, Due 12/12)(1)                                           |  |           | 15,828 |      |        | 15,727    |  |   | 15,279
|                                                                                 |  |                   |  | Series A Preferred Stock (1,506,602 shares)                                |  |           |        |      |        | 1,500     |  |   | 1,500 
|                                                                                 |  |                   |  |                                                                            |  |           |        |      |        |           |  |   |       
|Total Affiliate Investments (represents 4.9% of total investments at fair value) |  |                   |  |                                                                            |  | 41,890    |        |      | 54,492
|                                                                                 |  |                   |  |                                                                            |  |           |        |      |        |           |  |   |       

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements



6



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

March 31, 2009 (unaudited)

(dollars in thousands)



|                                                |  |                                |  |                                                              |  |           |        |      |   |            |  |   |       
|----------------------------------------------- |  | ------------------------------ |  | ------------------------------------------------------------ |  | --------- | ------ | ---- | - | ---------- |  | - | ------
|Portfolio Company                               |  | Industry                       |  | Investment(8)                                                |  | Principal |        | Cost |   | Fair Value
|Non-Affiliate Investments (less than 5% owned): |  |                                |  |                                                              |  |           |        |      |  
|Active Brands International, lnc.(2)            |  | Consumer Products              |  | Senior Debt (10.3%, Due 6/12)(1)                             |  | $         | 21,049 |      | $ | 20,931     |  | $ | 18,052
|                                                |  |                                |  | Subordinated Debt (17.0%, Due 9/12)(1)(7)                    |  |           | 14,112 |      |   | 12,801     |  |   | 2,902 
|                                                |  |                                |  | Class A1 Common Stock (3,056 shares)                         |  |           |        |      |   | 3,056      |  |   |      
|                                                |  |                                |  | Warrants to purchase Class A-1 Common Stock (expire 6/17)    |  |           |        |      |   | 331        |  |   |      
|Allens T.V. Cable Service, Inc.                |  | Cable                          |  | Senior Debt (7.8%, Due 12/12)(1)                             |  |           | 7,155  |      |   | 7,123      |  |   | 7,083 
|                                                |  |                                |  | Subordinated Debt (10.2%, Due 12/12)(1)                      |  |           | 2,390  |      |   | 2,333      |  |   | 2,262 
|                                                |  |                                |  | Warrants to purchase Common Stock (expire 11/15)             |  |           |        |      |   |           |  |   |      
|Amerifit Nutrition, Inc.(2)                     |  | Healthcare                     |  | Senior Debt (11.5%, Due 3/10)(1)                             |  |           | 3,461  |      |   | 3,434      |  |   | 3,434 
|B & H Education, Inc.(2)                        |  | Education                      |  | Series A-1 Convertible Preferred Stock (12.0%, 5,384 shares) |  |           |        |      |   | 1,532      |  |   | 2,000 
|BLI Holdings, Inc.(2)                           |  | Drugs                          |  | Senior Debt (11.3%, Due 12/09)(1)                            |  |           | 10,333 |      |   | 10,192     |  |   | 10,081
|CEI Holdings Inc.(6)(18)                        |  | Cosmetics                      |  | Senior Debt (8.3%, Due 3/14)(1)(7)                           |  |           | 3,908  |      |   | 3,854      |  |   | 673   
|Cervalis LLC                                    |  | Business Services              |  | Senior Debt (7.3%, Due 3/12)(1)                              |  |           | 18,688 |      |   | 18,601     |  |   | 18,334
|Coastal Sunbelt Real Estate, Inc.               |  | Real Estate Investments        |  | Subordinated Unsecured Debt (15.0%, Due 7/12)                |  |           | 2,140  |      |   | 2,128      |  |   | 2,128 
|                                                |  |                                |  | Series A-2 Preferred Stock (12.0%, 20,000 shares)            |  |           |        |      |   | 2,581      |  |   | 3,030 
|                                                |  |                                |  | Warrants to purchase Class B Common Stock                    |  |           |        |      |   |           |  |   |      
|Construction Trailer Specialists, Inc.(2)       |  | Auto Parts                     |  | Senior Debt (11.6%, Due 7/12-10/12)(1)                       |  |           | 9,723  |      |   | 9,662      |  |   | 9,397 
|Cruz Bay Publishing, Inc.                       |  | Publishing                     |  | Subordinated Debt (9.9%, Due 12/13)(1)                       |  |           | 20,000 |      |   | 19,768     |  |   | 17,336
|CWP/RMK Acquisition Corp.(2)                    |  | Home Furnishings               |  | Senior Debt (8.6%, Due 6/11)(1)                              |  |           | 6,239  |      |   | 6,209      |  |   | 5,083 
|                                                |  |                                |  | Subordinated Debt (13.0%, Due 12/12)(1)(7)                   |  |           | 11,929 |      |   | 10,198     |  |   | 237   
|                                                |  |                                |  | Common Stock (500 shares)                                    |  |           |        |      |   | 500        |  |   |      
|Cyrus Networks, LLC                             |  | Business Services              |  | Senior Debt (4.6%, Due 7/13)(1)                              |  |           | 5,622  |      |   | 5,589      |  |   | 5,201 
|                                                |  |                                |  | Subordinated Debt (7.9%, Due 1/14)(1)                        |  |           | 6,066  |      |   | 6,058      |  |   | 5,238 
|Dayton Parts Holdings, LLC(2)(12)               |  | Auto Parts                     |  | Preferred LLC Interest (10.0%, 16,470 units)                 |  |           |        |      |   | 603        |  |   | 603   
|                                                |  |                                |  | Class A Common LLC Interest (8.0%, 10,980 units)             |  |           |        |      |   | 400        |  |   | 240   
|Empower IT Holdings, Inc.(2)                    |  | Information Services           |  | Senior Debt (11.0%, Due 5/12)(1)                             |  |           | 7,806  |      |   | 7,733      |  |   | 7,733 
|Equibrand Holding Corporation(2)                |  | Leisure Activities             |  | Senior Debt (9.5%, Due 9/10)(1)                              |  |           | 4,640  |      |   | 4,612      |  |   | 4,612 
|                                                |  |                                |  | Subordinated Debt (16.0%, Due 3/11)(1)                       |  |           | 9,340  |      |   | 9,309      |  |   | 9,309 
|Flexsol Packaging Corp.(6)                      |  | Plastic Products               |  | Subordinated Debt (11.3%, Due 12/12)(1)(7)                   |  |           | 3,083  |      |   | 3,057      |  |   | 285   
|G&L Investment Holdings, LLC(2)                 |  | Insurance                      |  | Subordinated Debt (8.8%, Due 5/14)(1)                        |  |           | 17,500 |      |   | 16,939     |  |   | 15,240
|                                                |  |                                |  | Series A Preferred Shares (14.0%, 5,000,000 shares)          |  |           |        |      |   | 6,011      |  |   | 6,011 
|                                                |  |                                |  | Class C Shares (621,907 shares)                              |  |           |        |      |   | 529        |  |   | 183   
|Golden Knight II CLO, Ltd(6)                    |  | Diversified Financial Services |  | Income Notes (8.0%, Due 4/19)                                |  |           |        |      |   | 3,575      |  |   | 179   
|GSDM Holdings, LLC(2)                           |  | Healthcare                     |  | Senior Debt (7.5%, Due 2/13)(1)                              |  |           | 8,550  |      |   | 8,465      |  |   | 8,256 
|                                                |  |                                |  | Subordinated Debt (14.0%, Due 8/13)(1)                       |  |           | 7,848  |      |   | 7,808      |  |   | 7,808 
|                                                |  |                                |  | Series B Preferred Units (12.5%, 4,213,333 units)            |  |           |        |      |   | 4,397      |  |   | 2,063 
|Home Interiors & Gifts, Inc.(6)(9)              |  | Home Furnishings               |  | Senior Debt (8.0%, Due 3/11)(7)                              |  |           | 4,141  |      |   | 3,834      |  |   | 57    
|Jenzabar, Inc.                                  |  | Technology                     |  | Senior Preferred Stock (11.0%, 3,750 shares)                 |  |           |        |      |   | 5,709      |  |   | 5,709 
|                                                |  |                                |  | Subordinated Preferred Stock (109,800 shares)                |  |           |        |      |   | 1,098      |  |   | 1,098 
|                                                |  |                                |  | Warrants to purchase Common Stock (expire 4/16)              |  |           |        |      |   | 422        |  |   | 21,674
|Lambeau Telecom Company, LLC(17)                |  | Communications-CLEC            |  | Senior Debt (12.0%, Due 2/13)                                |  |           | 1,403  |      |   | 1,403      |  |   | 1,148 
|Legacy Cabinets, Inc.(6)                        |  | Home Furnishings               |  | Subordinated Debt (10.1%, Due 8/13)(1)(7)                    |  |           | 2,328  |      |   | 2,256      |  |   | 734   
|LMS Intellibound Investors, LLC(16)             |  | Logistics                      |  | Senior Debt (8.5%, Due 3/14  6/14)(1)                       |  |           | 31,000 |      |   | 30,529     |  |   | 29,515
|                                                |  |                                |  | Subordinated Debt (16.0%, Due 9/14)(1)                       |  |           | 17,000 |      |   | 16,702     |  |   | 16,702
|Marietta Intermediate Holding Corporation(6)    |  | Cosmetics                      |  | Subordinated Debt (12.0%, Due 12/11)(1)(7)                   |  |           | 2,330  |      |   | 2,028      |  |   |      
|Maverick Healthcare Equity, LLC                 |  | Healthcare                     |  | Subordinated Debt (13.5%, Due 4/14)(1)                       |  |           | 12,643 |      |   | 12,546     |  |   | 12,546
|                                                |  |                                |  | Preferred Units (10.0%, 1,250,000 units)                     |  |           |        |      |   | 1,403      |  |   | 1,361 
|                                                |  |                                |  | Class A Common Units (1,250,000 units)                       |  |           |        |      |   |           |  |   |      

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements



7



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

March 31, 2009 (unaudited)

(dollars in thousands)



|                                                                                      |  |                        |  |                                                                    |   |           |        |      |           |            |  |   |       
|------------------------------------------------------------------------------------- |  | ---------------------- |  | ------------------------------------------------------------------ | - | --------- | ------ | ---- | --------- | ---------- |  | - | ------
|Portfolio Company                                                                     |  | Industry               |  | Investment(8)                                                      |   | Principal |        | Cost |           | Fair Value
|MCI Holdings LLC(2)                                                                   |  | Healthcare             |  | Subordinated Debt (12.7%, Due 4/13)(1)                             |   | $         | 31,657 |      | $         | 31,500     |  | $ | 31,500
|                                                                                      |  |                        |  | Class A LLC Interest (4,712,042 units)                             |   |           |        |      |           | 3,000      |  |   | 8,614 
|Metropolitan Telecommunications Holding Company(2)                                    |  | Communications-CLEC    |  | Senior Debt (10.8%, Due 9/10-12/11)(1)                             |   |           | 23,769 |      |           | 23,569     |  |   | 23,569
|                                                                                      |  |                        |  | Warrants to purchase Common Stock (expire 9/13)                    |   |           |        |      |           | 1,843      |  |   | 10,127
|Miles Media Group, LLC(2)                                                             |  | Publishing             |  | Senior Debt (12.5%, Due 6/13)(1)                                   |   |           | 18,048 |      |           | 17,709     |  |   | 17,218
|NDSSI Holdings, LLC(2)                                                                |  | Electronics            |  | Senior Debt (9.9%, Due 9/13-3/14)(1)                               |   |           | 19,421 |      |           | 19,212     |  |   | 18,753
|                                                                                      |  |                        |  | Subordinated Debt (15.0%, Due 9/14)(1)                             |   |           | 21,550 |      |           | 21,480     |  |   | 21,480
|                                                                                      |  |                        |  | Series A Preferred Units (516,691 units)                           |   |           |        |      |           | 718        |  |   | 718   
|                                                                                      |  |                        |  | Class A Common Units (1,000,000 units)                             |   |           |        |      |           | 333        |  |   | 882   
|New Century Companies, Inc.(6)                                                        |  | Industrial Equipment   |  | Warrants to purchase Common Stock (expire 6/10)                    |   |           |        |      |           |           |  |   |      
|PartMiner, Inc.(2)                                                                    |  | Information Services   |  | Senior Debt (7.8%, Due 6/09)(1)                                    |   |           | 604    |      |           | 600        |  |   | 600   
|Philadelphia Newspapers, LLC(6)(13)                                                   |  | Newspaper              |  | Subordinated Unsecured Debt (16.5%, Due 6/14)(7)                   |   |           | 5,082  |      |           | 5,070      |  |   |      
|Powercom Corporation(2)(17)                                                           |  | Communications-CLEC    |  | Warrants to purchase Class A Common Stock (expire 6/14)            |   |           |        |      |           | 286        |  |   |      
|Quantum Medical Holdings, LLC(2)                                                      |  | Laboratory Instruments |  | Senior Debt (7.1%, Due 12/10 - 5/11)(1)                            |   |           | 16,500 |      |           | 16,449     |  |   | 16,449
|                                                                                      |  |                        |  | Subordinated Debt (15.0%, Due 12/11)(1)                            |   |           | 18,032 |      |           | 17,922     |  |   | 17,922
|                                                                                      |  |                        |  | Preferred LLC Interest (1,000,000 units)                           |   |           |        |      |           | 576        |  |   | 1,123 
|Restaurant Technologies, Inc.                                                         |  | Food Services          |  | Senior Debt (16.6%, Due 2/12)(1)                                   |   |           | 37,804 |      |           | 37,559     |  |   | 37,034
|                                                                                      |  |                        |  | Series B Preferred Stock (499 shares)                              |   |           |        |      |           | 15         |  |   | 8     
|                                                                                      |  |                        |  | Series A-4 Convertible Preferred Stock (7,813 shares)              |   |           |        |      |           | 336        |  |   |      
|Sagamore Hill Broadcasting, LLC(2)                                                    |  | Broadcasting           |  | Senior Debt (12.5%, Due 8/11)(1)                                   |   |           | 25,959 |      |           | 25,767     |  |   | 25,767
|Summit Business Media Intermediate Holding Company, LLC                               |  | Information Services   |  | Subordinated Debt (9.0%, Due 7/14)(1)                              |   |           | 6,000  |      |           | 5,996      |  |   | 3,296 
|Tegra Medical Holdings, LLC(11)                                                       |  | Industrial Products    |  | Senior Debt (9.5%, Due 10/13)(1)                                   |   |           | 28,685 |      |           | 28,477     |  |   | 28,004
|                                                                                      |  |                        |  | Common Units (1,000,000 units)                                     |   |           |       |      |           | 1,000      |  |   | 1,134 
|Teleguam Holdings, LLC(2)                                                             |  | Communications-Other   |  | Subordinated Debt (7.5%, Due 10/12)(1)                             |   |           | 20,000 |      |           | 19,842     |  |   | 17,071
|The e-Media Club I, LLC(6)                                                            |  | Investment Fund        |  | LLC Interest (74 units)                                            |   |           |        |      |           | 88         |  |   | 9     
|The Matrixx Group, Incorporated                                                       |  | Plastic Products       |  | Subordinated Debt (15.5%, Due 11/14)(1)                            |   |           | 14,327 |      |           | 14,327     |  |   | 14,327
|ValuePage, Inc.(6)                                                                    |  | Communications-Other   |  | Senior Debt (12.8%, Due 6/08)(7)                                   |   |           | 1,241  |      |           | 993        |  |   | 28    
|VOX Communications Group Holdings, LLC(2)(6)                                          |  | Broadcasting           |  | Senior Debt (13.5%, Due 3/09)(1)(7)                                |   |           | 11,314 |      |           | 10,462     |  |   | 9,548 
|                                                                                      |  |                        |  | Convertible Preferred Subordinated Notes (12.5%, Due 6/15-6/17)(7) |   |           | 1,974  |      |           | 1,415      |  |   |      
|VS&A-PBI Holding LLC(6)                                                               |  | Publishing             |  | LLC Interest                                                       |   |           |        |      |           | 500        |  |   |      
|WebMediaBrands Inc.(6)(15)                                                            |  | Information Services   |  | Common Stock (148,373 shares)                                      |   |           |        |      |           | 2,114      |  |   | 59    
|Wireco Worldgroup Inc.                                                                |  | Industrial Equipment   |  | Senior Debt (3.5%, Due 2/14)(1)                                    |   |           | 3,920  |      |           | 3,940      |  |   | 2,393 
|Xpressdocs Holdings, Inc.(2)                                                          |  | Business Services      |  | Senior Debt (8.9%, Due 7/11-12/11)(1)                              |   |           | 14,730 |      |           | 14,664     |  |   | 14,027
|                                                                                      |  |                        |  | Subordinated Debt (16.0%, Due 7/12)(1)                             |   |           | 6,430  |      |           | 6,397      |  |   | 4,550 
|                                                                                      |  |                        |  | Series A Preferred Stock (161,870 shares)                          |   |           |        |      |           | 501        |  |   |      
|                                                                                      |  |                        |  |                                                                    |   |           |        |      |           |            |  |   |       
|Total Non-Affiliate Investments (represents 53.1% of total investments at fair value) |  |                        |  |                                                                    |   | 632,909   |        |      | 591,747  
|                                                                                      |  |                        |  |                                                                    |   |           |        |      |           |            |  |   |       
|Total Investments                                                                     |  |                        |  |                                                                    | $ | 1,464,198 |        | $    | 1,114,992
|                                                                                      |  |                        |  |                                                                    |   |           |        |      |           |            |  |   |       



The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

8



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

March 31, 2009 (unaudited)

(dollars in thousands)



|                          |  |                                                  |  |              |   |  |          |        |          |        |      |   |           |        |   |      |  
|------------------------- |  | ------------------------------------------------ |  | ------------ | - |  | -------- | ------ | -------- | ------ | ---- | - | --------- | ------ | - | ---- | -
|Counterparty              |  | Instrument                                       |  | InterestRate |   |  | Expiring |        | Notional |        | Cost |   | FairValue |       
|Interest Rate Swaps       |  |                                                  |  |              |   |  |          |        |          |        |      |   |           |        |   |      |  
|SunTrust Bank             |  | Interest Rate SwapPay Fixed/Receive Floating(1) |  | 10.0         | % |  | 11/10    |        | $        | 16,000 |      | $ |          |        | $ | (616 | )
|                          |  | Interest Rate SwapPay Fixed/Receive Floating(1) |  | 14.0         | % |  | 11/10    |        |          | 8,000  |      |   |          |        |   | (308 | )
|                          |  | Interest Rate SwapPay Fixed/Receive Floating(1) |  | 13.0         | % |  | 08/11    |        |          | 12,500 |      |   |          |        |   | (238 | )
|                          |  | Interest Rate SwapPay Fixed/Receive Floating(1) |  | 9.0          | % |  | 08/11    |        |          | 8,681  |      |   |          |        |   | (165 | )
|                          |  |                                                  |  |              |   |  |          |        |          |        |      |   |           |        |   |      |  
|Total Interest Rate Swaps |  |                                                  |  |              |   |  | $        | 45,181 |          | $      |     |   | $         | (1,327 | )
|                          |  |                                                  |  |              |   |  |          |        |          |        |      |   |           |        |   |      |  



The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

9



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2008

(dollars in thousands)



|                                       |  |                       |  |                                                    |  |           |        |      |   |            |  |   |       
|-------------------------------------- |  | --------------------- |  | -------------------------------------------------- |  | --------- | ------ | ---- | - | ---------- |  | - | ------
|Portfolio Company                      |  | Industry              |  | Investment(8)                                      |  | Principal |        | Cost |   | Fair Value
|Control Investments(4):                |  |                       |  |                                                    |  |           |        |      |   |            |  |   |       
|Avenue Broadband LLC(2)                |  | Cable                 |  | Subordinated Debt (14.0%, Due 3/14-12/14)(1)       |  | $         | 13,727 |      | $ | 13,619     |  | $ | 13,619
|                                       |  |                       |  | Preferred Units (10.0%, 17,100 units)(1)           |  |           |        |      |   | 18,960     |  |   | 25,992
|                                       |  |                       |  | Warrants to purchase Class B Common Stock          |  |           |        |      |   |           |  |   |      
|Broadview Networks Holdings, Inc.(6)   |  | Communications- CLEC  |  | Series A Preferred Stock (12.0%, 87,254 shares)    |  |           |        |      |   | 81,984     |  |   | 70,666
|                                       |  |                       |  | Series A-1 Preferred Stock (12.0%, 100,702 shares) |  |           |        |      |   | 77,495     |  |   | 68,659
|                                       |  |                       |  | Class A Common Stock (4,698,987 shares)            |  |           |        |      |   |           |  |   |      
|Cleartel Communications, Inc.(2)(6)    |  | Communications- CLEC  |  | Subordinated Debt (11.2%, Due 5/09-3/11)(7)        |  |           | 41,172 |      |   | 36,047     |  |   |      
|                                       |  |                       |  | Series B Preferred Stock (8.0%, 57,862 shares)     |  |           |        |      |   | 50,612     |  |   |      
|                                       |  |                       |  | Common Stock (744,777 shares)                      |  |           |        |      |   | 62,125     |  |   |      
|                                       |  |                       |  | Guaranty ($5,000)                                  |  |           |        |      |   |            |  |   |       
|Coastal Sunbelt, LLC(2)                |  | Food Services         |  | Senior Debt (8.4%, Due 1/12-7/12)(1)               |  |           | 22,246 |      |   | 22,127     |  |   | 22,127
|                                       |  |                       |  | Subordinated Debt (14.8%, Due 1/13)(1)             |  |           | 8,223  |      |   | 8,115      |  |   | 8,115 
|                                       |  |                       |  | Preferred LLC Interest (12.0%, 123,250 units)      |  |           |        |      |   | 14,597     |  |   | 14,648
|                                       |  |                       |  | Warrants to purchase Class B Common Stock          |  |           |        |      |   |           |  |   |      
|Crystal Media Network, LLC(6)(5)       |  | Broadcasting          |  | LLC Interest                                       |  |           |        |      |   | 2,447      |  |   | 2,556 
|GMC Television Broadcasting, LLC(2)(6) |  | Broadcasting          |  | Senior Debt (9.2%, Due 4/12-6/12)(1)(7)            |  |           | 23,712 |      |   | 22,520     |  |   | 22,520
|                                       |  |                       |  | Subordinated Debt (14.0%, Due 6/13)(1)(7)          |  |           | 8,000  |      |   | 7,076      |  |   | 5,465 
|                                       |  |                       |  | Class B Voting Units (8.0%, 86,700 units)          |  |           |        |      |   | 9,071      |  |   |      
|Intran Media, LLC                      |  | Other Media           |  | Senior Debt (10.7%, Due 12/11)(1)                  |  |           | 9,000  |      |   | 8,888      |  |   | 8,888 
|                                       |  |                       |  | Series A Preferred Units (10.0%, 86,000 units)     |  |           |        |      |   | 9,095      |  |   | 1,956 
|                                       |  |                       |  | Series B Preferred Units (10.0%, 30,000 units)     |  |           |        |      |   | 3,000      |  |   | 1,096 
|Jet Plastica Investors, LLC(2)         |  | Plastic Products      |  | Subordinated Debt (14.9%, Due 3/13)(1)             |  |           | 33,427 |      |   | 33,174     |  |   | 29,947
|                                       |  |                       |  | Preferred LLC Interest (8.0%, 301,595 units)       |  |           |        |      |   | 34,014     |  |   |      
|JetBroadband Holdings, LLC(2)          |  | Cable                 |  | Subordinated Unsecured Debt (14.8%, Due 8/15-2/16) |  |           | 26,911 |      |   | 25,577     |  |   | 25,577
|                                       |  |                       |  | Preferred Units (10.0%, 133,204 units)             |  |           |        |      |   | 18,470     |  |   | 16,562
|LMS Intellibound Investors, LLC(2)(16) |  | Logistics             |  | Senior Debt (7.5%, Due 8/12)(1)                    |  |           | 11,328 |      |   | 11,223     |  |   | 11,223
|                                       |  |                       |  | Subordinated Debt (15.0%, Due 11/12)(1)            |  |           | 17,000 |      |   | 16,882     |  |   | 16,882
|                                       |  |                       |  | Preferred Units (12.0%, 19,650 units)              |  |           |        |      |   | 23,780     |  |   | 38,845
|                                       |  |                       |  | Warrants to purchase Class B Common Stock          |  |           |        |      |   |           |  |   |      
|MTP Holding, LLC(6)                    |  | Communications- Other |  | Common LLC Interest (79,171 units)                 |  |           |        |      |   | 3          |  |   | 28    
|National Product Services, Inc.(2)(5)  |  | Business Services     |  | Senior Debt (8.9%, Due 6/09)                       |  |           | 13,886 |      |   | 10,221     |  |   | 9,492 
|                                       |  |                       |  | Subordinated Debt (16.0%, Due 6/09)(7)             |  |           | 16,010 |      |   | 12,305     |  |   |      
|                                       |  |                       |  | Common Stock (995,428 shares)                      |  |           |        |      |   |           |  |   |      
|Orbitel Holdings, LLC(2)               |  | Cable                 |  | Senior Debt (9.0%, Due 3/12)(1)                    |  |           | 16,300 |      |   | 16,192     |  |   | 16,192
|                                       |  |                       |  | Preferred LLC Interest (10.0%, 120,000 units)      |  |           |        |      |   | 13,324     |  |   | 11,597
|                                       |  |                       |  | Letter of Credit ($97)                             |  |           |        |      |   |            |  |   |       
|PremierGarage Holdings, LLC(2)(5)      |  | Home Furnishings      |  | Senior Debt (9.7%, Due 6/10-12/10)(1)              |  |           | 8,782  |      |   | 8,702      |  |   | 7,832 
|                                       |  |                       |  | Preferred LLC Units (8.0%, 445 units)              |  |           |        |      |   | 4,971      |  |   |      
|                                       |  |                       |  | Common LLC Units (356 units)                       |  |           |        |      |   |           |  |   |      
|RadioPharmacy Investors, LLC(2)        |  | Healthcare            |  | Senior Debt (8.1%, Due 12/10)(1)                   |  |           | 8,500  |      |   | 8,469      |  |   | 8,469 
|                                       |  |                       |  | Subordinated Debt (15.0%, Due 12/11)(1)            |  |           | 9,837  |      |   | 9,793      |  |   | 9,793 
|                                       |  |                       |  | Preferred LLC Interest (8.0%, 70,000 units)        |  |           |        |      |   | 8,123      |  |   | 3,479 
|Superior Industries Investors, LLC(2)  |  | Sporting Goods        |  | Subordinated Debt (14.0%, Due 3/13)(1)             |  |           | 18,033 |      |   | 17,920     |  |   | 17,920
|                                       |  |                       |  | Preferred Units (8.0%, 125,400 units)              |  |           |        |      |   | 14,978     |  |   | 18,611



The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

10



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2008

(dollars in thousands)



|                                                                                 |  |                      |  |                                                                            |  |           |        |      |         |            |  |   |       
|-------------------------------------------------------------------------------- |  | -------------------- |  | -------------------------------------------------------------------------- |  | --------- | ------ | ---- | ------- | ---------- |  | - | ------
|Portfolio Company                                                                |  | Industry             |  | Investment(8)                                                              |  | Principal |        | Cost |         | Fair Value
|TNR Holdings Corp.(2)(6)(19)                                                     |  | Entertainment        |  | Senior Debt (12.0%, Due 7/13)(7)                                           |  | $         | 2,104  |      | $       | 1,708      |  | $ | 1,708 
|                                                                                 |  |                      |  | Series A Preferred Stock (8.0%, 43,264 shares)                             |  |           |        |      |         | 28,770     |  |   | 25,682
|                                                                                 |  |                      |  | Legacy Series A Preferred Stock (12.5%, 585,939 shares)                    |  |           |        |      |         | 15,000     |  |   |      
|                                                                                 |  |                      |  | Legacy Common Stock (1,806 shares)                                         |  |           |        |      |         | 3,000      |  |   |      
|                                                                                 |  |                      |  | Warrants to purchase Common Stock (expire 7/18)                            |  |           |        |      |         |           |  |   |      
|                                                                                 |  |                      |  | Warrants to purchase Legacy Common Stock (expire 9/17)                     |  |           |        |      |         |           |  |   |      
|Total Sleep Holdings, Inc.(2)                                                    |  | Healthcare           |  | Subordinated Debt (15.0%, Due 9/11-3/12)                                   |  |           | 32,429 |      |         | 29,579     |  |   | 26,540
|                                                                                 |  |                      |  | Unsecured Note (0.0%, Due 6/11)                                            |  |           | 375    |      |         | 327        |  |   |      
|                                                                                 |  |                      |  | Series A Preferred Stock (10.0%, 3,700 shares)                             |  |           |        |      |         | 3,793      |  |   |      
|                                                                                 |  |                      |  | Common Stock (4,046,875 shares)                                            |  |           |        |      |         | 1,000      |  |   |      
|Working Mother Media, Inc.(6)(10)                                                |  | Publishing           |  | Guaranty ($833)                                                            |  |           |        |      |         |            |  |   |       
|                                                                                 |  |                      |  |                                                                            |  |           |        |      |         |            |  |   |       
|Total Control Investments (represents 46.7% of total investments at fair value)  |  |                      |  |                                                                            |  | 819,076   |        |      | 562,686
|                                                                                 |  |                      |  |                                                                            |  |           |        |      |         |            |  |   |       
|                                                                                 |  |                      |  |                                                                            | 
|Affiliate Investments(3):                                                        |  |                      |  |                                                                            |  |           |        |      |         |            |  |   |       
|Advanced Sleep Concepts, Inc.(2)                                                 |  | Home Furnishings     |  | Senior Debt (13.9%, Due 10/11)(1)                                          |  |           | 6,195  |      |         | 6,023      |  |   | 5,629 
|                                                                                 |  |                      |  | Subordinated Debt (16.0%, Due 4/12)(1)                                     |  |           | 4,922  |      |         | 4,791      |  |   | 4,426 
|                                                                                 |  |                      |  | Series A Preferred Stock (20.0%, 49 shares)                                |  |           |        |      |         | 298        |  |   |      
|                                                                                 |  |                      |  | Common Stock (423 shares)                                                  |  |           |        |      |         | 525        |  |   |      
|                                                                                 |  |                      |  | Warrants to purchase Common Stock (expire 10/16)                           |  |           |        |      |         | 348        |  |   |      
|Cherry Hill Holdings, Inc.(2)(6)                                                 |  | Entertainment        |  | Series A Preferred Stock (10.0%, 750 shares)                               |  |           |        |      |         | 907        |  |   | 878   
|Stratford School Holdings, Inc.(2)                                               |  | Education            |  | Senior Debt (6.8%, Due 7/11-9/11)(1)                                       |  |           | 3,700  |      |         | 3,634      |  |   | 3,634 
|                                                                                 |  |                      |  | Subordinated Debt (14.0%, Due 12/11)(1)                                    |  |           | 6,717  |      |         | 6,683      |  |   | 6,683 
|                                                                                 |  |                      |  | Series A Convertible Preferred Stock (12.0%, 10,000 shares)                |  |           |        |      |         | 120        |  |   | 12,842
|                                                                                 |  |                      |  | Warrants to purchase Common Stock (expire 5/15)(1)                         |  |           |        |      |         | 67         |  |   | 3,903 
|Sunshine Media Delaware, LLC(2)(6)                                               |  | Publishing           |  | Common Stock (145 shares)                                                  |  |           |        |      |         | 581        |  |   |      
|                                                                                 |  |                      |  | Class A LLC Interest (8.0%, 563,808 units)                                 |  |           |        |      |         | 564        |  |   |      
|                                                                                 |  |                      |  | Options to acquire Warrants to purchase Class B LLC Interest (expire 5/14) |  |           |        |      |         |           |  |   |      
|Velocity Technology Enterprises, Inc.(2)                                         |  | Business Services    |  | Senior Debt (8.0%, Due 12/12)(1)                                           |  |           | 16,817 |      |         | 16,705     |  |   | 16,204
|                                                                                 |  |                      |  | Series A Preferred Stock (1,506,602 shares)                                |  |           |        |      |         | 1,500      |  |   | 1,500 
|XFone, Inc.(6)(14)                                                               |  | Communications-Other |  | Common Stock (837,556 shares)                                              |  |           |        |      |         | 2,395      |  |   | 419   
|                                                                                 |  |                      |  | Warrants to purchase Common Stock (expire 3/11)                            |  |           |        |      |         |           |  |   | 8     
|                                                                                 |  |                      |  |                                                                            |  |           |        |      |         |            |  |   |       
|Total Affiliate Investments (represents 4.7% of total investments at fair value) |  |                      |  |                                                                            |  | 45,141    |        |      | 56,126 
|                                                                                 |  |                      |  |                                                                            |  |           |        |      |         |            |  |   |       



The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

11



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2008

(dollars in thousands)



|                                                |  |                                |  |                                                              |  |           |        |      |   |            |  |   |       
|----------------------------------------------- |  | ------------------------------ |  | ------------------------------------------------------------ |  | --------- | ------ | ---- | - | ---------- |  | - | ------
|Portfolio Company                               |  | Industry                       |  | Investment(8)                                                |  | Principal |        | Cost |   | Fair Value
|Non-Affiliate Investments (less than 5% owned): |  |                                |  |                                                              |  |           |        |      |   |            |  |   |       
|Active Brands International, lnc.(2)            |  | Consumer Products              |  | Senior Debt (8.2%, Due 6/12)(1)                              |  | $         | 20,000 |      | $ | 19,882     |  | $ | 18,942
|                                                |  |                                |  | Subordinated Debt (15.0%, Due 9/12)(1)(7)                    |  |           | 13,822 |      |   | 13,071     |  |   | 3,913 
|                                                |  |                                |  | Class A-1 Common Stock (3,056 shares)                        |  |           |        |      |   | 3,056      |  |   |      
|                                                |  |                                |  | Warrants to purchase Class A-1 Common Stock (expire 6/17)    |  |           |        |      |   | 332        |  |   |      
|Allens T.V. Cable Service, Inc.                |  | Cable                          |  | Senior Debt (8.2%, Due 12/12)(1)                             |  |           | 7,430  |      |   | 7,394      |  |   | 7,351 
|                                                |  |                                |  | Subordinated Debt (10.5%, Due 12/12)(1)                      |  |           | 2,349  |      |   | 2,288      |  |   | 2,214 
|                                                |  |                                |  | Warrants to purchase Common Stock (expire 11/15)             |  |           |        |      |   |           |  |   | 30    
|Amerifit Nutrition, Inc.(2)                     |  | Healthcare                     |  | Senior Debt (11.4%, Due 3/10)(1)                             |  |           | 3,634  |      |   | 3,600      |  |   | 3,600 
|B & H Education, Inc.(2)                        |  | Education                      |  | Series A-1 Convertible Preferred Stock (12.0%, 5,384 shares) |  |           |        |      |   | 1,490      |  |   | 2,000 
|BLI Holdings, Inc.(2)                           |  | Drugs                          |  | Senior Debt (11.3%, Due 1/09)(1)                             |  |           | 11,333 |      |   | 11,234     |  |   | 11,234
|CEI Holdings Inc.(18)                           |  | Cosmetics                      |  | Senior Debt (6.3%, Due 3/14)(1)                              |  |           | 3,918  |      |   | 3,927      |  |   | 1,674 
|Cervalis LLC                                    |  | Business Services              |  | Senior Debt (7.3%, Due 3/12)(1)                              |  |           | 19,625 |      |   | 19,525     |  |   | 19,034
|Coastal Sunbelt Real Estate, Inc.               |  | Real Estate Investments        |  | Subordinated Unsecured Debt (15.0%, Due 7/12)                |  |           | 2,124  |      |   | 2,111      |  |   | 2,111 
|                                                |  |                                |  | Series A-2 Preferred Stock (12.0%, 20,000 shares)            |  |           |        |      |   | 2,507      |  |   | 3,080 
|                                                |  |                                |  | Warrants to purchase Class B Common Stock                    |  |           |        |      |   |           |  |   |      
|Construction Trailer Specialists, Inc.(2)       |  | Auto Parts                     |  | Senior Debt (9.7%, Due 7/12-10/12)(1)                        |  |           | 8,776  |      |   | 8,704      |  |   | 8,704 
|Cruz Bay Publishing, Inc.                       |  | Publishing                     |  | Subordinated Debt (10.5%, Due 12/13)(1)                      |  |           | 20,000 |      |   | 19,858     |  |   | 17,348
|CWP/RMK Acquisition Corp.(2)                    |  | Home Furnishings               |  | Senior Debt (9.6%, Due 6/11)(1)                              |  |           | 6,005  |      |   | 5,971      |  |   | 5,104 
|                                                |  |                                |  | Subordinated Debt (14.1%, Due 12/12)(1)(7)                   |  |           | 11,929 |      |   | 10,198     |  |   | 3,489 
|                                                |  |                                |  | Common Stock (500 shares)                                    |  |           |        |      |   | 500        |  |   |      
|Cyrus Networks, LLC                             |  | Business Services              |  | Senior Debt (5.8%, Due 7/13)(1)                              |  |           | 5,441  |      |   | 5,408      |  |   | 4,915 
|                                                |  |                                |  | Subordinated Debt (9.1%, Due 1/14)(1)                        |  |           | 6,066  |      |   | 6,057      |  |   | 5,110 
|Dayton Parts Holdings, LLC(2)(12)               |  | Auto Parts                     |  | Subordinated Debt (6.5%, Due 6/11)(1)(14)                    |  |           | 21,500 |      |   | 21,380     |  |   | 21,380
|                                                |  |                                |  | Preferred LLC Interest (10.0%, 16,470 units)                 |  |           |        |      |   | 589        |  |   | 589   
|                                                |  |                                |  | Class A Common LLC Interest (8.0%, 10,980 units)             |  |           |        |      |   | 400        |  |   | 338   
|Empower IT Holdings, Inc.(2)                    |  | Information Services           |  | Senior Debt (11.0%, Due 5/12)(1)                             |  |           | 8,534  |      |   | 8,455      |  |   | 8,455 
|Equibrand Holding Corporation(2)                |  | Leisure Activities             |  | Senior Debt (11.1%, Due 9/10)(1)                             |  |           | 4,640  |      |   | 4,604      |  |   | 4,604 
|                                                |  |                                |  | Subordinated Debt (16.0%, Due 3/11)(1)                       |  |           | 9,248  |      |   | 9,212      |  |   | 9,212 
|Flexsol Packaging Corp.(6)                      |  | Plastic Products               |  | Subordinated Debt (14.3%, Due 12/12)(1)(7)                   |  |           | 3,081  |      |   | 3,058      |  |   | 1,133 
|G&L Investment Holdings, LLC(2)                 |  | Insurance                      |  | Subordinated Debt (9.7%, Due 5/14)(1)                        |  |           | 17,500 |      |   | 16,912     |  |   | 15,164
|                                                |  |                                |  | Series A Preferred Shares (14.0%, 5,000,000 shares)          |  |           |        |      |   | 5,810      |  |   | 5,810 
|                                                |  |                                |  | Class C Shares (621,907 shares)                              |  |           |        |      |   | 529        |  |   | 284   
|Golden Knight II CLO, Ltd.                      |  | Diversified Financial Services |  | Income Notes (8.0%, Due 4/19)                                |  |           |        |      |   | 3,575      |  |   | 435   
|GSDM Holdings, LLC(2)                           |  | Healthcare                     |  | Senior Debt (7.5%, Due 2/13)(1)                              |  |           | 8,775  |      |   | 8,682      |  |   | 8,355 
|                                                |  |                                |  | Subordinated Debt (14.0%, Due 8/13)(1)                       |  |           | 7,809  |      |   | 7,767      |  |   | 7,767 
|                                                |  |                                |  | Series B Preferred Units (12.5%, 4,213,333 units)            |  |           |        |      |   | 4,397      |  |   | 1,965 
|Home Interiors & Gifts, Inc.(6)(9)              |  | Home Furnishings               |  | Senior Debt (8.0%, Due 3/11)(7)                              |  |           | 4,141  |      |   | 3,991      |  |   | 667   
|Jenzabar, Inc.                                  |  | Technology                     |  | Senior Preferred Stock (11.0%, 5,000 shares)                 |  |           |        |      |   | 7,475      |  |   | 7,475 
|                                                |  |                                |  | Subordinated Preferred Stock (109,800 shares)                |  |           |        |      |   | 1,098      |  |   | 1,098 
|                                                |  |                                |  | Warrants to purchase Common Stock (expire 4/16)              |  |           |        |      |   | 422        |  |   | 27,407
|Jupitermedia Corporation(6)(15)                 |  | Information Services           |  | Common Stock (148,373 shares)                                |  |           |        |      |   | 2,114      |  |   | 56    
|Legacy Cabinets, Inc.                           |  | Home Furnishings               |  | Subordinated Debt (9.8%, Due 8/13)(1)                        |  |           | 2,328  |      |   | 2,313      |  |   | 752   
|Marietta Intermediate Holding Corporation(6)    |  | Cosmetics                      |  | Subordinated Debt (12.0%, Due 12/11)(1)(7)                   |  |           | 2,262  |      |   | 2,028      |  |   |      
|Maverick Healthcare Equity, LLC                 |  | Healthcare                     |  | Subordinated Debt (13.5%, Due 4/14)(1)                       |  |           | 12,596 |      |   | 12,493     |  |   | 12,494
|                                                |  |                                |  | Preferred Units (10.0%, 1,250,000 units)                     |  |           |        |      |   | 1,403      |  |   | 1,403 
|                                                |  |                                |  | Class A Common Units (1,250,000 units)                       |  |           |        |      |   |           |  |   | 138   
|MCI Holdings LLC(2)                             |  | Healthcare                     |  | Subordinated Debt (12.7%, Due 4/13)(1)                       |  |           | 31,446 |      |   | 31,280     |  |   | 31,280
|                                                |  |                                |  | Class A LLC Interest (4,712,042 units)                       |  |           |        |      |   | 3,000      |  |   | 8,305 



The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

12



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2008

(dollars in thousands)



|                                                                                      |  |                        |  |                                                                    |   |           |        |      |           |            |  |   |       
|------------------------------------------------------------------------------------- |  | ---------------------- |  | ------------------------------------------------------------------ | - | --------- | ------ | ---- | --------- | ---------- |  | - | ------
|Portfolio Company                                                                     |  | Industry               |  | Investment(8)                                                      |   | Principal |        | Cost |           | Fair Value
|Metropolitan Telecommunications Holding Company(2)                                    |  | Communications-CLEC    |  | Senior Debt (10.8%, Due 6/10-9/10)(1)                              |   | $         | 23,769 |      | $         | 23,530     |  | $ | 23,530
|                                                                                      |  |                        |  | Warrants to purchase Common Stock (expire 9/13)                    |   |           |        |      |           | 1,843      |  |   | 9,655 
|Miles Media Group, LLC(2)                                                             |  | Publishing             |  | Senior Debt (12.5%, Due 6/13)(1)                                   |   |           | 18,274 |      |           | 17,913     |  |   | 17,395
|NDSSI Holdings, LLC(2)                                                                |  | Electronics            |  | Senior Debt (9.9%, Due 9/13-3/14)(1)                               |   |           | 19,921 |      |           | 19,697     |  |   | 19,189
|                                                                                      |  |                        |  | Subordinated Debt (15.0%, Due 9/14)(1)                             |   |           | 21,284 |      |           | 21,211     |  |   | 21,211
|                                                                                      |  |                        |  | Series A Preferred Units (516,691 units)                           |   |           |        |      |           | 718        |  |   | 718   
|                                                                                      |  |                        |  | Class A Common Units (1,000,000 units)                             |   |           |        |      |           | 333        |  |   | 900   
|New Century Companies, Inc.(6)                                                        |  | Industrial Equipment   |  | Warrants to purchase Common Stock (expire 6/10)                    |   |           |        |      |           |           |  |   |      
|New England Precision Grinding Holdings, LLC(11)                                      |  | Industrial Products    |  | Senior Debt (11.1%, Due 10/13)(1)                                  |   |           | 25,685 |      |           | 25,464     |  |   | 25,033
|                                                                                      |  |                        |  | Common Units (1,000,000 units)                                     |   |           |        |      |           | 1,000      |  |   | 1,213 
|PartMiner, Inc.(2)                                                                    |  | Information Services   |  | Senior Debt (8.7%, Due 6/09)(1)                                    |   |           | 854    |      |           | 846        |  |   | 846   
|Philadelphia Newspapers, LLC(6)(13)                                                   |  | Newspaper              |  | Subordinated Unsecured Debt (16.5%, Due 6/14)(7)                   |   |           | 5,082  |      |           | 5,070      |  |   |      
|Powercom Corporation(2)(19)                                                           |  | Communications-CLEC    |  | Senior Debt (11.5%, Due 6/11)                                      |   |           | 1,357  |      |           | 1,357      |  |   | 1,279 
|                                                                                      |  |                        |  | Warrants to purchase Class A Common Stock (expire 6/14)            |   |           |        |      |           | 286        |  |   |      
|Quantum Medical Holdings, LLC(2)                                                      |  | Laboratory Instruments |  | Senior Debt (7.5%, Due 5/11)(1)                                    |   |           | 15,500 |      |           | 15,438     |  |   | 15,438
|                                                                                      |  |                        |  | Subordinated Debt (15.0%, Due 12/11)(1)                            |   |           | 18,032 |      |           | 17,911     |  |   | 17,911
|                                                                                      |  |                        |  | Preferred LLC Interest (1,000,000 units)                           |   |           |        |      |           | 557        |  |   | 1,704 
|Restaurant Technologies, Inc.                                                         |  | Food Services          |  | Senior Debt (16.6%, Due 2/12)(1)                                   |   |           | 37,197 |      |           | 36,929     |  |   | 36,929
|                                                                                      |  |                        |  | Series B Preferred Stock (499 shares)                              |   |           |        |      |           | 15         |  |   | 19    
|                                                                                      |  |                        |  | Series A-4 Convertible Preferred Stock (7,813 shares)              |   |           |        |      |           | 336        |  |   | 97    
|Sagamore Hill Broadcasting, LLC(2)                                                    |  | Broadcasting           |  | Senior Debt (11.5%, Due 8/12)(1)                                   |   |           | 25,800 |      |           | 25,664     |  |   | 24,793
|Summit Business Media Intermediate Holding Company, LLC                               |  | Information Services   |  | Subordinated Debt (7.5%, Due 7/14)(1)                              |   |           | 6,000  |      |           | 5,995      |  |   | 4,261 
|Teleguam Holdings, LLC(2)                                                             |  | Communications-Other   |  | Subordinated Debt (9.2%, Due 10/12)(1)                             |   |           | 20,000 |      |           | 19,831     |  |   | 16,920
|The e-Media Club I, LLC(6)                                                            |  | Investment Fund        |  | LLC Interest (74 units)                                            |   |           |        |      |           | 88         |  |   | 9     
|The Matrixx Group, Incorporated                                                       |  | Plastic Products       |  | Subordinated Debt (15.5%, Due 11/14)(1)                            |   |           | 14,238 |      |           | 14,238     |  |   | 14,238
|ValuePage, Inc.(6)                                                                    |  | Communications-Other   |  | Senior Debt (12.8%, Due 6/08)(7)                                   |   |           | 1,230  |      |           | 998        |  |   | 28    
|VOX Communications Group Holdings, LLC(2)                                             |  | Broadcasting           |  | Senior Debt (13.5%, Due 3/09)(1)                                   |   |           | 11,312 |      |           | 10,725     |  |   | 10,674
|                                                                                      |  |                        |  | Convertible Preferred Subordinated Notes (12.5%, Due 6/15-6/17)(7) |   |           | 1,856  |      |           | 1,415      |  |   | 393   
|VS&A-PBI Holding LLC(6)                                                               |  | Publishing             |  | LLC Interest                                                       |   |           |        |      |           | 500        |  |   |      
|Wireco Worldgroup Inc.                                                                |  | Industrial Equipment   |  | Senior Debt (3.7%, Due 2/14)(1)                                    |   |           | 3,930  |      |           | 3,951      |  |   | 2,576 
|Xpressdocs Holdings, Inc.(2)                                                          |  | Business Services      |  | Senior Debt (8.9%, Due 7/11-12/11)(1)                              |   |           | 15,168 |      |           | 15,091     |  |   | 14,550
|                                                                                      |  |                        |  | Subordinated Debt (16.0%, Due 7/12)(1)                             |   |           | 6,390  |      |           | 6,355      |  |   | 6,238 
|                                                                                      |  |                        |  | Series A Preferred Stock (161,870 shares)                          |   |           |        |      |           | 501        |  |   | 170   
|                                                                                      |  |                        |  |                                                                    |   |           |        |      |           |            |  |   |       
|Total Non-Affiliate Investments (represents 48.6% of total investments at fair value) |  |                        |  |                                                                    |   | 605,906   |        |      | 584,336  
|                                                                                      |  |                        |  |                                                                    |   |           |        |      |           |            |  |   |       
|Total Investments                                                                     |  |                        |  |                                                                    | $ | 1,470,123 |        | $    | 1,203,148
|                                                                                      |  |                        |  |                                                                    |   |           |        |      |           |            |  |   |       



The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

13



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2008

(dollars in thousands)



|                                                 |  |                                                  |  |              |   |  |          |        |          |        |      |   |           |      |   |      |  
|------------------------------------------------ |  | ------------------------------------------------ |  | ------------ | - |  | -------- | ------ | -------- | ------ | ---- | - | --------- | ---- | - | ---- | -
|Counterparty                                     |  | Instrument                                       |  | InterestRate |   |  | Expiring |        | Notional |        | Cost |   | FairValue |     
|Interest Rate Swaps                              |  |                                                  |  |              |   |  |          |        |          |        |      |   |           |      |   |      |  
|SunTrust Bank                                    |  | Interest Rate SwapPay Fixed/Receive Floating(1) |  | 10.0         | % |  | 11/10    |        | $        | 16,000 |      | $ |          |      | $ | (649 | )
|Interest Rate SwapPay Fixed/Receive Floating(1) |  |                                                  |  | 14.0         | % |  | 11/10    |        |          | 8,000  |      |   |          |      |   | (324 | )
|                                                 |  |                                                  |  |              |   |  |          |        |          |        |      |   |           |      |   |      |  
|Total Interest Rate Swaps                        |  |                                                  |  |              |   |  | $        | 24,000 |          | $      |     |   | $         | (973 | )
|                                                 |  |                                                  |  |              |   |  |          |        |          |        |      |   |           |      |   |      |  



|(1) | Some or all of this security is funded through our SBIC subsidiary or one of our other financing subsidiaries and may
have been pledged as collateral in connection therewith. See Note 5Borrowings to the Consolidated Financial Statements.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes securities issued by one or more of the portfolio companys affiliates.
|--- | --------------------------------------------------------------------------------

|(3) | Affiliate investments represent companies in which we own at least 5%, but not more than 25% of the portfolio
companys voting securities.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Control investments represent companies in which we own more than 25% of the portfolio companys voting securities.
|--- | -------------------------------------------------------------------------------------------------------------------

|(5) | Represents a non-majority-owned control portfolio company of which we own at least 25%, but not more than 50% of the
portfolio companys voting securities.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Portfolio company is non-income producing at period end.
|--- | --------------------------------------------------------

|(7) | Loan or debt security is on non-accrual status.
|--- | -----------------------------------------------

|(8) | Interest rates represent the weighted-average annual stated interest rate on loans and debt securities, presented by
nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. Rates on preferred stock and preferred LLC interests, where applicable, represent the contractual rate.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | On April 29, 2008, Home Interiors & Gifts, Inc. filed for Chapter 11 bankruptcy protection.
|--- | -------------------------------------------------------------------------------------------

|(10) | On October 2, 2008, Working Mother Media, Inc. changed its name to WMAC II, Inc.
|---- | --------------------------------------------------------------------------------

|(11) | On January 14, 2009, New England Precision Grinding Holdings, LLC changed its name to Tegra Medical Holdings, LLC.
|---- | ------------------------------------------------------------------------------------------------------------------

|(12) | On February 20, 2009, Dayton Parts Holdings, LLC subordinated debt paid off in full.
|---- | ------------------------------------------------------------------------------------

|(13) | On February 22, 2009, Philadelphia Newspapers, LLC filed for Chapter 11 bankruptcy protection.
|---- | ----------------------------------------------------------------------------------------------

|(14) | On February 23, 2009, we sold our equity interest in XFone, Inc., for $0.4 million.
|---- | -----------------------------------------------------------------------------------

|(15) | On February 24, 2009, Jupitermedia Corporation changed its name to WebMediaBrands, Inc.
|---- | ---------------------------------------------------------------------------------------

|(16) | On February 27, 2009, we sold our equity interest for $40.5 million and increased our debt holdings by $20.6
million. We are now a non-affiliate investor in LMS Intellibound Investors, LLC.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(17) | On February 28, 2009, this obligation and all of the assets of Powercom Corporation (other than its accounts
receivable), were transferred to Lambeau Telecom Company, LLC, an affiliate of BCN Telecom, Inc., or BCN, in satisfaction of certain subordinated liabilities of Powercom Corporation owed to BCN.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(18) | On April 17, 2009, we sold our CEI Holdings senior debt for $0.7 million.
|---- | -------------------------------------------------------------------------

|(19) | On July 28, 2008, we converted our debt securities in TNR Entertainment Corp. into preferred stock of TNR Holdings
Corp. and invested $2.0 million in debt in TNR Holdings Corp. The amounts reported herein as Legacy Series A Preferred Stock, Legacy Common Stock and Warrants to purchase Legacy Common Stock, relate to our equity investment in TNR Entertainment
Corp. On April 20, 2009, TNR Holdings Corp. repaid in full its debt together with all accrued interest and we concurrently sold our equity in TNR Holdings Corp. for an aggregate between the two transactions of $11.7 million in cash.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(20) | On April 29, 2009, Cleartel Communications Inc., or Cleartel, an MCG control investment, entered into an asset
purchase agreement with Birch Communications, Inc. pursuant to which Birch Communications, Inc. will acquire substantially all of Cleartels operating assets in exchange for consideration that we currently expect will satisfy MCGs
existing guarantees with respect to this investment. The closing of the transaction is subject to regulatory approvals and other customary closing conditions, and is expected to occur in the third quarter of 2009.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

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##### Table of Contents

MCG Capital Corporation

Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 1DESCRIPTION OF BUSINESS

These
Condensed Consolidated Financial Statements present the results of operations, financial position and cash flows of MCG Capital Corporation and its consolidated subsidiaries. The terms we, our, us and
MCG refer to MCG Capital Corporation and its consolidated subsidiaries.

We are a solutions-focused commercial finance company that provides
capital and advisory services to middle-market companies throughout the United States. We are an internally managed, non-diversified, closed-end investment company that elected to be regulated as a business development company, or BDC, under the
Investment Company Act of 1940, as amended, or the 1940 Act. Our organization includes the following categories of subsidiaries:

Wholly Owned Special-Purpose Financing SubsidiariesThese subsidiaries are bankruptcy remote, special-purpose entities to which we transfer certain loans. Each financing subsidiary, in turn, transfers the loans to a
Delaware statutory trust. For accounting purposes, the transfers of the loans to the Delaware statutory trusts are structured as on-balance sheet securitizations.

Small Business Investment SubsidiariesWe own Solutions Capital I, LP, a wholly owned subsidiary licensed by the United States Small Business Administration, or SBA, which operates as a small
business investment company, or SBIC, under the Small Business Investment Act of 1958, as amended. In connection with the formation of Solutions Capital I, LP, MCG also established another wholly owned subsidiary, Solutions Capital GP, LLC,
to act as the general partner of Solutions Capital I, LP, while MCG is the sole limited partner.

Taxable SubsidiariesWe
currently qualify as a regulated investment company, or RIC, for federal income tax purposes, which allows us to avoid paying corporate income taxes on any income or gains that we distribute to our stockholders. We have certain wholly owned taxable
subsidiaries, or Taxable Subsidiaries, which each hold one or more portfolio investments listed on our Consolidated Schedule of Investments. The purpose of these Taxable Subsidiaries is to permit us to hold portfolio companies organized as
limited liability companies, or LLCs, (or other forms of pass-through entities) and still satisfy the RIC tax requirement that at least 90% of our gross revenue for income tax purposes must consist of investment income. Absent the Taxable
Subsidiaries, a portion of the gross income of any LLC (or other pass-through entity) portfolio investment would flow through directly to us for the 90% test. To the extent that such income did not consist of investment income, it could jeopardize
our ability to qualify as a RIC and, therefore, cause us to incur significant federal income taxes. The income of the LLCs (or other pass-through entities) owned by Taxable Subsidiaries is taxed to the Taxable Subsidiaries and does not flow through
to us, thereby helping us preserve our RIC status and resultant tax advantages. We do not consolidate the Taxable Subsidiaries for income tax purposes and they may generate income tax expense because of the Taxable Subsidiaries ownership of
the portfolio companies. We reflect any such income tax expense on our Consolidated Statement of Operations.

The accompanying financial statements
reflect the consolidated accounts of MCG and the following subsidiaries: Solutions Capital I, LP, Solutions Capital GP, LLC, and MCGs special-purpose financing subsidiaries, MCG Finance V, LLC, MCG Finance VII, LLC and MCG Finance VIII,
LLC.

BASIS OF PRESENTATION AND USE OF
ESTIMATES

These unaudited financial statements and the accompanying notes are prepared in accordance with accounting principles
generally accepted in the United States of America and conform to Regulation S-X under the Securities Exchange Act of 1934, as amended. We believe we have made all necessary adjustments so that the financial statements are presented fairly and that
all such adjustments are of a normal recurring nature. We eliminated all significant intercompany balances. In accordance with Article 6 of Regulation S-X of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, we do not consolidate portfolio company investments, including those in which we have a controlling interest. Certain prior period information has been reclassified to conform to current year presentation.



15



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Preparing financial statements requires us to make estimates and assumptions that affect the amounts reported on our
Condensed Consolidated Financial Statements and accompanying notes. Although we believe the estimates and assumptions used in preparing these Condensed Consolidated Financial Statements and related notes are reasonable, actual results could differ
materially.

Interim results are not necessarily indicative of results for a full year. You should read these Condensed Consolidated Financial Statements
in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-Kfor the year ended December 31, 2008.

CERTAIN RISKS AND UNCERTAINTIES

Economic conditions during 2008,
continuing into 2009 and market dislocations resulted in the availability of debt and equity capital declining significantly. Generally, the limited amount of available debt financing has shorter maturities, higher interest rates and fees and more
restrictive terms than debt facilities available in the past. In addition, during 2008 and the first quarter of 2009, the price of our common stock was well below our net asset value, thereby making it undesirable to issue additional shares of our
common stock. Because of these challenges, our near-term strategies shifted from originating debt and equity investments, to deleveraging our balance sheet, preserving liquidity necessary to meet our operational needs and servicing our borrowing
obligations. Key initiatives that we undertook beginning in 2008 to provide necessary liquidity include monetizations, the suspension of dividends, the renegotiation of our debt agreements which was completed in 2009, the repurchase of debt at
significant discounts and the implementation of a corporate restructuring. Although there can be no assurances that such initiatives will be sufficient, we believe we have sufficient liquidity to meet our 2009 operating requirements.

RECENT ACCOUNTING PRONOUNCEMENTS

FAIR VALUE MEASUREMENTS

On February 12, 2008, FASB Staff
Position No. FAS 157-2Effective Date of FASB No. 157, or FSP 157-2, was issued. FSP 157-2 deferred the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after
November 15, 2008, with early adoption permitted in certain cases. Our adoption of this standard effective January 1, 2009 did not affect our financial position or results of operations.

On October 10, 2008, FASB Staff Position No. FAS 157-3Determining the Fair Value of a Financial Asset When the Market for That Asset is Not
Active, or FSP 157-3, was issued. FSP 157-3 provides an illustrative example of how to determine the fair value of a financial asset in an inactive market. This FSP does not change the fair value measurement principles set forth in SFAS 157.
Since adopting SFAS 157 in January 2008, our practices for determining the fair value of our investment portfolio have been, and continue to be, consistent with the guidance provided in the example in FSP 157-3. Therefore, our adoption of FSP 157-3
did not affect our practices for determining the fair value of our investment portfolio and did not have a material effect on our financial position or results of operations.

On April 9, 2009, FASB Staff Position No. FAS 157-4Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Indentifying Transactions
That Are Not Orderly, or FSP 157-4, was issued. This FSP provides guidance for determining whether normal market activity exists for Level 2 assets and liabilities. In addition, FSP 157-4 expands disclosure requirements for fair value reporting
and requires a categorization of investments consistent with that required for SFAS 115Accounting for Certain Investments in Debt and Equity Securities. FSP 157-4 is effective for periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. We will adopt this standard for our period ended June 30, 2009. Since our Level 2 investments comprise less that 0.5% of our investment portfolio, we do not believe that the
adoption of FSP 157-4 will have a material effect on our financial position or results of operations.

On April 9, 2009,
FASB Staff Position No. FAS 107-1 and APB 28-1Interim Disclosures about Fair Value of Financial Instruments, or FSP 107-1, was issued. This FSP requires disclosures about financial instruments, including
fair value, carrying amount, and method and significant assumptions used to estimate the fair value. FSP 107-1 is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.
We will adopt this standard for the period ended June 30, 2009. Currently, we are reviewing the disclosure requirements of this FSP.



16



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##### Table of Contents

TWO-CLASS METHOD OF PRESENTING
EARNINGS PER SHARE

In June 2008, FASB Staff Position EITF 03-06-1Determining Whether Instruments
Granted in Share-based Payment Transactions are Participating Securities, or FSP EITF 03-06-1, was issued. This standard requires companies to include unvested share-based payment awards that contain non-forfeitable rights to dividends in the
computation of earnings per share pursuant to the two-class method. In effect, FSP EITF 03-06-1 requires companies to report basic and diluted earnings per share in two broad categories. First, companies must report basic and diluted earnings
per share associated with the unvested share-based payments with non-forfeitable rights. Second, companies must report separately basic and diluted earnings per share for their remaining common stock. FSP EITF 03-06-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. We adopted this standard for our financial statements ended March 31, 2009. As required, we applied this standard retroactively
to all reported periods. Our adoption of this standard did not have a material impact on our financial position or results of operations. See Note 9(Loss) Earnings Per Share for additional information about our adoption of this
standard.

DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES

In March 2008, the Financial Accounting Standards Board issued SFAS No. 161Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133, or SFAS 161. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives; quantitative disclosures about
fair value amounts of, and gains and losses on, derivative instruments; and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for fiscal years beginning after November 15, 2008 and
interim periods within those fiscal years, and early adoption is encouraged. We adopted this standard as of January 1, 2009. We have reflected the disclosure requirements for SFAS 161 in Note 2Investment Portfolio.

NOTE 2INVESTMENT PORTFOLIO

The following table summarizes the composition of our investment portfolio at cost:



|                                 |  |                    |           |                           |       |   |                   |  |                    |   |                           |  |       |  
|-------------------------------- |  | ------------------ | --------- | ------------------------- | ----- | - | ----------------- |  | ------------------ | - | ------------------------- |  | ----- | -
|                                 |  | March 31, 2009     |           |                           |       |   | December 31, 2008 | 
|(dollars in thousands)           |  | Investmentsat Cost |           | Percent ofTotal Portfolio |       |   |                   |  | Investmentsat Cost |   | Percent ofTotal Portfolio | 
|Debt investments                 |  |                    |           |                           |       |   |                   |  |                    |   |                           |  |       |  
|Senior secured debt              |  | $                  | 479,101   |                           | 32.7  | % |                   |  |                    | $ | 445,392                   |  | 30.3  | %
|Subordinated debt                |  |                    |           |                           |       |   |                   |  |                    |   |                           |  |       |  
|Secured                          |  |                    | 421,334   |                           | 28.8  |   |                   |  |                    |   | 439,440                   |  | 29.9  |  
|Unsecured                        |  |                    | 34,640    |                           | 2.4   |   |                   |  |                    |   | 34,500                    |  | 2.3   |  
|                                 |  |                    |           |                           |       |   |                   |  |                    |   |                           |  |       |  
|Total debt investments           |  |                    | 935,075   |                           | 63.9  |   |                   |  |                    |   | 919,332                   |  | 62.5  |  
|                                 |  |                    |           |                           |       |   |                   |  |                    |   |                           |  |       |  
|                                 |  |                    |           |                           |      
|Equity investments               |  |                    |           |                           |       |   |                   |  |                    |   |                           |  |       |  
|Preferred equity                 |  |                    | 444,061   |                           | 30.3  |   |                   |  |                    |   | 463,333                   |  | 31.5  |  
|Common/common equivalents equity |  |                    | 85,062    |                           | 5.8   |   |                   |  |                    |   | 87,458                    |  | 6.0   |  
|                                 |  |                    |           |                           |       |   |                   |  |                    |   |                           |  |       |  
|Total equity investments         |  |                    | 529,123   |                           | 36.1  |   |                   |  |                    |   | 550,791                   |  | 37.5  |  
|                                 |  |                    |           |                           |       |   |                   |  |                    |   |                           |  |       |  
|Total investments                |  | $                  | 1,464,198 |                           | 100.0 | % |                   |  |                    | $ | 1,470,123                 |  | 100.0 | %
|                                 |  |                    |           |                           |       |   |                   |  |                    |   |                           |  |       |  

The following table summarizes the composition of our investment portfolio at fair value:



|                                 |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  
|-------------------------------- |  | ------------------------ | --------- | ------------------------- | ----- | - | ----------------- |  | ------------------------ | - | ------------------------- |  | ----- | -
|                                 |  | March 31, 2009           |           |                           |       |   | December 31, 2008 | 
|(dollars in thousands)           |  | Investments atFair Value |           | Percent ofTotal Portfolio |       |   |                   |  | Investments atFair Value |   | Percent ofTotal Portfolio | 
|Debt investments                 |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  
|Senior secured debt              |  | $                        | 456,377   |                           | 40.9  | % |                   |  |                          | $ | 428,817                   |  | 35.7  | %
|Subordinated debt                |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  
|Secured                          |  |                          | 303,490   |                           | 27.2  |   |                   |  |                          |   | 351,425                   |  | 29.2  |  
|Unsecured                        |  |                          | 27,823    |                           | 2.5   |   |                   |  |                          |   | 28,081                    |  | 2.3   |  
|                                 |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  
|Total debt investments           |  |                          | 787,690   |                           | 70.6  |   |                   |  |                          |   | 808,323                   |  | 67.2  |  
|                                 |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  
|                                 |  |                          |           |                           |      
|Equity investments               |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  
|Preferred equity                 |  |                          | 277,893   |                           | 24.9  |   |                   |  |                          |   | 339,576                   |  | 28.2  |  
|Common/common equivalents equity |  |                          | 49,409    |                           | 4.5   |   |                   |  |                          |   | 55,249                    |  | 4.6   |  
|                                 |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  
|Total equity investments         |  |                          | 327,302   |                           | 29.4  |   |                   |  |                          |   | 394,825                   |  | 32.8  |  
|                                 |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  
|Total investments                |  | $                        | 1,114,992 |                           | 100.0 | % |                   |  |                          | $ | 1,203,148                 |  | 100.0 | %
|                                 |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  



17



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##### Table of Contents

Our debt instruments bear contractual interest rates ranging from 3.5% to 17.0%, a portion of which may be deferred. As
of March 31, 2009, approximately 60.4% of the fair value of our loan portfolio was at variable rates based on a LIBOR benchmark or prime rate and 39.6% of the fair value of our loan portfolio was at fixed rates. As of March 31, 2009,
approximately 45.6% of our loan portfolio, at fair value, had LIBOR floors between 1.5% and 4.0% on the LIBOR base index and prime floors between 3.0% and 6.0%. At origination, our loans generally have four- to eight-year stated maturities.
Borrowers typically pay an origination fee based on a percent of the total commitment and a fee on undrawn commitments.

When one of our loans becomes more
than 90 days past due, or if we otherwise do not expect the customer to be able to service its debt and other obligations, we will, as a general matter, place the loan on non-accrual status and generally will cease recognizing interest income on
that loan until all principal and interest has been brought current through payment or due to a restructuring such that the interest income is deemed 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.

The following table summarizes the costof loans more than 90 days past due and loans on
non-accrual status:



|                                          |  |                    |         |                    |       |   |                   |  |                    |   |                    |  |       |  
|----------------------------------------- |  | ------------------ | ------- | ------------------ | ----- | - | ----------------- |  | ------------------ | - | ------------------ |  | ----- | -
|                                          |  | March 31, 2009     |         |                    |       |   | December 31, 2008 | 
|(dollars in thousands)                    |  | Investmentsat Cost |         | % of LoanPortfolio |       |   |                   |  | Investmentsat Cost |   | % of LoanPortfolio | 
|Loans greater than 90 days past due       |  |                    |         |                    |       |   |                   |  |                    |   |                    |  |       |  
|On non-accrual status                     |  | $                  | 7,885   |                    | 0.84  | % |                   |  |                    | $ | 4,989              |  | 0.54  | %
|Not on non-accrual status                 |  |                    |        |                    |      |   |                   |  |                    |   |                   |  |      |  
|                                          |  |                    |         |                    |       |   |                   |  |                    |   |                    |  |       |  
|Total loans greater than 90 days past due |  | $                  | 7,885   |                    | 0.84  | % |                   |  |                    | $ | 4,989              |  | 0.54  | %
|                                          |  |                    |         |                    |       |   |                   |  |                    |   |                    |  |       |  
|                                          |  |                    |         |                    |      
|Loans on non-accrual status               |  |                    |         |                    |       |   |                   |  |                    |   |                    |  |       |  
|0 to 90 days past due                     |  | $                  | 127,990 |                    | 13.69 | % |                   |  |                    | $ | 114,495            |  | 12.44 | %
|Greater than 90 days past due             |  |                    | 7,885   |                    | 0.84  |   |                   |  |                    |   | 4,989              |  | 0.54  |  
|                                          |  |                    |         |                    |       |   |                   |  |                    |   |                    |  |       |  
|Total loans on non-accrual status         |  | $                  | 135,875 |                    | 14.53 | % |                   |  |                    | $ | 119,484            |  | 12.98 | %
|                                          |  |                    |         |                    |       |   |                   |  |                    |   |                    |  |       |  

The following table summarizes the fair value of loans more than 90 days past due and loans on
non-accrual status:



|                                          |  |                          |        |                    |      |   |                   |  |                          |   |                    |  |      |  
|----------------------------------------- |  | ------------------------ | ------ | ------------------ | ---- | - | ----------------- |  | ------------------------ | - | ------------------ |  | ---- | -
|                                          |  | March 31, 2009           |        |                    |      |   | December 31, 2008 | 
|(dollars in thousands)                    |  | Investments atFair Value |        | % of LoanPortfolio |      |   |                   |  | Investments atFair Value |   | % of LoanPortfolio | 
|Loans greater than 90 days past due       |  |                          |        |                    |      |   |                   |  |                          |   |                    |  |      |  
|On non-accrual status                     |  | $                        | 371    |                    | 0.05 | % |                   |  |                          | $ | 695                |  | 0.09 | %
|Not on non-accrual status                 |  |                          |       |                    |     |   |                   |  |                          |   |                   |  |     |  
|                                          |  |                          |        |                    |      |   |                   |  |                          |   |                    |  |      |  
|Total loans greater than 90 days past due |  | $                        | 371    |                    | 0.05 | % |                   |  |                          | $ | 695                |  | 0.09 | %
|                                          |  |                          |        |                    |      |   |                   |  |                          |   |                    |  |      |  
|                                          |  |                          |        |                    |     
|Loans on non-accrual status               |  |                          |        |                    |      |   |                   |  |                          |   |                    |  |      |  
|0 to 90 days past due                     |  | $                        | 37,567 |                    | 4.77 | % |                   |  |                          | $ | 38,619             |  | 4.77 | %
|Greater than 90 days past due             |  |                          | 371    |                    | 0.05 |   |                   |  |                          |   | 695                |  | 0.09 |  
|                                          |  |                          |        |                    |      |   |                   |  |                          |   |                    |  |      |  
|Total loans on non-accrual status         |  | $                        | 37,938 |                    | 4.82 | % |                   |  |                          | $ | 39,314             |  | 4.86 | %
|                                          |  |                          |        |                    |      |   |                   |  |                          |   |                    |  |      |  



18



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##### Table of Contents

The following table summarizes our investment portfolio by industry at cost:



|                                                              |  |                    |           |                           |       |   |                   |  |                    |   |                           |  |       |  
|------------------------------------------------------------- |  | ------------------ | --------- | ------------------------- | ----- | - | ----------------- |  | ------------------ | - | ------------------------- |  | ----- | -
|                                                              |  | March 31, 2009     |           |                           |       |   | December 31, 2008 | 
|(dollars in thousands)                                        |  | Investments atCost |           | Percent ofTotal Portfolio |       |   |                   |  | Investments atCost |   | Percent ofTotal Portfolio | 
|TelecommunicationsCLEC (competitive local exchange carriers) |  | $                  | 335,616   |                           | 22.9  | % |                   |  |                    | $ | 335,279                   |  | 22.8  | %
|Communicationsother                                          |  |                    | 20,838    |                           | 1.4   |   |                   |  |                    |   | 23,227                    |  | 1.6   |  
|Cable                                                         |  |                    | 121,363   |                           | 8.3   |   |                   |  |                    |   | 115,824                   |  | 7.9   |  
|Healthcare                                                    |  |                    | 134,814   |                           | 9.2   |   |                   |  |                    |   | 133,706                   |  | 9.1   |  
|Food services                                                 |  |                    | 82,899    |                           | 5.7   |   |                   |  |                    |   | 82,119                    |  | 5.6   |  
|Business services                                             |  |                    | 92,479    |                           | 6.3   |   |                   |  |                    |   | 93,668                    |  | 6.4   |  
|Broadcasting                                                  |  |                    | 78,758    |                           | 5.4   |   |                   |  |                    |   | 78,918                    |  | 5.4   |  
|Plastic products                                              |  |                    | 97,901    |                           | 6.7   |   |                   |  |                    |   | 84,484                    |  | 5.7   |  
|Logistics                                                     |  |                    | 47,231    |                           | 3.2   |   |                   |  |                    |   | 51,885                    |  | 3.5   |  
|Electronics                                                   |  |                    | 41,743    |                           | 2.9   |   |                   |  |                    |   | 41,959                    |  | 2.9   |  
|Laboratory instruments                                        |  |                    | 34,947    |                           | 2.4   |   |                   |  |                    |   | 33,906                    |  | 2.3   |  
|Publishing                                                    |  |                    | 39,122    |                           | 2.7   |   |                   |  |                    |   | 39,416                    |  | 2.7   |  
|Sporting goods                                                |  |                    | 32,994    |                           | 2.3   |   |                   |  |                    |   | 32,898                    |  | 2.2   |  
|Industrial products                                           |  |                    | 29,477    |                           | 2.0   |   |                   |  |                    |   | 26,464                    |  | 1.8   |  
|Education                                                     |  |                    | 12,078    |                           | 0.8   |   |                   |  |                    |   | 11,994                    |  | 0.8   |  
|Technology                                                    |  |                    | 7,229     |                           | 0.5   |   |                   |  |                    |   | 8,995                     |  | 0.6   |  
|Home furnishings                                              |  |                    | 48,949    |                           | 3.3   |   |                   |  |                    |   | 48,631                    |  | 3.3   |  
|Insurance                                                     |  |                    | 23,479    |                           | 1.6   |   |                   |  |                    |   | 23,251                    |  | 1.6   |  
|Consumer products                                             |  |                    | 37,119    |                           | 2.5   |   |                   |  |                    |   | 36,341                    |  | 2.5   |  
|Leisure activities                                            |  |                    | 13,921    |                           | 1.0   |   |                   |  |                    |   | 13,816                    |  | 0.9   |  
|Other media                                                   |  |                    | 21,292    |                           | 1.5   |   |                   |  |                    |   | 20,983                    |  | 1.4   |  
|Entertainment                                                 |  |                    | 49,385    |                           | 3.4   |   |                   |  |                    |   | 49,385                    |  | 3.4   |  
|Information services                                          |  |                    | 16,443    |                           | 1.1   |   |                   |  |                    |   | 17,410                    |  | 1.2   |  
|Other(a)                                                      |  |                    | 44,121    |                           | 2.9   |   |                   |  |                    |   | 65,564                    |  | 4.4   |  
|                                                              |  |                    |           |                           |       |   |                   |  |                    |   |                           |  |       |  
|Total                                                         |  | $                  | 1,464,198 |                           | 100.0 | % |                   |  |                    | $ | 1,470,123                 |  | 100.0 | %
|                                                              |  |                    |           |                           |       |   |                   |  |                    |   |                           |  |       |  



|(a) | No individual industry within this category exceeds 1% as of March 31, 2009.
|--- | ----------------------------------------------------------------------------



19



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##### Table of Contents

The following table summarizes our investment portfolio by industry at fair value:



|                        |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  
|----------------------- |  | ------------------------ | --------- | ------------------------- | ----- | - | ----------------- |  | ------------------------ | - | ------------------------- |  | ----- | -
|                        |  | March 31, 2009           |           |                           |       |   | December 31, 2008 | 
|(dollars in thousands)  |  | Investments atFair Value |           | Percent ofTotal Portfolio |       |   |                   |  | Investments atFair Value |   | Percent ofTotal Portfolio | 
|TelecommunicationsCLEC |  | $                        | 170,347   |                           | 15.3  | % |                   |  |                          | $ | 173,789                   |  | 14.4  | %
|Communicationsother    |  |                          | 17,127    |                           | 1.5   |   |                   |  |                          |   | 17,403                    |  | 1.5   |  
|Cable                   |  |                          | 122,815   |                           | 11.0  |   |                   |  |                          |   | 119,134                   |  | 9.9   |  
|Healthcare              |  |                          | 111,420   |                           | 10.0  |   |                   |  |                          |   | 123,589                   |  | 10.3  |  
|Food services           |  |                          | 82,577    |                           | 7.4   |   |                   |  |                          |   | 81,935                    |  | 6.8   |  
|Business services       |  |                          | 74,613    |                           | 6.7   |   |                   |  |                          |   | 77,213                    |  | 6.4   |  
|Broadcasting            |  |                          | 59,637    |                           | 5.4   |   |                   |  |                          |   | 66,401                    |  | 5.5   |  
|Plastic products        |  |                          | 54,366    |                           | 4.9   |   |                   |  |                          |   | 45,317                    |  | 3.8   |  
|Logistics               |  |                          | 46,217    |                           | 4.1   |   |                   |  |                          |   | 66,950                    |  | 5.6   |  
|Electronics             |  |                          | 41,833    |                           | 3.8   |   |                   |  |                          |   | 42,018                    |  | 3.5   |  
|Laboratory instruments  |  |                          | 35,494    |                           | 3.2   |   |                   |  |                          |   | 35,054                    |  | 2.9   |  
|Publishing              |  |                          | 34,554    |                           | 3.1   |   |                   |  |                          |   | 34,743                    |  | 2.9   |  
|Sporting goods          |  |                          | 31,672    |                           | 2.8   |   |                   |  |                          |   | 36,531                    |  | 3.0   |  
|Industrial products     |  |                          | 29,138    |                           | 2.6   |   |                   |  |                          |   | 26,246                    |  | 2.2   |  
|Education               |  |                          | 29,074    |                           | 2.6   |   |                   |  |                          |   | 29,062                    |  | 2.4   |  
|Technology              |  |                          | 28,481    |                           | 2.6   |   |                   |  |                          |   | 35,980                    |  | 3.0   |  
|Home furnishings        |  |                          | 24,255    |                           | 2.2   |   |                   |  |                          |   | 27,899                    |  | 2.3   |  
|Insurance               |  |                          | 21,434    |                           | 1.9   |   |                   |  |                          |   | 21,258                    |  | 1.8   |  
|Consumer products       |  |                          | 20,954    |                           | 1.9   |   |                   |  |                          |   | 22,855                    |  | 1.9   |  
|Leisure activities      |  |                          | 13,921    |                           | 1.2   |   |                   |  |                          |   | 13,816                    |  | 1.2   |  
|Other media             |  |                          | 12,426    |                           | 1.1   |   |                   |  |                          |   | 11,940                    |  | 1.0   |  
|Entertainment           |  |                          | 12,216    |                           | 1.1   |   |                   |  |                          |   | 28,268                    |  | 2.4   |  
|Information services    |  |                          | 11,688    |                           | 1.0   |   |                   |  |                          |   | 13,618                    |  | 1.1   |  
|Other(a)                |  |                          | 28,733    |                           | 2.6   |   |                   |  |                          |   | 52,129                    |  | 4.2   |  
|                        |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  
|Total                   |  | $                        | 1,114,992 |                           | 100.0 | % |                   |  |                          | $ | 1,203,148                 |  | 100.0 | %
|                        |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  



|(a) | No individual industry within this category exceeds 1% as of March 31, 2009.
|--- | ----------------------------------------------------------------------------

We manage our interest rate exposure on an ongoing basis by comparing our interest rate sensitive assets to our interest rate sensitive liabilities, and from time to
time, may enter into interest rate swaps. As of March 31, 2009, we included the $1.3 million fair value of these interest rate swaps in other liabilities on our Consolidated Balance Sheets. During the three months ended
March 31, 2009, we reported changes in the fair value of these interest rate swaps in net unrealized (depreciation) appreciation on investments on our Consolidated Statement of Operations. We did not designate any of our interest rate
swaps as hedges for accounting purposes. Each quarter, we settle these interest rates swaps for cash.

No interest rate swaps were issued or outstanding
during the three months ended March 31, 2008. The following table summarizes our existing interest rate swaps with SunTrust Bank as the counterparty in which we pay fixed interest rates and receive floating interest rates:



|                       |  |              |                      |              |   |  |          |                                  |      |   |           |  |   |        |   |                                       |  |  |   |      |  
|---------------------- |  | ------------ | -------------------- | ------------ | - |  | -------- | -------------------------------- | ---- | - | --------- |  | - | ------ | - | ------------------------------------- |  |  | - | ---- | -
|(dollars in thousands) |  |              | As of March 31, 2009 |              |   |  |          | Three months endedMarch 31, 2009 |     
|DateEntered            |  | DateExpiring |                      | InterestRate |   |  | Notional |                                  | Cost |   | FairValue |  |   |        |   | Unrealized Appreciation(Depreciation) | 
|07/08                  |  | 11/10        |                      | 10.0         | % |  | $        | 16,000                           |      | $ |          |  | $ | (616   | ) |                                       |  |  | $ | 33   |  
|07/08                  |  | 11/10        |                      | 14.0         | % |  |          | 8,000                            |      |   |          |  |   | (308   | ) |                                       |  |  |   | 16   |  
|03/09                  |  | 08/11        |                      | 13.0         | % |  |          | 12,500                           |      |   |          |  |   | (238   | ) |                                       |  |  |   | (238 | )
|03/09                  |  | 08/11        |                      | 9.0          | % |  |          | 8,681                            |      |   |          |  |   | (165   | ) |                                       |  |  |   | (165 | )
|                       |  |              |                      |              |   |  |          |                                  |      |   |           |  |   |        |   |                                       |  |  |   |      |  
|Total                  |  |              |                      |              |   |  | $        | 45,181                           |      | $ |          |  | $ | (1,327 | ) |                                       |  |  | $ | (354 | )
|                       |  |              |                      |              |   |  |          |                                  |      |   |           |  |   |        |   |                                       |  |  |   |      |  



20



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##### Table of Contents

NOTE 3FAIR VALUE MEASUREMENT

We adopted SFAS 157 effective January 1, 2008. SFAS 157 defines and establishes a framework for measuring fair value. In addition, it expands disclosures about
assets and liabilities measured at fair value. SFAS 157s definition of fair value focuses on the exit price in the principal, or most advantageous, market. In measuring fair value, SFAS 157 also directs the use of market-based inputs over
entity-specific inputs.

FAIR VALUE HIERARCHY

SFAS 157 establishes the following three-level hierarchy, based upon the transparency of inputs to the fair value measurement of an asset or liability as of the
measurement date:



|                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                      
|---------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|SFAS 157Fair Value Hierarchy |  | Inputs to Fair Value Methodology                                                                                                                                                                                                                                                                                                                                                                                     
|Level 1                      |  | Quoted prices in active markets for identical assets or liabilities                                                                                                                                                                                                                                                                                                                                                  
|                             | 
|Level 2                      |  | Quoted prices for similar assets or liabilities; quoted markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the
full term of the financial instrument; inputs other than quoted prices that are observable for the asset or liability; or inputs that are derived principally from, or corroborated by, observable market information
|                             | 
|Level 3                      |  | Pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption is unobservable or when the estimation of fair value requires
significant management judgment                                                                                                                                                                                                 

We categorize a financial instrument in the fair value hierarchy based on the lowest level of input that is
significant to its fair value measurement.

ASSETS AND LIABILITIES MEASURED
AT FAIR VALUE ON A RECURRING BASIS

The
following table presents the assets and liabilities that we report at fair value on our Consolidated Balance Sheet by SFAS 157 hierarchy:



|                                |  |                                               |    |                                                                     |   |        |                                                                       |  |                                                      |           |  |   |          
|------------------------------- |  | --------------------------------------------- | -- | ------------------------------------------------------------------- | - | ------ | --------------------------------------------------------------------- |  | ---------------------------------------------------- | --------- |  | - | ---------
|                                |  | As of March 31, 2009                         
|(in thousands)                  |  | Quoted MarketPrices in ActiveMarkets(Level 1) |    | Internal Models withSignificantobservable MarketParameters(Level 2) |   |        | Internal Modelswith
SignificantUnobservableMarket Parameters(Level 3) |  | Total Fair ValueReported inConsolidatedBalance Sheet
|Assets                          |  |                                               |    |                                                                     |   |        |                                                                       |  |                                                      |           |  |   |          
|Non-affiliate investments       |  |                                               |    |                                                                     |   |        |                                                                       |  |                                                      |           |  |   |          
|Senior secured debt             |  | $                                             |   |                                                                     | $ | 3,123  |                                                                       |  | $                                                    | 318,926   |  | $ | 322,049  
|Subordinated secured debt       |  |                                               |   |                                                                     |   | 285    |                                                                       |  |                                                      | 200,460   |  |   | 200,745  
|Unsecured subordinated debt     |  |                                               |   |                                                                     |   |       |                                                                       |  |                                                      | 2,128     |  |   | 2,128    
|Preferred equity                |  |                                               |   |                                                                     |   | 179    |                                                                       |  |                                                      | 23,724    |  |   | 23,903   
|Common/common equivalents       |  |                                               | 59 |                                                                     |   |       |                                                                       |  |                                                      | 42,863    |  |   | 42,922   
|                                |  |                                               |    |                                                                     |   |        |                                                                       |  |                                                      |           |  |   |          
|Total non-affiliate investments |  |                                               | 59 |                                                                     |   | 3,587  |                                                                       |  |                                                      | 588,101   |  |   | 591,747  
|                                |  |                                               |    |                                                                     |   |        |                                                                       |  |                                                      |           |  |   |          
|Affiliate investments           |  |                                               |    |                                                                     |   |        |                                                                       |  |                                                      |           |  |   |          
|Senior secured debt             |  |                                               |   |                                                                     |   |       |                                                                       |  |                                                      | 24,403    |  |   | 24,403   
|Subordinated secured debt       |  |                                               |   |                                                                     |   |       |                                                                       |  |                                                      | 11,216    |  |   | 11,216   
|Unsecured subordinated debt     |  |                                               |   |                                                                     |   |       |                                                                       |  |                                                      |          |  |   |         
|Preferred equity                |  |                                               |   |                                                                     |   |       |                                                                       |  |                                                      | 14,970    |  |   | 14,970   
|Common/common equivalents       |  |                                               |   |                                                                     |   |       |                                                                       |  |                                                      | 3,903     |  |   | 3,903    
|                                |  |                                               |    |                                                                     |   |        |                                                                       |  |                                                      |           |  |   |          
|Total affiliate investments     |  |                                               |   |                                                                     |   |       |                                                                       |  |                                                      | 54,492    |  |   | 54,492   
|                                |  |                                               |    |                                                                     |   |        |                                                                       |  |                                                      |           |  |   |          
|Control investments             |  |                                               |    |                                                                     |   |        |                                                                       |  |                                                      |           |  |   |          
|Senior secured debt             |  |                                               |   |                                                                     |   |       |                                                                       |  |                                                      | 109,925   |  |   | 109,925  
|Subordinated secured debt       |  |                                               |   |                                                                     |   |       |                                                                       |  |                                                      | 91,529    |  |   | 91,529   
|Unsecured subordinated debt     |  |                                               |   |                                                                     |   |       |                                                                       |  |                                                      | 25,695    |  |   | 25,695   
|Preferred equity                |  |                                               |   |                                                                     |   |       |                                                                       |  |                                                      | 239,020   |  |   | 239,020  
|Common/common equivalents       |  |                                               |   |                                                                     |   |       |                                                                       |  |                                                      | 2,584     |  |   | 2,584    
|                                |  |                                               |    |                                                                     |   |        |                                                                       |  |                                                      |           |  |   |          
|Total control investments       |  |                                               |   |                                                                     |   |       |                                                                       |  |                                                      | 468,753   |  |   | 468,753  
|                                |  |                                               |    |                                                                     |   |        |                                                                       |  |                                                      |           |  |   |          
|                                |  |                                               |    |                                                                    
|Total assets at fair value      |  | $                                             | 59 |                                                                     | $ | 3,587  |                                                                       |  | $                                                    | 1,111,346 |  | $ | 1,114,992
|                                |  |                                               |    |                                                                     |   |        |                                                                       |  |                                                      |           |  |   |          
|Liabilities                     |  |                                               |    |                                                                     |   |        |                                                                       |  |                                                      |           |  |   |          
|Interest rate swaps(a)          |  |                                               |   |                                                                     |   | (1,327 | )                                                                     |  |                                                      |          |  |   |         
|                                |  |                                               |    |                                                                     |   |        |                                                                       |  |                                                      |           |  |   |          
|                                |  |                                               |    |                                                                    
|Total liabilities at fair value |  | $                                             |   |                                                                     | $ | (1,327 | )                                                                     |  | $                                                    |          |  | $ |         
|                                |  |                                               |    |                                                                     |   |        |                                                                       |  |                                                      |           |  |   |          



|(a) | Represents interest rate swaps on loans used as collateral on a securitized borrowing. The fair value of the interest
rate swaps are included in other liabilities on our Consolidated Balance Sheets.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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VALUATION METHODOLOGIES

As required by the 1940 Act, we classify our investments by level of control. Control investments include both majority-owned control investments and non-majority owned
control investments. Majority-owned control investments represent securities in which we own more than 50% of the voting interest of a portfolio company and generally control its board of directors. Non-majority owned control investments represent
securities that we own 25% to 50% of the portfolio companys equity. Non-control investments represent both affiliate and non-affiliate securities for which we do not have a controlling interest. Affiliate investments represent securities that
we own 5% to 25% of the portfolio companys equity. Non-affiliate investments represent securities that we own less than 5% of the portfolio companys equity.



| |  | Majority-Owned Control InvestmentsMajority-owned control investments comprise 40.1% of our investment portfolio. Market quotations are not
readily available for these investments; therefore, we use a combination of market and income approaches to determine their fair value. Typically, private companies are bought and sold based on multiples of EBITDA, cash flows, net income, revenues
or, in limited cases, book value. Generally, we apply multiples that we observe for other comparable companies to relevant financial data for the portfolio company. Also, in a limited number of cases, we use income approaches to determine the fair
value of these securities, based on our projections of the discounted future free cash flows that the portfolio company will likely generate, as well as industry derived capital costs. Our valuation approaches for majority-owned investments estimate
the value were we to sell or exit the investment. These valuation approaches assume the highest and best use of the investment by market participants and consider the value of our ability to control the portfolio companys capital structure and
the timing of a potential exit.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Non-Majority-Owned Control InvestmentsNon-majority owned investments comprise 1.9% of our investment portfolio. For our non-majority owned
equity investments, we use the same market and income valuation approaches used to value our majority-owned control investments. For non-majority-owned control debt investments, we estimate fair value using the market yield approach based on the
expected future cash flows discounted at the loans effective interest rates, based on our estimate of current market rates. We may adjust discounted cash flow calculations to reflect other market conditions or the perceived credit risk of the
borrower.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Non-Control InvestmentsNon-control investments comprise 58.0% of our investment portfolio. Quoted prices are not available for 99.4% of our
non-control investments, which represent 57.6% of our investment portfolio. For our non-control equity investments, we use the same market and income approaches used to value our control investments. For non-control debt investments, we estimate
fair value using a market yield approach based on the expected future cash flows discounted at the loans effective interest rates, based on our estimate of current market rates. We may adjust discounted cash flow calculations to reflect other
market conditions or the perceived credit risk of the borrower.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Thinly Traded and Over-the-Counter SecuritiesGenerally, we value securities that are traded in the over-the-counter market or on a stock
exchange, including broadly syndicated securities, at the average of the prevailing bid and ask prices on the date of the relevant period end. However, we may apply a discount to the market value of restricted or thinly traded public securities to
reflect the impact that these restrictions have on the value of these securities. We review factors including the trading volume, total securities outstanding and our percentage ownership of securities to determine whether the trading levels are
active (Level 1) or inactive (Level 2). As of March 31, 2009, these securities represented 0.3% of our investment portfolio.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
valuation analyses incorporate the impact that key events could have on the securities values, including private mergers and acquisitions, purchase transactions, public offerings, letters of intent and subsequent debt or equity sales. Our
valuation analyses consider key external data, such as market changes and industry valuation benchmarks. We also use independent valuation firms to provide additional data points for our quarterly valuation analyses. Our general practice is to
obtain an independent valuation or review of valuation once per year for each portfolio investment that has a fair value in excess of $5.0 million. Valuation firms performed independent valuations or reviewed valuations of 51 portfolio
companies over the last four quarters, representing $1.1 billion, or 99.4%, of the fair value of our total portfolio investments and $325.6 million, or 99.5%, of the fair value of our equity portfolio investments.



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|                                                        |  |                           |         |        |   |            |  |   |           |               |  |  |                 |   |  |                |   |  |       |  
|------------------------------------------------------- |  | ------------------------- | ------- | ------ | - | ---------- |  | - | --------- | ------------- |  |  | --------------- | - |  | -------------- | - |  | ----- | -
|                                                        |  | As of March 31, 2009      |        
|                                                        |  | Investments at Fair Value |         |        |   | Percent of | 
|(dollars in thousands)                                  |  | Debt                      |         | Equity |   | Total      |  |   |           | DebtPortfolio |  |  | EquityPortfolio |   |  | TotalPortfolio |  
|Quarter independent valuation/review prepared(a)        |  |                           |         |        |   |            |  |   |           |               |  |  |                 |   |  |                |   |  |       |  
|First quarter 2009                                      |  | $                         | 274,687 |        | $ | 239,586    |  | $ | 514,273   |               |  |  | 34.8            | % |  | 73.2           | % |  | 46.1  | %
|Fourth quarter 2008                                     |  |                           | 184,284 |        |   | 43,651     |  |   | 227,935   |               |  |  | 23.4            |   |  | 13.4           |   |  | 20.5  |  
|Third quarter 2008                                      |  |                           | 177,925 |        |   | 30,520     |  |   | 208,445   |               |  |  | 22.6            |   |  | 9.3            |   |  | 18.7  |  
|Second quarter 2008                                     |  |                           | 145,609 |        |   | 11,799     |  |   | 157,408   |               |  |  | 18.5            |   |  | 3.6            |   |  | 14.1  |  
|                                                        |  |                           |         |        |   |            |  |   |           |               |  |  |                 |   |  |                |   |  |       |  
|Total                                                   |  |                           | 782,505 |        |   | 325,556    |  |   | 1,108,061 |               |  |  | 99.3            |   |  | 99.5           |   |  | 99.4  |  
|                                                        |  |                           |         |        |   |            |  |   |           |               |  |  |                 |   |  |                |   |  |       |  
|Not evaluated during the 12 months ended March 31, 2009 |  |                           | 5,185   |        |   | 1,746      |  |   | 6,931     |               |  |  | 0.7             |   |  | 0.5            |   |  | 0.6   |  
|                                                        |  |                           |         |        |   |            |  |   |           |               |  |  |                 |   |  |                |   |  |       |  
|Total Investment Portfolio                              |  | $                         | 787,690 |        | $ | 327,302    |  | $ | 1,114,992 |               |  |  | 100.0           | % |  | 100.0          | % |  | 100.0 | %
|                                                        |  |                           |         |        |   |            |  |   |           |               |  |  |                 |   |  |                |   |  |       |  



|(a) | Independent valuations/reviews prepared multiple times for the same investment throughout the year have that
investments fair value reflected in the most recent quarter for which an independent valuation/review was prepared.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The majority
of the valuations performed by the independent valuation firms utilize proprietary models and inputs. We intend to continue to use independent valuation firms to provide additional support for our internal analyses. Our board of directors considers
our valuations, as well as the independent valuations and reviews, in its determination of the fair value of our investments. The fair value of our interest rate swap is based on a binding broker quote, which is based on the estimated net present
value of the future cash flows using a forward interest rate yield-curve in effect as of the measurement period.

Due to the uncertainty inherent in the
valuation process, such estimates of fair value may differ significantly from the values that would have been used had a ready market for the securities existed, and such differences could be material. In addition, changes in the market environment
and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to differ from the valuations currently assigned.

CHANGES IN LEVEL 3 FAIR VALUE MEASUREMENTS

We classify securities in the Level 3 valuation hierarchy based on the significance of the unobservable factors to the overall fair value measurement. Our fair value approach for Level 3 securities primarily uses
unobservable inputs, but may also include observable, actively quoted components derived from external sources. Accordingly, the gains and losses in the table below include fair value changes due, in part, to observable factors.



23



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##### Table of Contents

The following table provides a reconciliation of fair value changes during the three-month period from December 31,
2008 to March 31, 2009 for all investments for which we determine fair value using unobservable (Level 3) factors.



|                                                |  |                                                             |         |   |                      |   |        |                    |  |   |         |   |  |   |           |  
|----------------------------------------------- |  | ----------------------------------------------------------- | ------- | - | -------------------- | - | ------ | ------------------ |  | - | ------- | - |  | - | --------- | -
|                                                |  | Fair value measurements using unobservable inputs (Level 3) |        
|(in thousands)                                  |  | Non-affiliateInvestments                                    |         |   | AffiliateInvestments |   |        | ControlInvestments |  |   | Total   |  
|Fair value December 31, 2008                    |  |                                                             |         |   |                      |   |        |                    |  |   |         |   |  |   |           |  
|Senior secured debt                             |  | $                                                           | 289,982 |   |                      | $ | 25,467 |                    |  | $ | 108,451 |   |  | $ | 423,900   |  
|Subordinated secured debt                       |  |                                                             | 210,902 |   |                      |   | 11,109 |                    |  |   | 128,281 |   |  |   | 350,292   |  
|Unsecured subordinated debt                     |  |                                                             | 2,504   |   |                      |   |       |                    |  |   | 25,577  |   |  |   | 28,081    |  
|Preferred equity                                |  |                                                             | 26,128  |   |                      |   | 15,220 |                    |  |   | 297,793 |   |  |   | 339,141   |  
|Common/common equivalents equity                |  |                                                             | 48,279  |   |                      |   | 3,903  |                    |  |   | 2,584   |   |  |   | 54,766    |  
|                                                |  |                                                             |         |   |                      |   |        |                    |  |   |         |   |  |   |           |  
|Total fair value December 31, 2008              |  |                                                             | 577,795 |   |                      |   | 55,699 |                    |  |   | 562,686 |   |  |   | 1,196,180 |  
|                                                |  |                                                             |         |   |                      |   |        |                    |  |   |         |   |  |   |           |  
|                                                |  |                                                             |         |  
|Realized/unrealized (losses) gains              |  |                                                             |         |   |                      |   |        |                    |  |   |         |   |  |   |           |  
|Senior secured debt                             |  |                                                             | (3,889  | ) |                      |   | (116   | )                  |  |   | (591    | ) |  |   | (4,596    | )
|Subordinated secured debt                       |  |                                                             | (6,254  | ) |                      |   | 45     |                    |  |   | (22,773 | ) |  |   | (28,982   | )
|Unsecured subordinated debt                     |  |                                                             | (393    | ) |                      |   |       |                    |  |   | (5      | ) |  |   | (398      | )
|Preferred equity                                |  |                                                             | (1,053  | ) |                      |   | (280   | )                  |  |   | (24,630 | ) |  |   | (25,963   | )
|Common/common equivalents equity                |  |                                                             | (5,480  | ) |                      |   |       |                    |  |   |        |   |  |   | (5,480    | )
|                                                |  |                                                             |         |   |                      |   |        |                    |  |   |         |   |  |   |           |  
|Total realized/unrealized (losses) gains        |  |                                                             | (17,069 | ) |                      |   | (351   | )                  |  |   | (47,999 | ) |  |   | (65,419   | )
|                                                |  |                                                             |         |   |                      |   |        |                    |  |   |         |   |  |   |           |  
|                                                |  |                                                             |         |  
|Purchases, issuances and settlements, net       |  |                                                             |         |   |                      |   |        |                    |  |   |         |   |  |   |           |  
|Senior secured debt                             |  |                                                             | 21,610  |   |                      |   | (948   | )                  |  |   | 13,288  |   |  |   | 33,950    |  
|Subordinated secured debt                       |  |                                                             | (21,070 | ) |                      |   | 62     |                    |  |   | 2,903   |   |  |   | (18,105   | )
|Unsecured subordinated debt                     |  |                                                             | 17      |   |                      |   |       |                    |  |   | 123     |   |  |   | 140       |  
|Preferred equity                                |  |                                                             | (1,351  | ) |                      |   | 30     |                    |  |   | (34,143 | ) |  |   | (35,464   | )
|Common/common equivalents equity                |  |                                                             | 64      |   |                      |   |       |                    |  |   |        |   |  |   | 64        |  
|                                                |  |                                                             |         |   |                      |   |        |                    |  |   |         |   |  |   |           |  
|Total purchases, issuances and settlements, net |  |                                                             | (730    | ) |                      |   | (856   | )                  |  |   | (17,829 | ) |  |   | (19,415   | )
|                                                |  |                                                             |         |   |                      |   |        |                    |  |   |         |   |  |   |           |  
|                                                |  |                                                             |         |  
|Transfers in (out) of categories                |  |                                                             |         |   |                      |   |        |                    |  |   |         |   |  |   |           |  
|Senior secured debt                             |  |                                                             | 11,223  |   |                      |   |       |                    |  |   | (11,223 | ) |  |   |          |  
|Subordinated secured debt                       |  |                                                             | 16,882  |   |                      |   |       |                    |  |   | (16,882 | ) |  |   |          |  
|Unsecured subordinated debt                     |  |                                                             |        |   |                      |   |       |                    |  |   |        |   |  |   |          |  
|Preferred equity                                |  |                                                             |        |   |                      |   |       |                    |  |   |        |   |  |   |          |  
|Common/common equivalents equity                |  |                                                             |        |   |                      |   |       |                    |  |   |        |   |  |   |          |  
|                                                |  |                                                             |         |   |                      |   |        |                    |  |   |         |   |  |   |           |  
|Total transfers in (out) of categories          |  |                                                             | 28,105  |   |                      |   |       |                    |  |   | (28,105 | ) |  |   |          |  
|                                                |  |                                                             |         |   |                      |   |        |                    |  |   |         |   |  |   |           |  
|                                                |  |                                                             |         |  
|Fair value as of March 31, 2009                 |  |                                                             |         |   |                      |   |        |                    |  |   |         |   |  |   |           |  
|Senior secured debt                             |  |                                                             | 318,926 |   |                      |   | 24,403 |                    |  |   | 109,925 |   |  |   | 453,254   |  
|Subordinated secured debt                       |  |                                                             | 200,460 |   |                      |   | 11,216 |                    |  |   | 91,529  |   |  |   | 303,205   |  
|Unsecured subordinated debt                     |  |                                                             | 2,128   |   |                      |   |       |                    |  |   | 25,695  |   |  |   | 27,823    |  
|Preferred equity                                |  |                                                             | 23,724  |   |                      |   | 14,970 |                    |  |   | 239,020 |   |  |   | 277,714   |  
|Common/common equivalents equity                |  |                                                             | 42,863  |   |                      |   | 3,903  |                    |  |   | 2,584   |   |  |   | 49,350    |  
|                                                |  |                                                             |         |   |                      |   |        |                    |  |   |         |   |  |   |           |  
|Total fair value as of March 31, 2009           |  | $                                                           | 588,101 |   |                      | $ | 54,492 |                    |  | $ | 468,753 |   |  | $ | 1,111,346 |  
|                                                |  |                                                             |         |   |                      |   |        |                    |  |   |         |   |  |   |           |  

The following table summarizes the unrealized (depreciation) appreciation on our Level 3 investments for the three
months ended March 31, 2009.



|                                                                              |  |                                                             |         |   |                      |   |      |                    |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------------- |  | ----------------------------------------------------------- | ------- | - | -------------------- | - | ---- | ------------------ |  | - | ------- | - |  | - | ------- | -
|                                                                              |  | Fair value measurements using unobservable inputs (Level 3) |        
|(in thousands)                                                                |  | Non-affiliateInvestments                                    |         |   | AffiliateInvestments |   |      | ControlInvestments |  |   | Total   |  
|Change in unrealized (depreciation) appreciation                              |  |                                                             |         |   |                      |   |      |                    |  |   |         |   |  |   |         |  
|Senior secured debt                                                           |  | $                                                           | (3,889  | ) |                      | $ | (116 | )                  |  | $ | (591    | ) |  | $ | (4,596  | )
|Subordinated secured debt                                                     |  |                                                             | (6,254  | ) |                      |   | 45   |                    |  |   | (22,773 | ) |  |   | (28,982 | )
|Unsecured subordinated debt                                                   |  |                                                             | (393    | ) |                      |   |     |                    |  |   | (5      | ) |  |   | (398    | )
|Preferred equity                                                              |  |                                                             | (988    | ) |                      |   | (280 | )                  |  |   | (40,887 | ) |  |   | (42,155 | )
|Common/common equivalents equity                                              |  |                                                             | (5,415  | ) |                      |   |     |                    |  |   |        |   |  |   | (5,415  | )
|                                                                              |  |                                                             |         |   |                      |   |      |                    |  |   |         |   |  |   |         |  
|Total change in unrealized (depreciation) appreciation on Level 3 investments |  | $                                                           | (16,939 | ) |                      | $ | (351 | )                  |  | $ | (64,256 | ) |  | $ | (81,546 | )
|                                                                              |  |                                                             |         |   |                      |   |      |                    |  |   |         |   |  |   |         |  



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##### Table of Contents

NOTE 4CONCENTRATIONS OF INVESTMENT
RISK

INVESTMENTS IN COMMUNICATIONS PORTFOLIO COMPANIES

As of March 31, 2009, approximately 16.8% of the fair value of our investment portfolio was composed of investments in the communications
industry. The 16.8% included 15.3% invested in CLECs and 1.5% invested in other communications companies, including a rural local exchange carrier, an international telecommunications service provider, a paging service and a telecommunications tower
company. As of December 31, 2008, approximately 15.9% of the fair value of our investment portfolio was composed of investments in the communications industry, including 14.4% invested in CLECs and 1.5% invested in other communications
companies. For the quarters ended March 31, 2009 and 2008, our portfolio companies in the communications industry contributed $1.2 million, or 4.5%, and $10.1 million, or 23.4%, respectively, of our total revenues.

Our investment in Broadview Networks Holdings, Inc., or Broadview, a CLEC that we control, represents our single largest investment. As of March 31, 2009 and
December 31, 2008, the fair value of our investment in Broadview represented $135.5 million, or 12.2%, and $139.3 million, or 11.6%, of the fair value of our investment portfolio, respectively. We did not accrete any dividends in the first
quarter of 2009, because we determined that the total value that we had recorded for this investment equaled the total enterprise value for this investment and any additional accretion of dividends would not be supportable or appropriate under our
valuation polices. However, during the first quarter of 2008, our investment in Broadview contributed $8.0 million, or 18.6%, of our total revenues. Currently, we do not expect to accrete any further dividends on our Broadview investment.

INVESTMENTS IN CABLE PORTFOLIO COMPANIES

As of March 31, 2009 and December 31, 2008, approximately 11.0% and 9.9%, respectively, of the fair value of our investment portfolio was composed of
investments in the cable industry. During the three months ended March 31, 2009 and 2008, our investments in the cable industry contributed $2.4 million, or 8.6%, and $2.8 million, or 6.5%, respectively, of our total revenues.

INVESTMENTS IN HEALTHCARE PORTFOLIO COMPANIES

As of March 31, 2009 and December 31, 2008, approximately 10.0% and 10.3%, respectively, of the fair value of our investment portfolio was composed of
investments in the healthcare industry. During the three months ended March 31, 2009 and 2008, our investments in the healthcare industry contributed $3.8 million, or 13.5%, and $3.8 million, or 8.8%, respectively, of our total
revenues.

INVESTMENTS IN FOOD SERVICES COMPANIES

As of March 31, 2009 and December 31, 2008, approximately 7.4% and 6.8%, respectively, of the fair value of our investment portfolio was composed of investments
in the food services industry. For the quarters ended March 31, 2009 and 2008, our investments in the food services industry contributed $2.8 million or 10.2%, and $2.4 million or 5.6%, respectively, of our total revenues.



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##### Table of Contents

NOTE 5BORROWINGS

The following table summarizes our borrowing facilities and the potential borrowing capacity of those facilities and contingent borrowing eligibility of Solutions Capital
I, LP, a wholly owned subsidiary, as an SBIC, under the Small Business Investment Act of 1958, as amended.



|                                       |  |                           |  |                   |         |  |   |                           |  |                   |  |   |         |  |   |        
|-------------------------------------- |  | ------------------------- |  | ----------------- | ------- |  | - | ------------------------- |  | ----------------- |  | - | ------- |  | - | -------
|(dollars in thousands)                 |  | Maturity Date             |  | March 31, 2009    |         |  |   | December 31, 2008        
|                                       |  | PotentialMaximumBorrowing |  | AmountOutstanding |         |  |   | PotentialMaximumBorrowing |  | AmountOutstanding
|Unsecured Notes                        |  |                           |  |                   |         |  |   |                           |  |                   |  |   |         |  |   |        
|Series 2005-A                          |  | October 2010              |  | $                 | 44,686  |  | $ | 44,686                    |  |                   |  | $ | 50,000  |  | $ | 50,000 
|Series 2007-A                          |  | October 2012              |  |                   | 22,342  |  |   | 22,342                    |  |                   |  |   | 25,000  |  |   | 25,000 
|                                       |  |                           |  |                   |         | 
|Commercial Loan Funding Trust Facility |  |                           |  |                   |         |  |   |                           |  |                   |  |   |         |  |   |        
|Class A Variable Funding Certificate   |  | August 2011(a)            |  |                   | 188,509 |  |   | 185,532                   |  |                   |  |   | 218,750 |  |   | 162,219
|Class B Variable Funding Certificate   |  | August 2011(a)            |  |                   |        |  |   |                          |  |                   |  |   | 31,250  |  |   | 24,950 
|                                       |  |                           |  |                   |         | 
|Term Securitizations                   |  |                           |  |                   |         |  |   |                           |  |                   |  |   |         |  |   |        
|Series 2006-1 Class A-1 Notes          |  | April 2018                |  |                   | 106,250 |  |   | 106,250                   |  |                   |  |   | 106,250 |  |   | 106,250
|Series 2006-1 Class A-2 Notes          |  | April 2018                |  |                   | 50,000  |  |   |                          |  |                   |  |   | 50,000  |  |   |       
|Series 2006-1 Class A-3 Notes          |  | April 2018                |  |                   | 85,000  |  |   | 85,000                    |  |                   |  |   | 85,000  |  |   | 85,000 
|Series 2006-1 Class B Notes            |  | April 2018                |  |                   | 58,750  |  |   | 58,750                    |  |                   |  |   | 58,750  |  |   | 58,750 
|Series 2006-1 Class C Notes(b)         |  | April 2018                |  |                   | 45,000  |  |   | 40,000                    |  |                   |  |   | 45,000  |  |   | 40,000 
|Series 2006-1 Class D Notes(c)         |  | April 2018                |  |                   | 47,500  |  |   | 29,880                    |  |                   |  |   | 47,500  |  |   | 37,380 
|Unsecured Revolving Line of Credit(d)  |  | May 2009                  |  |                   | 31,205  |  |   | 31,205                    |  |                   |  |   | 70,000  |  |   | 44,500 
|                                       |  |                           |  |                   |         | 
|SBIC (Maximum borrowing potential)(e)  |  | (f)                       |  |                   | 130,000 |  |   | 27,600                    |  |                   |  |   | 130,000 |  |   | 2,600  
|                                       |  |                           |  |                   |         |  |   |                           |  |                   |  |   |         |  |   |        
|Total borrowings                       |  |                           |  | $                 | 809,242 |  | $ | 631,245                   |  |                   |  | $ | 917,500 |  | $ | 636,649
|                                       |  |                           |  |                   |         |  |   |                           |  |                   |  |   |         |  |   |        





|(a) | Renewable each February at the lenders discretion. The lender provided this renewal in February 2009. At that
time, the final legal maturity became August 2011. In conjunction with additional collateral transferred to this facility in February 2009, the Class B advances were retired.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Amount outstanding excludes $5.0 million of notes that we repurchased in December 2008 for $1.6 million. The notes that
MCG, the parent company, purchased are eliminated from this schedule as part of the consolidation process.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Amount outstanding excludes $10.1 million of notes that we repurchased in December 2008 for $2.4 million and $7.5
million of notes that we repurchased in January 2009 for $2.1 million. The notes that MCG, the parent company, purchased are eliminated from this schedule as part of the consolidation process.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | In February 2009, we renegotiated this agreement, which, in part, reduced the borrowing capacity for this facility from
$70.0 million to $35.0 million. On May 4, 2009, we repaid the balance of this facility. See Note 12Subsequent Events
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(e) | As of March 31, 2009, we had the potential to borrow up to $130.0 million of SBA-guaranteed debentures under
the SBIC program. The SBA has approved and committed up to $130.0 million in borrowings to the SBIC. To realize the full $130.0 million borrowing potential approved and committed by the SBIC under this program, we must fund a total of
$65.0 million to the SBIC, of which we have funded $18.6 million as of March 31, 2009. Based on our funded capital, Solutions Capital I, LP, may, subject to compliance with the SBAs customary procedures, borrow up to an
additional $28.3 million to originate investments. To access the entire $130.0 million that has been approved and committed by the SBA, we would have had to fund an additional $46.4 million. In February 2009, the American Recovery and Investment
Act of 2009 was passed into law which, among other things, included a provision that increased the maximum amount of outstanding leverage available to SBIC companies up to $150.0 million.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(f) | Currently, we may originate new borrowings through September 2012 at which time we can apply for a new commitment. We
must repay borrowings under the SBIC program within ten years after the borrowing date, which will occur between September 2018 and September 2022.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Each of our credit facilities has certain collateral requirements and/or financial covenants. The net worth covenant requires that we maintain a minimum stockholders equity of not less than $525.0 million.
The terms of this facility include a step-down provision that allows us to reduce the minimum stockholders equity requirement to $500.0 million plus 50% of the proceeds from any issuances after December 31, 2008, if we reduce the
effective advance rate for the advances outstanding to less than 60% of eligible collateral and we provide formal notice to the lender. Under these covenants, we must also maintain an asset coverage ratio of at least 180%.

As a BDC, we are not permitted to incur indebtedness or issue senior securities, including preferred stock, unless immediately after such borrowing we have an asset
coverage for total borrowings (excluding borrowings by our SBIC facility) of at least 200%. In addition, we may not be permitted to declare any cash dividend or other distribution on our outstanding common shares, or purchase any such shares,
unless, at the time of such declaration or purchase, we have an asset coverage of at least 200% after deducting the amount of such dividend, distribution, or purchase price. If we are unable to meet this asset coverage requirement, we may not be
able to incur additional senior debt. As of March 31, 2009, our ratio of total assets to total borrowings and other senior securities was 199%. As discussed in Note 12Subsequent Events, as of May 4, 2009, this asset coverage
ratio increased to 208%. As of March 31, 2009, we could not borrow under any of our debt facilities,



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except for the SBIC program, until our asset coverage ratio returned to at least 200%. Because borrowings by our SBIC facility are exempt from the minimum
BDC asset coverage requirement, we have $28.3 million of funded borrowing capacity in our SBIC.

We fund all of our debt facilities, except the Unsecured
Revolving Line of Credit and the Unsecured Notes through our bankruptcy remote, special-purpose, wholly owned subsidiaries. Therefore, these subsidiaries assets may not be available to our creditors. In some cases, advances under our debt
facilities are subject to certain collateral levels, collateral quality, leverage and other restrictive covenants. We continue to service the portfolio investments that are used as collateral in our secured borrowing facilities. Additional
information about these facilities is provided below.

Unsecured Notes. In October 2005, we issued $50.0 million of Series
2005-A unsecured notes, at a fixed interest rate of 6.73% per annum. In October 2007, we issued an additional $25.0 million of Series 2007-A unsecured notes at a fixed interest rate of 6.71% per annum. Both of these tranches are
five-year notes that require semi-annual interest payments. We issued these notes through private placements with Bayerische Hypo-Und Vereinsbank, AG, New York Branch, or HVB, acting as the placement agent. In February 2009, these notes were
amended. In connection with these amendments, MCG and the noteholders agreed to a number of modifications to the terms of the notes, including certain financial covenants. The minimum asset coverage ratio that we are required to maintain has been
lowered from 200% to 180% effective as of December 31, 2008. The minimum consolidated stockholders equity requirement was reduced from $642.9 million prior to December 31, 2008 to $500.0 million effective as of and after
December 31, 2008. The cross-default provisions were modified so that defaults of indebtedness by certain direct and indirect subsidiaries, including Solutions Capital I, L.P. and the special purpose subsidiaries relating to the 2006-1 term
securitization and our secured warehouse credit facility, would not constitute defaults under the notes, as long as we (the parent company) or any other subsidiary that is not a non-recourse financing subsidiary are not liable for the repayment of
such indebtedness. The interest rate for the Series 2005-A Notes, increased from 6.73% to 8.98%. The interest rate for the Series 2007-A Notes, increased from 6.71% to 8.96%. The amendments also require us to offer to repurchase the unsecured notes
with a portion of certain monetization proceeds at a purchase price of 102% of the principal amount to be purchased.

As discussed in
Note 12Subsequent Events, on May 4, 2009, we repaid our revolving line of credit. Prior to that repayment, we were required to use 60% of the cash net proceeds of any sale of unencumbered assets to reduce amounts outstanding under
the unsecured notes and the revolving line of credit on a pro rata basis, based on then outstanding amounts. Thereafter, we agreed to direct 40% of such net monetization proceeds from unencumbered asset sales as and when such sales occur to the
repurchase of the notes, unless an event of default under one of the financing subsidiary debt facilities has occurred and is continuing, in which case the percentage of net proceeds increases to 60%. In March 2009, we repaid $5.3 million from
monetization proceeds, which resulted in a $5.3 million reduction in the borrowing capacity of the Series 2005-A Notes. Additionally, we repaid $2.7 million from monetization proceeds, which resulted in a $2.7 million reduction in the
borrowing capacity of the Series 2007-A Notes. As of March 31, 2009, the outstanding balances under the Series 2005-A and Series 2007-A Notes were $44.7 million and $22.3 million, respectively. We also agreed to limit the amount
of debt from the 2006-1 term securitization and our common stock that we may repurchase. We are permitted to make $2.5 million of debt repurchases from the 2006-1 term securitization for every $5.0 million in unsecured notes we have offered to
purchase. Once we have offered to purchase $35.0 million in unsecured notes, then we may also repurchase $1.0 million in shares of our common stock for every $5.0 million increment of unsecured notes offered to be repurchased, provided that the
amount of permitted 2006-1 debt repurchases shall be reduced by the amount of any MCG common stock repurchases made. We paid to the holders of the unsecured notes an amendment fee of $375,000, or 0.50%.

MCG Commercial Loan Funding Trust.We established, through MCG Commercial Loan Funding Trust, a $250.0 million warehouse financing facility
funded through Three Pillars Funding LLC, an asset-backed commercial paper conduit administered by SunTrust Robinson Humphrey, Inc., or SunTrust. The warehouse financing facility, which operates like a revolving credit facility, is secured primarily
by MCG Commercial Loan Funding Trusts assets, including commercial loans that we sold to the trust. The pool of commercial loans in the trust must meet certain requirements, such as term, average life, investment rating, agency rating and
industry diversity requirements. We must also meet certain requirements related to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs. We funded this facility through two separate
Variable Funding Certificates, or VFCs, including a $218.75 million Class A VFC and a $31.25 million Class B VFC.



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In February 2009, SunTrust renewed its annual liquidity commitment for this facility. In connection with
this renewal, a number of modifications were made to the warehouse facility terms, including a reduction in the facility borrowing commitment from $250.0 million to $190.0 million. In conjunction with this reduction, the Class B VFC was retired. The
legal final maturity date is now August 2011, subject to contractual terms and conditions. The requirement for a six-month standstill upon non-liquidity renewal has been eliminated. If a new agreement or extension is not executed by February 2010,
the warehouse facility enters an 18-month amortization period during which principal under the facility is paid down through orderly monetizations of portfolio company assets that are financed through the facility. The facility is funded by third
parties through the commercial paper market with SunTrust providing a liquidity backstop, subject to SunTrusts annual liquidity commitment.

Advances under the Class A VFC may be up to 64% of eligible collateral. As of March 31, 2009 and December 31, 2008, there was $295.5 million and $259.1 million, respectively, of collateral under this facility. The
warehouse facility is non-recourse to us; therefore, in the event of a termination event or upon the legal final maturity date, the lenders under the warehouse facility may only look to the collateral to satisfy the outstanding obligations under
this facility. The interest rate for Class A advances has been increased to the commercial paper rate plus 2.50%. Class A advances previously bore interest at the commercial paper rate plus 1.50%. The minimum asset coverage ratio that we
are required to maintain was reduced from 200% to 180% effective as of December 31, 2008, and the minimum consolidated stockholders equity requirement was reduced from $654.0 million prior to December 31, 2008 to $525.0 million
as of December 31, 2008. The terms of this facility include a step-down provision that allows us to reduce the minimum stockholders equity requirement to $500.0 million plus 50% of the proceeds from any equity issuances after
December 31, 2008, if we reduce the effective advance rate for the advances outstanding to less than 60% of eligible collateral and we formally notify the lender. Prior to the commencement of any amortization period, we will contribute 80% of
net proceeds from monetizations of collateral financed in the warehouse facility to reduce the facility borrowing limit, until such limit is reduced to $150.0 million. In addition, 7.5% of the sale of the first $100.0 million of unencumbered
investment assets by us will be used to repay the warehouse facility until such facility is reduced to $150.0 million. In March 2009, we repaid $1.5 million from monetization proceeds which resulted in a $1.5 million reduction in the
facility borrowing limit. As of March 31, 2009, the maximum borrowing capacity under the warehouse facility was $188.5 million. We paid a $2.375 million, or 1.25%, facility renewal fee.

MCG Commercial Loan Trust 2006-1.In April 2006, we completed a $500.0 million debt securitization through MCG Commercial Loan Trust 2006-1, a
wholly owned subsidiary. The 2006-1 Trust issued $106.25 million of Class A-1 Notes, $50.0 million of Class A-2 Notes, $85.0 million of Class A-3 Notes, $58.75 million of Class B Notes, $45.0 million of Class
C Notes, and $47.5 million of Class D Notes. The respective classes of notes bear interest at LIBOR plus 0.33%, 0.35%, 0.33%, 0.58%, 1.05% and 2.25%.

All the notes are secured by the assets of MCG Commercial Loan Trust 2006-1, including commercial loans totaling $386.0 million and $405.8 million as of March 31, 2009 and December 31, 2008,
respectively, that the trust purchased from us. We retain all of the equity in the securitization. The securitization includes a five-year reinvestment period ending in April 2011, unless we terminate this facility earlier, during which the
trust may use principal collections received on the underlying collateral to purchase new collateral from us. 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 five-year revolving period. The Class A-3 Notes are a delayed draw class of secured notes, which were drawn in full during April 2007. From time to time, the trust purchases additional commercial loans from us, primarily using the
proceeds from the Class A-2 revolving notes. The pool of commercial loans in the trust must meet certain requirements, such as asset mix and concentration, collateral coverage, term, agency rating, minimum coupon, minimum spread and sector
diversity requirements.

In December 2008, we repurchased $15.1 million of collateralized loan obligations for $4.0 million that had
previously been issued by Commercial Loan Trust 2006-1. In January 2009, we purchased an additional $7.5 million of these notes for $2.1 million, which resulted in a $5.4 million gain on extinguishment of debt during the quarter ending
March 31, 2009.



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Unsecured Revolving Line of Credit.In June 2008, we entered into an agreement, effective
May 30, 2008, for a one-year unsecured revolving line of credit facility with a $70.0 million commitment. SunTrust Bank acts as the agent for this facility and SunTrust Robinson Humphrey, Inc. acted as arranger for this facility.
Originally, SunTrust Bank committed $25.0 million to this facility, while Chevy Chase Bank, F.S.B.; Sovereign Bank; and BMO Capital Markets, Inc., each committed $15.0 million. Advances under this facility bear interest at LIBOR plus
2.75%, prime plus 1.25% or the Federal Funds rate plus 4.00% (reduced to the Federal Funds rate plus 3.00%, if the Federal Funds rate is less than 0.25% below LIBOR), with a commitment fee of 0.25% per annum on undrawn amounts. We use this
facility for the origination of loans to, and investments in, primarily middle-market companies; repayment of indebtedness; working capital; and other general corporate purposes. In February 2009, the Unsecured Revolving Line of Credit agreement was
amended to reduce the maximum borrowing limit from $70.0 million to $35.0 million and increase the interest rate on borrowings under this facility to LIBOR plus 400 basis points from LIBOR plus 275 basis points. The amendment also reduced the
minimum stockholders equity requirements from $650.0 million prior to December 31, 2008 to $500.0 million plus 50% of the proceeds from post-amendment date equity issuances for the periods ending as of and after December 31, 2008. In
addition, we agreed to maintain minimum cash and cash equivalents of $12.5 million at all times and a quarterly cash coverage ratio of not less than 1.25 to 1.00. We are required to direct a portion of any monetization proceeds to pay down
debt. Up to 60% of the net proceeds of any sale by us or unencumbered investment assets will reduce amounts outstanding under the revolving line of credit and our unsecured notes on a pro rata basis, based on then-outstanding amounts. All asset
monetizations are at our sole discretion based upon the economic merits of any proposed transaction. Dividends payable in cash with a declared payment date prior to July 1, 2009 are limited to the minimum amount required for us to maintain our
status as a RIC. We may not repurchase or redeem our equity or debt, provided that we may use up to $5.0 million to repurchase debt from our 2006-1 term securitization facility. We paid the lenders an amendment fee, with each consenting lender
receiving 0.50%. As discussed more fully in Note 12Subsequent Events, on May 4, 2009 we repaid this facility in full in advance of its May 29, 2009 maturity.

SBIC Debentures.In December 2004, we formed a wholly owned subsidiary, Solutions Capital I, LP. Solutions Capital I, LP has a license from the SBA
to operate as an SBIC, under the Small Business Investment Act of 1958, as amended, or SBIC Act. As of March 31, 2009, the license gave Solutions Capital I, LP the potential to borrow up to $130.0 million. The SBA has approved and
committed $130.0 million in borrowings to the SBIC, subject to certain capital requirements and customary procedures. These funds can be used to provide debt and equity capital to qualifying small businesses. We may use the borrowings from the
SBA to fund new originations; however, we may not use these borrowings to originate debt to companies that are currently in our portfolio without SBA approval. In addition, we may not use these funds for working capital.

To realize the full $130.0 million potential borrowing that we have been approved for under this program, we must fund a total of $65.0 million
to the SBIC, of which we have funded $18.6 million as of March 31, 2009. Based on our current funded capital, Solutions Capital I, LP, may, subject to compliance with the SBAs customary procedures, borrow up to an additional $28.3
million to originate new investments. To access the entire $130.0 million that the SBA has approved and committed, we would have to fund an additional $46.4 million.

The American Recovery and Reinvestment Act of 2009, which was passed into law in February 2009, included a provision that increased the maximum amount of outstanding leverage to available SBIC companies to up
to $150.0 million, which represents a $12.9 million increase over the $137.1 million limit as of December 31, 2008. Solutions Capital I, LP would require the SBAs approval and commitment in order to access this incremental borrowing
capacity. To access the entire $150.0 million, we would have to fund a total of $56.4 million, in addition to the $18.6 million that we had funded through March 31, 2009. As of March 31, 2009 and December 31, 2008, we had
$31.7 million and $27.8 million, respectively, of investments and we had $20.1 million and $0.8 million, respectively, of restricted cash to be used for investments by our SBIC.



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Once drawn, the SBIC debt bears an interim interest rate of LIBOR plus 30 basis points. Currently,
$13.0 million of our outstanding borrowings are subject to the interim rate. The rate becomes fixed at the time of SBA pooling, which is within nine months of funding, and is set to the then-current 10-year treasury rate plus a spread and an
annual SBA charge. As of March 31, 2009, the SBIC had $27.6 million outstanding summarized in the following table:



|                       |  |                    |        |                  |   |       |  |                              |   |  |                       |  |      |   |  |    
|---------------------- |  | ------------------ | ------ | ---------------- | - | ----- |  | ---------------------------- | - |  | --------------------- |  | ---- | - |  | ---
|                       |  | Amount Outstanding |        |                  |   |       |  |                              |  
|(dollars in thousands) |  | March 31,2009      |        | December 31,2008 |   | Rate  |  | Treasury Rate atPooling Date |   |  | Spread inbasis points
|Tranche                |  |                    |        |                  |   |       |  |                              |   |  |                       |  |      |   |  |    
|                       |  |                    |        |                  |   |      
|2008-10B               |  | $                  | 2,600  |                  | $ | 2,600 |  | 6.44                         | % |  | Fixed                 |  | 3.80 | % |  | 264
|2009-10A               |  |                    | 12,000 |                  |   |      |  | 5.34                         | % |  | Fixed                 |  | 2.81 | % |  | 253
|Interim 2009-10B       |  |                    | 13,000 |                  |   |      |  | 2.78                         | % |  | Interim               |  | NA   |   |  | NA 
|                       |  |                    |        |                  |   |       |  |                              |   |  |                       |  |      |   |  |    
|Total                  |  | $                  | 27,600 |                  | $ | 2,600 |  |                              |   |  |                       |  |      |   |  |    

In October 2008, we received exemptive relief from the Securities and Exchange Commission, or SEC, which
effectively allows us to exclude debt issued by Solutions Capital I, LP from the calculation of our consolidated BDC asset coverage ratio. Even though we were below the 200% asset coverage requirement as of March 31, 2009, we could continue to
borrow under the SBIC program.

The following table summarizes repayments based on the contractual principal collections of the outstanding loans that
comprise the collateral, where applicable. Actual repayments could differ significantly due to prepayments by our borrowers and modifications of our borrowers existing loan agreements.



|               |  |                   |         |                      |   |         |  |   |        
|-------------- |  | ----------------- | ------- | -------------------- | - | ------- |  | - | -------
|               |  | March 31, 2009   
|(in thousands) |  | Debt withRecourse |         | Debt withoutRecourse |   | Total  
|2009           |  | $                 | 31,205  |                      | $ | 1,347   |  | $ | 32,552 
|2010           |  |                   | 44,686  |                      |   | 184,185 |  |   | 228,871
|2011           |  |                   |        |                      |   |        |  |   |       
|2012           |  |                   | 22,342  |                      |   |        |  |   | 22,342 
|2013           |  |                   |        |                      |   |        |  |   |       
|Thereafter(a)  |  |                   | 27,600  |                      |   | 319,880 |  |   | 347,480
|               |  |                   |         |                      |   |         |  |   |        
|Total          |  | $                 | 125,833 |                      | $ | 505,412 |  | $ | 631,245
|               |  |                   |         |                      |   |         |  |   |        

| | 
| | 

| | (a) | Recourse on Solutions Capital I, LPs outstanding debt is limited to MCGs commitment of $65.0 million. As of
March 31, 2009, we had $27.6 million of debt outstanding.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table summarizes our outstanding borrowings by interest
rate benchmark:



|                        |  |               |         |  |  |                  |   |        
|----------------------- |  | ------------- | ------- |  |  | ---------------- | - | -------
|(in thousands)          |  | March 31,2009 |         |  |  | December 31,2008
|Interest rate benchmark |  |               |         |  |  |                  |   |        
|LIBOR                   |  | $             | 351,085 |  |  |                  | $ | 371,880
|Commercial paper rate   |  |               | 185,532 |  |  |                  |   | 187,169
|Fixed rate              |  |               | 94,628  |  |  |                  |   | 77,600 
|                        |  |               |         |  |  |                  |   |        
|Total borrowings        |  | $             | 631,245 |  |  |                  | $ | 636,649
|                        |  |               |         |  |  |                  |   |        

As of March 31, 2009, we reported $631.2 million of borrowings on our Consolidated Balance
Sheet at cost. We estimate that the fair value of these borrowings as of March 31, 2009 was approximately $435.1 million, based on market data and current interest rates.



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NOTE 6CAPITAL STOCK

We have one class of common stock and one class of preferred stock authorized. Our board of directors is authorized to provide for the issuance of shares of preferred
stock in one or more series; establish the number of shares to be included in each such series; and to establish the designations, voting powers, preferences and rights of the shares of each such series, and any qualifications, limitations or
restrictions thereof subject to the 1940 Act.

In 2008, we raised $57.7 million of net proceeds by issuing 9.5 million shares of newly issued common
stock in a rights offering. See Note 9(Loss) Earnings Per Share for additional details regarding this rights offering.

NOTE 7SHARE-BASED COMPENSATION

EMPLOYEE
SHARE-BASED COMPENSATION

From time to time, we award shares of restricted common stock to employees under
the Amended and Restated 2006 Employee Restricted Stock Plan,or the 2006 Plan, which our stockholders initially approved in June 2006. Under the terms of the 2006 Plan, we may award up to 3,500,000 shares of common stock to employees. Shares
of restricted common stock awarded under the 2006 Plan may be subject to the employees meeting service or performance conditions specified at the time of award. The award date is the date on which the shares are awarded by the Compensation
Committee of our board of directors, while the fair value of the respective stock award is based on the closing price of our common stock on the NASDAQ Global Select Market on the award date. We amortize restricted stock awards on a straight-line
basis over the requisite service period and report this expense as amortization of employee restricted stock awards on ourConsolidated Statements of Operations.

During the three months ended March 31, 2009, we did not issue any shares of restricted stock. During 2008, we issued 1,336,000 shares of restricted stock under the 2006 Plan, with a weighted-average fair value
per share of stock on the award date of $4.99. These awards included 648,000 shares of restricted stock awarded under the 2006 Plan as part of the MCG Capital 2008 Retention Program, or the Retention Program, with a weighted-average fair
value per of common stock of $3.58.

The forfeiture provision for the shares of restricted stock issued under the Retention Program will lapse on a cliff
basis in March 2011. The forfeiture provisions for the other shares of restricted common stock awarded in 2008 lapse ratably over the three- or four-year period set forth in the respective award agreements.

During the three months ended March 31, 2009 and 2008, we recognized $1.5 million and $1.8 million, respectively, of compensation expense related to share-based
compensation awards, including none and $0.1 million, respectively, of dividends paid on shares securing non-recourse employee loans. As of March 31, 2009, all the restricted share awards for which forfeiture provisions have not lapsed
carried non-forfeitable dividend rights to the holder of the restricted shares. We record dividends paid on restricted shares of common stock for which forfeiture provisions are expected to lapse to retained earnings, while we record dividends paid
on restricted shares for which forfeiture provisions are not expected to lapse to compensation expense. No dividends were paid during the three months ended March 31, 2009. During the three months ended March 31, 2008, all dividends paid
on restricted stock were charged to retained earnings except for dividends paid on shares securing non-recourse employee loans, because we expect the forfeiture provisions will lapse for all such shares. As of March 31, 2009, we had $9.5
million of unrecognized compensation cost related to restricted stock awarded to employees. We will recognize these costs over the remaining weighted-average requisite service period of 2.1 years.

NON-EMPLOYEE DIRECTOR SHARE BASED COMPENSATION

During June 2006, our stockholders initially approved the Amended and Restated 2006 Non-Employee Director Restricted Stock Plan, or the 2006 Non-Employee Plan,
under which we may issue up to 100,000 shares of common stock. During the three months ended March 31, 2009 and 2008, we did not award any restricted shares of common stock to non-employee directors. During the three months ended March 31,
2009 and 2008, we recognized $0.1 million and $0.1 million, respectively, of compensation costs related to share-based awards to non-employee directors. We include this compensation cost in general and administrative expense on our Consolidated
Statements of Operations. As of March 31, 2009, we had $0.2 million of unrecognized compensation cost related to restricted stock awarded to non-employee directors, which we expect to recognize over the remaining weighted-average requisite
service period of 1.7 years.



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SUMMARY OF EMPLOYEE AND
NON-EMPLOYEE DIRECTOR SHARE-BASED COMPENSATION

The following
table summarizes our restricted stock award activity during the three months ended March 31, 2009:



|                                                         |  |           |   |  |                                                |      
|-------------------------------------------------------- |  | --------- | - |  | ---------------------------------------------- | -----
|                                                         |  | Shares    |   |  | Weighted-AverageGrant DateFair Value per Share
|Subject to forfeiture provisions as of December 31, 2008 |  | 1,451,000 |   |  | $                                              | 8.49 
|Forfeiture period lapsed                                 |  | (114,000  | ) |  |                                                | 14.51
|Forfeited                                                |  | (18,000   | ) |  |                                                | 4.75 
|                                                         |  |           |   |  |                                                |      
|Subject to forfeiture provisions as of March 31, 2009(a) |  | 1,319,000 |   |  | $                                              | 8.02 
|                                                         |  |           |   |  |                                                |      

| | 
| | 

| | (a) | Includes 12,000 performance shares held in trust with a weighted-average award date fair value of $19.37 per share.
| | --- | -------------------------------------------------------------------------------------------------------------------

NOTE 8INCOME TAXES

As a RIC, we are taxed under Subchapter M of the Internal Revenue Code. As such, our income generally is not taxable to the extent we distribute it to stockholders and we
meet certain qualification tests as outlined in the Internal Revenue Code. However, income from certain investments owned by our wholly owned subsidiaries is subject to federal, state and local income taxes. We met our distribution requirements as a
regulated investment company for 2008 and will monitor distribution requirements for 2009 in order to ensure compliance under Subchapter M of the Internal Revenue Code.

We use the asset and liability method to account for our taxable subsidiaries income taxes. Using this method, we recognize deferred tax assets and liabilities for the estimated future tax effects attributable
to temporary differences between financial reporting and tax bases of assets and liabilities. In addition, we recognize deferred tax benefits associated with net operating carryforwards that we may use to offset future tax obligations. We measure
deferred tax assets and liabilities using the enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporary differences. During the three months ended March 31, 2009 and 2008, we
recorded an income tax benefit of $0.2 million and an income tax provision of $0.2 million, respectively, which were attributable primarily to unrealized gains on investments held by our subsidiaries.

From December 2001 through March 31, 2009, we declared $11.78 of distributions per share. Each year, we mail statements on Form 1099-DIV to our stockholders that
identify whether we made distributions from ordinary income, net capital gains on the sale of securities, which are each taxable distributions, and/or a return of paid-in-capital surplus, which is a nontaxable distribution. A portion of our
distributions may represent a return of capital to our stockholders, to the extent that the total distributions paid in a given year exceed current and accumulated taxable earnings and profits. A portion of the distributions that we paid to
stockholders during fiscal years 2008, 2006, 2005, 2004 and 2003 represented a return of capital.

Historically, we declared dividends that we paid the
following quarter. The following table summarizes the distributions that we declared and paid since January 1, 2008.



|                  |  |                |  |                |  |        |     
|----------------- |  | -------------- |  | -------------- |  | ------ | ----
|Date Declared     |  | Record Date    |  | Payment Date   |  | Amount
|May 6, 2008       |  | June 30, 2008  |  | July 30, 2008  |  | $      | 0.27
|February 22, 2008 |  | March 12, 2008 |  | April 29, 2008 |  |        | 0.44

We determine the tax attributes of our distributions as of the end of our fiscal year based upon our taxable
income for the full year and distributions paid during the full year. During the three months ended March 31, 2009, we did not make any distributions to stockholders. However, we will monitor 2009 taxable income in order to ensure compliance
with the distribution requirements as a RIC.

Taxable income differs from net income recognized in accordance with accounting principles generally accepted
in the United States, or GAAP, because of temporary and permanent differences in income and expense recognition. Taxable income generally excludes unrealized gains and losses from appreciation or depreciation of our investments, which are included
in GAAP net income. Further, amounts recognized for financial reporting purposes may differ from amounts included in taxable income due to the accrued dividends on preferred stock, which increases the book basis but not the tax basis of our
investments, and non-accrual interest on loans, which increases tax basis but not book basis. The following table summarizes the cost, as well as the unrealized appreciation and depreciation for federal income tax purposes as of March 31, 2009
and December 31, 2008:



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|                                                                      |  |                |           |   |  |  |                   |   |           |  
|--------------------------------------------------------------------- |  | -------------- | --------- | - |  |  | ----------------- | - | --------- | -
|(in thousands)                                                        |  | March 31, 2009 |           |   |  |  | December 31, 2008 |  
|Cost for federal income tax purposes                                  |  | $              | 1,415,856 |   |  |  |                   | $ | 1,413,241 |  
|                                                                      |  |                |          
|Gross unrealized appreciation                                         |  |                |           |   |  |  |                   |   |           |  
|Unrealized appreciation of fair value of portfolio investments (GAAP) |  |                | 59,452    |   |  |  |                   |   | 85,754    |  
|Book to tax differences                                               |  |                | 88,398    |   |  |  |                   |   | 91,770    |  
|                                                                      |  |                |           |   |  |  |                   |   |           |  
|Gross unrealized appreciationtax basis                               |  |                | 147,850   |   |  |  |                   |   | 177,524   |  
|                                                                      |  |                |           |   |  |  |                   |   |           |  
|                                                                      |  |                |          
|Gross unrealized depreciation                                         |  |                |           |   |  |  |                   |   |           |  
|Unrealized depreciation of fair value of portfolio investments (GAAP) |  |                | (408,658  | ) |  |  |                   |   | (352,729  | )
|Book to tax differences                                               |  |                | (40,056   | ) |  |  |                   |   | (34,888   | )
|                                                                      |  |                |           |   |  |  |                   |   |           |  
|Gross unrealized depreciationtax basis                               |  |                | (448,714  | ) |  |  |                   |   | (387,617  | )
|                                                                      |  |                |           |   |  |  |                   |   |           |  
|Net unrealized (depreciation) appreciationtax basis                  |  |                | (300,864  | ) |  |  |                   |   | (210,093  | )
|                                                                      |  |                |           |   |  |  |                   |   |           |  
|                                                                      |  |                |          
|Total investments at fair value (GAAP)                                |  | $              | 1,114,992 |   |  |  |                   | $ | 1,203,148 |  
|                                                                      |  |                |           |   |  |  |                   |   |           |  

The following table reconciles GAAP net loss to taxable net income (loss) for the three months ended
March 31, 2009 and the year ended December 31, 2008:



|                                                                                |  |                                 |         |   |  |  |                             |   |          |  
|------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - |  |  | --------------------------- | - | -------- | -
|(in thousands)                                                                  |  | Three monthsendedMarch 31, 2009 |         |   |  |  | Year endedDecember 31, 2008 |  
|Net loss                                                                        |  | $                               | (50,946 | ) |  |  |                             | $ | (191,245 | )
|Difference between book and tax losses on investments(a)                        |  |                                 | (519    | ) |  |  |                             |   | (73,272  | )
|Net change in unrealized depreciation on investments not taxable until realized |  |                                 | 82,584  |   |  |  |                             |   | 248,218  |  
|Timing difference related to deductibility of long-term incentive compensation  |  |                                 | 362     |   |  |  |                             |   | 6,642    |  
|Taxable interest income on non-accrual loans(b)                                 |  |                                 | 4,640   |   |  |  |                             |   | 2,051    |  
|Dividend income accrued for GAAP purposes that is not yet taxable               |  |                                 | (1,825  | ) |  |  |                             |   | (19,972  | )
|Distributions from taxable subsidiaries                                         |  |                                 |        |   |  |  |                             |   | 483      |  
|Federal tax (benefit) provision                                                 |  |                                 | (172    | ) |  |  |                             |   | 789      |  
|Other, net                                                                      |  |                                 | 38      |   |  |  |                             |   | 4,181    |  
|                                                                                |  |                                 |         |   |  |  |                             |   |          |  
|Taxable income (loss) before deductions for distributions                       |  | $                               | 34,162  |   |  |  |                             | $ | (22,125  | )
|                                                                                |  |                                 |         |   |  |  |                             |   |          |  

| | 
| | 

| | (a) | Results for the year ended December 31, 2008, primarily reflect the write-off, for tax purposes, of the common
stock of Cleartel.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------

| | (b) | Results for the year ended December 31, 2008, reflect the reversal of interest that we previously recognized on
non-accrual loans of a portfolio investment that we liquidated. We applied the proceeds from the liquidation to the portfolio companys outstanding principal balance on the debt obligation to us.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In December 2007, we received an examination report from the IRS. See Note 10Contingencies and Commitments for information about that report.



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NOTE 9(LOSS) EARNINGS PER SHARE

The following table summarizes our calculation of basic and diluted (loss) earnings per share for the three months ended March 31, 2009 and
2008:



|                                                                      |  |           |         |   |      |   |         |  
|--------------------------------------------------------------------- |  | --------- | ------- | - | ---- | - | ------- | -
|                                                                      |  | March 31, |        
|(dollars in thousands, except per share amounts)                      |  | 2009      |         |   | 2008 |  
|Numerator                                                             |  |           |         |   |      |   |         |  
|Net Income                                                            |  | $         | (50,946 | ) |      | $ | 2,498   |  
|Less: Dividends declaredcommon and restricted shares                 |  |           |        |   |      |   | (28,855 | )
|                                                                      |  |           |         |   |      |   |         |  
|Undistributed earnings                                                |  |           | (50,946 | ) |      |   | (26,357 | )
|Percentage allocated to common shares(a)                              |  |           | 100.0   | % |      |   | 98.7    | %
|                                                                      |  |           |         |   |      |   |         |  
|Undistributed earningscommon shares                                  |  |           | (50,946 | ) |      |   | (26,014 | )
|Add: Dividends declaredcommon shares                                 |  |           |        |   |      |   | 28,471  |  
|                                                                      |  |           |         |   |      |   |         |  
|                                                                      |  |          
|Numerator for basic and diluted earnings per share                    |  |           |         |   |      |   |         |  
|Common shares                                                         |  |           | (50,946 | ) |      |   | 2,457   |  
|Participating unvested shares                                         |  |           |        |   |      |   | 41      |  
|                                                                      |  |           |         |   |      |   |         |  
|Numerator for basic and diluted earnings per sharetotal              |  |           | (50,946 | ) |      |   | 2,498   |  
|                                                                      |  |           |         |   |      |   |         |  
|                                                                      |  |          
|Denominator for basic and diluted weighted-average shares outstanding |  |           |         |   |      |   |         |  
|Common shares                                                         |  |           | 74,498  |   |      |   | 67,941  |  
|Participating unvested shares                                         |  |           |        |   |      |   | 906     |  
|                                                                      |  |           |         |   |      |   |         |  
|Basic and diluted weighted-average shares outstandingtotal           |  |           | 74,498  |   |      |   | 68,847  |  
|                                                                      |  |           |         |   |      |   |         |  
|                                                                      |  |          
|(Loss) earnings per share:                                            |  |           |         |   |      |   |         |  
|Basiccommon and participating unvested shares                        |  | $         | (0.68   | ) |      | $ | 0.04    |  
|Dilutedcommon and participating unvested shares                      |  | $         | (0.68   | ) |      | $ | 0.04    |  
|(a)Weighted-average shares                                            |  |           |         |   |      |   |         |  
|Weighted-average common shares                                        |  |           |         |   |      |   |         |  
|Weighted-average common shares outstanding                            |  |           | 74,498  |   |      |   | 64,583  |  
|Adjustment for bonus element of rights                                |  |           |        |   |      |   | 3,358   |  
|                                                                      |  |           |         |   |      |   |         |  
|Basic weighted-average common shares                                  |  |           | 74,498  |   |      |   | 67,941  |  
|                                                                      |  |           |         |   |      |   |         |  
|Weighted-average restricted shares                                    |  |           |         |   |      |   |         |  
|Weighted-average restricted shares                                    |  |           |        |   |      |   | 861     |  
|Bonus element                                                         |  |           |        |   |      |   | 45      |  
|                                                                      |  |           |         |   |      |   |         |  
|Total weighted-average restricted shares                              |  |           |        |   |      |   | 906     |  
|                                                                      |  |           |         |   |      |   |         |  
|Total                                                                 |  |           | 74,498  |   |      |   | 68,847  |  
|                                                                      |  |           |         |   |      |   |         |  
|                                                                      |  |          
|Percentage allocated to common shares                                 |  |           | 100.0   | % |      |   | 98.7    | %

ADOPTION OF FSP EITF 03-6-1

As described in Note 1Description of Business, we adopted FSP EITF 03-6-1 on January 1, 2009. Our restricted stock contains rights to receive
non-forfeitable dividends, and, thus, are participating securities requiring the two-class method of computing earnings per share under the provisions of FSP EITF 03-6-1. The calculation of earnings per share for common shares excludes income
attributable to our restricted stock from the numerator and excludes the dilutive impact of those shares from the denominator. The provisions of FSP EITF 03-6-1 also require us to retroactively adjust all prior period earnings from per share
computations so that our restricted stock are considered participating securities requiring the two-class method of computing earnings per share.



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The retroactive application of the provisions of FSP EITF 03-6-1 did not change our previously reported earnings per
share for the period ended March 31, 2008, in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008. FSP EITF 03-6-1 had no impact on our basic and diluted loss per share for the three months ended March 31, 2009,
because the holders of the participating unvested shares are not required to fund any portion of the loss.

In June 2008, FASB Staff Position EITF
03-06-1Determining Whether Instruments Granted in Share-based Payment Transactions are Participating Securities, or FSP EITF 03-06-1, was issued. This standard requires companies to include unvested share-based payment awards that contain
non-forfeitable rights to dividends in the computation of earnings per share pursuant to the two-class method. In effect, FSP EITF 03-06-1 requires that we must report basic and diluted earnings per share in two broad categories. First, we must
report basic and diluted earnings per share associated with the unvested share-based payments with non-forfeitable rights. Second, companies must report separately basic and diluted earnings per share for their remaining common stock. FSP EITF
03-06-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. We adopted this standard for our financial statements ended March 31, 2009. As required, we
applied this standard retroactively to all reported periods. In some instances, the application of this standard resulted in a slight increase in the weighted-average number of shares used to compute basic and diluted earnings per share. However,
because the change in the weighted-average number of shares was relatively small, our adoption of this standard did not result in a change to the earnings per share that we reported previously for March 31, 2008.

SHAREHOLDERS RIGHTS OFFERING

We issued transferable rights to stockholders of record on March 28, 2008. The rights entitled rights holders to subscribe for an aggregate of 9.5 million shares of our common stock. Record date stockholders
received one right for every seven outstanding shares of common stock owned on the record date. The rights entitled the holders to purchase one new share of common stock for every right held. The subscription price equaled 88% of the VWAP of our
common stock on the NASDAQ Global Select Market during the five trading days ended April 18, 2008. We issued all 9.5 million shares of common stock on April 29, 2008 at a subscription price of $6.36 per share. The market price of our
common stock was $9.92 per share on March 25, 2008, which was the last day that our common stock and the rights were traded together. Since the $6.36 per share subscription price of common stock issued under the rights offering was lower than
the $9.92 per share market price on March 25, 2008, the rights offering contained a bonus element. Accordingly, as required by SFAS 128, we retroactively increased the weighted-average number of shares of common stock outstanding used to
compute basic and diluted earnings per share by a factor of 1.052 for all historical periods prior to April 29, 2008 (the date that the common stock was issued in conjunction with the stockholders rights offering). This factor represents
the impact of the bonus element of the rights offering on our common stock.

NOTE 10CONTINGENCIES
AND COMMITMENTS

Legal Proceedings and Tax Reviews

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 on our financial condition or results of operations.

In December 2007, we received an examination report from the IRS related to its audit of our tax returns for the 2004 and 2005 tax years. The IRS proposed changes to
certain deductions made by us for those years, primarily associated with the timing of certain realized losses in our portfolio. We are appealing the proposed changes and believe it is more likely than not that our appeal will be successful. If our
appeal is not successful, we could be subject to up to $17.8 million of additional taxes, interest and penalties and we could be required to make up to $25.1 million of additional cash and/or stock distributions to our stockholders, although
alternative options may be available to us in lieu of such distributions. If, in the future, we believe it is more likely than not that we will not prevail, we would accrue the estimated amounts due.

Financial Instruments

During the normal course of business,
we are party to certain financial instruments, including loans, participations in loans, guarantees, letters of credit and other financial commitments. We conduct extensive due diligence and,



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when appropriate, obtain collateral to limit our credit risk. Generally, these commitments have fixed expiration dates or other termination clauses, which
may require payment of a fee by the counterparty. We expect many commitments will expire unused; therefore, the total commitment amounts do not necessarily represent future cash requirements.

In accordance with GAAP, the unused portions of these commitments are not recorded on our Consolidated Balance Sheets. The following table summarizes the nominal
dollar balance and the fair value of unused commercial loan commitments, guarantees and standby letters of credit as of March 31, 2009 and December 31, 2008:



|                           |  |                |        |                   |   |       
|-------------------------- |  | -------------- | ------ | ----------------- | - | ------
|(in thousands)             |  | March 31, 2009 |        | December 31, 2008
|Unused loan commitments(a) |  | $              | 37,349 |                   | $ | 43,393
|                           |  |               
|Guarantees                 |  |                | 5,677  |                   |   | 5,833 
|                           |  |               
|Standby letters of credit  |  |                |       |                   |   | 97    

| | 
| | 

| | (a) | Estimated fair value of unused loan commitments as of March 31, 2009 and 2008 was $0.2 million and $0.2
million, respectively, based on the fees that we currently charge to enter into similar arrangements, taking into account the creditworthiness of the counterparties.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We currently have three guarantees totaling $5.7 million. Two guarantees relate to Cleartel Communications, Inc. in the amounts of $2.0 million and $3.0 million for third party-debt and a telecommunications service
provider, respectively, for which we consider the credit risk to be remote. The last guarantee in the amount of $0.7 million for WMAC II, Inc., will expire on April 30, 2009 and we believe that the credit risk for this guarantee is remote. We
report off-balance sheet guarantees on our Consolidated Schedules of Investments, as required by the 1940 Act.



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NOTE 11FINANCIAL HIGHLIGHTS

The following schedule summarizes financial highlights for the three months ended March 31, 2009 and 2008:



|                                                                                    |  |                             |         |   |      |   |         |   
|----------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | --
|                                                                                    |  | Three months endedMarch 31, |        
|                                                                                    |  | 2009                        |         |   | 2008 |  
|PER SHARE DATA                                                                      |  |                             |         |   |      |   |         |   
|Net asset value at beginning of period(a)                                           |  | $                           | 8.66    |   |      | $ | 12.73   |   
|                                                                                    |  |                             |         |   |      |   |         |   
|                                                                                    |  |                            
|Net (loss) income                                                                   |  |                             |         |   |      |   |         |   
|Net operating income before investment losses and gain on extinguishment of debt(b) |  |                             | 0.16    |   |      |   | 0.31    |   
|Net change in unrealized depreciation on investments(b)                             |  |                             | (1.10   | ) |      |   | (0.27   | ) 
|Net realized gains on investments(b)                                                |  |                             | 0.19    |   |      |   |        |   
|Gain on extinguishment of debt(b)                                                   |  |                             | 0.07    |   |      |   |        |   
|                                                                                    |  |                             |         |   |      |   |         |   
|Net (loss) income(b)                                                                |  |                             | (0.68   | ) |      |   | 0.04    |   
|                                                                                    |  |                             |         |   |      |   |         |   
|Net decrease in net assets resulting from distributions(b)                          |  |                             |        |   |      |   | (0.44   | ) 
|                                                                                    |  |                             |         |   |      |   |         |   
|Net increase in stockholders equity relating to stock-based transactions           |  |                             |         |   |      |   |         |   
|Net increase in stockholders equity from restricted stock amortization             |  |                             | 0.02    |   |      |   | 0.03    |   
|Dilutive effect of forfeiture provisions of previously issued restricted stock      |  |                             | 0.01    |   |      |   |        |   
|New increase in stockholders equity from other stock transactions                  |  |                             | 0.01    |   |      |   |        |   
|                                                                                    |  |                             |         |   |      |   |         |   
|Net increase in stockholders equity relating to stock-based transactions           |  |                             | 0.04    |   |      |   | 0.03    |   
|                                                                                    |  |                             |         |   |      |   |         |   
|                                                                                    |  |                            
|Net asset value at end of period(a)                                                 |  | $                           | 8.02    |   |      | $ | 12.36   |   
|                                                                                    |  |                             |         |   |      |   |         |   
|                                                                                    |  |                            
|MARKET PRICE PER SHARE AT END OF
PERIOD                                             |  | $                           | 1.28    |   |      | $ | 9.09    |   
|                                                                                    |  |                            
|TOTAL RETURN(c)                                                                     |  |                             | 80.28   | % |      |   | (17.77  | )%
|SHARES OF COMMON STOCK OUTSTANDING(c)                                               |  |                             |         |   |      |   |         |   
|Weighted-average (diluted)(b)(d)                                                    |  |                             | 74,498  |   |      |   | 68,847  |   
|End of period                                                                       |  |                             | 76,027  |   |      |   | 65,570  |   
|                                                                                    |  |                            
|NET ASSETS                                                                          |  |                             |         |   |      |   |         |   
|Average (annualized)                                                                |  | $                           | 660,665 |   |      | $ | 823,485 |   
|End of period                                                                       |  |                             | 609,531 |   |      |   | 810,203 |   
|                                                                                    |  |                            
|RATIOS (ANNUALIZED)                                                                 |  |                             |         |   |      |   |         |   
|Operating expenses to average net assets                                            |  |                             | 9.74    | % |      |   | 10.61   | % 
|Net operating income to average net assets                                          |  |                             | 7.33    | % |      |   | 10.39   | % 



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

|(b) | Based on weighted-average number of shares outstanding.
|--- | -------------------------------------------------------

|(c) | Total return = [(ending market price per share  beginning market price per share + dividends paid
per share) / beginning market price]. The three months ended March 31, 2009 reflects a large increase in market price per share in the period between December 31, 2008 and March 31, 2009.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | In accordance with FSP EITF 03-06-1Determining Whether Instruments Granted in Share-based Payment Transactions
are Participating Securities, we adjusted the weighted-average basic and diluted common shares outstanding for the three months ended March 31, 2008 to include participating restricted shares of common stock that received non-forfeitable
dividends. See Note 9(Loss) Earnings Per Share for additional information. The implementation of this standard did not change our previously reported earnings per share.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTE 12SUBSEQUENT EVENTS

MONETIZATIONS

In March 2009, three major customers
notified TNR Holdings Corp., or TNR, that they did not intend to renew their contracts. As a result, the revenues forecasted for TNR decreased by nearly 80%, which resulted in a significant decline in the fair value of our investment in TNR in March
2009. On April 20, 2009, TNR repaid in full its debt together with all accrued interest and we concurrently sold our equity in TNR for an aggregate between the two transactions of $11.7 million in cash. This combined transaction represented a
$15.8 million additional loss compared to our reported fair value as of December 31, 2008. The sale price is reflected in our reported fair value as of March 31, 2009.

UNSECURED REVOLVING LINE OF CREDIT

On
May 4, 2009, we repaid the remaining balance on our unsecured revolving line of credit out of existing cash on hand. As of March 31, 2009, the balance on the unsecured line of credit was $31.2 million. After this repayment, we had over
$23.3 million of unrestricted cash, $35.9 million of cash held in securitization accounts and $20.2 million of restricted cash as of May 4, 2009. As of May 4, 2009, based on preliminary balances of total assets, total borrowings
and other securities, our BDC asset coverage ratio increased to 208%.

ASSET PURCHASE
AGREEMENTCLEARTEL COMMUNICATIONS, INC.

On April 29, 2009, Cleartel
Communications Inc., or Cleartel, an MCG control investment, entered into an asset purchase agreement with Birch Communications, Inc. pursuant to which Birch Communications, Inc. will acquire substantially all of Cleartels operating assets in
exchange for consideration that we currently expect will satisfy MCGs existing guarantees with respect to this investment. The closing of the transaction is subject to regulatory approvals and other customary closing conditions, and is
expected to occur in the third quarter of 2009. Once closed, we will recognize a significant realized loss with an offsetting reduction in our unrealized losses. Since we reduced the fair value of our investment in Cleartel to zero during
2008, we do not expect that this transaction will have a material effect on our 2009 net income.



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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, including the consolidated schedule of investments, as of March 31, 2009,
and the related consolidated statements of operations, changes in net assets, cash flows, and financial highlights for the three month periods ended March 31, 2009 and 2008. These financial statements are the responsibility of MCG Capital
Corporation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 US 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, 2008, including the consolidated schedule of investments, and the related consolidated statements of operations, changes in net
assets, cash flows, and financial highlights for the year then ended (not presented herein), and in our report dated March 5, 2009 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, 2008, 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

May 8, 2009



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##### Table of Contents

Selected Financial Data

The following table summarizes key financial data for MCG Capital Corporation for the three months ended March 31, 2009 and 2008. You should refer to this data when
reading our Managements Discussion and Analysis of Financial Condition and Results of Operations and our unaudited Condensed Consolidated Financial Statements and notes thereto.



|                                                                                                                                                         |  |                             |           |   |      |   |          
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | --------- | - | ---- | - | ---------
|                                                                                                                                                         |  | Three months endedMarch 31,
|(in thousands, except per share amounts)                                                                                                                 |  | 2009                        |           |   | 2008
|INCOME STATEMENT DATA                                                                                                                                    |  |                             |           |   |      |   |          
|Revenue                                                                                                                                                  |  | $                           | 27,806    |   |      | $ | 42,996   
|Net operating income before net investment losses, gains on extinguishment of debt and income tax (benefit) provision                                    |  |                             | 11,938    |   |      |   | 21,266   
|DNOI(a)                                                                                                                                                  |  |                             | 13,475    |   |      |   | 23,008   
|Net (loss) income                                                                                                                                        |  |                             | (50,946   | ) |      |   | 2,498    
|                                                                                                                                                         |  |                            
|PER COMMON SHARE DATA                                                                                                                                    |  |                             |           |   |      |   |          
|Net operating income before net investment losses, gains on extinguishment of debt and income tax (benefit) provision per common
sharebasic and diluted |  | $                           | 0.16      |   |      | $ | 0.31     
|DNOI per common sharebasic and diluted(a)                                                                                                               |  | $                           | 0.18      |   |      | $ | 0.33     
|(Loss) earnings per common sharebasic and diluted                                                                                                       |  | $                           | (0.68     | ) |      | $ | 0.04     
|Cash dividends declared per common share                                                                                                                 |  | $                           |          |   |      | $ | 0.44     
|                                                                                                                                                         |  |                            
|SELECTED PERIOD-END BALANCES                                                                                                                             |  |                             |           |   |      |   |          
|Fair value of investment portfolio                                                                                                                       |  | $                           | 1,114,992 |   |      | $ | 1,512,416
|Total assets                                                                                                                                             |  |                             | 1,255,340 |   |      |   | 1,574,686
|Borrowings                                                                                                                                               |  |                             | 631,245   |   |      |   | 720,336  
|Total stockholders equity                                                                                                                               |  |                             | 609,531   |   |      |   | 810,203  
|Net asset value per common share outstanding(b)                                                                                                          |  | $                           | 8.02      |   |      | $ | 12.36    
|                                                                                                                                                         |  |                            
|OTHER PERIOD-END DATA                                                                                                                                    |  |                             |           |   |      |   |          
|Average size of investment                                                                                                                               |  | $                           | 15,704    |   |      | $ | 19,145   
|Number of portfolio companies                                                                                                                            |  |                             | 71        |   |      |   | 79       
|Number of employees                                                                                                                                      |  |                             | 70        |   |      |   | 98       
|                                                                                                                                                         |  |                            
|RECONCILIATION OF DNOI TO NET OPERATING INCOME
BEFORE NET INVESTMENT LOSSES, GAINS ON EXTINGUISHMENT OF DEBT AND TAX
(BENEFIT) PROVISION                 |  |                             |           |   |      |   |          
|Net operating income before net investment losses, gains on extinguishment of debt and income tax (benefit) provision                                    |  | $                           | 11,938    |   |      | $ | 21,266   
|Amortization of employee restricted stock awards                                                                                                         |  |                             | 1,537     |   |      |   | 1,742    
|                                                                                                                                                         |  |                             |           |   |      |   |          
|DNOI(a)                                                                                                                                                  |  | $                           | 13,475    |   |      | $ | 23,008   
|                                                                                                                                                         |  |                             |           |   |      |   |          
|WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING(c)                                                                                                            |  |                             |           |   |      |   |          
|Basic                                                                                                                                                    |  |                             | 74,498    |   |      |   | 68,847   
|Diluted                                                                                                                                                  |  |                             | 74,498    |   |      |   | 68,847   
|                                                                                                                                                         |  |                            
|NUMBER OF COMMON SHARES OUTSTANDING AT
PERIOD END                                                                                                        |  |                             | 76,027    |   |      |   | 65,570   



|(a) | DNOI is net operating income before net investment losses, gains on extinguishment of debt and income tax (benefit) provision, as determined in accordance with accounting principles generally accepted in the United
States, or GAAP, adjusted for amortization of employee restricted stock awards. We view DNOI and the related per share measures as useful and appropriate supplements to net operating income, net income, earnings per share and cash flows from
operating activities. These measures serve as an additional measure of MCGs operating performance exclusive of employee restricted stock amortization, which represents an expense of the company but does not require settlement in cash. DNOI
does include paid-in-kind, or PIK, interest and dividend income which are generally not payable in cash on a regular basis but rather at investment maturity or when declared. DNOI should not be considered as an alternative to net operating income,
net income, earnings per share and cash flows from operating activities (each computed in accordance with GAAP). Instead, DNOI should be reviewed in connection with net operating income, net income, earnings per share and cash flows from operating
activities in MCGs consolidated financial statements, to help analyze how MCGs business is performing.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(c) | In accordance with FSP EITF 03-06-1Determining Whether Instruments Granted in Share-based Payment Transactions
are Participating Securities, we adjusted the weighted-average basic and diluted common shares outstanding for the three months ended March 31, 2008 to include participating restricted shares of common stock that received non-forfeitable
dividends. See Note 9(Loss) Earnings Per Share in the Notes to Condensed Consolidated Financial Statements for additional information. The implementation of this standard did not change our previously reported earnings per share for the
quarter ended March 31, 2008.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

The following table summarizes key financial data for MCG Capital Corporation for the three months ended March 31,
2009 and 2008. You should refer to this data when reading our Managements Discussion and Analysis of Financial Condition and Results of Operations and our unaudited Condensed Consolidated Financial Statements and notes thereto.



|                                                                             |  |                             |           |   |      |   |           |  
|---------------------------------------------------------------------------- |  | --------------------------- | --------- | - | ---- | - | --------- | -
|                                                                             |  | Three months endedMarch 31, |          
|(in thousands, except per share amounts)                                     |  | 2009                        |           |   | 2008 |  
|PORTFOLIO COMPANY DATA (FAIR VALUE)                                          |  |                             |           |   |      |   |           |  
|Portfolio by type                                                            |  |                             |           |   |      |   |           |  
|Debt investments                                                             |  |                             |           |   |      |   |           |  
|Senior secured debt                                                          |  | $                           | 456,377   |   |      | $ | 452,445   |  
|Subordinated debt                                                            |  |                             |           |   |      |   |           |  
|Secured                                                                      |  |                             | 303,490   |   |      |   | 513,467   |  
|Unsecured                                                                    |  |                             | 27,823    |   |      |   | 32,722    |  
|                                                                             |  |                             |           |   |      |   |           |  
|Total debt investments                                                       |  |                             | 787,690   |   |      |   | 998,634   |  
|                                                                             |  |                             |           |   |      |   |           |  
|                                                                             |  |                            
|Equity investments                                                           |  |                             |           |   |      |   |           |  
|Preferred equity                                                             |  |                             | 277,893   |   |      |   | 449,978   |  
|Common equity/equivalents                                                    |  |                             | 49,409    |   |      |   | 63,804    |  
|                                                                             |  |                             |           |   |      |   |           |  
|Total equity investments                                                     |  |                             | 327,302   |   |      |   | 513,782   |  
|                                                                             |  |                             |           |   |      |   |           |  
|Total portfolio                                                              |  | $                           | 1,114,992 |   |      | $ | 1,512,416 |  
|                                                                             |  |                             |           |   |      |   |           |  
|% of total portfolio                                                         |  |                             |           |   |      |   |           |  
|Debt investments                                                             |  |                             |           |   |      |   |           |  
|Senior secured debt                                                          |  |                             | 40.9      | % |      |   | 29.9      | %
|Subordinated debt                                                            |  |                             |           |   |      |   |           |  
|Secured                                                                      |  |                             | 27.2      |   |      |   | 34.0      |  
|Unsecured                                                                    |  |                             | 2.5       |   |      |   | 2.1       |  
|                                                                             |  |                             |           |   |      |   |           |  
|Total debt investments                                                       |  |                             | 70.6      |   |      |   | 66.0      |  
|                                                                             |  |                             |           |   |      |   |           |  
|Equity investments                                                           |  |                             |           |   |      |   |           |  
|Preferred equity                                                             |  |                             | 24.9      |   |      |   | 29.8      |  
|Common equity/equivalents                                                    |  |                             | 4.5       |   |      |   | 4.2       |  
|                                                                             |  |                             |           |   |      |   |           |  
|Total equity investments                                                     |  |                             | 29.4      |   |      |   | 34.0      |  
|                                                                             |  |                             |           |   |      |   |           |  
|Total portfolio                                                              |  |                             | 100.0     | % |      |   | 100.0     | %
|                                                                             |  |                             |           |   |      |   |           |  
|                                                                             |  |                            
|YIELD ON AVERAGE LOAN PORTFOLIO (FAIR
VALUE)                                 |  |                             |           |   |      |   |           |  
|Average 90-Day LIBOR                                                         |  |                             | 1.2       | % |      |   | 3.3       | %
|Spread to avg. LIBOR on average loan portfolio                               |  |                             | 11.9      |   |      |   | 9.7       |  
|Impact of fee accelerations of unearned fees on paid/restructured loans      |  |                             | 0.1       |   |      |   |          |  
|Impact of previously unaccrued loans                                         |  |                             |          |   |      |   |          |  
|Impact of non-accrual loans                                                  |  |                             | (0.9      | ) |      |   | (0.9      | )
|                                                                             |  |                             |           |   |      |   |           |  
|Total yield on average loan portfolio                                        |  |                             | 12.3      | % |      |   | 12.1      | %
|                                                                             |  |                             |           |   |      |   |           |  
|                                                                             |  |                            
|COMPOSITION OF LOAN PORTFOLIO BY INTEREST
TYPE (FAIR VALUE)                  |  |                             |           |   |      |   |           |  
|% of loans with fixed interest rates                                         |  |                             | 39.6      | % |      |   | 37.9      | %
|% of loans with floating interest rates                                      |  |                             | 60.4      | % |      |   | 62.1      | %
|                                                                             |  |                            
|PERCENTAGE OF TOTAL DEBT INVESTMENTS (FAIR
VALUE)                            |  |                             |           |   |      |   |           |  
|Loans on non-accrual status                                                  |  |                             | 4.8       | % |      |   | 7.1       | %
|Loans greater than 90 days past due                                          |  |                             | 0.1       | % |      |   | 1.2       | %
|                                                                             |  |                            
|PERCENTAGE OF TOTAL DEBT INVESTMENTS (COST)                                  |  |                             |           |   |      |   |           |  
|Loans on non-accrual status                                                  |  |                             | 14.5      | % |      |   | 7.5       | %
|Loans greater than 90 days past due                                          |  |                             | 0.8       | % |      |   | 1.3       | %
|                                                                             |  |                            
|PORTFOLIO COMPANY OPERATING METRICS                                          |  |                             |           |   |      |   |           |  
|Average annual revenue(a)                                                    |  | $                           | 86,028    |   |      | $ | 76,116    |  
|Average annual EBITDA(a)                                                     |  |                             | 9,272     |   |      |   | 10,517    |  
|Weighted average loan to value of non-broadly syndicated portfolio companies |  |                             | 63.8      | % |      |   | 53.6      | %
|Weighted average trailing twelve month equity EBITDA multiple(a)(b)(c)       |  |                             | 8.3       | x |      |   | 10.2      | x
|Weighted average forward twelve month equity EBITDA multiple(a)(b)(c)        |  |                             | 7.0       | x |      |   | 8.0       | x
|Weighted average EBITDA to interest ratio(a)                                 |  |                             | 2.5       | x |      |   | 2.6       | x
|Weighted average debt to EBITDA ratio on the debt portfolio(c)               |  |                             | 6.0       | x |      |   | 6.0       | x



|(a) | Excludes portfolio companies with limited or no operations.
|--- | -----------------------------------------------------------

|(b) | Excludes portfolio companies valued on a liquidation basis.
|--- | -----------------------------------------------------------

|(c) | For portfolio companies with a nominal EBITDA amount, the EBITDA multiple and maximum debt to EBITDA ratio is limited to
15x.
|--- | -----------------------------------------------------------------------------------------------------------------------------



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|ITEM2. | 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 Condensed Consolidated Financial Statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.

This Quarterly Report on Form 10-Q, including Managements Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking
statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates, forecasts, projections, intentions, goals, strategies, plans, prospects
and the beliefs and assumptions of our management including, without limitation: our expectations regarding our results of operations, including revenues, net operating income, distributable net operating income and general and administrative
expenses and the factors that may affect such results; our current strategic direction, including opportunistically monetizing assets, the preservation of liquidity, building our cash position, deleveraging our balance sheet and increasing our BDC
asset coverage ratio; the amount, timing and price (relative to fair value) of asset monetizations; the timing of, and our ability to, repurchase equity, additional debt securities and make stockholder distributions; the application of losses for
tax purposes during 2009; the management of our expense base relative to our asset size, including compensation of our employees; the level and timing of originations; the cause of net unrealized losses; the performance of our portfolio companies;
the sufficiency of liquidity, future cash flows from operations and monetizations to meet operating expenses during the upcoming year; the outcome of our tax appeal with IRS; our ability to access our SBIC facility and to exclude debt from our BDC
asset coverage ratio; general market conditions; economic and other factors. Forward-looking statements can be identified by terminology such as anticipate, believe, could, could increase the
likelihood, hope, target, project, goals, potential, predict, might, estimate, expect, intend, is planned,
may, should, will, will enable, would be expected, look forward, may provide, would or similar terms, variations of such terms or the negative of those
terms. 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. Important factors could cause our actual results to differ
materially from those indicated or implied by forward-looking statements. Such factors that could cause or contribute to such differences include those risk factors discussed in Item IA of Part II of this Quarterly Report on Form 10-Q.

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

DESCRIPTION OF BUSINESS

We are a solutions-focused commercial finance company providing capital and advisory services to middle-market companies throughout the United States. We make debt and equity investments primarily in companies with annual revenue of
$20 million to $200 million and earnings before interest, taxes, depreciation and amortization, or EBITDA, of $3 million to $25 million, which we refer to as middle-market companies. Generally, our portfolio companies
use our capital investment to finance acquisitions, recapitalizations, buyouts, organic growth and working capital. We identify and source new portfolio companies through multiple channels, including private equity sponsors, investment bankers,
brokers, fund-less sponsors, institutional syndication partners, other club lenders and owner operators.

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



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Subchapter M of the Internal Revenue Code. In order to continue to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment,
we must meet certain requirements, including certain minimum distribution requirements. If we satisfy these requirements, we generally will not have to pay corporate-level taxes on any income we distribute to our stockholders as dividends, allowing
us to substantially reduce or eliminate our corporate-level tax liability. From time to time, our wholly owned subsidiaries may execute transactions that trigger corporate-level tax liabilities. In such cases, we recognize a tax provision in the
period when it becomes more likely than not that the taxable event will occur.

ECONOMIC MARKET
CONDITIONS

We are in a recession, which many believe may last longer and be more severe than other recent economic downturns. Banks
and others in the financial services industry have continued to report significant write-downs in the fair value of their assets, which has led to the failure of a number of banks and investment companies, a number of distressed mergers and
acquisitions, and the governments infusion of cash into the auto industry, large insurers and numerous large banks in an effort to avoid their collapse or bankruptcy. Consumer confidence continued to deteriorate and unemployment figures
significantly increased during the quarter. In addition, the stock market has continued to decline, with the S&P 500 and the NASDAQ Global Select Market (on which shares of MCG trades), declining by 11.7% and 2.8%, respectively, between
December 31, 2008 and March 31, 2009.

Consistent with other companies in the financial services sector, we have been affected adversely by many
of these events. The availability of debt and equity capital continues to be constrained. While the price of our stock rose from $0.71 as of December 31, 2008 to $1.28 as of March 31, 2009, our stock was trading at 16.0% of our net asset
value as of March 31, 2009, thereby making it undesirable to issue new equity. In addition, the deterioration in consumer confidence and a general reduction in spending by both consumers and businesses have had an adverse effect on a number of
the industries in which some of our portfolio companies operate and has led to an overall reduction in many of the comparable multiples that we use to estimate the fair value of certain companies in our investment portfolio. Consequently, during the
three months ended March 31, 2009, we recorded $82.6 million of unrealized depreciation, which includes the reversal of a previously recorded unrealized appreciation on LMS Intellibound Investors, LLC, or LMS, realized on the sale of our
investment in LMS in February 2009. When excluding net reversal of previously recorded unrealized appreciation, we recognized $69.5 million of unrealized depreciation on our investment portfolio primarily because of the performance of certain
portfolio companies and a reduction in multiples and market pricing used to estimate the fair value of our investments. In addition, we suspended new loan and equity originations in July 2008; however, from time to time we continue to make advances
to current portfolio companies.

During the quarter ended March 31, 2009, we continued to monitor evolving economic events and execute measures
instituted in 2008 to build and retain liquidity, meet the requirements of regulators and our debt agreements, and reduce expenditures. We recognize that many of these measures have been difficult for our stockholders, our employees and our
portfolio companies. Nonetheless, we believe these actions are necessary to preserve capital and liquidity during this turbulent economic period. If we are able to meet our goals with respect to leverage levels, unrestricted cash balances and credit
agreement limitations, we will evaluate on a quarterly basis the potential repurchase of equity and additional debt securities at a discount, if available, and the resumption of stockholder distributions.

The following sections summarize the key initiatives that we undertook beginning 2008 and continuing throughout the quarter ended March 31, 2009.

MONETIZATIONS

Since the second half of 2008, we have
focused on the monetization of certain debt and equity investments in our portfolio to deleverage our balance sheet and build cash reserves. Beginning in 2008 and continuing into 2009, the availability of capital became increasingly constrained.
Thus, it has become more challenging to consummate monetizations on a timely basis. However, during the three months ended March 31, 2009, we successfully monetized $64.2 million of our portfolio investments (at close to our carrying value). On
February 27, 2009, we sold our equity investment in LMS, for $40.5 million to MSouth Equity Partners. We made the original equity investment in LMS in May 2007. In addition, in February 2009, we received full repayment of our
$21.5 million second-lien investment from Dayton parts Holding, LLC, a non-affiliate investment in our portfolio. This second-lien loan was repaid at par and $0.9 million above its most previously reported fair value. In 2008, we
successfully monetized $155.6 million of our portfolio assets, including $92.1 million of monetizations (at close to our carrying value) during the second half of the year.



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Since we began our deleveraging initiatives in July 2008, we cumulatively have completed a total of $169.2 million
in investment monetizations, including 17 monetizations which were completed at 99.4% of their most recently reported fair value and one monetization, which was TNR Holdings Corp., or TNR, a distressed sale, was completed at 42.7% of its most
recently reported fair value. In March 2009, three major customers notified TNR that they did not intend to renew their contracts. As a result, the revenues forecasted for TNR decreased by nearly 80%, which resulted in a significant decline in the
fair value of our investment in TNR in March 2009. On April 20, 2009, TNR repaid in full its debt together with all accrued interest and we concurrently sold our equity in TNR for an aggregate between the two transactions of $11.7 million in
cash. This combined transaction represented a $15.8 million additional loss compared to our reported fair value as of December 31, 2008. We will strive to continue monetizing assets over the course of the next several quarters; however, the
timing of such monetizations depends largely upon future market conditions. We are under no contractual or other obligation to monetize assets at specified times, levels or prices.

BORROWING AGREEMENTS

On May 4, 2009, we elected to repay our unsecured revolving
line of credit prior to the maturity of this facility, which will mature on May 29, 2009. We made this repayment as part of our continuing initiative to reduce our leverage.

In February 2009, we successfully renegotiated three of our debt facilities. These amendments relaxed key covenant requirements under the borrowing facilities. Most significantly, the minimum net worth requirement was
reduced from $654.0 million to $525.0 million, plus 50% of the proceeds from post amendment date equity issuances in our secured warehouse facility and to $500.0 million for our unsecured privately placed notes. In addition, cross-default
provisions related to our unsecured privately placed notes were modified so that the defaults under other non-recourse facilities would not be an event of default for the unsecured notes. We also obtained a liquidity renewal and covenant relief from
SunTrust for our committed secured warehouse facility, which resulted in a final maturity for this facility of August 2011.

As described more fully in the
Liquidity and Capital ResourcesBorrowings section of this Managements Discussion and Analysis of Financial Conditions and Results of Operations, we agreed to increase the interest rates paid under the facilities. These
amendments provide us with continuing debt financing with repayment terms that are tied to future monetizations.

In addition to the borrowing facilities
described above, our wholly owned subsidiary, Solutions Capital I, LP has a license which allows us to borrow up to $130.0 million under the Small Business Investment Act of 1958, based upon our current commitment and existing approval by the
SBA. As of March 31, 2009, we had $27.6 million of debt under the facility. We must repay these borrowings within ten years after the borrowing date, which will occur between 2018 and 2022. In October 2008, we received exemptive relief from the
Securities and Exchange Commission, or SEC, that, among other things, allows us effectively to exclude debt issued by Solutions Capital I, LP from the calculation of our consolidated BDC asset coverage ratio. The American Recovery and
Reinvestment Act of 2009, which was passed into law in February 2009, included a provision that increased the maximum amount of outstanding leverage to available SBIC companies to up to $150.0 million, which represents a $12.9 million
increase over SBAs $137.1 million maximum limit as of December 31, 2008. Solutions Capital I, LP would require the SBAs approval and commitment in order to access this incremental borrowing capacity. To access the entire $150.0
million, we would have to fund a total of $65.0 million, in addition to the $18.6 million that we had funded through March 31, 2009. There is no assurance that we could draw up to the maximum limit available under the SBIC program.

DIVIDEND SUSPENSION

We did not
declare dividends during the quarter ended March 31, 2009. Currently, we expect to apply certain losses for tax purposes in 2009 that we recognized for book purposes during 2008, which could result in a significant reduction to our statutorily
required dividend payment in 2009. In order to preserve capital, we intend to pay the statutory minimum dividend for 2009, which could result in no payments being made in 2009. Variables that could necessitate a dividend in 2009 to meet our RIC
requirements include the actual timing of gains and losses for tax purposes, equity investment monetizations and distributions in the event that all or part of our appeal with the IRS is unsuccessful. We will make our decisions with respect to the
actual level of 2009 dividends on a quarter-by-quarter basis during 2009, after taking into account the minimum statutorily required level of distributions, gains and losses recognized for tax purposes, portfolio transactional events, our liquidity
and our asset coverage ratio at the time of such decision.



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REPURCHASE OF COLLATERALIZED LOAN
OBLIGATIONS

In January 2009, we repurchased $7.5 million of collateralized loan obligations for $2.1 million that had previously been
issued by our wholly owned subsidiary, Commercial Loan Trust 2006-1. As a result of this purchase, we recognized a $5.4 million gain on extinguishment of debt for the quarter ended March 31, 2009. In total, since December 2008, we have
repurchased a total of $22.6 million of collateralized loan obligations.

In addition to being able to extinguish this debt for less than 27% of the
principal amount of the associated notes, our interest expense will be reduced by approximately $0.7 million of annual interest expense, based on the LIBOR in effect as of March 31, 2009, over the remaining life of the Commercial Loan Trust
2006-1 facility.

CORPORATE RESTRUCTURING

In August 2008, we announced the implementation of a corporate restructuring that resulted in lower incentive compensation for our executives, a 27% reduction in our workforce and the closure of certain facilities.
Subsequent to the August 2008 reduction in force, another six employees left MCG, whom we do not expect to replace in the near-term. In total, including our reduction in force and voluntary terminations, we have reduced the workforce from 101 to 69,
or 32%, since we began our cost reduction initiatives. To further control our general and administrative expenses, we implemented a base salary freeze for essentially all personnel. We plan to manage our expense base relative to our asset size as
the portfolio decreases through monetizations.

OVERVIEW OF RESULTS OF
OPERATIONS

For the three months ended March 31, 2009, which represents our first quarter, we reported a net loss of
$50.9 million, or $0.68 per diluted share, compared to net income of $2.5 million, or $0.04 per diluted share, for the three months ended March 31, 2008. Our net operating income during the first quarter of 2009 was
$11.9 million, or $0.16 per diluted share, compared to $21.3 million, or $0.31 per diluted share, during the first quarter of 2008.

The $50.9 million
net loss reported for the three months ended March 31, 2009 primarily reflects the recognition of $68.3 million of net investment losses during the first quarter of 2009. These investment losses included $14.3 million of realized
gains on our investments, partially offset by a $13.1 million reversal of unrealized appreciation on these investments and $69.5 million of unrealized depreciation which represents valuation write-downs of several portfolio investments,
including $15.8 million of unrealized depreciation on our investment in TNR and $13.5 of unrealized depreciation on our investment in Total Sleep Holdings, Inc., or Total Sleep. The unrealized depreciation recognized on our TNR and Total Sleep
investments and our other portfolio investments was due predominantly to the performance of some portfolio companies and a reduction in the multiples used to estimate the fair value of our investments.

The $11.9 million of net operating income that we reported for the quarter ended March 31, 2009 was consistent with our expectations for the quarter. The
$9.3 million, or 43.9%, decrease in net operating income during the first quarter of 2009 from the same quarter in 2008 was attributable primarily to the absence of dividend income on our Broadview investment, which we ceased to accrete
beginning in the quarter ended June 30, 2008, because our fair value for this investment represents Broadviews enterprise value.

PORTFOLIO COMPOSITION AND INVESTMENT ACTIVITY

As of March 31, 2009, the fair value of our investment portfolio was $1,115.0 million, which represents an $88.1 million, or 7.3%, decrease from the $1,203.1 million fair value as of
December 31, 2008. The following sections describe the composition of our investment portfolio as of March 31, 2009 and describe key changes in our portfolio during the three months ended March 31, 2009.



45



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PORTFOLIO COMPOSITION

The following table summarizes the composition of our investment portfolio at fair value:



|                                 |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  
|-------------------------------- |  | ------------------------ | --------- | ------------------------- | ----- | - | ----------------- |  | ------------------------ | - | ------------------------- |  | ----- | -
|                                 |  | March 31, 2009           |           |                           |       |   | December 31, 2008 | 
|(dollars in thousands)           |  | Investments atFair Value |           | Percent ofTotal Portfolio |       |   |                   |  | Investments atFair Value |   | Percent ofTotal Portfolio | 
|Debt investments                 |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  
|Senior secured debt              |  | $                        | 456,377   |                           | 40.9  | % |                   |  |                          | $ | 428,817                   |  | 35.7  | %
|Subordinated debt                |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  
|Secured                          |  |                          | 303,490   |                           | 27.2  |   |                   |  |                          |   | 351,425                   |  | 29.2  |  
|Unsecured                        |  |                          | 27,823    |                           | 2.5   |   |                   |  |                          |   | 28,081                    |  | 2.3   |  
|                                 |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  
|Total debt investments           |  |                          | 787,690   |                           | 70.6  |   |                   |  |                          |   | 808,323                   |  | 67.2  |  
|                                 |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  
|                                 |  |                          |           |                           |      
|Equity investments               |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  
|Preferred equity                 |  |                          | 277,893   |                           | 24.9  |   |                   |  |                          |   | 339,576                   |  | 28.2  |  
|Common/common equivalents equity |  |                          | 49,409    |                           | 4.5   |   |                   |  |                          |   | 55,249                    |  | 4.6   |  
|                                 |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  
|Total equity investments         |  |                          | 327,302   |                           | 29.4  |   |                   |  |                          |   | 394,825                   |  | 32.8  |  
|                                 |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  
|Total investments                |  | $                        | 1,114,992 |                           | 100.0 | % |                   |  |                          | $ | 1,203,148                 |  | 100.0 | %
|                                 |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  

The following table summarizes our investment portfolio by industry at fair value:



|                        |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  
|----------------------- |  | ------------------------ | --------- | ------------------------- | ----- | - | ----------------- |  | ------------------------ | - | ------------------------- |  | ----- | -
|                        |  | March 31, 2009           |           |                           |       |   | December 31, 2008 | 
|(dollars in thousands)  |  | Investments atFair Value |           | Percent ofTotal Portfolio |       |   |                   |  | Investments atFair Value |   | Percent ofTotal Portfolio | 
|TelecommunicationsCLEC |  | $                        | 170,347   |                           | 15.3  | % |                   |  |                          | $ | 173,789                   |  | 14.4  | %
|Communicationsother    |  |                          | 17,127    |                           | 1.5   |   |                   |  |                          |   | 17,403                    |  | 1.5   |  
|Cable                   |  |                          | 122,815   |                           | 11.0  |   |                   |  |                          |   | 119,134                   |  | 9.9   |  
|Healthcare              |  |                          | 111,420   |                           | 10.0  |   |                   |  |                          |   | 123,589                   |  | 10.3  |  
|Food services           |  |                          | 82,577    |                           | 7.4   |   |                   |  |                          |   | 81,935                    |  | 6.8   |  
|Business services       |  |                          | 74,613    |                           | 6.7   |   |                   |  |                          |   | 77,213                    |  | 6.4   |  
|Broadcasting            |  |                          | 59,637    |                           | 5.4   |   |                   |  |                          |   | 66,401                    |  | 5.5   |  
|Plastic products        |  |                          | 54,366    |                           | 4.9   |   |                   |  |                          |   | 45,317                    |  | 3.8   |  
|Logistics               |  |                          | 46,217    |                           | 4.1   |   |                   |  |                          |   | 66,950                    |  | 5.6   |  
|Electronics             |  |                          | 41,833    |                           | 3.8   |   |                   |  |                          |   | 42,018                    |  | 3.5   |  
|Laboratory instruments  |  |                          | 35,494    |                           | 3.2   |   |                   |  |                          |   | 35,054                    |  | 2.9   |  
|Publishing              |  |                          | 34,554    |                           | 3.1   |   |                   |  |                          |   | 34,743                    |  | 2.9   |  
|Sporting goods          |  |                          | 31,672    |                           | 2.8   |   |                   |  |                          |   | 36,531                    |  | 3.0   |  
|Industrial products     |  |                          | 29,138    |                           | 2.6   |   |                   |  |                          |   | 26,246                    |  | 2.2   |  
|Education               |  |                          | 29,074    |                           | 2.6   |   |                   |  |                          |   | 29,062                    |  | 2.4   |  
|Technology              |  |                          | 28,481    |                           | 2.6   |   |                   |  |                          |   | 35,980                    |  | 3.0   |  
|Home furnishings        |  |                          | 24,255    |                           | 2.2   |   |                   |  |                          |   | 27,899                    |  | 2.3   |  
|Insurance               |  |                          | 21,434    |                           | 1.9   |   |                   |  |                          |   | 21,258                    |  | 1.8   |  
|Consumer products       |  |                          | 20,954    |                           | 1.9   |   |                   |  |                          |   | 22,855                    |  | 1.9   |  
|Leisure activities      |  |                          | 13,921    |                           | 1.2   |   |                   |  |                          |   | 13,816                    |  | 1.2   |  
|Other media             |  |                          | 12,426    |                           | 1.1   |   |                   |  |                          |   | 11,940                    |  | 1.0   |  
|Entertainment           |  |                          | 12,216    |                           | 1.1   |   |                   |  |                          |   | 28,268                    |  | 2.4   |  
|Information services    |  |                          | 11,688    |                           | 1.0   |   |                   |  |                          |   | 13,618                    |  | 1.1   |  
|Other(a)                |  |                          | 28,733    |                           | 2.6   |   |                   |  |                          |   | 52,129                    |  | 4.2   |  
|                        |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  
|Total                   |  | $                        | 1,114,992 |                           | 100.0 | % |                   |  |                          | $ | 1,203,148                 |  | 100.0 | %
|                        |  |                          |           |                           |       |   |                   |  |                          |   |                           |  |       |  



|(a) | No individual industry within this category exceeds 1% as of March 31, 2009.
|--- | ----------------------------------------------------------------------------

As of March 31, 2009, our ten largest portfolio companies comprised 45.4% of the fair value of our investment portfolio. These ten customers accounted for 42.6% of
our total revenue during the three months ended March 31, 2009. As of March 31, 2009, approximately 16.8% of the fair value of our portfolio was invested in companies in the communications industry, of which 15.3% were competitive local
exchange carriers, or CLECs. Our largest portfolio company, Broadview, which is a CLEC, represents 12.2% of the fair value of our portfolio. Our remaining investments in the communications industry include telecommunications tower companies, rural
local exchange carriers, Internet service providers, wireless companies and security alarm companies. See Results of Operations for additional information regarding our investment in Broadview.



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OVERVIEW OF CHANGES IN INVESTMENT
PORTFOLIO

During the three months ended March 31, 2009, we made $52.8 million of originations and advances, including originations
to four existing portfolio companies compared to $37.2 million of originations and advances during the three months ended March 31, 2008. The following table summarizes our total portfolio investment activity during the three months ended
March 31, 2009 and 2008:



|                                                   |  |                             |           |   |  |  |      |   |           |  
|-------------------------------------------------- |  | --------------------------- | --------- | - |  |  | ---- | - | --------- | -
|                                                   |  | Three months endedMarch 31, |          
|(in thousands)                                     |  | 2009                        |           |   |  |  | 2008 |  
|Beginning investment portfolio                     |  | $                           | 1,203,148 |   |  |  |      | $ | 1,545,090 |  
|Originations and advances                          |  |                             | 52,806    |   |  |  |      |   | 37,193    |  
|Gross payments, reductions and sales of securities |  |                             | (72,663   | ) |  |  |      |   | (51,571   | )
|Net unrealized losses                              |  |                             | (69,134   | ) |  |  |      |   | (18,713   | )
|Net realized gains                                 |  |                             | 14,222    |   |  |  |      |   | 200       |  
|(Additions to) amortization of unearned income     |  |                             | (291      | ) |  |  |      |   | 720       |  
|Reversals of unrealized appreciation               |  |                             | (13,096   | ) |  |  |      |   | (503      | )
|                                                   |  |                             |           |   |  |  |      |   |           |  
|Ending investment portfolio                        |  | $                           | 1,114,992 |   |  |  |      | $ | 1,512,416 |  
|                                                   |  |                             |           |   |  |  |      |   |           |  

The following table shows our originations and advances during the three months ended March 31, 2009 and
2008 by security type:



|                                 |  |                              |        |            |       |   |      |  |   |   |            |  |       |  
|-------------------------------- |  | ---------------------------- | ------ | ---------- | ----- | - | ---- |  | - | - | ---------- |  | ----- | -
|                                 |  | Three months ended March 31, |       
|                                 |  | 2009                         |        |            |       |   | 2008 | 
|(dollars in thousands)           |  | $                            |        | % of Total |       |   |      |  | $ |   | % of Total | 
|Debt investments                 |  |                              |        |            |       |   |      |  |   |   |            |  |       |  
|Senior secured debt              |  | $                            | 41,778 |            | 79.1  | % |      |  |   | $ | 9,782      |  | 26.3  | %
|Subordinated debt                |  |                              |        |            |       |   |      |  |   |   |            |  |       |  
|Secured                          |  |                              | 4,076  |            | 7.7   |   |      |  |   |   | 8,888      |  | 23.9  |  
|Unsecured                        |  |                              | 127    |            | 0.3   |   |      |  |   |   | 804        |  | 2.2   |  
|                                 |  |                              |        |            |       |   |      |  |   |   |            |  |       |  
|Total debt investments           |  |                              | 45,981 |            | 87.1  |   |      |  |   |   | 19,474     |  | 52.4  |  
|                                 |  |                              |        |            |       |   |      |  |   |   |            |  |       |  
|                                 |  |                              |        |            |      
|Equity investments               |  |                              |        |            |       |   |      |  |   |   |            |  |       |  
|Preferred equity                 |  |                              | 6,825  |            | 12.9  |   |      |  |   |   | 17,710     |  | 47.6  |  
|Common/common equivalents equity |  |                              |       |            |      |   |      |  |   |   | 9          |  |      |  
|                                 |  |                              |        |            |       |   |      |  |   |   |            |  |       |  
|Total equity investments         |  |                              | 6,825  |            | 12.9  |   |      |  |   |   | 17,719     |  | 47.6  |  
|                                 |  |                              |        |            |       |   |      |  |   |   |            |  |       |  
|Total originations and advances  |  | $                            | 52,806 |            | 100.0 | % |      |  |   | $ | 37,193     |  | 100.0 | %
|                                 |  |                              |        |            |       |   |      |  |   |   |            |  |       |  

The following table shows our gross payments, reductions, and sales of securities during the three months ended
March 31, 2009 and 2008 by security type:



|                                                         |  |                              |        |            |       |   |      |  |   |   |            |  |       |  
|-------------------------------------------------------- |  | ---------------------------- | ------ | ---------- | ----- | - | ---- |  | - | - | ---------- |  | ----- | -
|                                                         |  | Three months ended March 31, |       
|                                                         |  | 2009                         |        |            |       |   | 2008 | 
|(dollars in thousands)                                   |  | $                            |        | % of Total |       |   |      |  | $ |   | % of Total | 
|Debt investments                                         |  |                              |        |            |       |   |      |  |   |   |            |  |       |  
|Senior secured debt                                      |  | $                            | 7,777  |            | 10.7  | % |      |  |   | $ | 33,532     |  | 65.0  | %
|Subordinated debt                                        |  |                              |        |            |       |   |      |  |   |   |            |  |       |  
|Secured                                                  |  |                              | 22,171 |            | 30.5  |   |      |  |   |   | 13,696     |  | 26.6  |  
|Unsecured                                                |  |                              |       |            |      |   |      |  |   |   |           |  |      |  
|                                                         |  |                              |        |            |       |   |      |  |   |   |            |  |       |  
|Total debt investments                                   |  |                              | 29,948 |            | 41.2  |   |      |  |   |   | 47,228     |  | 91.6  |  
|                                                         |  |                              |        |            |       |   |      |  |   |   |            |  |       |  
|                                                         |  |                              |        |            |      
|Equity investments                                       |  |                              |        |            |       |   |      |  |   |   |            |  |       |  
|Preferred equity                                         |  |                              | 42,289 |            | 58.2  |   |      |  |   |   | 3,592      |  | 7.0   |  
|Common/common equivalents equity                         |  |                              | 426    |            | 0.6   |   |      |  |   |   | 751        |  | 1.4   |  
|                                                         |  |                              |        |            |       |   |      |  |   |   |            |  |       |  
|Total equity investments                                 |  |                              | 42,715 |            | 58.8  |   |      |  |   |   | 4,343      |  | 8.4   |  
|                                                         |  |                              |        |            |       |   |      |  |   |   |            |  |       |  
|                                                         |  |                              |        |            |      
|Total gross payments, reductions and sales of securities |  | $                            | 72,663 |            | 100.0 | % |      |  |   | $ | 51,571     |  | 100.0 | %
|                                                         |  |                              |        |            |       |   |      |  |   |   |            |  |       |  



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During the three months ended March 31, 2009 and 2008, our gross payments, reductions and sales of securities by
transaction type included:



|                                                          |  |                             |        |  |  |      |   |       
|--------------------------------------------------------- |  | --------------------------- | ------ |  |  | ---- | - | ------
|                                                          |  | Three months endedMarch 31,
|(in thousands)                                            |  | 2009                        |        |  |  | 2008
|Sale of equity investments                                |  | $                           | 37,518 |  |  |      | $ | 743   
|Principal repayments                                      |  |                             | 21,500 |  |  |      |   | 27,332
|Scheduled principal amortization                          |  |                             | 8,083  |  |  |      |   | 9,773 
|Collection of accrued paid-in-kind interest and dividends |  |                             | 5,562  |  |  |      |   | 2,990 
|Senior loan sales                                         |  |                             |       |  |  |      |   | 10,733
|                                                          |  |                             |        |  |  |      |   |       
|Total gross payments, reductions and sales of securities  |  | $                           | 72,663 |  |  |      | $ | 51,571
|                                                          |  |                             |        |  |  |      |   |       

SIGNIFICANT CHANGES IN PORTFOLIO

As shown in the following table, during the three months ended March 31, 2009, we monetized four portfolio investments with a fair value totaling $64.2 million:



|                                |  |                                   |        |                          |   |                 |  |                                        |   |       |   |       |  |   |       
|------------------------------- |  | --------------------------------- | ------ | ------------------------ | - | --------------- |  | -------------------------------------- | - | ----- | - | ----- |  | - | ------
|(in thousands)                  |  | Three months ended March 31, 2009
|Portfolio Company               |  | PrincipalRepayments               |        | Sale ofEquityinvestments |   | SeniorLoanSales |  | PIK Interestand DividendPrepayments(a) |   | Total
|LMS Intellibound Investors, LLC |  | $                                 |       |                          | $ | 35,907          |  | $                                      |  |       | $ | 4,557 |  | $ | 40,464
|Dayton Parts Holdings, LLC      |  |                                   | 21,500 |                          |   |                |  |                                        |  |       |   |      |  |   | 21,500
|Jenzabar, Inc.                  |  |                                   |       |                          |   | 1,185           |  |                                        |  |       |   | 640   |  |   | 1,825 
|Xfone, Inc.                     |  |                                   |       |                          |   | 426             |  |                                        |  |       |   |      |  |   | 426   
|                                |  |                                   |        |                          |   |                 |  |                                        |   |       |   |       |  |   |       
|Total                           |  | $                                 | 21,500 |                          | $ | 37,518          |  | $                                      |  |       | $ | 5,197 |  | $ | 64,215
|                                |  |                                   |        |                          |   |                 |  |                                        |   |       |   |       |  |   |       



|(a) | Only includes paid-in-kind interest and dividends related to the prepayment of an investment.
|--- | ---------------------------------------------------------------------------------------------

The proceeds from these monetizations, with the exception of Xfone, Inc., correlated closely with the most recently reported fair value
of the associated investments. In conjunction with the sale of our equity interest in LMS, we issued $7.1 million of additional debt to LMS. As of March 31, 2009, the fair value of our debt investment in LMS equaled $46.2 million.

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
the following investment rating system to characterize and monitor our expected level of returns on each investment in our portfolio:



|                 |  |                                                                                                                                                                 
|---------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 expect 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



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The following table shows the distribution of our investments on our 1 to 5 investment rating scale at fair value
as of March 31, 2009 and December 31, 2008:



|                       |  |                          |           |     |                     |       |                   |  |  |                          |   |           |                     |  |       |  
|---------------------- |  | ------------------------ | --------- | --- | ------------------- | ----- | ----------------- |  |  | ------------------------ | - | --------- | ------------------- |  | ----- | -
|(dollars in thousands) |  | March 31, 2009           |           |     |                     |       | December 31, 2008 | 
|Investment Rating      |  | Investments atFair Value |           |     | % of TotalPortfolio |       |                   |  |  | Investments atFair Value |   |           | % of TotalPortfolio | 
|1                      |  | $                        | 669,004   | (a) |                     | 60.0  | %                 |  |  |                          | $ | 719,765   | (a)                 |  | 59.8  | %
|2                      |  |                          | 179,499   |     |                     | 16.1  |                   |  |  |                          |   | 206,829   |                     |  | 17.2  |  
|3                      |  |                          | 232,714   |     |                     | 20.9  |                   |  |  |                          |   | 233,172   |                     |  | 19.4  |  
|4                      |  |                          | 19,257    |     |                     | 1.7   |                   |  |  |                          |   | 32,648    |                     |  | 2.7   |  
|5                      |  |                          | 14,518    |     |                     | 1.3   |                   |  |  |                          |   | 10,734    |                     |  | 0.9   |  
|                       |  |                          |           |     |                     |       |                   |  |  |                          |   |           |                     |  |       |  
|                       |  | $                        | 1,114,992 |     |                     | 100.0 | %                 |  |  |                          | $ | 1,203,148 |                     |  | 100.0 | %
|                       |  |                          |           |     |                     |       |                   |  |  |                          |   |           |                     |  |       |  

| | 
| | 

| | (a) | As of March 31, 2009 and December 31, 2008, Investment Rating 1 includes $316.9 million and
$362.9 million, respectively, of loans to companies in which we also hold equity securities or for which we realized a gain on our equity investment.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

When one of our loans becomes more than 90 days past due, or if we otherwise do not expect the customer to be able to service its debt and other obligations, we will, as a general matter, place the loan on non-accrual
status and will generally cease recognizing interest income on that loan until all principal and interest has been brought current through payment or due to a restructuring such that the interest income is deemed 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.

The following table summarizes loans on
non-accrual status and loans greater than 90 days past due, at cost, as of March 31, 2009 and December 31, 2008:



|                                          |  |                    |         |                    |       |   |                   |  |                    |   |                    |  |       |  
|----------------------------------------- |  | ------------------ | ------- | ------------------ | ----- | - | ----------------- |  | ------------------ | - | ------------------ |  | ----- | -
|                                          |  | March 31, 2009     |         |                    |       |   | December 31, 2008 | 
|(dollars in thousands)                    |  | Investmentsat Cost |         | % of LoanPortfolio |       |   |                   |  | Investmentsat Cost |   | % of LoanPortfolio | 
|Loans greater than 90 days past due       |  |                    |         |                    |       |   |                   |  |                    |   |                    |  |       |  
|On non-accrual status                     |  | $                  | 7,885   |                    | 0.84  | % |                   |  |                    | $ | 4,989              |  | 0.54  | %
|Not on non-accrual status                 |  |                    |        |                    |      |   |                   |  |                    |   |                   |  |      |  
|                                          |  |                    |         |                    |       |   |                   |  |                    |   |                    |  |       |  
|Total loans greater than 90 days past due |  | $                  | 7,885   |                    | 0.84  | % |                   |  |                    | $ | 4,989              |  | 0.54  | %
|                                          |  |                    |         |                    |       |   |                   |  |                    |   |                    |  |       |  
|                                          |  |                    |         |                    |      
|Loans on non-accrual status               |  |                    |         |                    |       |   |                   |  |                    |   |                    |  |       |  
|0 to 90 days past due                     |  | $                  | 127,990 |                    | 13.69 | % |                   |  |                    | $ | 114,495            |  | 12.44 | %
|Greater than 90 days past due             |  |                    | 7,885   |                    | 0.84  |   |                   |  |                    |   | 4,989              |  | 0.54  |  
|                                          |  |                    |         |                    |       |   |                   |  |                    |   |                    |  |       |  
|Total loans on non-accrual status)        |  | $                  | 135,875 |                    | 14.53 | % |                   |  |                    | $ | 119,484            |  | 12.98 | %
|                                          |  |                    |         |                    |       |   |                   |  |                    |   |                    |  |       |  

The following table summarizes loans on non-accrual status and loans greater than 90 days past due, at fair value,
as of March 31, 2009 and December 31, 2008:



|                                          |  |                          |        |                    |      |   |                   |  |                          |   |                    |  |      |  
|----------------------------------------- |  | ------------------------ | ------ | ------------------ | ---- | - | ----------------- |  | ------------------------ | - | ------------------ |  | ---- | -
|                                          |  | March 31, 2009           |        |                    |      |   | December 31, 2008 | 
|(dollars in thousands)                    |  | Investments atFair Value |        | % of LoanPortfolio |      |   |                   |  | Investments atFair Value |   | % of LoanPortfolio | 
|Loans greater than 90 days past due       |  |                          |        |                    |      |   |                   |  |                          |   |                    |  |      |  
|On non-accrual status                     |  | $                        | 371    |                    | 0.05 | % |                   |  |                          | $ | 695                |  | 0.09 | %
|Not on non-accrual status                 |  |                          |       |                    |     |   |                   |  |                          |   |                   |  |     |  
|                                          |  |                          |        |                    |      |   |                   |  |                          |   |                    |  |      |  
|Total loans greater than 90 days past due |  | $                        | 371    |                    | 0.05 | % |                   |  |                          | $ | 695                |  | 0.09 | %
|                                          |  |                          |        |                    |      |   |                   |  |                          |   |                    |  |      |  
|                                          |  |                          |        |                    |     
|Loans on non-accrual status               |  |                          |        |                    |      |   |                   |  |                          |   |                    |  |      |  
|0 to 90 days past due                     |  | $                        | 37,567 |                    | 4.73 | % |                   |  |                          | $ | 38,619             |  | 4.77 | %
|Greater than 90 days past due             |  |                          | 371    |                    | 0.05 |   |                   |  |                          |   | 695                |  | 0.09 |  
|                                          |  |                          |        |                    |      |   |                   |  |                          |   |                    |  |      |  
|Total loans on non-accrual status         |  | $                        | 37,938 |                    | 4.78 | % |                   |  |                          | $ | 39,314             |  | 4.86 | %
|                                          |  |                          |        |                    |      |   |                   |  |                          |   |                    |  |      |  

The $1.3 million decrease from December 31, 2008 to March 31, 2009 resulted from unrealized depreciation
of $12.3 million on loans that were on non-accrual status as of December 31, 2008. These decreases were partially offset by the placement of $11.0 million of other loans on non-accrual status, including $9.6 million of loans made to portfolio
companies in the broadcasting industry.



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RESULTS OF OPERATIONS

The following section compares our results of operations for the three months ended March 31, 2009 compared to the three months ended March 31, 2008.

COMPARISON OF THE THREE MONTHS ENDED
MARCH 31, 2009 AND 2008

The following table summarizes the components of our net (loss) income for the three
months ended March 31, 2009 and 2008:



|                                                                                                                     |  |                             |         |   |          |   |         |   |  |   |            |   |  |       |   
|-------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | -------- | - | ------- | - |  | - | ---------- | - |  | ----- | --
|                                                                                                                     |  | Three months endedMarch 31, |         |   | Variance |  
|(dollars in thousands)                                                                                               |  | 2009                        |         |   | 2008     |   |         | $ |  |   | Percentage |  
|Revenue                                                                                                              |  |                             |         |   |          |   |         |   |  |   |            |   |  |       |   
|Interest and dividend income                                                                                         |  |                             |         |   |          |   |         |   |  |   |            |   |  |       |   
|Interest income                                                                                                      |  | $                           | 24,054  |   |          | $ | 29,829  |   |  | $ | (5,775     | ) |  | (19.4 | )%
|Dividend income                                                                                                      |  |                             | 1,824   |   |          |   | 11,721  |   |  |   | (9,897     | ) |  | (84.4 | ) 
|Loan fees                                                                                                            |  |                             | 719     |   |          |   | 849     |   |  |   | (130       | ) |  | (15.3 | ) 
|                                                                                                                     |  |                             |         |   |          |   |         |   |  |   |            |   |  |       |   
|Total interest and dividend income                                                                                   |  |                             | 26,597  |   |          |   | 42,399  |   |  |   | (15,802    | ) |  | (37.3 | ) 
|Advisory fees and other income                                                                                       |  |                             | 1,209   |   |          |   | 597     |   |  |   | 612        |   |  | 102.5 |   
|                                                                                                                     |  |                             |         |   |          |   |         |   |  |   |            |   |  |       |   
|Total revenue                                                                                                        |  |                             | 27,806  |   |          |   | 42,996  |   |  |   | (15,190    | ) |  | (35.3 | ) 
|                                                                                                                     |  |                             |         |   |          |   |         |   |  |   |            |   |  |       |   
|                                                                                                                     |  |                             |         |  
|Operating expenses                                                                                                   |  |                             |         |   |          |   |         |   |  |   |            |   |  |       |   
|Interest expense                                                                                                     |  |                             | 6,558   |   |          |   | 10,300  |   |  |   | (3,742     | ) |  | (36.3 | ) 
|Employee compensation                                                                                                |  |                             |         |   |          |   |         |   |  |   |            |   |  |       |   
|Salaries and benefits                                                                                                |  |                             | 3,798   |   |          |   | 6,206   |   |  |   | (2,408     | ) |  | (38.8 | ) 
|Amortization of employee restricted stock                                                                            |  |                             | 1,537   |   |          |   | 1,742   |   |  |   | (205       | ) |  | (11.8 | ) 
|                                                                                                                     |  |                             |         |   |          |   |         |   |  |   |            |   |  |       |   
|Total employee compensation                                                                                          |  |                             | 5,335   |   |          |   | 7,948   |   |  |   | (2,613     | ) |  | (32.9 | ) 
|General and administrative expense                                                                                   |  |                             | 3,975   |   |          |   | 3,482   |   |  |   | 493        |   |  | 14.2  |   
|                                                                                                                     |  |                             |         |   |          |   |         |   |  |   |            |   |  |       |   
|Total operating expenses                                                                                             |  |                             | 15,868  |   |          |   | 21,730  |   |  |   | (5,862     | ) |  | (27.0 | ) 
|                                                                                                                     |  |                             |         |   |          |   |         |   |  |   |            |   |  |       |   
|                                                                                                                     |  |                             |         |  
|Net operating income before net investment losses, gain on extinguishment of debt and income tax (benefit) provision |  |                             | 11,938  |   |          |   | 21,266  |   |  |   | (9,328     | ) |  | (43.9 | ) 
|Net investment losses before gain on extinguishment of debt and income tax (benefit) provision                       |  |                             | (68,331 | ) |          |   | (18,598 | ) |  |   | (49,733    | ) |  | NM    |   
|                                                                                                                     |  |                             |         |  
|Gain on extinguishment of debt                                                                                       |  |                             | 5,275   |   |          |   |        |   |  |   | 5,275      |   |  | NM    |   
|                                                                                                                     |  |                             |         |  
|Income tax (benefit) provision                                                                                       |  |                             | (172    | ) |          |   | 170     |   |  |   | 342        |   |  | NM    |   
|                                                                                                                     |  |                             |         |   |          |   |         |   |  |   |            |   |  |       |   
|Net (loss) income                                                                                                    |  | $                           | (50,946 | ) |          | $ | 2,498   |   |  | $ | (53,444    | ) |  | NM    |   
|                                                                                                                     |  |                             |         |   |          |   |         |   |  |   |            |   |  |       |   



NM=Not Meaningful

TOTAL REVENUE

Total revenue includes interest and dividend income and advisory fees and other income. During the three months ended March 31, 2009, our total revenue was $27.8 million, which represents a
$15.2 million, or 35.3%, decrease from the three months ended March 31, 2008. This decline was composed primarily of: a $9.9 million, or 84.4%, decrease in dividend income; a $5.8 million, or 19.4%, decrease in interest income;
and a $0.1 million, or 15.3%, decrease in loan fees. These decreases were partially offset by a $0.6 million, or 102.5%, increase in advisory fees and other income. We expect that our revenues will be below historical levels until such time
that interest rates rise and/or we recommence originating new investments. The following sections describe the reasons for these variances.

INTEREST INCOME

The level of interest income that we earn depends upon the level of interest-bearing
investments outstanding during the period, as well as the weighted-average yield on these investments. The weighted-average yield varies each period because of changes in the composition of our portfolio of debt investments, changes in stated
interest rates and the balance of loans on non-accrual status for which we are not accruing interest. During the three months ended March 31, 2009, the total yield on our average debt portfolio at fair value was 12.3% compared to 12.1% during
the three months ended March 31, 2008. The weighted-average LIBOR was 1.2% during the three months ended March 31, 2009, compared to 3.3% during the three months ended March 31, 2008. The spread to average LIBOR on our average loan
portfolio at fair value during the three months ended March 31, 2009 was 11.1% compared to 8.9% during the three months ended March 31, 2008, due to the decrease in LIBOR increasing the spreads on our fixed rate loans and loans with
LIBOR floors, a decrease in the fair value of loans on non-accrual, and an increase in some of our rates on loans that we have amended since March 31, 2008.



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During the three months ended March 31, 2009, interest income was $24.0 million, compared to $29.8 million
during the three months ended March 31, 2008, which represented a $5.8 million, or 19.4%, decrease. This decrease reflected a $6.2 million decrease resulting from a 202 basis point reduction in average LIBOR and a $7.3
million decrease in interest income resulting from a decline in average loan balances. These decreases were partially offset by a $4.7 million increase in interest income resulting from a 221 basis point increase in our spread to LIBOR and a
$3.0 million increase in interest income resulting from a change in the average fair value daily balance of loans that are on non-accrual status.

Interest
income includes certain amounts that we have not received in cash, such as contractual paid-in-kind, or PIK, interest. PIK interest represents contractually deferred interest that is added to the loan balance and which may be prepaid by either
contract or the portfolio companys choice, but is generally paid at the end of the loan term. The following table shows the PIK related activity for the three months ended March 31, 2009 and 2008:



|                                        |  |                             |        |   |      |   |        |  
|--------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                        |  | Three months endedMarch 31, |       
|(in thousands)                          |  | 2009                        |        |   | 2008 |  
|Beginning PIK loan balance              |  | $                           | 26,354 |   |      | $ | 17,685 |  
|PIK interest earned during the period   |  |                             | 4,294  |   |      |   | 3,788  |  
|Interest receivable converted to PIK    |  |                             | 749    |   |      |   | 1,341  |  
|Principal payments of cash on PIK loans |  |                             | (365   | ) |      |   | (2,643 | )
|                                        |  |                             |        |   |      |   |        |  
|Ending PIK loan balance                 |  | $                           | 31,032 |   |      | $ | 20,171 |  
|                                        |  |                             |        |   |      |   |        |  

DIVIDEND INCOME

We accrete dividends on equity investments with stated dividend rates as they are earned, to the extent that we believe the dividends will be paid ultimately and the associated portfolio company has sufficient value
to support the accretion. We recognize dividends on our other equity investments when we receive the dividend payment. Our dividend income varies from period to period because of changes in the size and composition of our equity investments, the
yield from the investments in our equity portfolio and the ability of the portfolio companies to declare and pay dividends. The following table summarizes our dividend activity for the three months ended March 31, 2009 and 2008:



|                                         |  |                             |        |   |      |   |        |  
|---------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                         |  | Three months endedMarch 31, |       
|(in thousands)                           |  | 2009                        |        |   | 2008 |  
|Beginning accrued dividend balance       |  | $                           | 91,770 |   |      | $ | 75,614 |  
|Dividend income earned during the period |  |                             | 1,824  |   |      |   | 11,721 |  
|Payment of dividends                     |  |                             | (5,196 | ) |      |   | (345   | )
|                                         |  |                             |        |   |      |   |        |  
|Ending accrued dividend balance          |  | $                           | 88,398 |   |      | $ | 86,990 |  
|                                         |  |                             |        |   |      |   |        |  

During the three months ended March 31, 2009, our dividend income was $1.8 million, which represented a
$9.9 million, or 84.4%, decrease from the three months ended March 31, 2008. During the second quarter of 2008, we stopped accreting dividends on our Broadview investment, because our fair value reflects the full value of this investment.
As a result, during the three months ended March 31, 2009, we did not accrete any dividends from our Broadview investment, as compared to the $8.0 million of dividends we accreted for this investment during the three months ended March 31,
2008. We also ceased to accrete dividends on our equity investment in Jet Plastica Investors, LLC after March 2008, which resulted in a $0.7 million decrease in dividend income for the three months ended March 31, 2009. In addition, we ceased
to accrete dividends on three smaller investments, which resulted in an additional $0.6 million reduction in dividend income.

In February 2009, the sale
of our equity investment in LMS resulted in the payment of $4.6 million of dividends that we had accreted up to that date.

LOAN
FEES

Loan fees include origination fees on loans that we defer and amortize into interest income over the life of the loan. When
repayments or restructurings with major modifications occur, we accelerate the recognition of previously unamortized loan origination fees into loan income. These accelerations have the effect of increasing current period income and may reduce
future amortizable income. Because the repayments and restructurings may vary from period to period, the level of loan origination fees included in interest income may also vary.



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During the three months ended March 31, 2009, our loan fees decreased $0.1 million, or 15.3%, compared to the same
period in 2008 primarily because of decreased loan origination activity. We anticipate that loan origination activity during the remainder of 2009 will continue to be lower than historical levels.

ADVISORY FEES AND OTHER INCOME

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. Generally, advisory fees and other income relate to specific transactions or services and, therefore, may vary from period to period depending on the level and types of services provided. During the three months ended
March 31, 2009, we earned $1.2 million of advisory fees and other income, which represents a $0.6 million, or 102.5%, increase from the three months ended March 31, 2008. This increase was due primarily to a large advisory fee we
earned in connection with the LMS transaction during the three months ended March 31, 2009.

TOTAL OPERATING
EXPENSES

Total operating expenses include interest, employee compensation and general and administrative expenses. During the three
months ended March 31, 2009, we incurred $15.9 million of operating expenses, representing a $5.9 million, or 27.0%, decrease from the same quarter in the prior year. This decrease was composed of a $3.7 million decrease in
interest expense and a $2.6 million decrease in employee compensation expenses. These decreases were partially offset by a $0.5 million increase in general and administrative expense. The reasons for these variances are discussed in more
detail below.

INTEREST EXPENSE

During the three months ended March 31, 2009, we incurred $6.6 million of interest expense, which represented a $3.7 million, or 36.3%, decrease from the same period in 2008. The previously described reduction in average
LIBOR from 3.3% in the first quarter of 2008 to 1.2% in the first quarter of 2009 resulted in a $3.4 million decrease in interest expense. In addition, a decrease in average borrowing balances resulted in a $1.1 million decrease in interest
expense. These decreases were partially offset by $0.2 million of additional interest, resulting from a widening of the interest rate spread from 2.1% during the three months ended March 31, 2008 to 2.2% during the three months ended
March 31, 2009; and $0.6 million of additional interest, resulting from increases in our amortization of debt costs. As discussed in Liquidity and Capital ResourcesBorrowings, we renegotiated amendments to three of our debt
facilities in February 2009.

EMPLOYEE COMPENSATION

Employee compensation expense includes base salaries and benefits, variable annual incentive compensation and amortization of employee stock awards. During the three months ended March 31, 2009, our employee
compensation expense was $5.3 million, which represented a $2.6 million, or 32.9%, decrease from the same period in 2008. Salaries and benefits decreased by $2.4 million, or 38.8%, primarily because of our corporate restructuring
initiative in August 2008, which resulted in a $1.3 million decrease in incentive bonuses for the first three months of 2009 compared to the first three months in 2008 and a 27% reduction in our workforce beginning in August 2008. Subsequent to the
August 2008 reduction in force, six additional employees left MCG, whom we do not expect to replace in the near term. The reduction in force and voluntary terminations were the primary reasons for the remaining $1.1 million decrease in employee
salaries and benefits during the first quarter of 2009. To further control our general and administrative expenses, we implemented a base salary freeze for essentially all personnel.

During the three months ended March 31, 2009, we recognized $1.5 million of compensation expense related to restricted stock awards, compared to $1.7 million for the three months ended March 31,
2008, which represented a $0.2 million, or 11.8%, decrease. The lapsing of forfeiture provisions for previously awarded restricted stock accounted for the reduction in the amortization of employee restricted stock, partially offset by
additional amortization that we recognized on 1,336,000 shares of restricted stock awarded to employees after the first quarter of 2008 under our Amended and Restated 2006 Employee Restricted Stock Plan, including 648,000 shares of restricted
stock awarded as part of the MCG Capital 2008 Retention Program.



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GENERAL AND ADMINISTRATIVE

During the three months ended March 31, 2009, general and administrative expense increased to $4.0 million, which represented a $0.5 million, or 14.2%,
increase over the same period in 2008. This increase was primarily attributable to an increase in professional fees incurred during the first quarter of 2009.

NET OPERATING INCOME BEFORE NET INVESTMENT LOSSES, GAIN ON EXTINGUISHMENT
OF DEBT AND INCOME TAX (BENEFIT) PROVISION

Net operating income before net investment losses, gains on extinguishment of debt and income tax (benefit) provision for the three months ended March 31, 2009 totaled $11.9 million, compared with $21.3 million for the three
months ended March 31, 2008. This decrease is due to the items discussed above.

DISTRIBUTABLE NET
OPERATING INCOME

Distributable net operating income, or DNOI, is net operating income before net investment losses, gain
on extinguishment of debt and income tax (benefit) provision, as determined in accordance with accounting principles generally accepted in the United States, or GAAP, adjusted for amortization of employee restricted stock awards. We view DNOI and
the related per share measures as useful and appropriate supplements to net operating income, net income, earnings per share and cash flows from operating activities. These measures serve as an additional measure of MCGs operating performance
exclusive of employee restricted stock amortization, which represents expenses of the company, but does not require settlement in cash. DNOI does include paid-in-kind, or PIK, interest and dividend income which are generally not payable in cash on a
regular basis but rather at investment maturity or when declared. DNOI should not be considered as an alternative to net operating income, net income, earnings per share and cash flows from operating activities (each computed in accordance with
GAAP). Instead, DNOI should be reviewed in connection with net operating income, net income, earnings per share and cash flows from operating activities in MCGs consolidated financial statements, to help analyze how MCGs business is
performing.

During the three months ended March 31, 2009, DNOI was $13.5 million, or $0.18 per share, compared to $23.0 million, or $0.33 per
share, for the three months ended March 31, 2008. The following table shows a reconciliation of our reported net operating income before net investment losses, gain on extinguishment of debt and income tax (benefit) provision to DNOI for the
quarters ended March 31, 2009 and 2008:



|                                                                                                                                                        |  |                             |        |   |      |   |       
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------
|                                                                                                                                                        |  | Three months endedMarch 31,
|(in thousands, except per share data)                                                                                                                   |  | 2009                        |        |   | 2008
|Net operating income before net investment losses, gain on extinguishment of debt and income tax (benefit) provision                                    |  | $                           | 11,938 |   |      | $ | 21,266
|Amortization of employee restricted stock awards                                                                                                        |  |                             | 1,537  |   |      |   | 1,742 
|                                                                                                                                                        |  |                             |        |   |      |   |       
|DNOI                                                                                                                                                    |  | $                           | 13,475 |   |      | $ | 23,008
|                                                                                                                                                        |  |                             |        |   |      |   |       
|                                                                                                                                                        |  |                            
|Weighted-average common shares outstanding(b)                                                                                                           |  |                             |        |   |      |   |       
|Basic                                                                                                                                                   |  |                             | 74,498 |   |      |   | 68,847
|Diluted                                                                                                                                                 |  |                             | 74,498 |   |      |   | 68,847
|                                                                                                                                                        |  |                            
|(Loss) earnings per common sharebasic and diluted                                                                                                      |  | $                           | (0.68  | ) |      | $ | 0.04  
|Net operating income before net investment losses, gain on extinguishment of debt and income tax (benefit) provision per common
sharebasic and diluted |  | $                           | 0.16   |   |      | $ | 0.31  
|DNOI per common sharebasic and diluted(a)                                                                                                              |  | $                           | 0.18   |   |      | $ | 0.33  



|(a) | DNOI is net operating income before net investment losses, gain on extinguishment of debt and income tax (benefit)
provision, as determined in accordance with U.S. generally accepted accounting principles, or GAAP, adjusted for amortization of employee restricted stock awards. Amortization of employee restricted stock awards represents a non-cash company
expense. DNOI includes paid-in-kind, or PIK, interest and dividend income that generally are not payable on a regular basis, but rather at maturity or when declared. DNOI is not an alternative to measures computed in accordance with GAAP, such as
net operating income, net income, earnings per share and cash flows. Instead, DNOI is a non-GAAP metric that provides supplemental information about our business performance to consider together with GAAP measures.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | In accordance with FSP EITF 03-06-1Determining Whether Instruments Granted in Share-based Payment Transactions
are Participating Securities, we adjusted the weighted-average basic and diluted common shares outstanding for the three months ended March 31, 2008 to include participating restricted shares of common stock that received non-forfeitable
dividends. See Note 9(Loss) Earnings Per Share in the Notes to Condensed Consolidated Financial Statements for additional information. The implementation of this standard did not change our previously reported earnings per share;
however, DNOI decreased by one cent per share for the quarter ended March 31, 2008.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NET INVESTMENT LOSSES BEFORE GAIN
ON EXTINGUISHMENT OF DEBT AND INCOME TAX (BENEFIT) PROVISION

During the three months ended March 31, 2009, we incurred $68.3 million of net investment losses before gain on extinguishment of debt and income tax (benefit)
provision, compared to $18.6 million during the same period in 2008. These amounts represent the total of net realized gains and losses, net unrealized (depreciation) appreciation, and reversals of unrealized (appreciation) depreciation. We
reverse unrealized (appreciation) depreciation appreciation at the time that we realize the gain or loss.

The following table summarizes our realized and
unrealized (losses) and gains on investments and changes in our unrealized appreciation and depreciation on investments for the three months ended March 31, 2009:



|                                       |  |                   |  |                                   |  |                     |        |   |                          |   |         |                                                  |  |   |                |   |  |   |         |  
|-------------------------------------- |  | ----------------- |  | --------------------------------- |  | ------------------- | ------ | - | ------------------------ | - | ------- | ------------------------------------------------ |  | - | -------------- | - |  | - | ------- | -
|                                       |  |                   |  | Three months ended March 31, 2009 | 
|(dollars in thousands)                 |  | Industry          |  | Type                              |  | Realized(Loss)/Gain |        |   | Unrealized(Depreciation) |   |         | Reversal ofUnrealized(Appreciation)/Depreciation |  |   | Net(Loss)/Gain |  
|Portfolio Company                      |  |                   |  |                                   |  |                    
|TNR Holdings Corp.                     |  | Entertainment     |  | Control                           |  | $                   |       |   |                          | $ | (15,802 | )                                                |  | $ |               |   |  | $ | (15,802 | )
|Total Sleep Holdings, Inc.             |  | Healthcare        |  | Control                           |  |                     |       |   |                          |   | (13,540 | )                                                |  |   |               |   |  |   | (13,540 | )
|GMC Television Broadcasting, LLC       |  | Broadcasting      |  | Control                           |  |                     |       |   |                          |   | (6,218  | )                                                |  |   |               |   |  |   | (6,218  | )
|Jenzabar, Inc.                         |  | Technology        |  | Non-affiliate                     |  |                     |       |   |                          |   | (5,733  | )                                                |  |   |               |   |  |   | (5,733  | )
|Superior Industries Investors, LLC     |  | Sporting Goods    |  | Control                           |  |                     |       |   |                          |   | (4,955  | )                                                |  |   |               |   |  |   | (4,955  | )
|Broadview Networks Holdings, Inc.      |  | Communications    |  | Control                           |  |                     |       |   |                          |   | (3,822  | )                                                |  |   |               |   |  |   | (3,822  | )
|Jet Plastica Investors, LLC            |  | Plastic Products  |  | Control                           |  |                     |       |   |                          |   | (3,522  | )                                                |  |   |               |   |  |   | (3,522  | )
|CWP/RMK Acquisition Corp.              |  | Home Furnishings  |  | Non-affiliate                     |  |                     |       |   |                          |   | (3,511  | )                                                |  |   |               |   |  |   | (3,511  | )
|Active Brands International, Inc.      |  | Consumer Products |  | Non-affiliate                     |  |                     |       |   |                          |   | (2,679  | )                                                |  |   |               |   |  |   | (2,679  | )
|Avenue Broadband LLC                   |  | Cable             |  | Control                           |  |                     |       |   |                          |   | (2,085  | )                                                |  |   |               |   |  |   | (2,085  | )
|Xpressdocs Holdings, Inc.              |  | Business Services |  | Non-affiliate                     |  |                     |       |   |                          |   | (1,996  | )                                                |  |   |               |   |  |   | (1,996  | )
|VOX Communications Group Holdings, LLC |  | Broadcasting      |  | Non-affiliate                     |  |                     |       |   |                          |   | (1,256  | )                                                |  |   |               |   |  |   | (1,256  | )
|XFone, Inc.                            |  | Communications    |  | Affiliate                         |  |                     | (1,969 | ) |                          |   |        |                                                  |  |   | 1,969          |   |  |   |        |  
|LMS Intellibound Investors, LLC        |  | Logistics         |  | Control                           |  |                     | 16,257 |   |                          |   | (1,014  | )                                                |  |   | (15,065        | ) |  |   | 178     |  
|Other (< $1 million net (loss) gain)   |  |                   |  |                                   |  |                     | (35    | ) |                          |   | (3,355  | )                                                |  |   |               |   |  |   | (3,390  | )
|                                       |  |                   |  |                                   |  |                     |        |   |                          |   |         |                                                  |  |   |                |   |  |   |         |  
|Total                                  |  |                   |  |                                   |  | $                   | 14,253 |   |                          | $ | (69,488 | )                                                |  | $ | (13,096        | ) |  | $ | (68,331 | )
|                                       |  |                   |  |                                   |  |                     |        |   |                          |   |         |                                                  |  |   |                |   |  |   |         |  

As shown in the above table, we recorded $15.8 million of unrealized depreciation on TNR and $13.5 million of
unrealized depreciation on Total Sleep, primarily resulting from a reduction of the market pricing and multiples that we used to estimate their fair value. These changes and the remaining unrealized depreciation shown in the above table resulted
predominantly from a change in the performance of certain of the portfolio companies, and, to a lesser extent, the multiples that we used to estimate the fair value of the investments.

The following table summarizes our gains and (losses) on investments and the change in our unrealized appreciation and depreciation on investments for the three months ended March 31, 2008:



|                                     |  |                  |  |               |  |                                   |     |                                       |   |         |                                     |  |   |                 |   |  |   |         |  
|------------------------------------ |  | ---------------- |  | ------------- |  | --------------------------------- | --- | ------------------------------------- | - | ------- | ----------------------------------- |  | - | --------------- | - |  | - | ------- | -
|(in thousands)                       |  |                  |  |               |  | Three Months Ended March 31, 2008 |    
|Portfolio Company                    |  | Industry         |  | Type          |  | RealizedGain                      |     | UnrealizedAppreciation/(Depreciation) |   |         | Reversal ofUnrealized(Depreciation) |  |   | Net Gain/(Loss) |  
|JetBroadband Holdings, LLC           |  | Cable            |  | Control       |  | $                                 |    |                                       | $ | (6,155  | )                                   |  | $ |                |   |  | $ | (6,155  | )
|Working Mother Media, Inc.           |  | Publishing       |  | Control       |  |                                   |    |                                       |   | (3,890  | )                                   |  |   |                |   |  |   | (3,890  | )
|RadioPharmacy Investors, LLC         |  | Healthcare       |  | Control       |  |                                   |    |                                       |   | (2,568  | )                                   |  |   |                |   |  |   | (2,568  | )
|CWP/RMK Acquisition Corp.            |  | HomeFurnishings  |  | Non-affiliate |  |                                   |    |                                       |   | (2,477  | )                                   |  |   |                |   |  |   | (2,477  | )
|PremierGarage Holdings, LLC          |  | HomeFurnishings  |  | Control       |  |                                   |    |                                       |   | (2,290  | )                                   |  |   |                |   |  |   | (2,290  | )
|GMC Television Broadcasting, LLC     |  | Broadcasting     |  | Control       |  |                                   |    |                                       |   | (1,396  | )                                   |  |   |                |   |  |   | (1,396  | )
|Home Interiors & Gifts, Inc.         |  | HomeFurnishings  |  | Non-affiliate |  |                                   |    |                                       |   | (1,045  | )                                   |  |   |                |   |  |   | (1,045  | )
|National Product Services, Inc.      |  | BusinessServices |  | Control       |  |                                   |    |                                       |   | 1,128   |                                     |  |   |                |   |  |   | 1,128   |  
|Total Sleep Holdings, Inc.           |  | Healthcare       |  | Control       |  |                                   |    |                                       |   | 6,522   |                                     |  |   |                |   |  |   | 6,522   |  
|Other (< $1 million net (loss) gain) |  |                  |  |               |  |                                   | 200 |                                       |   | (6,542  | )                                   |  |   | (85             | ) |  |   | (6,427  | )
|                                     |  |                  |  |               |  |                                   |     |                                       |   |         |                                     |  |   |                 |   |  |   |         |  
|Total                                |  |                  |  |               |  | $                                 | 200 |                                       | $ | (18,713 | )                                   |  | $ | (85             | ) |  | $ | (18,598 | )
|                                     |  |                  |  |               |  |                                   |     |                                       |   |         |                                     |  |   |                 |   |  |   |         |  



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GAIN ON EXTINGUISHMENT OF DEBT

In January 2009, we repurchased $7.5 million of collateralized loan obligations for $2.1 million that previously had been issued by our wholly owned
subsidiary, Commercial Loan trust 2006-1. As a result of this purchase, we recognized a $5.4 million gain on extinguishment of debt during the quarter ending March 31, 2009. Partially offsetting this gain was a $0.1 million premium we incurred
when we repurchased some of our debt on March 2009.

INCOME TAX (BENEFIT) PROVISION

During the three months ended March 31, 2009, we recorded a $0.2 million income tax benefit compared to a $0.2 million income tax provision during the
three months ended March 31, 2008. Our income taxes primarily relate to unrealized gains and losses on our investments and the performance of certain of our investments that are held in taxable subsidiaries.

In December 2007, we received an examination report from the Internal Revenue Service, or IRS, related to their audit of our tax returns for the 2004 and 2005 tax years.
The IRS has proposed changes to certain deductions made by us for those years, most of which are related to the timing of certain realized losses in the portfolio. We are in the process of appealing the proposed changes, and we currently believe
that it is more likely than not that our appeal will be successful. There can be no assurance that our appeal will be successful with respect to any or all of the changes proposed by the IRS. If we are not successful appealing the adjustments
proposed by the IRS, we could be subject to penalties and interest of up to approximately $17.8 million. If our belief that we are more likely than not to be successful with our appeal changes, we will accrue an estimate of the amounts due. In the
event that our appeal is unsuccessful, we also could be required to make up to $25.1 million of additional cash and/or stock distributions to our stockholders, although alternative options may be available to us in lieu of such distributions.

NET (LOSS) INCOME

During the three months ended March 31, 2009, we incurred a net loss of $50.9 million, compared to net income of $2.5 million during the three months ended March 31, 2008. The decrease in net income is attributable to the
items discussed above.

FINANCIAL CONDITION, LIQUIDITY AND
CAPITAL RESOURCES

CASH AND CASH EQUIVALENTS,
CASH, SECURITIZATION ACCOUNTS, AND CASH, RESTRICTED

As of
March 31, 2009 and December 31, 2008, we had $50.3 million and $46.1 million, respectively, in cash and cash equivalents. In addition, as of March 31, 2009 and December 31, 2008, we had $41.8 million and $37.5 million,
respectively, in cash, securitization accounts, as well as $20.1 million and $1.0 million of restricted cash as of March 31, 2009 and December 31, 2008, respectively. During the three months ended March 31, 2008 and in January 2009,
we invested cash on hand in interest bearing deposit accounts. However, beginning in February 2009, we maintained our cash on hand in non-interest bearing accounts, which are fully insured by the U.S. Federal Deposit Insurance Corporation, or FDIC,
through December 31, 2009 under the FDICs Temporary Liquidity Guarantee Program.

Cash, securitization accounts include principal and
interest payments received on securitized loans, which in certain cases are held in designated bank accounts until monthly or quarterly disbursements are made from the securitization trusts. In certain cases, we are required to use a portion of
these amounts to pay interest expense, reduce borrowings or pay other amounts in accordance with the related securitization agreements. In other cases, we are permitted to use these amounts to acquire new loans into the securitization trusts. Cash
in securitization accounts has a negative impact on 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 and availability under our debt facilities to cover current funding requirements and operational needs.

Cash, restricted accounts primarily consist
of cash held by Solutions Capital I, LP, our SBIC. This cash is generally restricted to the origination of new loans from our SBIC.



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During the first quarter of 2009, our operating activities provided $16.5 million of cash, compared to $32.2 million
during the first quarter of 2008, which represents a $15.7 million decrease. Our operating activities provided less cash during the first three months of 2009 primarily because we increased the advances that we made to portfolio companies by
$26.2 million. Also contributing to the decrease was a $16.4 million increase in cash held in securitization and restricted cash accounts. These were partially offset by an increase in our principal collections by $20.1 million. The remaining
difference in the cash provided by our operations in the first quarter of 2009 primarily reflects additional cash used for our other assets and liabilities. During the first quarter of 2009, our financing activities used $12.4 million of cash,
compared to $43.5 million for the first quarter of 2008. This $31.1 million decrease in cash used by financing activities was due primarily to a $30.6 million decrease in net payments on borrowings and a $28.9 million decrease in the
distributions paid on our common stock. These amounts were partially offset by a $24.8 million net increase in cashsecuritization accounts for paydown of principal of debt.

We believe our current liquidity, combined with our future cash flows from operations and expected monetizations should provide sufficient liquidity to meet our operating expenses during the upcoming year.

CURRENT MARKET CONDITIONS

We are in a recession, which many believe will be longer and deeper than those of recent memory. Banks and others in the financial services industry have continued to report significant write-downs in the fair value
of their assets, which has led to the failure of a number of banks and investment companies, a number of distressed mergers and acquisitions, and the governments infusion of cash into the auto industry, large insurers and numerous large banks
in an effort to avoid their collapse or bankruptcy. Consumer confidence continued to deteriorate and unemployment figures significantly increased during the quarter. In addition, the stock market has continued to decline, with the S&P 500 and
the NASDAQ Global Select Market (on which MCG trades), declining by 11.7% and 2.8%, respectively, between December 31, 2008 and March 31, 2009.

Consistent with other companies in the financial services sector, we have been affected adversely by many of these events. The availability of debt and equity capital continues to be constrained. While the price of our stock rose from $0.71
as of December 31, 2008 to $1.28 as of March 31, 2009, our stock was trading at 16.0% of our net asset value as of March 31, 2009, thereby making it undesirable to issue new equity. In addition, the deterioration in consumer
confidence and a general reduction in spending by both consumers and businesses has had an adverse effect on a number of the industries in which some of our portfolio companies operate and has led to an overall reduction in many of the comparable
multiples that we use to estimate the fair value of certain companies in our investment portfolio. Consequently, during the three months ended March 31, 2009, we recorded $82.6 million unrealized depreciation, which includes the reversal of a
previously recorded unrealized appreciation on LMS, realized on the sale of our investment in LMS, in February 2009. When excluding net reversal of previously recorded unrealized appreciation, we recognized $69.5 million of unrealized
depreciation on our investment portfolio primarily because of the performance of certain portfolio companies and a reduction in multiples and market pricing used to estimate the fair value of our investments. In addition, we suspended new loan and
equity originations in July 2008; however, from time to time we continue to make advances to current portfolio companies.

During the quarter ended
March 31, 2009, we continued to monitor evolving economic events and execute measures instituted in 2008 to retain liquidity, meet the requirements of regulators and debt agreements, and reduce expenditures. We recognize that many of these
measures have been difficult for our stockholders, our employees and our portfolio companies. Nonetheless, we believe these actions are necessary to preserve capital and liquidity during this turbulent economic period. If we are able to meet our
goals with respect to leverage levels, unrestricted cash balances and credit agreement limitations, we will evaluate on a quarterly basis the potential repurchase of equity and additional debt securities at a discount, if available, and the
resumption of stockholder distributions. The following sections summarize the key initiatives that we undertook during 2008 and continued throughout the quarter ended March 31, 2009.

LIQUIDITY AND CAPITAL RESOURCES

The current capital markets continue to be challenging for most companies in the financial services sector, including MCG. Beginning in 2008, we initiated a number of measures aimed at preserving our liquidity,
deleveraging our balance sheet, building cash reserves and improving our BDC asset coverage ratios. Once we meet our liquidity and capital objectives, we may consider debt and equity repurchases, subject to the limitations set forth in the 1940 Act
and our borrowing facilities, and we expect to evaluate the resumption of dividends in the future.



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Major initiatives that we started during 2008, which are continuing in 2009, are summarized below:



| |  |  | MonetizationsSince the second half of 2008, we have focused on the monetization of certain debt and equity investments in our portfolio to deleverage
our balance sheet and build cash reserves. Beginning in 2008 and continuing into 2009, the availability of capital became increasingly constrained. Thus, it has become more challenging to consummate monetizations on a timely basis. However, during
the three months ended March 31, 2009, we successfully monetized $64.2 million of our portfolio investments (at close to our carrying value). On February 27, 2009, we sold our equity investment in LMS for $40.5 million to MSouth
Equity Partners. We made the original equity investment in LMS in May 2007. In addition, in February 2009, we received full repayment of our $21.5 million second-lien investment from Dayton Parts Holding, LLC, a non-affiliate investment in our
portfolio. This second-lien loan was repaid at par and $0.9 million above its most previously reported fair value. In 2008, we successfully monetized $155.6 million of our portfolio assets, including $92.1 million of monetizations (at
close to our carrying value) during the second half of the year.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Since we began our deleveraging initiatives in July
2008, we cumulatively have completed a total of $169.2 million in investment monetizations, including 17 monetizations which were completed at 99.4% of their most recently reported fair value and one monetization, which was the TNR distressed
sale, was completed at 42.7% of its most recently reported fair value. In March 2009, three major customers notified TNR that they did not intend to renew their contracts. On April 20, 2009, TNR repaid in full its debt together with all accrued
interest and we concurrently sold our equity in TNR for an aggregate between the two transactions of $11.7 million in cash. This combined transaction represented a $15.8 million additional loss compared to our reported fair value as of
December 31, 2008. We will strive to continue monetizing assets over the course of the next several quarters; however, the timing of such monetizations depends largely upon future market conditions. We are under no contractual or other
obligation to monetize assets at specified times, levels or prices.



| |  |  | Renegotiation of AgreementsIn February 2009, we successfully amended the agreements for our revolving credit facility, our secured warehouse facility
and our privately placed notes. Most significantly, these amendments relaxed key covenant requirements under the borrowing facilities. The minimum net worth requirement was reduced from $654.0 million to $525.0 million, plus 50% of the
proceeds from post-amendment date equity issuances, in the secured warehouse facility and to $500.0 million for the revolving credit facility and the privately placed notes. In addition, cross-default provisions in the agreement for our privately
placed notes were modified so that defaults under other non-recourse credit facilities would not be an event of default for the privately placed notes. In addition, in February 2009, the lender for our secured warehouse facility provided its annual
renewal of its liquidity facility that supports our secured warehouse credit facility, which resulted in a final legal maturity for this facility of August 2011.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In exchange for these concessions, we agreed to increase the interest rates paid for borrowings under these facilities and to apply a portion of the
proceeds from future monetizations to reduce the outstanding borrowings and the borrowing capacity under these facilities. In addition, our borrowing commitment under the secured warehouse facility was reduced from $250.0 million to $190.0
million. As of March 31, 2009, we had $185.5 million outstanding under this facility. The borrowing capacity for our revolving credit facility was reduced from $70.0 million to $35.0 million. As of March 31, 2009, we had
$31.2 million outstanding under our revolving credit facility. On May 4, 2009, we elected to repay our unsecured revolving line of credit prior to the maturity of this facility. We made this repayment as part of our continuing initiative
to reduce our leverage.

These amendments will provide us with continuing debt financing and the repayment terms that we established for
these facilities, which are generally tied to future monetizations, provide a contingency-based mechanism for us to repay a portion of these obligations as liquidity becomes available.



| |  |  | Corporate Restructuring In August 2008, we announced the implementation of a corporate restructuring that resulted in lower incentive compensation for
our executives, a 27% reduction in our workforce and the closure of certain facilities. Subsequent to the August 2008 reduction in force, another six employees left MCG, whom we do not expect to replace. In total, including our reduction in force
and voluntary terminations, we have reduced the workforce from 101 to 69, or 32%, since we began our cost reduction
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | initiatives. To further control our general and administrative expense, we implemented a salary freeze for virtually all personnel for 2009. We plan to
manage our expense base relative to our asset size as the portfolio decreases through monetizations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Dividend SuspensionWe did not declare dividends during the quarter ended March 31, 2009. Currently, we expect to apply certain losses for tax
purposes in 2009 that we recognized for book purposes during 2008, which could result in a significant reduction to our statutorily required dividend payment in 2009. In order to preserve capital, we intend to pay the statutory minimum dividend for
2009, which could result in no payments being made in 2009. Variables that could necessitate a dividend in 2009 to meet our RIC requirements include the actual timing of gains and losses for tax purposes, equity investment monetizations and
distributions in the event that all or part of our appeal with the IRS is unsuccessful. We will make our decisions with respect to the actual level of 2009 dividends on a quarter-by-quarter basis during 2009, after taking into account the minimum
statutorily required level of distributions, gains and losses recognized for tax purposes, portfolio transactional events, our liquidity and our asset coverage ratio at the time of such decision.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Origination ReductionsWe have suspended new loan and equity origination activities. We believe that until the cost of our capital decreases, the best
use for our unrestricted cash is to build liquidity and repurchase our debt and equity securities, subject to limitations set forth in the 1940 Act and restrictive covenants in our borrowing agreements. From time to time, we may make advances to
existing portfolio companies.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Repurchases of Collateralized Loan ObligationsIn January 2009, we repurchased $7.5 million of collateralized loan obligations for $2.1 million that had
previously been issued by our wholly owned subsidiary, Commercial Loan Trust 2006-1. As a result of this purchase, we recognized a $5.4 million gain on extinguishment of debt for the quarter ended March 31, 2009. In total, since December 2008,
we have repurchased a total of $22.6 million of collateralized loan obligations for approximately 27% of par.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition
to being able to extinguish this debt for less than 27% of the principal amount of the associated notes, our interest expense will be reduced by approximately $0.7 million of annual interest expense, based on the LIBOR in effect as of March 31,
2009, over the remaining life of the Commercial Loan Trust 2006-1 facility.

In order to reduce future cash interest payments, as well as
future amounts due at maturity or upon redemption, we may, from time to time, purchase such debt for cash in open market purchases and/or privately negotiated transactions, if attractive pricing can be identified. We will evaluate any such
transactions in light of then-existing market conditions, taking into account our current liquidity and prospects for future access to capital. The amounts involved in any such transactions, individually or in the aggregate, may be material.



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##### Table of Contents

LIQUIDITY AND CAPITAL
RESOURCESBORROWINGS

The following table summarizes our borrowing facilities and the potential borrowing
capacity of those facilities and contingent borrowing eligibility of Solutions Capital I, LP, an SBIC.



|                                       |  |                           |     |                   |                |         |  |                           |                   |                   |  |  |   |         |  |   |        
|-------------------------------------- |  | ------------------------- | --- | ----------------- | -------------- | ------- |  | ------------------------- | ----------------- | ----------------- |  |  | - | ------- |  | - | -------
|(dollars in thousands)                 |  | Maturity Date             |     |                   | March 31, 2009 |         |  |                           | December 31, 2008
|                                       |  | PotentialMaximumBorrowing |     | AmountOutstanding |                |         |  | PotentialMaximumBorrowing |                   | AmountOutstanding
|Unsecured Notes                        |  |                           |     |                   |                |         |  |                           |                   |                   |  |  |   |         |  |   |        
|Series 2005-A                          |  | October 2010              |     |                   | $              | 44,686  |  | $                         | 44,686            |                   |  |  | $ | 50,000  |  | $ | 50,000 
|Series 2007-A                          |  | October 2012              |     |                   |                | 22,342  |  |                           | 22,342            |                   |  |  |   | 25,000  |  |   | 25,000 
|                                       |  |                           |     |                   |                |        
|Commercial Loan Funding Trust Facility |  |                           |     |                   |                |         |  |                           |                   |                   |  |  |   |         |  |   |        
|Class A Variable Funding Certificate   |  | August 2011               | (a) |                   |                | 188,509 |  |                           | 185,532           |                   |  |  |   | 218,750 |  |   | 162,219
|Class B Variable Funding Certificate   |  | August 2011               | (a) |                   |                |        |  |                           |                  |                   |  |  |   | 31,250  |  |   | 24,950 
|                                       |  |                           |     |                   |                |        
|Term Securitizations                   |  |                           |     |                   |                |         |  |                           |                   |                   |  |  |   |         |  |   |        
|Series 2006-1 Class A-1 Notes          |  | April 2018                |     |                   |                | 106,250 |  |                           | 106,250           |                   |  |  |   | 106,250 |  |   | 106,250
|Series 2006-1 Class A-2 Notes          |  | April 2018                |     |                   |                | 50,000  |  |                           |                  |                   |  |  |   | 50,000  |  |   |       
|Series 2006-1 Class A-3 Notes          |  | April 2018                |     |                   |                | 85,000  |  |                           | 85,000            |                   |  |  |   | 85,000  |  |   | 85,000 
|Series 2006-1 Class B Notes            |  | April 2018                |     |                   |                | 58,750  |  |                           | 58,750            |                   |  |  |   | 58,750  |  |   | 58,750 
|Series 2006-1 Class C Notes(b)         |  | April 2018                |     |                   |                | 45,000  |  |                           | 40,000            |                   |  |  |   | 45,000  |  |   | 40,000 
|Series 2006-1 Class D Notes(c)         |  | April 2018                |     |                   |                | 47,500  |  |                           | 29,880            |                   |  |  |   | 47,500  |  |   | 37,380 
|                                       |  |                           |     |                   |                |        
|Unsecured Revolving Line of Credit(d)  |  | May 2009                  |     |                   |                | 31,205  |  |                           | 31,205            |                   |  |  |   | 70,000  |  |   | 44,500 
|                                       |  |                           |     |                   |                |        
|SBIC (Maximum borrowing potential)(e)  |  | (f)                       |     |                   |                | 130,000 |  |                           | 27,600            |                   |  |  |   | 130,000 |  |   | 2,600  
|                                       |  |                           |     |                   |                |         |  |                           |                   |                   |  |  |   |         |  |   |        
|Total borrowings                       |  |                           |     |                   | $              | 809,242 |  | $                         | 631,245           |                   |  |  | $ | 917,500 |  | $ | 636,649
|                                       |  |                           |     |                   |                |         |  |                           |                   |                   |  |  |   |         |  |   |        



|(a) | Renewable each February at the lenders discretion. The lender provided this renewal in February 2009. At that
time, the final legal maturity became August 2011. In conjunction with additional collateral transferred to this facility in February 2009, the Class B advances were retired.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Amount outstanding excludes $5.0 million of notes that we repurchased in December 2008 for $1.6 million. The notes that
MCG, the parent company, purchased are eliminated from this schedule as part of the consolidation process.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Amount outstanding excludes $10.1 million of notes that we repurchased in December 2008 for $2.4 million and $7.5
million of notes that we repurchased in January 2009 for $2.1 million. The notes that MCG, the parent company, purchased are eliminated from this schedule as part of the consolidation process.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | In February 2009, we renegotiated this agreement, which, in part, reduced the borrowing capacity for this facility from
$70.0 million to $35.0 million. On May 4, 2009, we repaid the balance of this facility. See Note 12Subsequent Events
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(e) | As of March 31, 2009, we had the potential to borrow up to $130.0 million of SBA-guaranteed debentures under
the SBIC program. The SBA has approved and committed up to $130.0 million in borrowings to the SBIC. To realize the full $130.0 million borrowing potential approved and committed by the SBIC under this program, we must fund a total of
$65.0 million to the SBIC, of which we have funded $18.6 million as of March 31, 2009. Based on our funded capital, Solutions Capital I, LP, may, subject to compliance with the SBAs customary procedures, borrow up to an
additional $28.3 million to originate investments. To access the entire $130.0 million that has been approved and committed by the SBA, we would have had to fund an additional $46.4 million. In February 2009, the American Recovery and Investment
Act of 2009 was passed into law which, among other things, included a provision that increased the maximum amount of outstanding leverage available to SBIC companies up to $150.0 million.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(f) | Currently, we may originate new borrowings through September 2012 at which time we can apply for a new commitment. We
must repay borrowings under the SBIC program within ten years after the borrowing date, which will occur between September 2018 and September 2022.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Each of our credit facilities has certain collateral requirements and/or financial covenants. During the first three months of 2009, the net worth covenant requires that we maintain a minimum stockholders equity
of not less than $525.0 million. The terms of this facility include a step-down provision that allows us to reduce the minimum stockholders equity requirement to $500.0 million plus 50% of the proceeds from any issuances after
December 31, 2008, if we reduce the effective advance rate for the advances outstanding to less than 60% of eligible collateral and we provide formal notice to the lender. Under these covenants, we must also maintain an asset coverage ratio of
at least 180%.

Our asset coverage ratio decreased to 199% as of March 31, 2009, but by May 4, 2009 had increased to 208%. We intend to
deleverage our balance sheet and pay only the minimum statutory dividend, which may be as low as zero, during the 2009. Furthermore, none of our borrowing facilities contain a financial covenant that requires us to maintain a 200% asset coverage
ratio. In addition, we have $28.3 million of funded borrowing capacity available in our SBIC subsidiary that is exempt from the asset coverage ratio requirements.

As of March 31, 2009, we were in compliance with all key financial covenants under each of our borrowing facilities, although there can be no assurance regarding compliance in future periods. On our website, we have provided a list of
hyperlinks to each of our borrowing agreements where these covenant requirements can be reviewed. You may view this list at http://www.mcgcapital.com/. We are not including the information contained on our website as a part of, or
incorporating it by reference into, this Quarterly Report on Form 10-Q.



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We fund all of our debt facilities, except the Unsecured Revolving Line of Credit and the Unsecured Notes through our
bankruptcy remote, special-purpose, wholly owned subsidiaries. Therefore, these subsidiaries assets may not be available to our creditors. In some cases, advances under our debt facilities are subject to certain collateral levels, collateral
quality, leverage and other restrictive covenants. We continue to service the portfolio investments that are used as collateral in our secured borrowing facilities. Additional information about these facilities is provided below.

Unsecured Notes. In October 2005, we issued $50.0 million of Series 2005-A unsecured notes, at a fixed interest rate of 6.73% per annum.
In October 2007, we issued an additional $25.0 million of Series 2007-A unsecured notes at a fixed interest rate of 6.71% per annum. Both of these tranches are five-year notes that require semi-annual interest payments. We issued these
notes through private placements with Bayerische Hypo-Und Vereinsbank, AG, New York Branch, or HVB, acting as the placement agent. In February 2009, these notes were amended. In connection with these amendments, MCG and the noteholders agreed to a
number of modifications to the terms of the notes, including certain financial covenants. The minimum asset coverage ratio that we are required to maintain has been lowered from 200% to 180% effective as of December 31, 2008. The minimum
consolidated stockholders equity requirement was reduced from $642.9 million prior to December 31, 2008 to $500.0 million effective as of and after December 31, 2008. The cross-default provisions were modified so that defaults of
indebtedness by certain direct and indirect subsidiaries, including Solutions Capital I, L.P. and the special purpose subsidiaries relating to the 2006-1 term securitization and our secured warehouse credit facility, would not constitute defaults
under the notes, as long as we (the parent company) or any other subsidiary that is not a non-recourse financing subsidiary are not liable for the repayment of such indebtedness. The interest rate for the Series 2005-A Notes increased from 6.73% to
8.98%. The interest rate for the Series 2007-A Notes increased from 6.71% to 8.96%. The amendments also require us to offer to repurchase the unsecured notes with a portion of certain monetization proceeds at a purchase price of 102% of the
principal amount to be purchased.

On May 4, 2009, we repaid our revolving line of credit. Prior to that repayment, we were required to
use 60% of the cash net proceeds of any sale of unencumbered assets to reduce amounts outstanding under the unsecured notes and the revolving line of credit on a pro rata basis, based on then outstanding amounts. Thereafter, we agreed to direct 40%
of such net monetization proceeds from unencumbered asset sales as and when such sales occur to the repurchase of the notes, unless an event of default under one of the financing subsidiary debt facilities has occurred and is continuing, in which
case the percentage of net proceeds increases to 60%. In March 2009, we repaid $5.3 million from monetization proceeds, which resulted in a $5.3 million reduction in the borrowing capacity of the Series 2005-A Notes. Additionally, we
repaid $2.7 million from monetization proceeds, which resulted in a $2.7 million reduction in the borrowing capacity of the Series 2007-A Notes. As of March 31, 2009, the outstanding balances under the Series 2005-A and Series
2007-A Notes were $44.7 million and $22.3 million, respectively. We also agreed to limit the amount of debt from the 2006-1 term securitization and our common stock that we may repurchase. We may make $2.5 million of debt repurchases from
the 2006-1 term securitization for every $5.0 million in unsecured notes we have offered to purchase. Once we have offered to purchase $35.0 million in unsecured notes, then we may also repurchase $1.0 million in shares of our common stock
for every $5.0 million increment of unsecured notes offered to be repurchased provided that the amount of permitted 2006-1 debt repurchases shall be reduced by the amount of any MCG common stock repurchases made. We paid to the holders of the
unsecured notes an amendment fee of $375,000, or 0.50%.

MCG Commercial Loan Funding Trust.We established, through MCG Commercial
Loan Funding Trust, a $250.0 million warehouse financing facility funded through Three Pillars Funding LLC, an asset-backed commercial paper conduit administered by SunTrust Robinson Humphrey, Inc., or SunTrust. The warehouse financing
facility, which operates like a revolving credit facility, is secured primarily by MCG Commercial Loan Funding Trusts assets, including commercial loans that we sold to the trust. The pool of commercial loans in the trust must meet certain
requirements, such as term, average life, investment rating, agency rating and industry diversity requirements. We must also meet certain requirements related to portfolio performance, including required minimum portfolio yield and limitations on
delinquencies and charge-offs. We funded this facility through two separate Variable Funding Certificates, or VFCs, including a $218.75 million Class A VFC and a $31.25 million Class B VFC.



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In February 2009, SunTrust renewed its annual liquidity commitment for this facility. In connection with
this renewal, a number of modifications were made to the warehouse facility terms, including a reduction in the facility borrowing commitment from $250.0 million to $190.0 million. In conjunction with this reduction, the Class B VFC was retired. The
legal final maturity date is now August 2011, subject to contractual terms and conditions. The requirement for a six-month standstill upon non-liquidity renewal has been eliminated. If a new agreement or extension is not executed by February 2010,
the warehouse facility enters an 18-month amortization period during which principal under the facility is paid down through orderly monetizations of portfolio company assets that are financed through the facility. The facility is funded by third
parties through the commercial paper market with SunTrust providing a liquidity backstop, subject to SunTrusts annual liquidity commitment.

Advances under the Class A VFC may be up to 64% of eligible collateral. As of March 31, 2009 and December 31, 2008, there was $295.5 million and $259.1 million, respectively, of collateral under this facility. The
warehouse facility is non-recourse to us; therefore, in the event of a termination event or upon the legal final maturity date, the lenders under the warehouse facility may only look to the collateral to satisfy the outstanding obligations under
this facility. The interest rate for Class A advances has been increased to the commercial paper rate plus 2.50%. Class A advances previously bore interest at the commercial paper rate plus 1.50%. The minimum asset coverage ratio that we
are required to maintain was reduced from 200% to 180% effective as of December 31, 2008, and the minimum consolidated stockholders equity requirement was reduced from $654.0 million prior to December 31, 2008 to $525.0 million as of
December 31, 2008. The terms of this facility include a step-down provision that allows us to reduce the minimum stockholders equity requirement to $500.0 million plus 50% of the proceeds from any equity issuances after December 31,
2008, if we reduce the effective advance rate for the advances outstanding to less than 60% of eligible collateral and we formally notify the lender. Prior to the commencement of any amortization period, we will contribute 80% of net proceeds from
monetizations of collateral financed in the warehouse facility to reduce the facility borrowing limit, until such limit is reduced to $150.0 million. In addition, 7.5% of the sale of the first $100.0 million of unencumbered investment assets by us
will be used to repay the warehouse facility until such facility is reduced to $150.0 million. In March 2009, we repaid $1.5 million from monetization proceeds which resulted in a $1.5 million reduction in the facility borrowing limit. As
of March 31, 2009, the maximum borrowing capacity under the warehouse facility was $188.5 million. We paid a $2.375 million, or 1.25%, facility renewal fee.

MCG Commercial Loan Trust 2006-1. In April 2006, we completed a $500.0 million debt securitization through MCG Commercial Loan Trust 2006-1, a wholly owned subsidiary. The 2006-1 Trust issued
$106.25 million of Class A-1 Notes, $50.0 million of Class A-2 Notes, $85.0 million of Class A-3 Notes, $58.75 million of Class B Notes, $45.0 million of Class C Notes, and $47.5 million of Class D Notes.
The respective classes of notes bear interest at LIBOR plus 0.33%, 0.35%, 0.33%, 0.58%, 1.05% and 2.25%.

All of the notes are secured by
the assets of MCG Commercial Loan Trust 2006-1, including commercial loans totaling $386.0 million and $405.8 million as of March 31, 2009 and December 31, 2008, respectively, that the trust purchased from us. We retain all of the
equity in the securitization. The securitization includes a five-year reinvestment period ending in April 2011, unless we terminate this facility earlier, during which the trust may use principal collections received on the underlying
collateral to purchase new collateral from us. 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
five-year revolving period. The Class A-3 Notes are a delayed draw class of secured notes, which were drawn in full during April 2007. From time to time, the trust purchases additional commercial loans from us, primarily using the proceeds from
the Class A-2 revolving notes. The pool of commercial loans in the trust must meet certain requirements, such as asset mix and concentration, collateral coverage, term, agency rating, minimum coupon, minimum spread and sector diversity
requirements.

In December 2008, we repurchased $15.1 million of collateralized loan obligations for $4.0 million that had previously been
issued by Commercial Loan Trust 2006-1. In January 2009, we purchased an additional $7.5 million of these notes for $2.1 million, which resulted in a $5.4 million gain on extinguishment of debt during the quarter ending March 31, 2009.

Unsecured Revolving Line of Credit.In June 2008, we entered into an agreement, effective May 30, 2008 for a one-year unsecured
revolving line of credit facility with a $70.0 million commitment. SunTrust Bank



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acts as the agent for this facility and SunTrust Robinson Humphrey, Inc. acted as arranger for this facility. Originally, SunTrust Bank committed
$25.0 million to this facility, while Chevy Chase Bank, F.S.B.; Sovereign Bank; and BMO Capital Markets, Inc., each committed $15.0 million. Advances under this facility bear interest at LIBOR plus 2.75%, prime plus 1.25% or the Federal
Funds rate plus 4.00% (reduced to the Federal Funds rate plus 3.00%, if the Federal Funds rate is less than 0.25% below LIBOR), with a commitment fee of 0.25% per annum on undrawn amounts. We use this facility for the origination of loans to,
and investments in, primarily middle-market companies; repayment of indebtedness; working capital; and other general corporate purposes. In February 2009, the Unsecured Revolving Line of Credit agreement was amended to reduce the maximum borrowing
limit from $70.0 million to $35.0 million and increase the interest rate on borrowings under this facility to LIBOR plus 400 basis points from LIBOR plus 275 basis points. The amendment also reduced the minimum stockholders equity
requirements from $650.0 million prior to December 31, 2008 to $500.0 million plus 50% of the proceeds from post-amendment date equity issuances for the periods ending as of and after December 31, 2008. In addition, we agreed to maintain
minimum cash and cash equivalents of $12.5 million at all times and a quarterly cash coverage ratio of not less than 1.25 to 1.00. We are required to direct a portion of any monetization proceeds to pay down debt. Up to 60% of the net proceeds
of any sale by us or unencumbered investment assets will reduce amounts outstanding under the revolving line of credit and our unsecured notes on a pro rata basis, based on then-outstanding amounts. All asset monetizations are at our sole discretion
based upon the economic merits of any proposed transaction. Dividends payable in cash with a declared payment date prior to July 1, 2009 are limited to the minimum amount required for us to maintain our status as a RIC. We may not repurchase or
redeem our equity or debt, provided that we may use up to $5.0 million to purchase debt from our 2006-1 term securitization facility. We paid the lenders an amendment fee, with each consenting lender receiving 0.50%. As previously discussed, on
May 4, 2009, we repaid this facility in full in advance of its May 29, 2009 maturity.

SBIC Debentures.In December 2004,
we formed a wholly owned subsidiary, Solutions Capital I, LP. Solutions Capital I, LP has a license from the SBA to operate as an SBIC, under the Small Business Investment Act of 1958, as amended, or SBIC Act. As of March 31, 2009, the
license gave Solutions Capital I, LP the potential to borrow up to $130.0 million. The SBA has approved and committed $130.0 million in borrowings to the SBIC, subject to certain capital requirements and customary procedures. These funds can be
used to provide debt and equity capital to qualifying small businesses. We may use the borrowings from the SBA to fund new originations; however, we may not use these borrowings to originate debt to companies that are currently in our portfolio
without SBA approval. In addition, we may not use these funds for working capital.

To realize the full $130.0 million potential
borrowing that we have been approved for under this program, we must fund a total of $65.0 million to the SBIC, of which we have funded $18.6 million as of March 31, 2009. Based on our current funded capital, Solutions Capital I, LP, may,
subject to compliance with the SBAs customary procedures, borrow up to an additional $28.3 million to originate new investments. To access the entire $130.0 million that the SBA has approved and committed, we would have to fund an additional
$46.4 million.

The American Recovery and Reinvestment Act of 2009, which was passed into law in February 2009, included a
provision that increased the maximum amount of outstanding leverage to available SBIC companies to up to $150.0 million, which represents a $12.9 million increase over the $137.1 million limit as of December 31, 2008. Solutions
Capital I, LP would require the SBAs approval and commitment in order to access this incremental borrowing capacity. To access the entire $150.0 million, we would have to fund a total of $56.4 million, in addition to the $18.6 million that we
had funded through March 31, 2009. As of March 31, 2009 and December 31, 2008, we had $31.7 million and $27.8 million, respectively, of investments and we had $20.1 million and $0.8 million, respectively, of restricted cash to be
used for investments by our SBIC.



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Once drawn, the SBIC debt bears an interim interest rate of LIBOR plus 30 basis points. Currently,
$13.0 million of our outstanding borrowings are subject to the interim rate. The rate becomes fixed at the time of SBA pooling, which is within nine months of funding, and is set to the then-current 10-year treasury rate plus a spread and an
annual SBA charge. As of March 31, 2009, the SBIC had $27.6 million outstanding summarized in the following table:



|                       |  |                    |        |                  |   |                              |  |      |                       |  |         |  |      |   |  |    
|---------------------- |  | ------------------ | ------ | ---------------- | - | ---------------------------- |  | ---- | --------------------- |  | ------- |  | ---- | - |  | ---
|                       |  | Amount Outstanding |        | Rate             |   | Treasury Rate atPooling Date |  |      | Spread inbasis points
|(dollars in thousands) |  | March 31,2009      |        | December 31,2008 |   |                              | 
|Tranche                |  |                    |        |                  |   |                              |  |      |                       |  |         |  |      |   |  |    
|2008-10B               |  | $                  | 2,600  |                  | $ | 2,600                        |  | 6.44 | %                     |  | Fixed   |  | 3.80 | % |  | 264
|2009-10A               |  |                    | 12,000 |                  |   |                             |  | 5.34 | %                     |  | Fixed   |  | 2.81 | % |  | 253
|Interim 2009-10B       |  |                    | 13,000 |                  |   |                             |  | 2.78 | %                     |  | Interim |  | NA   |   |  | NA 
|                       |  |                    |        |                  |   |                              |  |      |                       |  |         |  |      |   |  |    
|Total                  |  | $                  | 27,600 |                  | $ | 2,600                        |  |      |                       |  |         |  |      |   |  |    

In October 2008, we received exemptive relief from the Securities and Exchange Commission, or SEC,
which effectively allows us to exclude debt issued by Solutions Capital I, L.P. from the calculation of our consolidated BDC asset coverage ratio. Even though we were below the 200% asset coverage requirement as of March 31, 2009, we could
continue to borrow under the SBIC program.

The following table shows our weighted-average borrowings, the weighted-average interest rate on all of our
borrowings, including amortization of deferred debt issuance costs and commitment fees, the average LIBOR, and the average spread to LIBOR for the three months ended March 31, 2009 and 2008:



|                                                                                |  |                    |         |   |                |   |         |  
|------------------------------------------------------------------------------- |  | ------------------ | ------- | - | -------------- | - | ------- | -
|(dollars in thousands)                                                          |  | Three months ended |        
|                                                                                |  | March 31, 2009     |         |   | March 31, 2008 |  
|Weighted average borrowings                                                     |  | $                  | 635,631 |   |                | $ | 726,177 |  
|                                                                                |  |                   
|Average LIBOR                                                                   |  |                    | 1.2     | % |                |   | 3.2     | %
|Average spread to LIBOR, excluding amortization of deferred debt issuance costs |  |                    | 2.2     |   |                |   | 2.1     |  
|Impact of amortization of deferred debt issuance costs                          |  |                    | 0.7     |   |                |   | 0.3     |  
|                                                                                |  |                    |         |   |                |   |         |  
|Total cost of funds                                                             |  |                    | 4.1     | % |                |   | 5.6     | %
|                                                                                |  |                    |         |   |                |   |         |  

The 4.1% weighted-average cost of funds for the three months ended March 31, 2009 was 148 basis points less
than the same period in 2008. This decrease resulted from a 202 basis point decrease in average LIBOR, partially offset by a 12 basis point increase in the average spread to LIBOR and a 42 basis point increase in the impact of amortization of
deferred debt issuance costs.

LIQUIDITY AND CAPITAL RESOURCESCOMMON
STOCK

We are a closed-end investment company that has elected to be regulated as a BDC, under the 1940 Act. The 1940 Act prohibits
us from selling shares of our common stock at a price below the current net asset value of such stock, or NAV, unless our stockholders approve such a sale and our Board of Directors make certain determinations. On April 23, 2008, the
stockholders approved a proposal that authorizes us for a twelve-month period to issue shares of our common stock, with the approval of the board of directors, at a price below the then-current NAV. The approval expired on April 23, 2009.

On March 28, 2008, we issued to our stockholders of record transferable rights to subscribe for up to 9.5 million shares of our common stock.
Stockholders received one right for every seven outstanding shares of common stock owned on the record date. The rights offering expired on April 18, 2008. At the time of expiration, the rights offering, which was oversubscribed by 67%,
resulted in the issuance of 9.5 million shares of our common stock. Net proceeds after payment of dealer-manager fees and before other offering-related expenses were $57.7 million that we used to make investments primarily in middle-market
companies, repayment of indebtedness, working capital, and other general corporate purposes. The subscription price for the rights offering was $6.36, or 88% of the volume-weighted average sales prices, or VWAP, of our common stock on the
NASDAQ Global Select market during the five trading days ending on the expiration date. The VWAP was $7.23 per share of common stock.

During the
three months ended March 31, 2009, we did not grant any shares of restricted stock under the Employee Plan. During the three months ended March 31, 2009, the forfeiture provision lapsed on 18,000 shares of restricted stock pursuant to the
Employee Plans time and service requirements.

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.



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

As of March 31, 2009, we had unused commitments to extend credit to our portfolio companies of
$37.3 million, which are not reflected on our balance sheet, as shown in the table below.



|                                                |  |                          |        |                      |   |                    |  |       |       |  |   |       
|----------------------------------------------- |  | ------------------------ | ------ | -------------------- | - | ------------------ |  | ----- | ----- |  | - | ------
|(in thousands)                                  |  | As of March 31, 2009    
|Unused commitments to portfolio companies       |  | Non-AffiliateInvestments |        | AffiliateInvestments |   | ControlInvestments |  | Total
|Revolving credit facilities                     |  | $                        | 15,019 |                      | $ | 12,650             |  | $     | 8,148 |  | $ | 35,817
|Other                                           |  |                          | 108    |                      |   |                   |  |       | 1,424 |  |   | 1,532 
|                                                |  |                          |        |                      |   |                    |  |       |       |  |   |       
|Total unused commitments to portfolio companies |  | $                        | 15,127 |                      | $ | 12,650             |  | $     | 9,572 |  | $ | 37,349
|                                                |  |                          |        |                      |   |                    |  |       |       |  |   |       

From time to time, we provide guarantees or standby letters of credit on behalf of our portfolio companies. As of
March 31, 2009, we had $5.7 million of guarantees and standby letters of credit.

CONTRACTUAL OBLIGATIONS

The following table shows our contractual obligations as of March 31, 2009:



|                                          |  |                        |         |                    |   |           |  |           |         |              |   |        |  |   |        
|----------------------------------------- |  | ---------------------- | ------- | ------------------ | - | --------- |  | --------- | ------- | ------------ | - | ------ |  | - | -------
|(in thousands)                            |  | Payments Due by Period
|Contractual Obligations(a)                |  | Total                  |         | Less than1 year(b) |   | 1-3 years |  | 4-5 years |         | After 5years
|Borrowings                                |  |                        |         |                    |   |           |  |           |         |              |   |        |  |   |        
|Unsecured notes                           |  | $                      | 67,028  |                    | $ |          |  | $         | 44,686  |              | $ | 22,342 |  | $ |       
|Commercial loan funding trust facility(c) |  |                        | 185,532 |                    |   | 1,347     |  |           | 184,185 |              |   |       |  |   |       
|Term securitizations                      |  |                        | 319,880 |                    |   |          |  |           |        |              |   |       |  |   | 319,880
|Unsecured revolving line of credit(c)     |  |                        | 31,205  |                    |   | 31,205    |  |           |        |              |   |       |  |   |       
|SBIC                                      |  |                        | 27,600  |                    |   |          |  |           |        |              |   |       |  |   | 27,600 
|                                          |  |                        |         |                    |   |           |  |           |         |              |   |        |  |   |        
|Total borrowings                          |  |                        | 631,245 |                    |   | 32,552    |  |           | 228,871 |              |   | 22,342 |  |   | 347,480
|Operating Leases                          |  |                        | 8,689   |                    |   | 2,313     |  |           | 4,551   |              |   | 1,825  |  |   |       
|                                          |  |                        |         |                    |   |           |  |           |         |              |   |        |  |   |        
|Total contractual obligations             |  | $                      | 639,934 |                    | $ | 34,865    |  | $         | 233,422 |              | $ | 24,167 |  | $ | 347,480
|                                          |  |                        |         |                    |   |           |  |           |         |              |   |        |  |   |        



|(a) | Excludes the unused commitments to extend credit to our customers of $37.3 million as discussed above.
|--- | ------------------------------------------------------------------------------------------------------

|(b) | As of May 4, 2009, all contractual debt payments due less than 1 year have been made.
|--- | -------------------------------------------------------------------------------------

|(c) | Borrowings under the MCG Commercial Loan Funding Trust Facility 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

FINANCIAL
INSTRUMENTS

During the normal course of business, we are party to certain financial instruments, including loans, participations in
loans, guarantees, letters of credit and other financial commitments. We conduct extensive due diligence and, when appropriate, obtain collateral to limit our credit risk. Generally, these commitments have fixed expiration dates or other termination
clauses, which may require payment of a fee by the counterparty. We expect many commitments will expire unused; therefore, the total commitment amounts do not necessarily represent future cash requirements.

In accordance with GAAP, the unused portions of these commitments are not recorded on our Consolidated Balance Sheets. The following table summarizes the nominal
dollar balance and the fair value of unused commercial loan commitments, guarantees and standby letters of credit as of March 31, 2009 and December 31, 2008:



|                           |  |                |        |                   |   |       
|-------------------------- |  | -------------- | ------ | ----------------- | - | ------
|(in thousands)             |  | March 31, 2009 |        | December 31, 2008
|Unused loan commitments(a) |  | $              | 37,349 |                   | $ | 43,393
|Guarantees                 |  |                | 5,677  |                   |   | 5,833 
|Standby letters of credit  |  |                |       |                   |   | 97    

| | 
| | 

| | (a) | Estimated fair value of unused loan commitments as of March 31, 2009 and 2008 was $0.2 million and $0.2
million, respectively, based on the fees that we currently charge to enter into similar arrangements, taking into account the creditworthiness of the counterparties.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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DISTRIBUTIONS

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

We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time
to time. In addition, we may be limited in our ability to make distributions due to the BDC asset coverage test for borrowings applicable to us as a BDC under the 1940 Act and due to provisions in our credit facilities. If we do not distribute a
certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of favorable regulated investment company tax treatment. We cannot assure stockholders that they will receive any distributions or
distributions at a particular level. We may make distributions to our stockholders of certain net capital gains.

Since December 2001, we have declared
distributions of $11.78 per share. The following table summarizes our distributions declared since January 1, 2008:



|                  |  |                |  |                |  |        |     
|----------------- |  | -------------- |  | -------------- |  | ------ | ----
|Date Declared     |  | Record Date    |  | Payment Date   |  | Amount
|May 6, 2008       |  | June 30, 2008  |  | July 30, 2008  |  | $      | 0.27
|February 22, 2008 |  | March 12, 2008 |  | April 29, 2008 |  |        | 0.44

We met our distribution requirements as a regulated investment company for 2008 and will monitor distribution
requirements for 2009 in order to ensure compliance under Subchapter M of the Internal Revenue Code. Currently, we expect to apply certain losses for tax purposes in 2009 that we recognized for book purposes during 2008, which will significantly
reduce our statutorily required dividend payment in 2009. In order to preserve capital, we intend to pay the statutory minimum dividend for 2009, which could be as low as zero for all of 2009. Variables that could necessitate a dividend in 2009
include the actual timing of gains and losses for tax purposes and equity investment monetizations. We will make decisions with respect to the actual level of 2009 dividends on a quarter-by-quarter basis during 2009, after taking into account the
minimum statutorily required level of distributions, gains and losses recognized for tax purposes, monetizations, our liquidity and our BDC asset coverage ratio at the time of such decision.

Each year, we mail statements on Form 1099-DIV to our stockholders, which identify the source of the distribution, such as 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. 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, 2008, 2006, 2005, 2004, and 2003 a portion of the distributions to our stockholders was deemed a return of capital. None of the
distributions to stockholders during the fiscal year ended December 31, 2007 was deemed a return of capital. We did not declare a dividend during the quarter ended March 31, 2009. We determine the tax attributes of our distributions as of
the end of our fiscal year based upon our taxable income for the full year and distributions paid during the full year. Therefore, a determination of tax attributes made on a quarterly basis may not be representative of the actual tax attributes of
distributions for a full year.

The following table reconciles GAAP net income to taxable net income for the three months ended March 31, 2009 and the
year ended December 31, 2008:



|                                                                                |  |                                  |         |   |                             |   |          |  
|------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | --------------------------- | - | -------- | -
|(in thousands)                                                                  |  | Three months endedMarch 31, 2009 |         |   | Year endedDecember 31, 2008 |  
|Net loss                                                                        |  | $                                | (50,946 | ) |                             | $ | (191,245 | )
|Difference between book and tax losses on investments(a)                        |  |                                  | (519    | ) |                             |   | (73,272  | )
|Net change in unrealized depreciation on investments not taxable until realized |  |                                  | 82,584  |   |                             |   | 248,218  |  
|Timing difference related to deductibility of long-term incentive compensation  |  |                                  | 362     |   |                             |   | 6,642    |  
|Taxable interest income on non-accrual loans(b)                                 |  |                                  | 4,640   |   |                             |   | 2,051    |  
|Dividend income accrued for GAAP purposes that is not yet taxable               |  |                                  | (1,825  | ) |                             |   | (19,972  | )
|Distributions from taxable subsidiaries                                         |  |                                  |        |   |                             |   | 483      |  
|Federal tax (benefit) provision                                                 |  |                                  | (172    | ) |                             |   | 789      |  
|Other, net                                                                      |  |                                  | 38      |   |                             |   | 4,181    |  
|                                                                                |  |                                  |         |   |                             |   |          |  
|Taxable income (loss) before deductions for distributions                       |  | $                                | 34,162  |   |                             | $ | (22,125  | )
|                                                                                |  |                                  |         |   |                             |   |          |  

| | 
| | 

| | (a) | Results for the year ended December 31, 2008, primarily reflect the write-off, for tax purposes, of the common
stock of Cleartel.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------

| | (b) | Results for the year ended December 31, 2008, reflect the reversal of interest that we previously recognized on
non-accrual loans of a portfolio investment that we liquidated. We applied the proceeds from the liquidation to the portfolio companys outstanding principal balance on the debt obligation to us.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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CRITICAL ACCOUNTING POLICIES

The condensed consolidated financial statements are based on the selection and application of significant accounting policies, which require management to make
significant estimates and assumptions. The following section describes our accounting policies associated with the valuation of our portfolio of investments. For a full discussion of our other critical accounting policies and estimates, see
Managements and Discussion of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008.

VALUATION OF INVESTMENTS

We determine the value of each investment in our portfolio on
a quarterly basis. Value, as defined in Section 2(a)(41) of the Investment Company Act of 1940, is: (i) the market price for those securities for which a market quotation is readily available; and (ii) for all other securities and
assets, fair value is as determined in good faith by the board of directors. As of March 31, 2009, investments in portfolio companies comprised over 88.8% of our total assets, of which 99.7% are valued at fair value and 0.3% are valued at
market value based on readily ascertainable public market quotes.

ADOPTION OF SFAS 157FAIR
VALUE MEASUREMENTS

In September 2006, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 157Fair Value Measurements, or SFAS 157, which, for financial assets, is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. In part, SFAS 157 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date.

The new standard provides a consistent definition of fair value
that focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs.

DETERMINATION OF FAIR VALUE IN GOOD FAITH

As a BDC, we invest primarily in illiquid securities including debt and equity securities of private companies. To protect our investments and maximize our returns, we negotiate the structure of each debt and equity
security in our investment portfolio. 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 portfolio companys financial or operational performance deteriorates or
shows negative variances from its business plan and, in some cases, allow for decreases in the spread if financial or operational performance improves or exceeds the portfolio companys plan. Generally, our investments are subject to some
restrictions on resale and have no established trading market. Because of the type of investments that we make and the nature of our business, our valuation processes require analyses of numerous market, industry and company-specific factors,
including the performance of the underlying investment, the financial condition of the portfolio company, changing market events and other factors relevant to the individual security.

There is no single approach for determining fair value in good faith. Unlike banks, we are not permitted to provide a general reserve for anticipated loan losses. As a result, for portfolio investments that do not
have an active market, we must apply judgment to the specific facts and circumstances associated with each security to determine fair value.

We use
several valuation methodologies to estimate the fair value of our investment portfolio, which generally results in a range of fair values from which we derive a single estimate of the portfolio companys fair value. To determine a portfolio
companys fair value, we analyze its historical and projected financial results, as well as key market value factors. In determining a securitys fair value, we assume we would exchange it in an orderly transaction at the measurement date.
We use the following methods to determine the fair value of investments in our portfolio that are not traded actively.



| |  | Majority-Owned Control InvestmentsMajority-owned control investments comprise 40.1% of our investment portfolio. Market quotations are not
readily available for these investments; therefore, we use a combination of market and income approaches to determine their fair value. Typically, private companies
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | are bought and sold based on multiples of EBITDA, cash flows, net income, revenues or, in limited cases, book value. Generally, we apply multiples that we
observe for other comparable companies to relevant financial data for the portfolio company. Also, in a limited number of cases, we use income approaches to determine the fair value of these securities, based on our projections of the discounted
future free cash flows that the portfolio company will likely generate, as well as industry derived capital costs. Our valuation approaches for majority-owned investments estimate the value were we to sell or exit the investment. These valuation
approaches assume the highest and best use of the investment by market participants and consider the value of our ability to control the portfolio companys capital structure and the timing of a potential exit.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Non-Majority-Owned Control InvestmentsNon-majority owned investments comprise 1.9% of our investment portfolio. For our non-majority owned
equity investments, we use the same market and income valuation approaches used to value our majority-owned control investments. For non-majority-owned control debt investments, we estimate fair value using the market yield approach based on the
expected future cash flows discounted at the loans effective interest rates, based on our estimate of current market rates. We may adjust discounted cash flow calculations to reflect other market conditions or the perceived credit risk of the
borrower.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Non-Control InvestmentsNon-control investments comprise 58.0% of our investment portfolio. Quoted prices are not available for 99.4% of our
non-control investments, which represent 57.6% of our investment portfolio. For our non-control equity investments, we use the same market and income approaches used to value our control investments. For non-control debt investments, we estimate
fair value using a market yield approach based on the expected future cash flows discounted at the loans effective interest rates, based on our estimate of current market rates. We may adjust discounted cash flow calculations to reflect other
market conditions or the perceived credit risk of the borrower.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Thinly Traded and Over-the-Counter SecuritiesGenerally, we value securities that are traded in the over-the-counter market or on a stock
exchange, including broadly syndicated securities, at the average of the prevailing bid and ask prices on the date of the relevant period end. However, we may apply a discount to the market value of restricted or thinly traded public securities to
reflect the impact that these restrictions have on the value of these securities. We review factors including the trading volume, total securities outstanding and our percentage ownership of securities to determine whether the trading levels are
active (Level 1) or inactive (Level 2). As of March 31, 2009, these securities represented 0.3% of our investment portfolio.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
valuation analyses incorporate the impact that key events could have on the securities values, including private mergers and acquisitions, purchase transactions, public offerings, letters of intent and subsequent debt or equity sales. Our
valuation analyses consider key external data, such as market changes and industry valuation benchmarks. We also use independent valuation firms to provide additional support for our quarterly valuation analyses. Our general practice is to obtain an
independent valuation or review of valuation once per year for each portfolio investment that has a fair value in excess of $5.0 million.

As shown in
the following table, over the last four quarters, independent valuation firms performed independent valuations or reviewed valuations of 51 portfolio companies, representing $1.1 billion, or 99.4%, of the fair value of our total portfolio
investments and $325.6 million, or 99.5%, of the fair value of our equity portfolio investments.



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|                                                        |  |                           |         |            |   |         |  |               |           |  |                 |   |  |                |   |  |       |  
|------------------------------------------------------- |  | ------------------------- | ------- | ---------- | - | ------- |  | ------------- | --------- |  | --------------- | - |  | -------------- | - |  | ----- | -
|                                                        |  | As of March 31, 2009      |        
|                                                        |  | Investments at Fair Value |         | Percent of |  
|(dollars in thousands)                                  |  | Debt                      |         | Equity     |   | Total   |  | DebtPortfolio |           |  | EquityPortfolio |   |  | TotalPortfolio |  
|Quarter independent valuation/review prepared(a)        |  |                           |         |            |   |         |  |               |           |  |                 |   |  |                |   |  |       |  
|First quarter 2009                                      |  | $                         | 274,687 |            | $ | 239,586 |  | $             | 514,273   |  | 34.8            | % |  | 73.2           | % |  | 46.1  | %
|Fourth quarter 2008                                     |  |                           | 184,284 |            |   | 43,651  |  |               | 227,935   |  | 23.4            |   |  | 13.4           |   |  | 20.5  |  
|Third quarter 2008                                      |  |                           | 177,925 |            |   | 30,520  |  |               | 208,445   |  | 22.6            |   |  | 9.3            |   |  | 18.7  |  
|Second quarter 2008                                     |  |                           | 145,609 |            |   | 11,799  |  |               | 157,408   |  | 18.5            |   |  | 3.6            |   |  | 14.1  |  
|                                                        |  |                           |         |            |   |         |  |               |           |  |                 |   |  |                |   |  |       |  
|Total                                                   |  | $                         | 782,505 |            |   | 325,556 |  |               | 1,108,061 |  | 99.3            |   |  | 99.5           |   |  | 99.4  |  
|                                                        |  |                           |         |            |   |         |  |               |           |  |                 |   |  |                |   |  |       |  
|Not evaluated during the 12 months ended March 31, 2009 |  |                           | 5,185   |            |   | 1,746   |  |               | 6,931     |  | 0.7             |   |  | 0.5            |   |  | 0.6   |  
|                                                        |  |                           |         |            |   |         |  |               |           |  |                 |   |  |                |   |  |       |  
|Total Investment Portfolio                              |  | $                         | 787,690 |            | $ | 327,302 |  | $             | 1,114,992 |  | 100.0           | % |  | 100.0          | % |  | 100.0 | %
|                                                        |  |                           |         |            |   |         |  |               |           |  |                 |   |  |                |   |  |       |  



|(a) | Independent valuations/reviews prepared multiple times for the same investment throughout the year have that
investments fair value reflected in the most recent quarter for which an independent valuation/review was prepared.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The majority
of the valuations used by the independent valuation firms utilize proprietary models and inputs. We intend to continue to use independent valuation firms to provide additional support for our internal analyses each year. Our board of directors
considers our valuations, as well the independent valuations and reviews in its determination of the fair value of our investments. The fair value of our interest rate swap is based on a binding broker quote, based on the estimated net present value
of the future cash flows using a forward interest rate yield-curve in effect as of the measurement period.

Due to the uncertainty inherent in the
valuation process, such estimates of fair value may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. In addition, changes in the market environment
and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different from the valuations currently assigned.

RECENT ACCOUNTING PRONOUNCEMENTS

FAIR VALUE MEASUREMENTS

On February 12, 2008, FASB Staff Position No. FAS
157-2Effective Date of FASB No. 157, or FSP 157-2, was issued. FSP 157-2 deferred the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008, with early
adoption permitted in certain cases. Our implementation of this standard effective January 1, 2009, did not affect our financial position or results of operations.

On October 10, 2008, FASB Staff Position No. FAS 157-3Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active, or FSP 157-3, was issued. FSP 157-3 provides
an illustrative example of how to determine the fair value of a financial asset in an inactive market. This FSP does not change the fair value measurement principles set forth in SFAS 157. Since adopting SFAS 157 in January 2008, our practices for
determining the fair value of our investment portfolio have been, and continue to be, consistent with the guidance provided in the example in FSP 157-3. Therefore, our adoption of FSP 157-3 did not affect our practices for determining the fair value
of our investment portfolio and does not have a material effect on our financial position or results of operations.

On April 9, 2009, FASB Staff
Position No. FAS 157-4Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Indentifying Transactions That Are Not Orderly, or FSP 157-4, was issued. This FSP provides
additional guidance, primarily for Level 2 assets and liabilities, in determining fair value when compared to normal market activity and expands general fair value disclosures. In addition, FSP 157-4 expanded the disclosure requirements regarding
fair value reporting and require a categorization of investments consistent with that required for SFAS 115Accounting for Certain Investments in Debt and Equity Securities. FSP 157-4 is effective for periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15, 2009. We will adopt this standard for our period ended June 30, 2009. Since our Level 2 investments comprise less that 0.5% of our investment portfolio, we do not
believe this standard will have a material effect on our financial position or results of operations.

On April 9, 2009, FASB Staff Position No.
FAS 107-1 and APB 28-1Interim Disclosures about Fair Value of Financial Instruments, or FSP 107-1, was issued. This FSP requires disclosures about financial instruments,



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including fair value, carrying amount, and method and significant assumptions used to estimate the fair value. FSP 107-1 is effective for periods ending
after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We will adopt this standard for the period ended June 30, 2009. Currently, we are reviewing the disclosure requirements of this FSP.

TWO-CLASS METHOD OF PRESENTING EARNINGS PER
SHARE

In June 2008, FASB Staff Position EITF 03-06-1Determining Whether Instruments Granted in Share-based Payment
Transactions are Participating Securities, or FSP EITF 03-06-1, was issued. This standard requires that unvested share-based payment awards that contain non-forfeitable rights to dividends or payments shall be included in the computation of a
companys earnings per share pursuant to the two-class method. In effect, FSP EITF 03-06-1 requires companies to report basic and diluted earnings per share in two broad categories. First, companies would be required to report basic and
diluted earnings per share associated with the unvested share-based payments with non-forfeitable rights. Second, companies would separately report basic and diluted earnings per share for their remaining common stock. FSP EITF 03-06-1 is effective
for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior period earnings per share presented must be adjusted retrospectively to conform to the provisions of this FSP.
Early application is not permitted. We do have share-based payment awards that contain non-forfeitable rights to dividends and have adjusted our basic and diluted average shares outstanding as of March 31, 2008.

DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES

In March 2008, the Financial Accounting Standards Board issued SFAS No. 161Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133, or SFAS 161. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives; quantitative disclosures about fair value amounts
of, and gains and losses on, derivative instruments; and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for fiscal years beginning after November 15, 2008 and interim periods
within those fiscal years, and early adoption is encouraged. We adopted this standard January 1, 2009. We have reflected the disclosure requirements for SFAS 161.



|ITEM3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------ | ----------------------------------------------------------

Beginning in late 2007, the United States entered a recession, which many believe could be prolonged. As the economy continued to
deteriorate in 2008, spending by both consumers and businesses declined significantly. This reduction in spending has had an adverse effect on a number of the industries in which some of our portfolio companies operate, which have impacted the
broader financial and credit markets and have reduced the availability of debt and equity capital for the market as a whole and financial firms in particular. The Company and other commercial finance companies have historically utilized the
collateralized loan obligation, or CLO, market to finance some of their investment activities. Due to the current dislocation of the CLO market, which we believe may continue for an extended period of time, we and other companies in the commercial
finance sector will have to either curtail originations or obtain access to alternative debt markets. During 2008 and continuing into 2009, the availability of debt capital has been extremely constrained. This trend continued into 2009, which has
significantly limited our ability to originate new investments during the first quarter of 2009 and we expect our ability to originate new investments to be limited throughout the remainder of 2009. While we have been successful in renegotiating
certain of our borrowing agreements in early 2009, these agreements are at higher cost and include less favorable terms than our historical borrowing agreements.

The United States has been in a recession since late 2007. In the event that this recession continues for a significant time or the economy deteriorates further, the financial position and results of operations of certain of the
middle-market companies in our portfolio could be affected adversely, which ultimately could lead to difficulty in meeting debt service requirements and an increase in defaults. During the first quarter of 2009, we experienced write-downs across the
portfolio, most of which were due to a reduction in the performance of certain portfolio companies and a reduction in multiples and market pricing used to estimate the fair value of our investments. There can be no assurance that the performance of
our portfolio companies will not be further impacted by economic conditions, which could have a negative impact on our future results.

Interest rate
sensitivity refers to the change in earnings that may result from changes in the level of interest rates. Our net interest income is affected by changes in various interest rates, including LIBOR, prime rates and commercial paper rates. As of
March 31, 2009, approximately 60.4% of our loan portfolio, at fair value, bears



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interest at a spread to LIBOR or prime rate, and 39.6% at a fixed rate. As of March 31, 2009, approximately 45.6% of our loan portfolio, at fair value,
has LIBOR floors between 1.5% and 4.0% on the LIBOR base index and prime floors between 3.0% and 6.0%. These floors minimize our exposure to significant decreases in interest rates.

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. During 2008, we entered into two interest rate swaps expiring in November 2010 for
notional amounts of $16.0 million and $8.0 million at interest rates of 10.0% and 14.0%, respectively. During the first quarter ended March 31, 2009, we entered into two interest rate swaps expiring in August 2010 for notional amounts
of $8.7 million and $12.5 million at interest rates of 9.0% and 13.0%, respectively.

The following table compares the interest rate base for our
commercial loans and our outstanding borrowings as of March 31, 2009 and December 31, 2008:



|                  |  |                 |         |            |   |                   |  |                                          |  |            |         |  |   |        
|----------------- |  | --------------- | ------- | ---------- | - | ----------------- |  | ---------------------------------------- |  | ---------- | ------- |  | - | -------
|                  |  | March 31, 2009  |         |            |   | December 31, 2008
|(in thousands)    |  | CommercialLoans |         | Borrowings |   |                   |  | Interest BearingCash andCommercial Loans |  | Borrowings
|Money Market Rate |  | $               |        |            | $ |                  |  |                                          |  | $          | 156     |  | $ |       
|Prime Rate        |  |                 | 79,483  |            |   |                  |  |                                          |  |            | 63,346  |  |   |       
|LIBOR             |  |                 |         |            |   |                   |  |                                          |  |            |         |  |   |        
|30-Day            |  |                 | 43,735  |            |   |                  |  |                                          |  |            | 16,825  |  |   |       
|60-Day            |  |                 |        |            |   |                  |  |                                          |  |            |        |  |   |       
|90-Day            |  |                 | 426,941 |            |   | 351,085           |  |                                          |  |            | 459,012 |  |   | 371,880
|180-Day           |  |                 | 7,701   |            |   |                  |  |                                          |  |            | 7,923   |  |   |       
|Commercial Paper  |  |                 |        |            |   | 185,532           |  |                                          |  |            |        |  |   | 187,169
|Fixed Rate        |  |                 | 377,215 |            |   | 94,628            |  |                                          |  |            | 372,226 |  |   | 77,600 
|                  |  |                 |         |            |   |                   |  |                                          |  |            |         |  |   |        
|Total             |  | $               | 935,075 |            | $ | 631,245           |  |                                          |  | $          | 919,488 |  | $ | 636,649
|                  |  |                 |         |            |   |                   |  |                                          |  |            |         |  |   |        

Based on our March 31, 2009 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 thousands) Basis Point Change |  | InterestIncome |        |   | InterestExpense |   |        | Unrealized(Depreciation)/Appreciation |  |   | Net Income |  
|(100)                                     |  | $              | (1,420 | ) |                 | $ | (5,366 | )                                     |  | $ | (111       | ) |  | $ | 4,057  |  
|100                                       |  |                | 1,660  |   |                 |   | 5,366  |                                       |  |   | 452        |   |  |   | (4,158 | )
|200                                       |  |                | 4,828  |   |                 |   | 10,732 |                                       |  |   | 904        |   |  |   | (6,808 | )
|300                                       |  |                | 10,340 |   |                 |   | 16,099 |                                       |  |   | 1,355      |   |  |   | (7,114 | )



|ITEM4. | CONTROLS AND PROCEDURES
|------ | -----------------------

DISCLOSURE CONTROLS AND PROCEDURES

Our management, with the
participation of our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2009. The term disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the companys management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required disclosure.

Management recognizes that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the foregoing
evaluation of our disclosure controls and procedures as of March 31, 2009, our Chief Executive Officer, our Chief Financial Officer and our Chief Accounting Officer concluded that, as of such date, our disclosure controls and procedures were
effective at the reasonable assurance level.



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INTERNAL CONTROL OVER FINANCIAL
REPORTING

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act), occurred during the fiscal quarter ended March 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION



|ITEM1. | LEGAL PROCEEDINGS
|------ | -----------------

In December 2007,
we received an examination report from the IRS related to its audit of our tax returns for the 2004 and 2005 tax years. The IRS proposed changes to certain deductions made by us for those years, primarily associated with the timing of certain
realized losses in our portfolio. We are appealing the proposed changes and believe it is more likely than not that our appeal will be successful. If our appeal is not successful, we could be subject to up to $17.8 million of additional taxes,
interest and penalties. If, in the future, we believe it is more likely than not that we will not prevail, we would accrue the estimated amounts due. In the event that our appeal is unsuccessful, we also could be required to make up to $25.1 million
of additional cash and/or stock distributions to our stockholders, although alternative options may be available to us in lieu of such distributions.

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 we cannot predict the outcome of these legal
proceedings with certainty, we do not expect that these proceedings will have a material effect on our financial condition or results of operations.



|ITEM1A. | 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 on Form 10-Q, including our financial statements and the related notes and the
schedules and exhibits to this Quarterly Report on Form 10-Q.

Set forth below and elsewhere in this Quarterly Report on Form 10-Q and in other
documents that we file with the SEC are descriptions of the risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this Quarterly Report on Form
10-Q. The description below includes any material changes to and supersedes the description of the risk factors affecting our business previously disclosed in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2008.

Many of our portfolio investments are not publicly-traded and, as a result, there is uncertainty as to
the value of our portfolio investments. If our determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposition of such investments, our net asset value could be
affected adversely.

In accordance with the 1940 Act and accounting principles generally accepted in the United States, we carry substantially all of
our portfolio investments at fair value as determined in good faith by our board of directors. Whenever possible, we value securities at market value; however, only a small percentage of our portfolio investments is traded publicly. We value the
investments that are not publicly traded pursuant to a valuation process utilizing the input of our valuation committee. The types of factors that may be considered in fair value pricing of these investments include private mergers and acquisitions
transactions, comparisons to publicly traded comparable companies, third-party assessments of valuation, discounted cash flow analyses, the nature and realizable value of any collateral, the portfolio companys earnings and its ability to make
payments, the markets in which the portfolio company does business, market-based pricing and other relevant factors. In determining fair value in good faith, we generally obtain financial and other information from portfolio companies, which may
include unaudited, projected or pro forma financial information. Our board of directors also uses several independent valuation firms to aid it in determining the fair value of these investments. Because our valuations, and particularly the
valuations of private securities and private companies, are inherently uncertain, they may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have
been used if a readily available market for these investments existed and from the amounts we may realize on any disposition of such investments. If our determinations regarding the fair value of our investments were materially higher than the
values that we ultimately realize upon the disposition of such investments, our net asset value could be affected adversely.



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Economic downturns or recessions could impair our portfolio companies financial position and operating results,
which could, in turn, harm our operating results.

The U.S. and most other markets have entered into a period of recession. Many of the companies in
which we have made, or may make investments are, and may continue to be, susceptible to economic downturns or recessions. Current adverse economic conditions have decreased the value of some of our loans and equity investments and a prolonged
recession or depression may further decrease such value. These conditions are contributing to, and if prolonged, could lead to further losses of value in our portfolio and decrease in our revenues, net income and net assets. If prolonged,
unfavorable or uncertain economic and market conditions may affect the ability of our portfolio companies to repay our loans or engage in a liquidity event, such as a sale, merger, recapitalization or initial public offering. Therefore, the number
of non-performing assets may increase and the value of our portfolio may decrease during these periods. A portfolio companys failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and,
potentially, an acceleration of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize our portfolio companys ability to meet its obligations under the debt securities that we
hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company. In addition, if one of our portfolio companies were to go bankrupt, even though we, or one of our
affiliates, may have structured our interest as senior debt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might re-characterize our
debt holding as equity and subordinate all, or a portion, of our claim to that of other creditors.

Investing in middle-market businesses involves a
high degree of risk and our financial results may be affected adversely if one or more of our significant portfolio investments defaults on its loans or fails to perform as we expect.

Our portfolio consists primarily of debt and equity investments in privately owned middle-market businesses. Investment in middle-market companies involves a number of
significant risks. Typically, the debt that we invest in is not initially rated by any rating agency; however, we believe that if such investments were rated, they would be below investment grade. Compared to larger publicly-owned companies, these
middle-market companies may be in a weaker financial position and experience wider variations in their operating results, which may make them more vulnerable to economic downturns. Typically, these companies need more capital to compete; however,
their access to capital is limited and their cost of capital is often higher than that of their competitors. Our portfolio companies face intense competition from larger companies with greater financial, technical and marketing resources and their
success typically depends on the management talents and efforts of an individual or a small group of persons. Therefore, the loss of any of their key employees could affect their ability to compete effectively and harm their financial condition.
Further, some of these companies conduct business in regulated industries that are susceptible to regulatory changes. These factors could impair the cash flow of our portfolio companies and result in other events, such as bankruptcy. These events
could limit a portfolio companys ability to repay their obligations to us, which may have an adverse affect on 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 the value of the loans collateral.

Some of these companies cannot obtain financing from public
capital markets or from traditional credit sources, such as commercial banks. Accordingly, loans made to these types of companies pose a higher default risk than loans made to companies who have access to traditional credit sources.

Generally, little, if any, public information is available about such companies. Therefore, we must rely on our employees diligence to obtain the information
needed to make well-informed investment decisions. If we do not uncover material information about these companies, we may not make a fully informed investment decision, which could, in turn cause us to lose money on our investments.

Our financial position and results of operations could be affected adversely if a significant portion of our portfolio is invested in industries that experience
adverse economic or business conditions.

From time to time, we target specific industries in which to invest on a recurring basis. This practice could
concentrate a significant portion of our portfolio in a specific industry. As of March 31, 2009, our investments in communications companies represented 16.8% of the fair value of our portfolio. Of the 16.8% investment, 15.3% represented
investments in CLECs and 1.5% represented investments in other communications companies. In addition as of March 31, 2009, our investments in cable portfolio companies and healthcare represented 11.0% and 10.0%, respectively, of the fair value
of our portfolio. If an industry in which we have significant investments suffers from adverse business or economic conditions, a material portion of our investment portfolio could be affected adversely, which, in turn, could adversely affect our
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Our financial results could be affected adversely if a significant portfolio investment fails to perform as expected.

Our total investment in companies may be significant individually or in the aggregate. As a result, if a significant investment in one or more
companies fails to perform as expected, our financial results could be affected adversely and the magnitude of the loss could be more significant than if we had made smaller investments in a greater number of companies.

Broadview Network Holdings, Inc., or Broadview, a CLEC serving primarily business customers, is our largest portfolio investment. As of March 31, 2009, we held
preferred stock in Broadview with a $135.5 million fair value. As of March 31, 2009 and December 31, 2008, our investment in Broadview represented 12.2% and 11.6%, respectively, of the fair value of our investment portfolio. During the
three months ended March 31, 2009, we recognized $3.8 million of unrealized depreciation on our investment in Broadview. If Broadviews performance deteriorates in future periods, we may be required to recognize additional unrealized
depreciation on this investment.

In November 2007, Broadview filed a registration statement on Form S-1 to register shares of its common stock for an
initial public offering, or IPO, of equity securities. Since early 2008, however, the IPO markets have been inaccessible due to market conditions. Broadview continues to perform in accordance with our expectations; however, we currently do not
expect to accrue any further dividends on our Broadview investment. Our ability to recognize income from our preferred stock investment in Broadview in future periods depends on the performance and value of Broadview.

Currently, we are in a period of capital markets disruption and recession and we do not expect these conditions to improve in the near future. This disruption in the
capital markets has contributed to the decrease in our net asset value and stock price, and could have an adverse impact on our business and operations.

Since late 2007, and particularly mid-2008, the financial services industry and the securities markets generally were materially and adversely affected by significant declines in the values of nearly all asset classes and by a lack of
liquidity. These market conditions were initially triggered by declines in home prices and the values of subprime mortgages, but spread to all mortgage and real estate asset classes, to leveraged bank loans and to nearly all asset classes, including
equities. For over a year, the global markets have been characterized by substantially increased volatility, short-selling and an overall loss of investor confidence, initially in financial institutions, but more recently in companies in a number of
other industries and in the broader markets. We believe that the U.S. economy has entered into a period of recession and forecasts for 2009 generally call for further weakness in the economy. As of March 31, 2009, our common stock was trading
at $1.28 per share, or at 16.0% of net asset value.

We may be unable to monetize assets in a difficult market environment that precludes our target buyers
from making investments at the fair values established by our board of directors. We are susceptible to the risk of significant loss if we are forced to discount the value of our investments in order to monetize assets to provide liquidity to fund
operations, meet our liability maturities and to maintain compliance with our debt covenants. In addition, if the fair value of our assets declines substantially, we may fail to maintain the BDC asset coverage ratios stipulated by the 1940 Act. As
of March 31, 2009, we were below the required BDC asset coverage ratio of 200%, but we had increased above 200% by May 4, 2009. When we are not in compliance with the ratio, it affects our ability to issue senior securities, including
borrowings, pay dividends and could cause us to breach certain covenants in our credit facilities, which could materially impair our business operations. However, because borrowings by our SBIC facility are exempt from the minimum asset coverage
requirement, we have $28.3 million of funded borrowing capacity that we can utilize in our SBIC facility regardless of the BDC asset coverage ratio for either investments in new portfolio companies or in existing portfolio companies with the
approval of the SBA. Further asset value degradation may result from circumstances that we may be unable to control, such as a severe decline in the value of the U.S. dollar, a protracted economic downturn or an operational problem that affects
third parties or us. Ongoing disruptive conditions could cause our stock price and net asset value to decline, restrict our business operations and could adversely impact our results of operations and financial condition.



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If we are not successful in our appeal to the Internal Revenue Service, we could be subject to up to $17.8 million of
additional taxes, interest and penalties, and could be required to make up to $25.1 million of additional cash and/or stock distributions. This event could have an adverse effect on our liquidity.

In December 2007, we received an examination report from the Internal Revenue Service related to its audit of our tax returns for the 2004 and 2005 tax years. The
Internal Revenue Service proposed changes to certain deductions made by us for those years, primarily associated with the timing of certain realized losses in our portfolio. We are appealing the proposed changes and believe it is more likely than
not that our appeal will be successful. In the event that our appeal is unsuccessful, we also could be required to make up to $25.1 million of additional cash and/or stock distributions to our stockholders, although alternative options may be
available to us in lieu of such distributions. Thus, if we are unsuccessful in our appeal, our liquidity could be affected adversely.

If market
constraints further prevent us from obtaining additional debt or equity capital, our liquidity could be adversely affected, our business prospects could be negatively impacted, we could lose key employees and our operating results could be
negatively affected.

The current economic and capital market conditions in the U.S. have resulted in a severe reduction in the availability of debt
and equity capital for the market as a whole, and financial services firms in particular. These conditions have constrained us and other companies in the financial services sector, limiting or completely preventing access to markets for debt and
equity capital needed to maintain operations, continue investment originations and to grow. If these conditions continue for a prolonged period of time, or worsen in the future, we could lose key employees and access to leverage and our business
prospects could be negatively impacted. In addition, the debt capital that will be available, if at all, may be at a higher cost and/or less favorable terms and conditions. Equity capital is, and may continue to be, difficult to raise because,
subject to some limited exceptions, we are not generally able to issue and sell our common stock at a price below net asset value per share. In addition, issuing equity at depressed stock prices is dilutive to our stockholders, uneconomical and
would impair our ability to grow. These events and inability to raise capital have resulted in the suspension of new originations, curtailed our ability to grow and had a negative impact on our liquidity and operating results. The continued
inability to raise additional capital could further constrain our liquidity, negatively impact our business prospects, cause the departure of key employees and negatively impact our operating 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 significantly or eliminated.

We have elected to be taxed for federal income tax purposes as a regulated investment company, or RIC, under
Subchapter M of the Internal Revenue Code. To qualify as a RIC under the Internal Revenue Code, we must meet certain source-of-income, asset diversification and annual distribution requirements. The annual distribution requirement for a RIC is
satisfied if we distribute to our stockholders at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, on an annual basis. If we do not distribute at least 98% of our
annual taxable income, we generally will be required to pay an excise tax on amounts carried over and distributed to stockholders in the next year equal to 4% of the amount by which 98% of our annual taxable income exceeds the distributions from
such income for the current year. We met our distribution requirements as a RIC for 2008. 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 RIC. 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. Consequently, if we are unable to obtain cash from other sources to satisfy our distributions to our stockholders, we may fail to qualify as a RIC and, thus, may be subject to
corporate-level income tax.

The Internal Revenue Service recently issued a Revenue Procedure that provides temporary cash flow relief to RICs, including
BDCs, by allowing them to satisfy their federal tax income distribution requirements through the use of substantial amounts of their own stock, rather than solely cash or other RIC assets. Although there has been some guidance that suggests that
distributions of stock consistent with the Revenue Procedure will not be viewed as violating the provisions of the 1940 Act relating to sales of shares below new asset value and do not need to be registered under the Securities Act of 1933, any such
distributions require complicated compliance procedures and would be dilutive to existing stockholders. To qualify as a RIC, we must also meet certain asset diversification requirements at the end of each calendar quarter. Failure to meet these
tests may, in certain instances, result in our having to dispose of certain investments quickly in order to prevent the loss of RIC status.



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Because most of our investments are in private companies, any such dispositions could be made at disadvantageous prices
and may result in substantial losses. If we fail to qualify as a RIC for any reason and become subject to corporate-level income tax, the resulting corporate-level taxes could substantially reduce our net assets, the amount of income available for
distribution and the amount of our distributions. Such a failure would have a material adverse effect on our stockholders and us.

We have substantial
indebtedness and, if we do not service our debt arrangements adequately, our business could be harmed materially.

As of March 31, 2009, we had
$631.2 million of outstanding borrowings under our debt facilities. As of March 31, 2009, the weighted-average annual interest rate on all of our outstanding borrowings was 3.4%, excluding the amortization of deferred debt issuance costs. In
order for us to make our annual interest payments on indebtedness, we must achieve annual returns on our March 31, 2009 total assets of at least 1.8%. Our ability to service our debt arrangements depends largely on our financial performance and
will be subject to prevailing economic conditions and competitive pressures.

Under our warehouse financing facility funded through Three Pillars Funding
LLC, an asset-backed commercial paper conduit administered by SunTrust Robinson Humphrey, Inc., or the SunTrust Warehouse, and under our debt securitization through MCG Commercial Loan Trust 2006-1, we are subject to 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 RIC under Subchapter M of the Internal
Revenue Code and impact our liquidity. In addition, these facilities include various affirmative and negative covenants, as well as cross-default provisions, whereby a payment default or acceleration under one of our debt facilities could constitute
a default under other debt facilities. In the event that there is a breach of one of the covenants contained in one of our debt facilities that has not been cured within any applicable cure period, if any, the lenders thereunder would have the
ability to accelerate the maturity of the indebtedness outstanding under that facility and exercise certain other remedies. In addition, our subsidiaries have sold some of our loans to trusts that serve as the vehicles for our securitization
facilities, and these trusts, which are bankruptcy remote, hold legal title to these assets. However, in the event of a default on these loans held by the trusts, we bear losses to the extent our collateral exceeds our borrowings, which was $206.5
million as of March 31, 2009.

Under our unsecured revolving line of credit, or the SunTrust Revolver, and under the terms of our unsecured notes, or
the Private Placement Notes, we are also subject to financial and operating covenants that restrict our business activities, including our ability to incur certain additional indebtedness, effect debt and stock repurchases in specified circumstances
or through the use of borrowings or unrestricted cash, or pay dividends above certain levels.

We record decreases in the fair values of our portfolio
company investments as unrealized depreciation, which could affect certain covenants in our credit facilities. Our SunTrust Warehouse requires that we maintain a minimum stockholders equity of not less than $525.0 million as of
December 31, 2008 plus 50% of the proceeds from any post-amendment date equity issuances. The SunTrust Revolver requires that we maintain a minimum stockholders equity of not less than $500.0 million plus 50% of the proceeds from any
post-amendment date equity issuances for the periods ending as of and after December 31, 2008 and the Private Placement Notes require that we maintain a consolidated stockholders equity of $500.0 million for the periods ending as of and after
December 31, 2008. As of March 31, 2009, our stockholders equity was $609.5 million. In the event that we experience a significant amount of unrealized depreciation, we could breach one or more of the covenants in our credit
facilities pursuant to which our lenders might, among other things, require full and immediate payment.

As a BDC, we are not permitted to incur
indebtedness or issue senior securities, including preferred stock, unless immediately after such borrowing we have an asset coverage for total borrowings (excluding borrowings by our SBIC facility) of at least 200%. In addition, we may not be
permitted to declare any cash dividend or other distribution on our outstanding common shares, or purchase any such shares, unless, at the time of such declaration or purchase, we have an asset coverage of at least 200% after deducting the amount of
such dividend, distribution, or purchase price. If we are unable to meet this asset coverage requirement, 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 until we are in compliance with the 200% threshold requirement.

Our ratio of total assets to total
borrowings and other senior securities was 199% as of March 31, 2009, but by May 4, 2009 had increased to 208%. Based on our March 31, 2009 balances of total assets, total borrowings and other securities, we had a $9.2 million
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excluding the SBIC borrowing capacity. We have $28.3 million of the funded borrowings capacity in our SBIC. Debt issued by our SBIC is excluded from the
total borrowings used to calculate our asset coverage ratio. As previously described, a ratio below 200% does not cause any defaults under any of our current borrowing facilities. Additionally, we have announced our intentions to increase cash to
repay our debt obligations and therefore do not currently need to access additional borrowings. We have also stated our intention to pay only the statutory minimum dividend for 2009 and not declared a dividend during the quarter ended March 31,
2009.

In addition, because a significant portion of our assets and liabilities are priced using various short-term rate indices, including one-month to
nine-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 or renew our debt
or able to do so on favorable terms, our operations could be affected adversely.

As of March 31, 2009, we had $631.2 million of borrowings. In
February 2009, we entered into amendments related to each of our SunTrust Warehouse, SunTrust Revolver and Private Placement Notes, pursuant to which the facility limits on the SunTrust Revolver and SunTrust Warehouse were reduced to
$35.0 million and $190.0 million, respectively. These facilities have been further reduced by monetization prepayments. As of March 31, 2009 the facility limits for the SunTrust Revolver, SunTrust Warehouse and Private Placement notes
are $31.2 million, $188.5 million and $67.0 million, respectively.

On May 4, 2009, we repaid in full our SunTrust Revolver which was scheduled to
mature in May 2009. Absent any acceleration events, the SunTrust Warehouse matures in August 2011 and the Private Placement Notes mature in October 2010 (with respect to the $44.7 million in notes remaining) and October 2012 (with respect to
the $22.3 million in notes remaining). We cannot be certain that we will be able to renew our credit facilities as they mature or to consummate new borrowing facilities to provide capital for normal operations, including new originations. Reflecting
concern about the stability of the financial markets, many lenders and institutional investors have reduced or ceased providing funding to borrowers. This market turmoil and tightening of credit has led to increased market volatility and widespread
reduction of business activity generally. If we are unable to renew or replace such facilities and consummate new facilities, at a reasonable size, our liquidity will be reduced significantly. Even if we are able to renew or refinance these
facilities or consummate new borrowing facilities, we may not be able to do so on favorable terms. If we are unable to repay amounts outstanding under such facilities and are declared in default or are unable to renew or refinance these facilities,
our operations could be affected adversely.

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

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

Investments in equity securities involve a substantial degree of risk.

We may purchase common stock and other equity securities, including warrants. Although equity securities have historically generated higher average total returns than debt securities over the long term, equity securities may experience more
volatility in those returns than debt securities. The equity securities we acquire may fail to appreciate and may decline in value or lose all value, and our ability to recover our investment will depend on our portfolio companys success.
Investments in equity securities involve a number of significant risks, including the risk of further dilution as a result of additional issuances. Investments in preferred securities involve special risks, such as the risk of deferred
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You may not receive future distributions.

In the event that our asset coverage ratio falls below 200%, which it did briefly as of March 31, 2009, we will be unable to make distributions until our asset coverage ratio improves. 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 RIC for the applicable period. We cannot assure you that you will receive any distributions or distributions at a
particular level. As of March 31, 2009, our asset coverage ratio was 199%. Based on our preliminary balances of total assets, total borrowings and other securities our BDC asset coverage ratio increased to 208% as of May 4, 2009. On
August 6, 2008, we announced that we had met our estimated distribution requirements for 2008. Subsequently, we did not make additional distributions during 2008. We may not be able to achieve operating results or our business may not perform
in a manner that will allow us to make any distributions in 2009 or thereafter. During the remainder of 2009, we will make decisions with respect to dividends on a quarter-by-quarter basis after taking into account the minimum statutorily required
level of distributions, including gains and losses recognized for tax purposes, portfolio transactional events, our liquidity and our BDC asset coverage ratio. In addition, we may not be able to make distributions at a specific level or to increase
the amount of these distributions from time to time. Due to the BDC asset coverage test applicable to us as a BDC, we may be limited in our ability to make distributions.

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

In accordance with generally accepted accounting principles and tax regulations, we include in taxable income certain amounts that we have not yet received in cash, such as contractual payment-in-kind interest, which
represents contractual interest added to the loan balance and due at the end of the loan term. The increases in loan balances as a result of contracted payment-in-kind arrangements are included in taxable income in advance of receiving cash payment.
Since we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our investment company taxable income to maintain tax benefits as a RIC.

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 usually are 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 liquidate some or all of the investments in
our portfolio immediately, 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 RIC if we do not satisfy one or more of the applicable criteria under the respective regulatory frameworks.

Our business depends on our key personnel.

We depend on the continued services of our executive officers and other
key management personnel. The loss of any of our executive officers or key management personnel could result in inefficiencies in our operations and lost business opportunities, which could have a negative impact on our business. In addition, under
our SunTrust Warehouse, if either Steven F. Tunney, our CEO, or B. Hagen Saville, our Executive Vice President, Business Development, ceases to be involved actively in the management of MCG and is not replaced by a person reasonably acceptable to
SunTrust within 90 consecutive calendar days of such occurrence, we would be in default under such facility. If we lose the services of Mr. Tunney or Mr. Saville and are unable to identify and hire suitably qualified replacements, it could
trigger a covenant default under our SunTrust Warehouse, which could accelerate the termination date of that facility.

Fluctuations in interest rates
could affect our income adversely.

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 portfolio companies 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 portfolio companies may be unable to meet higher payment obligations. Due to the



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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 not have a material effect on the existing fixed rate loans in our portfolio. In addition, a significant decrease in interest rates could 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 60.4% of the loans in our portfolio, based on amounts outstanding at fair value as of
March 31, 2009, were at variable rates based on a benchmark LIBOR or prime rate and approximately 39.6% were at fixed rates. As of March 31, 2009, approximately 45.6% of our loan portfolio, at fair value, has LIBOR floors between 1.5% and
4.0% on the LIBOR base index and prime floors between 3.0% and 6.0%. These floors minimize our exposure to significant decreases in interest rates.

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 BDC 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 would be precluded from issuing senior securities, could not pay dividends and 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. In addition, the 1940 Act prohibits us from selling shares of our common stock at a price below the current net asset
value unless our stockholders approve such a sale and our board of directors make certain determinations.

Any change in the regulation of our business
could have a negative effect on the profitability of our operations.

Changes in the laws, regulations or interpretations of the laws and regulations
that govern business development companies, RICs, SBICs or non-depository commercial lenders could have a significant effect on 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.

One of our wholly
owned subsidiaries is licensed by the SBA, and as a result, we will be subject to SBA regulations.

Our wholly owned subsidiary, Solutions Capital I,
LP, is licensed to operate as an SBIC and is regulated by the SBA. The SBA regulations require that a licensed SBIC be examined periodically and audited by an independent auditor to determine the SBICs compliance with the relevant SBA
regulations. If Solutions Capital I, LP fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit the Solutions Capital I, LPs use of debentures, declare outstanding
debentures immediately due and payable, and/or limit Solutions Capital I, LP from making new investments. The SBA also imposes a limit on the maximum amount that may be borrowed by any single SBIC. The SBA prohibits, without prior SBA approval, a
change of control of an SBIC or transfers that would result in any person (or a group of persons acting in concert) owning 10% or more of a class of capital stock of a licensed SBIC.

The SBA also places certain limitations on the financing terms of investments by SBICs in portfolio companies and prohibits SBICs from providing funds for certain
purposes or to businesses in a few prohibited industries. Compliance with SBA requirements may cause the SBIC to forego attractive investment opportunities that are not permitted under SBA regulations.

The SBA can revoke or suspend a license for willful or repeated violation of, or willful or repeated failure to observe, any provision of the Small Business
Investment Act of 1958 or any rule or regulation promulgated thereunder.



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Our common stock could be delisted from the NASDAQ Global Select Market if our common stock trades below $1.00 per
share.

Our common stock has traded below $1.00 per share on the NASDAQ Global Select Market. Because many companies have experienced similar
volatility in their stock prices, on October 16, 2008, the NASDAQ Stock Market LLC, or NASDAQ, made a rule filing with the SEC to temporarily suspend its bid price and market value of publicly held securities continued listing requirements
until January 16, 2009. On January 15, 2009, the SEC allowed NASDAQ to extend this suspension until April 20, 2009, which has been further extended until July 20, 2009.

Absent a further extension of NASDAQs recent rule filing, if the closing bid price per share for our common stock is below $1.00 per share for 30 consecutive
business days, we will receive notification from NASDAQ, indicating that we are not in compliance with NASDAQ Marketplace Rule 5450(a)(1). In accordance with NASDAQ Marketplace Rule 5810(c)(3)(A), we would then be provided 180 calendar days to
regain compliance.

To regain compliance with the minimum bid price requirement, the closing bid price of our common stock must remain at $1.00 per share
or more for a minimum of ten consecutive business days. If we do not regain compliance, we can apply to list our common stock on the NASDAQ Capital Market and NASDAQ will determine whether we meet the NASDAQ Capital Market initial listing criteria
as set forth in NASDAQ Marketplace Rule 5810(c), except for the minimum bid price requirement. If we meet the NASDAQ Capital Market initial listing criteria, NASDAQ may notify us that we have been granted an additional 180 calendar days to come into
compliance with the minimum bid price requirement. If we do not meet the initial listing criteria, NASDAQ may provide us with written notification that our common stock will be delisted. At that time, we would be permitted to appeal NASDAQs
determination to delist our common stock to a NASDAQ Listings Qualifications Panel.

Delisting from the NASDAQ Global Select Market could have an adverse
effect on our business and on the trading of our common stock. If a delisting of our common stock from the NASDAQ Stock Market were to occur, our common stock would trade on the Over-the-Counter Bulletin Board or on the pink sheets
maintained by the National Quotation Bureau, Inc. Such alternatives generally are considered to be less efficient markets, and our stock price, as well as the liquidity of our common stock, could be affected adversely.

Current levels of market volatility are unprecedented. Our stock price has been, and continues to be, volatile and purchasers of our common stock could incur
substantial losses.

The capital and credit markets have been experiencing extreme volatility and disruption for more than twelve months. In recent
months, the volatility and disruption have reached unprecedented levels, and we have experienced greater than usual stock price volatility. In addition, the stock market in general and the market prices for securities of financial services companies
and business development companies in particular have experienced extreme volatility that often have been unrelated or disproportionate to the operating performance of these companies. If current levels of market volatility continue or worsen, there
can be no assurance that we will not continue to experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

In addition, the trading price of our common stock following an offering may fluctuate substantially. The price of the common stock that will prevail in the market after
an offering may be higher or lower than the price you paid and the liquidity of our common stock may be limited, in each case depending on many factors, some of which are beyond our control and may not be directly related to our operating
performance. These factors include, but are not limited to, the following:



| |  |  | our quarterly results of operations;
| | - |  | ------------------------------------



| |  |  | price and volume fluctuations in the overall stock market from time to time;
| | - |  | ----------------------------------------------------------------------------



| |  |  | investors general perception of our company, the economy and general market conditions;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | actual or anticipated changes in our earnings or fluctuations in our operating results or changes in the expectations of securities analysts;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the financial performance of the specific industries in which we invest on a recurring basis, including without limitation, our investments in communications
companies;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | significant transactions or capital commitments by us or our competitors;
| | - |  | -------------------------------------------------------------------------



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| |  |  | significant volatility in the market price and trading volume of securities of business development companies or other financial services companies;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | volatility resulting from trading in derivative securities related to our common stock including puts, calls or short trading positions;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in laws or regulatory policies or tax guidelines with respect to business development companies or RICs;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | the loss of a major funding source, including one of our lenders;
| | - |  | -----------------------------------------------------------------



| |  |  | announcements of strategic developments, acquisitions and other material events by us or our competitors; or
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | departures of key personnel.
| | - |  | ----------------------------

If any of these
factors causes an adverse effect on our business, results of operations or financial condition, the price of our common stock could fall and investors may not be able to sell their common stock at or above their respective purchase prices.



|ITEM2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|------ | -----------------------------------------------------------

None.



|ITEM3. | DEFAULTS UPON SENIOR SECURITIES
|------ | -------------------------------

Not Applicable.



|ITEM4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|------ | ---------------------------------------------------

Not Applicable.



|ITEM5. | OTHER INFORMATION
|------ | -----------------

Not Applicable.



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|ITEM6. | EXHIBITS
|------ | --------

The following table lists exhibits filed
as part of this report, according to the number assigned to them in Item 601 of Regulation S-K. All exhibits listed in the following table are incorporated by reference except for those exhibits denoted in the last column.



|            |  |                                                                                                                                                                                                                                                                    |  |                           |  |                      |  |             |  |                    
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------- |  | -------------------- |  | ----------- |  | -------------------
|            |  |                                                                                                                                                                                                                                                                    |  | Incorporated by Reference
|Exhibit No. |  | Description                                                                                                                                                                                                                                                        |  | Form and SECFile No.      |  | Filing Date with SEC |  | Exhibit No. |  | Filed withthis 10-Q
|10.1        |  | First Amendment, dated as of February 26, 2009, to Revolving Credit Agreement among MCG Capital Corporation; SunTrust Bank; Chevy Chase Bank, F.S.B.; Sovereign Bank and BMO Capital Markets,
Inc.; and SunTrust Robinson Humphrey, Inc., dated as of May 30, 2008 |  | 8-K(0-33377)              |  | February 27, 2009    |  | 10.1        |  |                    
|            |  |                                                                                                                                                                                                                                                                    |  |                           | 
|10.2        |  | Amended and Restated Sale and Servicing Agreement, by and among MCG Commercial Loan Funding Trust; MCG Capital Corporation; Three Pillars Funding LLC; SunTrust Robinson Humphrey, Inc.; and Wells
Fargo Bank, National Association, dated as of February 26, 2009 |  | 8-K(0-33377)              |  | February 27, 2009    |  | 10.2        |  |                    
|            |  |                                                                                                                                                                                                                                                                    |  |                           | 
|10.3        |  | First Amendment among MCG Capital Corporation and the Holders of 6.73% Senior Notes under the October 11, 2005 Note Purchase Agreement, dated as of February 26, 2009                                                                                              |  | 8-K(0-33377)              |  | February 27, 2009    |  | 10.3        |  |                    
|            |  |                                                                                                                                                                                                                                                                    |  |                           | 
|10.4        |  | First Amendment among MCG Capital Corporation and the Holders of 6.71% Senior Notes under the October 3, 2007 Note Purchase Agreement, dated as of February 26, 2009                                                                                               |  | 8-K(0-33377)              |  | February 27, 2009    |  | 10.4        |  |                    
|            |  |                                                                                                                                                                                                                                                                    |  |                           | 
|15.1        |  | Letter regarding unaudited interim financial information from Ernst & Young LLP, independent registered public accounting firm                                                                                                                                     |  |                           |  |                      |  |             |  | *                  
|            |  |                                                                                                                                                                                                                                                                    |  |                           | 
|31.1        |  | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of Sarbanes-Oxley Act
of 2002                                                         |  |                           |  |                      |  |             |  | *                  
|            |  |                                                                                                                                                                                                                                                                    |  |                           | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of Sarbanes-Oxley Act
of 2002                                                         |  |                           |  |                      |  |             |  | *                  
|            |  |                                                                                                                                                                                                                                                                    |  |                           | 
|31.3        |  | Certification of Chief Accounting Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of Sarbanes-Oxley
Act of 2002                                                        |  |                           |  |                      |  |             |  | *                  
|            |  |                                                                                                                                                                                                                                                                    |  |                           | 
|32.1        |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002                                                                                                                      |  |                           |  |                      |  |             |  |                   
|            |  |                                                                                                                                                                                                                                                                    |  |                           | 
|32.2        |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002                                                                                                                      |  |                           |  |                      |  |             |  |                   
|            |  |                                                                                                                                                                                                                                                                    |  |                           | 
|32.3        |  | Certification of Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002                                                                                                                     |  |                           |  |                      |  |             |  |                   



|* | Filed herewith.
|- | ---------------

| | Furnished herewith.
|- | -------------------



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SIGNATURES

Pursuant to the requirements 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.



|                  |  |                         |  |                         
|----------------- |  | ----------------------- |  | ------------------------
|                  |  | MCG Capital Corporation
|                  |  |                        
|Date: May 8, 2009 |  | By:                     |  | /s/ STEVEN F. TUNNEY    
|                  |  |                         |  | Steven F. Tunney        
|                  |  |                         |  | Chief Executive Officer 
|                  |  |                        
|Date: May 8, 2009 |  | By:                     |  | /s/ STEPHEN J. BACICA   
|                  |  |                         |  | Stephen J. Bacica       
|                  |  |                         |  | Chief Financial Officer 
|                  |  |                        
|Date: May 8, 2009 |  | By:                     |  | /s/ LINDA A. NIMMONS    
|                  |  |                         |  | Linda A. Nimmons        
|                  |  |                         |  | Chief Accounting Officer



82