##### 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 September 30, 2008

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 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.



|                                              |  |   |  |                           |  |  
|--------------------------------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer                       |  | x |  | Accelerated filer         |  |  ̈
|                                              |  |   | 
|Non-accelerated filer                         |  |  ̈ |  | Smaller reporting company |  |  ̈
|(Do not check if a 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 October 28, 2008, there were 76,116,769 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 SEPTEMBER 30, 2008

TABLE OF CONTENTS



|                                                                                             |  |   
|-------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION                                                                |  | 1 
|                                                                                             | 
|Item 1. 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 Condensed Consolidated Financial Statements (Unaudited)                             |  | 15
|                                                                                             | 
|Report of Independent Registered Public Accounting Firm                                      |  | 34
|                                                                                             | 
|Selected Financial Data                                                                      |  | 35
|                                                                                             | 
|Item 2.Managements Discussion and Analysis of Financial Condition and Results of
Operations |  | 36
|                                                                                             | 
|Overview                                                                                     |  | 36
|                                                                                             | 
|Recent Developments                                                                          |  | 38
|                                                                                             | 
|Portfolio Composition and Investment Activity                                                |  | 38
|                                                                                             | 
|Asset Quality                                                                                |  | 42
|                                                                                             | 
|Results of Operations                                                                        |  | 43
|                                                                                             | 
|Financial Condition, Liquidity and Capital Resources                                         |  | 53
|                                                                                             | 
|Critical Accounting Policies                                                                 |  | 61
|                                                                                             | 
|Recent Accounting Pronouncements                                                             |  | 63
|                                                                                             | 
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                           |  | 64
|                                                                                             | 
|Item 4. Controls and Procedures                                                              |  | 65
|                                                                                             | 
|PART II. OTHER INFORMATION                                                                   |  | 66
|                                                                                             | 
|Item 1. Legal Proceedings                                                                    |  | 66
|                                                                                             | 
|Item 1A. Risk Factors                                                                        |  | 66
|                                                                                             | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                          |  | 74
|                                                                                             | 
|Item 3. Defaults Upon Senior Securities                                                      |  | 74
|                                                                                             | 
|Item 4. Submission of Matters to a Vote of Security Holders                                  |  | 74
|                                                                                             | 
|Item 5. Other Information                                                                    |  | 75
|                                                                                             | 
|Item 6. Exhibits                                                                             |  | 76
|                                                                                             | 
|SIGNATURES                                                                                   |  | 77



i



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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)                                                                                                                                                                         |  | September 30,2008 |           |   | December 31,2007 |  
|                                                                                                                                                                                                                 |  | (unaudited)       |           |   |                  |  
|Assets                                                                                                                                                                                                           |  |                   |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                                                                                                        |  | $                 | 19,281    |   |                  | $ | 23,297    |  
|Cash, securitization accounts                                                                                                                                                                                    |  |                   | 41,083    |   |                  |   | 37,003    |  
|Cash, restricted                                                                                                                                                                                                 |  |                   | 1,351     |   |                  |   | 4,010     |  
|Investments at fair value                                                                                                                                                                                        |  |                   |           |   |                  |   |           |  
|Non-affiliate investments (cost of $617,751and $675,077, respectively)                                                                                                                                           |  |                   | 624,768   |   |                  |   | 706,819   |  
|Affiliate investments (cost of $56,577 and $70,516, respectively)                                                                                                                                                |  |                   | 68,498    |   |                  |   | 77,601    |  
|Control investments (cost of $813,207and $818,808, respectively)                                                                                                                                                 |  |                   | 603,203   |   |                  |   | 760,670   |  
|                                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |  
|Total investments (cost of $1,487,535 and $1,564,401, respectively)                                                                                                                                              |  |                   | 1,296,469 |   |                  |   | 1,545,090 |  
|Interest receivable                                                                                                                                                                                              |  |                   | 7,966     |   |                  |   | 11,272    |  
|Other assets                                                                                                                                                                                                     |  |                   | 19,904    |   |                  |   | 16,909    |  
|                                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |  
|Total assets                                                                                                                                                                                                     |  | $                 | 1,386,054 |   |                  | $ | 1,637,581 |  
|                                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |  
|Liabilities                                                                                                                                                                                                      |  |                   |           |   |                  |   |           |  
|Borrowings (maturing within one year of $19,500 and $166,922, respectively)                                                                                                                                      |  | $                 | 652,968   |   |                  | $ | 751,035   |  
|Interest payable                                                                                                                                                                                                 |  |                   | 5,888     |   |                  |   | 6,599     |  
|Dividends payable                                                                                                                                                                                                |  |                   |          |   |                  |   | 28,858    |  
|Other liabilities                                                                                                                                                                                                |  |                   | 12,519    |   |                  |   | 16,400    |  
|                                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                                                                |  |                   | 671,375   |   |                  |   | 802,892   |  
|                                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |  
|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 September 30, 2008 and December 31, 2007, 76,117 issued and
outstanding on September 30, 2008 and 65,587 issued and outstanding on December 31, 2007 |  |                   | 761       |   |                  |   | 656       |  
|Paid-in capital                                                                                                                                                                                                  |  |                   | 995,859   |   |                  |   | 933,274   |  
|Undistributed (distributions in excess of) earnings                                                                                                                                                              |  |                   |           |   |                  |   |           |  
|Paid-in capital                                                                                                                                                                                                  |  |                   | (84,070   | ) |                  |   | (84,070   | )
|Other                                                                                                                                                                                                            |  |                   | (6,674    | ) |                  |   | 4,704     |  
|Net unrealized depreciation on investments                                                                                                                                                                       |  |                   | (191,066  | ) |                  |   | (19,311   | )
|Stockholder loans                                                                                                                                                                                                |  |                   | (131      | ) |                  |   | (564      | )
|                                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |  
|Total stockholders equity                                                                                                                                                                                       |  |                   | 714,679   |   |                  |   | 834,689   |  
|                                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |  
|Total liabilities and stockholders equity                                                                                                                                                                       |  | $                 | 1,386,054 |   |                  | $ | 1,637,581 |  
|                                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |  
|Net asset value per common share at end of period                                                                                                                                                                |  | $                 | 9.39      |   |                  | $ | 12.73     |  

The accompanying notes are an integral part of these financial statements



1



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##### Table of Contents

MCG Capital Corporation

Consolidated Statements of Operations

(unaudited)



|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | -------- | - |  | - | ------- | -
|                                                                                   |  | Three months endedSeptember 30, |         |   | Nine months endedSeptember 30, |  
|(in thousands, except per share amounts)                                           |  | 2008                            |         |   | 2007                           |   |         | 2008 |  |   | 2007     |  
|Revenue                                                                            |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Interest and dividend income                                                       |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Non-affiliate investments (less than 5% owned)                                     |  | $                               | 18,198  |   |                                | $ | 20,379  |      |  | $ | 55,652   |   |  | $ | 58,684  |  
|Affiliate investments (5% to 25% owned)                                            |  |                                 | 1,656   |   |                                |   | 3,447   |      |  |   | 5,205    |   |  |   | 10,993  |  
|Control investments (more than 25% owned)                                          |  |                                 | 10,529  |   |                                |   | 21,303  |      |  |   | 42,065   |   |  |   | 59,510  |  
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Total interest and dividend income                                                 |  |                                 | 30,383  |   |                                |   | 45,129  |      |  |   | 102,922  |   |  |   | 129,187 |  
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Advisory fees and other income                                                     |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Non-affiliate investments (less than 5% owned)                                     |  |                                 | 466     |   |                                |   | 1,145   |      |  |   | 1,399    |   |  |   | 3,459   |  
|Affiliate investments (5% to 25% owned)                                            |  |                                 |        |   |                                |   | 57      |      |  |   |         |   |  |   | 107     |  
|Control investments (more than 25% owned)                                          |  |                                 | 447     |   |                                |   | 751     |      |  |   | 1,071    |   |  |   | 4,659   |  
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Total advisory fees and other income                                               |  |                                 | 913     |   |                                |   | 1,953   |      |  |   | 2,470    |   |  |   | 8,225   |  
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Total revenue                                                                      |  |                                 | 31,296  |   |                                |   | 47,082  |      |  |   | 105,392  |   |  |   | 137,412 |  
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Operating expenses                                                                 |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Interest expense                                                                   |  |                                 | 7,991   |   |                                |   | 11,888  |      |  |   | 26,706   |   |  |   | 31,535  |  
|Employee compensation                                                              |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Salaries and benefits                                                              |  |                                 | 4,081   |   |                                |   | 6,186   |      |  |   | 13,673   |   |  |   | 18,052  |  
|Amortization of employee restricted stock awards                                   |  |                                 | 1,802   |   |                                |   | 2,120   |      |  |   | 5,406    |   |  |   | 7,126   |  
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Total employee compensation                                                        |  |                                 | 5,883   |   |                                |   | 8,306   |      |  |   | 19,079   |   |  |   | 25,178  |  
|General and administrative expense                                                 |  |                                 | 4,408   |   |                                |   | 2,640   |      |  |   | 12,377   |   |  |   | 7,911   |  
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Total operating expenses                                                           |  |                                 | 18,282  |   |                                |   | 22,834  |      |  |   | 58,162   |   |  |   | 64,624  |  
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Net operating income before net investment (losses) gains and income tax provision |  |                                 | 13,014  |   |                                |   | 24,248  |      |  |   | 47,230   |   |  |   | 72,788  |  
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Net realized (losses) gains on investments                                         |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Non-affiliate investments (less than 5% owned)                                     |  |                                 | 5,359   |   |                                |   | 2,567   |      |  |   | 5,484    |   |  |   | 8,508   |  
|Affiliate investments (5% to 25% owned)                                            |  |                                 | 1       |   |                                |   |        |      |  |   | (61      | ) |  |   |        |  
|Control investments (more than 25% owned)                                          |  |                                 | (14,823 | ) |                                |   | 673     |      |  |   | (14,551  | ) |  |   | 7,564   |  
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Total net realized (losses) gains on investments                                   |  |                                 | (9,463  | ) |                                |   | 3,240   |      |  |   | (9,128   | ) |  |   | 16,072  |  
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Net unrealized (depreciation) appreciation on investments                          |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Non-affiliate investments (less than 5% owned)                                     |  |                                 | (12,790 | ) |                                |   | 4,253   |      |  |   | (24,871  | ) |  |   | 615     |  
|Affiliate investments (5% to 25% owned)                                            |  |                                 | 4,214   |   |                                |   | 6,458   |      |  |   | 4,836    |   |  |   | 8,709   |  
|Control investments (more than 25% owned)                                          |  |                                 | (61,685 | ) |                                |   | (11,746 | )    |  |   | (151,447 | ) |  |   | (3,798  | )
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Total net unrealized (depreciation) appreciation on investments                    |  |                                 | (70,261 | ) |                                |   | (1,035  | )    |  |   | (171,482 | ) |  |   | 5,526   |  
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Net investment (losses) gains before income tax provision                          |  |                                 | (79,724 | ) |                                |   | 2,205   |      |  |   | (180,610 | ) |  |   | 21,598  |  
|Income tax provision                                                               |  |                                 | 236     |   |                                |   | 3,434   |      |  |   | 568      |   |  |   | 2,867   |  
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Net (loss) income                                                                  |  | $                               | (66,946 | ) |                                | $ | 23,019  |      |  | $ | (133,948 | ) |  | $ | 91,519  |  
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|(Loss) earnings per basic and diluted common share(a)                              |  | $                               | (0.90   | ) |                                | $ | 0.35    |      |  | $ | (1.87    | ) |  | $ | 1.44    |  
|                                                                                   |  |                                 |         |  
|Cash distributions declared per common share                                       |  | $                               |        |   |                                | $ | 0.44    |      |  | $ | 0.71     |   |  | $ | 1.32    |  
|                                                                                   |  |                                 |         |  
|Weighted-average common shares outstanding(a)                                      |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Basic                                                                              |  |                                 | 74,296  |   |                                |   | 65,537  |      |  |   | 71,526   |   |  |   | 63,378  |  
|Diluted                                                                            |  |                                 | 74,296  |   |                                |   | 65,556  |      |  |   | 71,526   |   |  |   | 63,381  |  



|(a) | In accordance with SFAS 128Earnings Per Share, for the purposes of computing the basic and diluted number
of shares, we adjusted the number of common shares outstanding prior to April 29, 2008 by a factor of 1.052 to reflect the impact of a bonus element associated with our rights offering to acquire shares of common stock issued to stockholders on
April 29, 2008 (the date that the common stock was issued in conjunction with the stockholders rights offering). See Note 5Capital Stock and Note 8(Loss) Earnings Per Share in the Notes to our Condensed
Consolidated Financial Statements for additional information about the rights offering, the associated bonus element, and its estimated impact on our net asset value per common share.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of these financial statements



2



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##### Table of Contents

MCG Capital Corporation

Consolidated Statements of Changes in Net Assets

(unaudited)



|                                                                                        |  |                                |          |   |      |   |         |  
|--------------------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | ------- | -
|                                                                                        |  | Nine months endedSeptember 30, |         
|(in thousands, except per share amounts)                                                |  | 2008                           |          |   | 2007 |  
|(Decrease) increase in net assets from operations                                       |  |                                |          |   |      |   |         |  
|Net operating income before investment (losses) gains and income tax provision          |  | $                              | 47,230   |   |      | $ | 72,788  |  
|Net realized (losses) gains on investments                                              |  |                                | (9,128   | ) |      |   | 16,072  |  
|Net unrealized (depreciation) appreciation on investments                               |  |                                | (171,482 | ) |      |   | 5,526   |  
|Income tax provision                                                                    |  |                                | (568     | ) |      |   | (2,867  | )
|                                                                                        |  |                                |          |   |      |   |         |  
|Net (loss) income                                                                       |  |                                | (133,948 | ) |      |   | 91,519  |  
|                                                                                        |  |                                |          |   |      |   |         |  
|Distributions to stockholders                                                           |  |                                |          |   |      |   |         |  
|Distributions declared                                                                  |  |                                | (49,185  | ) |      |   | (80,978 | )
|                                                                                        |  |                                |          |   |      |   |         |  
|Net decrease in net assets resulting from stockholder distributions                     |  |                                | (49,185  | ) |      |   | (80,978 | )
|                                                                                        |  |                                |          |   |      |   |         |  
|Capital share transactions                                                              |  |                                |          |   |      |   |         |  
|Issuance of common stock                                                                |  |                                | 57,107   |   |      |   | 95,246  |  
|Amortization of employee restricted stock awards accounted for as employee compensation |  |                                | 5,406    |   |      |   | 7,126   |  
|Amortization of employee restricted stock awards accounted for as restructuring expense |  |                                | 88       |   |      |   |        |  
|Amortization of non-employee director restricted stock awards                           |  |                                | 194      |   |      |   | 108     |  
|Cancellation of common stock held as collateral for stockholder loans                   |  |                                | (105     | ) |      |   |        |  
|                                                                                        |  |                               
|Stockholder loans                                                                       |  |                                |          |   |      |   |         |  
|Unrealized depreciation and realized loss on stockholder loans                          |  |                                | 328      |   |      |   |        |  
|Repayment of stockholder loans                                                          |  |                                | 105      |   |      |   | 151     |  
|                                                                                        |  |                                |          |   |      |   |         |  
|Net increase in net assets resulting from capital share transactions                    |  |                                | 63,123   |   |      |   | 102,631 |  
|                                                                                        |  |                                |          |   |      |   |         |  
|Total (decrease) increase in net assets                                                 |  |                                | (120,010 | ) |      |   | 113,172 |  
|                                                                                        |  |                               
|Net assets                                                                              |  |                                |          |   |      |   |         |  
|Beginning of period                                                                     |  |                                | 834,689  |   |      |   | 753,137 |  
|                                                                                        |  |                                |          |   |      |   |         |  
|End of period                                                                           |  | $                              | 714,679  |   |      | $ | 866,309 |  
|                                                                                        |  |                                |          |   |      |   |         |  
|Net asset value per common share at end of period                                       |  | $                              | 9.39     |   |      | $ | 13.22   |  
|Common shares outstanding at end of period                                              |  |                                | 76,117   |   |      |   | 65,541  |  

The accompanying notes are an integral part of these financial statements



3



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##### Table of Contents

MCG Capital Corporation

Consolidated Statements of Cash Flows

(unaudited)



|                                                                                 |  |                                |          |   |      |   |          |  
|-------------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | -------- | -
|                                                                                 |  | Nine months endedSeptember 30, |         
|(in thousands)                                                                   |  | 2008                           |          |   | 2007 |  
|Cash flows from operating activities                                             |  |                                |          |   |      |   |          |  
|Net (loss) income                                                                |  | $                              | (133,948 | ) |      | $ | 91,519   |  
|                                                                                 |  |                               
|Adjustments to reconcile net income to net cash provided by operating activities |  |                                |          |   |      |   |          |  
|Investments in portfolio companies                                               |  |                                | (70,817  | ) |      |   | (457,832 | )
|Principal collections related to investment repayments or sales                  |  |                                | 164,574  |   |      |   | 246,605  |  
|Increase in accrued payment-in-kind interest and dividends                       |  |                                | (19,895  | ) |      |   | (34,870  | )
|Increase in interest receivable                                                  |  |                                | (861     | ) |      |   | (4,629   | )
|Amortization of non-employee director restricted stock awards                    |  |                                | 194      |   |      |   | 108      |  
|Amortization of employee restricted stock awards                                 |  |                                | 5,494    |   |      |   | 7,126    |  
|Decrease (increase) in cashsecuritization accounts from interest collections    |  |                                | 64       |   |      |   | (771     | )
|Depreciation and amortization                                                    |  |                                | 2,755    |   |      |   | 1,340    |  
|Unrealized depreciation and realized loss on stockholder loans                   |  |                                | 328      |   |      |   |         |  
|(Increase) decrease in other assets                                              |  |                                | (1,635   | ) |      |   | 6,384    |  
|(Decrease) increase in other liabilities                                         |  |                                | (4,232   | ) |      |   | 6,060    |  
|Net realized losses (gains) on investments                                       |  |                                | 9,128    |   |      |   | (16,072  | )
|Net change in unrealized depreciation (appreciation) on investments              |  |                                | 171,482  |   |      |   | (5,526   | )
|                                                                                 |  |                                |          |   |      |   |          |  
|Net cash provided by (used in) operating activities                              |  |                                | 122,631  |   |      |   | (160,558 | )
|                                                                                 |  |                                |          |   |      |   |          |  
|Cash flows from financing activities                                             |  |                                |          |   |      |   |          |  
|Net (payments) proceeds on borrowings                                            |  |                                | (98,067  | ) |      |   | 137,897  |  
|Increase in cashsecuritization accounts for paydown of principal on debt        |  |                                | (4,144   | ) |      |   | (3,623   | )
|Payment of financing costs                                                       |  |                                | (3,413   | ) |      |   | (533     | )
|Distributions paid                                                               |  |                                | (78,130  | ) |      |   | (78,318  | )
|Issuance of common stock, net of costs                                           |  |                                | 57,107   |   |      |   | 95,246   |  
|Cancellation of common stock held as collateral for stockholder loans            |  |                                | (105     | ) |      |   |         |  
|Repayment of stockholder loans                                                   |  |                                | 105      |   |      |   | 151      |  
|                                                                                 |  |                                |          |   |      |   |          |  
|Net cash (used in) provided by financing activities                              |  |                                | (126,647 | ) |      |   | 150,820  |  
|                                                                                 |  |                                |          |   |      |   |          |  
|Decrease in cash and cash equivalents                                            |  |                                | (4,016   | ) |      |   | (9,738   | )
|                                                                                 |  |                               
|Cash and cash equivalents                                                        |  |                                |          |   |      |   |          |  
|Beginning balance                                                                |  |                                | 23,297   |   |      |   | 21,691   |  
|                                                                                 |  |                                |          |   |      |   |          |  
|Ending balance                                                                   |  | $                              | 19,281   |   |      | $ | 11,953   |  
|                                                                                 |  |                                |          |   |      |   |          |  
|Supplemental disclosure of cash flow information                                 |  |                                |          |   |      |   |          |  
|Interest paid                                                                    |  | $                              | 25,687   |   |      | $ | 28,184   |  
|Income taxes paid                                                                |  |                                | 1,105    |   |      |   | 1,029    |  

The accompanying notes are an integral part of these financial statements



4



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

September 30, 2008 (unaudited)

(dollars in thousands)



|                                                                                                |  |                                                         |                                           |                                                    |        |           |        |        |        |            |        |        |       
|----------------------------------------------------------------------------------------------- |  | ------------------------------------------------------- | ----------------------------------------- | -------------------------------------------------- | ------ | --------- | ------ | ------ | ------ | ---------- | ------ | ------ | ------
|Portfolio Company                                                                               |  | Industry                                                |                                           | Investment(8)                                      |        | Principal |        | Cost   |        | Fair Value
|Control Investments: Majority-owned(5):                                                         |  |                                                         |                                           |                                                    |        |           |        |        |       
|                                                                                                |  |                                                         |                                           |                                                    |       
|Avenue Broadband LLC(2)                                                                         |  | Cable                                                   |                                           | Subordinated Debt (14.0%, Due 3/14-12/14)(1)       |        | $         | 13,554 |        | $      | 13,441     |        | $      | 13,441
|                                                                                                |  |                                                         | Preferred Units (10.0%, 17,100 units)(1)  |                                                    |        |           |        |        | 18,520 |            |        | 24,648
|                                                                                                |  |                                                         | 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     |        |        | 74,008
|                                                                                                |  | Series A-1 Preferred Stock (12.0%, 100,702 shares)      |                                           |                                                    |        |           |        | 77,495 |        |            | 71,293
|                                                                                                |  | Class A Common Stock (4,698,987 shares)                 |                                           |                                                    |        |           |        |       |        |            |      
|                                                                                                |  |                                                         |                                           |                                                    |       
|Cleartel Communications, Inc.(2) (6)                                                            |  | Communications- CLEC                                    |                                           | Subordinated Debt (12.0%, Due 10/08-3/11)          |        |           | 39,184 |        |        | 34,547     |        |        |      
|                                                                                                |  | 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 (7.3%, Due 1/12)(1)                    |        |           | 15,290 |        |        | 15,160     |        |        | 15,160
|                                                                                                |  | Subordinated Debt (14.8%, Due 1/13)(1)                  |                                           |                                                    | 15,341 |           |        | 15,226 |        |            | 15,226
|                                                                                                |  | Preferred LLC Interest (12.0%, 123,250 units)           |                                           |                                                    |        |           |        | 14,203 |        |            | 15,266
|                                                                                                |  | Warrants to purchase Class B Common Stock               |                                           |                                                    |        |           |        |       |        |            |      
|                                                                                                |  |                                                         |                                           |                                                    |       
|GMC Television Broadcasting, LLC(2)(6)                                                          |  | Broadcasting                                            |                                           | Senior Debt (8.0%, Due 4/12-6/12)(1)               |        |           | 22,492 |        |        | 22,258     |        |        | 22,258
|                                                                                                |  | Subordinated Debt (14.0%, Due 6/13)(1)                  |                                           |                                                    | 8,000  |           |        | 7,648  |        |            | 5,366 
|                                                                                                |  | Class B Voting Units (8.0%, 86,700 units)               |                                           |                                                    |        |           |        | 9,071  |        |            |      
|                                                                                                |  |                                                         |                                           |                                                    |       
|Intran Media, LLC                                                                               |  | Other Media                                             |                                           | Senior Debt (7.5%, Due 12/11)(1)                   |        |           | 12,200 |        |        | 12,110     |        |        | 12,110
|                                                                                                |  | Preferred Units (10.0%, 86,000 units)                   |                                           |                                                    |        |           |        | 9,095  |        |            | 1,417 
|                                                                                                |  |                                                         |                                           |                                                    |       
|JetBroadband Holdings, LLC(2)                                                                   |  | Cable                                                   |                                           | Subordinated Unsecured Debt (14.8%, Due 8/15-2/16) |        |           | 26,179 |        |        | 25,980     |        |        | 25,980
|                                                                                                |  | Preferred Units (10.0%, 133,204 units)                  |                                           |                                                    |        |           |        | 18,471 |        |            | 16,584
|                                                                                                |  |                                                         |                                           |                                                    |       
|Jet Plastica Investors, LLC(2)                                                                  |  | Plastic Products                                        |                                           | Subordinated Debt (15.0%, Due 3/13)(1)             |        |           | 32,279 |        |        | 32,012     |        |        | 32,012
|                                                                                                |  | Preferred LLC Interest (8.0%, 301,595 units)            |                                           |                                                    |        |           |        | 34,014 |        |            | 884   
|                                                                                                |  |                                                         |                                           |                                                    |       
|LMS Intellibound Investors, LLC(2)                                                              |  | Logistics                                               |                                           | Senior Debt (7.5%, Due 8/12)(1)                    |        |           | 11,356 |        |        | 11,244     |        |        | 11,244
|                                                                                                |  | Subordinated Debt (15.0%, Due 11/12)(1)                 |                                           |                                                    | 17,000 |           |        | 16,874 |        |            | 16,874
|                                                                                                |  | Preferred Units (12.0%, 19,650 units)                   |                                           |                                                    |        |           |        | 23,114 |        |            | 36,359
|                                                                                                |  | Warrants to purchase Class B Common Stock               |                                           |                                                    |        |           |        |       |        |            |      
|                                                                                                |  |                                                         |                                           |                                                    |       
|MTP Holding, LLC(6)                                                                             |  | Communications- Other                                   |                                           | Common LLC Interest (79,171 units)                 |        |           |        |        |        | 3          |        |        | 28    
|                                                                                                |  |                                                         |                                           |                                                    |       
|Orbitel Holdings, LLC(2)                                                                        |  | Cable                                                   |                                           | Senior Debt (9.1%, Due 3/12)(1)                    |        |           | 16,100 |        |        | 15,984     |        |        | 15,984
|                                                                                                |  | Preferred LLC Interest (10.0%, 120,000 units)           |                                           |                                                    |        |           |        | 13,324 |        |            | 11,248
|                                                                                                |  | Standby Letter of Credit ($117)                         |                                           |                                                    |        |           |        |        |        |            |       
|                                                                                                |  |                                                         |                                           |                                                    |       
|RadioPharmacy Investors, LLC(2)                                                                 |  | Healthcare                                              |                                           | Senior Debt (7.3%, Due 12/10)(1)                   |        |           | 8,500  |        |        | 8,465      |        |        | 8,465 
|                                                                                                |  | Subordinated Debt (15.0%, Due 12/11)(1)                 |                                           |                                                    | 9,762  |           |        | 9,714  |        |            | 9,714 
|                                                                                                |  | Preferred LLC Interest (8.0%, 70,000 units)             |                                           |                                                    |        |           |        | 8,123  |        |            | 3,507 
|                                                                                                |  |                                                         |                                           |                                                    |       
|Superior Industries Investors, LLC(2)                                                           |  | Sporting Goods                                          |                                           | Subordinated Debt (14.0%, Due 3/13)(1)             |        |           | 17,941 |        |        | 17,821     |        |        | 17,821
|                                                                                                |  | Preferred LLC Units (8.0%, 125,400 units)               |                                           |                                                    |        |           |        | 14,684 |        |            | 29,294
|                                                                                                |  |                                                         |                                           |                                                    |       
|TNR Holding Corp.(2) (6) (12)                                                                   |  | Entertainment                                           |                                           | Senior Debt (12.0%, Due 7/13)                      |        |           | 2,000  |        |        | 1,708      |        |        | 1,708 
|                                                                                                |  | Series A Preferred Stock (8.0%, 43,264 shares)          |                                           |                                                    |        |           |        | 28,770 |        |            | 38,072
|                                                                                                |  | 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) (9)                                                               |  | Healthcare                                              |                                           | Subordinated Debt (15.0%, Due 9/11)                |        |           | 31,361 |        |        | 28,501     |        |        | 28,501
|                                                                                                |  | Unsecured Note (0.0%, Due 6/11)                         |                                           |                                                    | 375    |           |        | 323    |        |            | 323   
|                                                                                                |  | Series A Preferred Stock (10.0%, 3,700 shares)          |                                           |                                                    |        |           |        | 3,793  |        |            | 1,277 
|                                                                                                |  | Common Stock (2,592,920 shares)                         |                                           |                                                    |        |           |        | 1,000  |        |            |      
|                                                                                                |  |                                                         |                                           |                                                    |       
|Working Mother Media, Inc.(6)                                                                   |  | Publishing                                              |                                           | Guaranty ($990)                                    |        |           |        |        |        |           |        |        |      
|                                                                                                |  |                                                         |                                           |                                                    |        |           |        |        |        |            |        |        |       
|                                                                                                |  |                                                        
|Total Control Investments: Majority-owned (represents 44.4% of total investments at fair value) |  |                                                         | 775,417                                   |                                                    |        | 576,072  
|                                                                                                |  |                                                         |                                           |                                                    |        |           |        |        |        |            |        |        |       

The accompanying notes are an integral part of these financial statements



5



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

September 30, 2008 (unaudited)

(dollars in thousands)



|                                                                                                   |  |                                                                            |  |                                       |        |           |        |        |         |            |        |   |       
|-------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------- |  | ------------------------------------- | ------ | --------- | ------ | ------ | ------- | ---------- | ------ | - | ------
|Portfolio Company                                                                                  |  | Industry                                                                   |  | Investment(8)                         |        | Principal |        | Cost   |         | Fair Value
|Control Investments: Non-majority owned(4):                                                        |  |                                                                            |  |                                       |        |           |        |        |        
|                                                                                                   |  |                                                                            |  |                                       |       
|Crystal Media Network, LLC(6)(7)                                                                   |  | Broadcasting                                                               |  | LLC Interest                          |        |           |        |        | $       | 2,447      |        | $ | 2,516 
|                                                                                                   |  |                                                                            |  |                                       |       
|National Product Services, Inc.(2)                                                                 |  | Business Services                                                          |  | Senior Debt (11.2%, Due 6/09)         |        | $         | 13,700 |        |         | 9,378      |        |   | 13,364
|                                                                                                   |  | Subordinated Debt (16.0%, Due 6/09)                                        |  |                                       | 15,373 |           |        | 12,305 |         |            | 1,089 
|                                                                                                   |  | Common Stock (995,428 shares)                                              |  |                                       |        |           |        |       |         |            |      
|                                                                                                   |  |                                                                            |  |                                       |       
|PremierGarage Holdings, LLC(2)                                                                     |  | Home Furnishings                                                           |  | Senior Debt (9.7%, Due 6/10-12/10)(1) |        |           | 8,782  |        |         | 8,689      |        |   | 8,681 
|                                                                                                   |  | Preferred LLC Units (8.0%, 445 units)                                      |  |                                       |        |           |        | 4,971  |         |            | 1,481 
|                                                                                                   |  | Common LLC Units (356 units)                                               |  |                                       |        |           |        |       |         |            |      
|                                                                                                   |  |                                                                            |  |                                       |        |           |        |        |         |            |        |   |       
|                                                                                                   |  |                                                                            | 
|Total Control Investments: Non-majority-owned (represents 2.1% of total investments at fair value) |  |                                                                            |  |                                       |        | 37,790    |        |        | 27,131 
|                                                                                                   |  |                                                                            |  |                                       |        |           |        |        |         |            |        |   |       
|                                                                                                   |  |                                                                            | 
|Total Control Investments: (represents 46.5% of total investments at fair value)                   |  |                                                                            |  |                                       |        | 813,207   |        |        | 603,203
|                                                                                                   |  |                                                                            |  |                                       |        |           |        |        |         |            |        |   |       
|                                                                                                   |  |                                                                            |  |                                      
|Affiliate Investments(3):                                                                          |  |                                                                            |  |                                       |        |           |        |        |         |            |       
|                                                                                                   |  |                                                                            |  |                                       |       
|Advanced Sleep Concepts, Inc.(2)                                                                   |  | Home Furnishings                                                           |  | Senior Debt (13.1%, Due 10/11)(1)     |        |           | 6,195  |        |         | 5,996      |        |   | 5,996 
|                                                                                                   |  | Subordinated Debt (16.0%, Due 4/12)(1)                                     |  |                                       | 4,872  |           |        | 4,732  |         |            | 4,395 
|                                                                                                   |  | Series A Preferred Stock (20.0%, 49 shares)                                |  |                                       |        |           |        | 306    |         |            | 181   
|                                                                                                   |  | Common Stock (423 shares)                                                  |  |                                       |        |           |        | 524    |         |            |      
|                                                                                                   |  | Warrants to purchase Common Stock (expire 10/16)                           |  |                                       |        |           |        | 348    |         |            |      
|                                                                                                   |  |                                                                            |  |                                       |       
|Cherry Hill Holdings, Inc.(2)                                                                      |  | Entertainment                                                              |  | Senior Debt (10.5%, Due 8/11)(1)      |        |           | 10,634 |        |         | 10,561     |        |   | 10,561
|                                                                                                   |  | Series A Preferred Stock (10.0%, 750 shares)                               |  |                                       |        |           |        | 907    |         |            | 907   
|                                                                                                   |  |                                                                            |  |                                       |       
|Stratford School Holdings, Inc.(2)                                                                 |  | Education                                                                  |  | Senior Debt (8.6%, Due 7/11-9/11)(1)  |        |           | 3,700  |        |         | 3,625      |        |   | 3,625 
|                                                                                                   |  | Subordinated Debt (14.0%, Due 12/11)(1)                                    |  |                                       | 6,717  |           |        | 6,680  |         |            | 6,680 
|                                                                                                   |  | Series A Convertible Preferred Stock (12.0%, 10,000 shares)                |  |                                       |        |           |        | 90     |         |            | 11,199
|                                                                                                   |  | Warrants to purchase Common Stock (expire 5/15)(1)                         |  |                                       |        |           |        | 67     |         |            | 3,506 
|                                                                                                   |  |                                                                            |  |                                       |       
|Sunshine Media Delaware, LLC(2) (6)                                                                |  | Publishing                                                                 |  | Common Stock (145 shares)             |        |           |        |        |         | 581        |        |   | 101   
|                                                                                                   |  | Class A LLC Interest (8.0%, 563,808 units)                                 |  |                                       |        |           |        | 564    |         |            | 98    
|                                                                                                   |  | Options to acquire Warrants to purchase Class B LLC Interest (expire 5/14) |  |                                       |        |           |        |       |         |            |      
|                                                                                                   |  |                                                                            |  |                                       |       
|Velocity Technology Enterprises, Inc.(2)                                                           |  | Business Services                                                          |  | Senior Debt (8.8%, Due 12/12)(1)      |        |           | 17,806 |        |         | 17,701     |        |   | 17,430
|                                                                                                   |  | Series A Preferred Stock (1,506,602 shares)                                |  |                                       |        |           |        | 1,500  |         |            | 1,500 
|                                                                                                   |  |                                                                            |  |                                       |       
|XFone, Inc.(6)                                                                                     |  | Communications-Other                                                       |  | Common Stock (837,556 shares)         |        |           |        |        |         | 2,395      |        |   | 2,319 
|                                                                                                   |  | Warrants to purchase Common Stock (expire 3/11)                            |  |                                       |        |           |        |       |         |            |      
|                                                                                                   |  |                                                                            |  |                                       |        |           |        |        |         |            |        |   |       
|                                                                                                   |  |                                                                            | 
|Total Affiliate Investments (represents 5.3% of total investments at fair value)                   |  |                                                                            |  |                                       |        | 56,577    |        |        | 68,498 
|                                                                                                   |  |                                                                            |  |                                       |        |           |        |        |         |            |        |   |       

The accompanying notes are an integral part of these financial statements



6



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

September 30, 2008 (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 (8.4%, Due 6/12)(1)                              |        | $         | 19,550 |        | $ | 19,430     |        | $ | 19,430
|                                                |  | Subordinated Debt (15.0%, Due 9/12)(1)                    |  |                                                              | 13,370 |           |        | 13,134 |   |            | 13,008
|                                                |  | Class A-1 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 (9.3%, Due 12/12)(1)                             |        |           | 7,355  |        |   | 7,315      |        |   | 7,315 
|                                                |  | Subordinated Debt (10.7%, Due 12/12)(1)                   |  |                                                              | 2,309  |           |        | 2,244  |   |            | 2,242 
|                                                |  | Warrants to purchase Common Stock (expire 11/15)          |  |                                                              |        |           |        |       |   |            | 68    
|                                                |  |                                                           |  |                                                              |       
|Amerifit Nutrition, Inc.(2)                     |  | Healthcare                                                |  | Senior Debt (10.2%, Due 3/10)(1)                             |        |           | 3,804  |        |   | 3,791      |        |   | 3,791 
|                                                |  |                                                           |  |                                                              |       
|B & H Education, Inc.(2)                        |  | Education                                                 |  | Series A-1 Convertible Preferred Stock (12.0%, 5,384 shares) |        |           |        |        |   | 1,448      |        |   | 2,000 
|                                                |  |                                                           |  |                                                              |       
|BLI Holdings, Inc.(2)                           |  | Drugs                                                     |  | Subordinated Debt (16.6%, Due 9/08)(1)                       |        |           | 10,331 |        |   | 10,222     |        |   | 10,222
|                                                |  |                                                           |  |                                                              |       
|CEI Holdings Inc.                               |  | Cosmetics                                                 |  | Senior Debt (4.9%, Due 3/14)(1)                              |        |           | 3,928  |        |   | 3,938      |        |   | 2,642 
|                                                |  |                                                           |  |                                                              |       
|Cervalis LLC                                    |  | Business Services                                         |  | Senior Debt (7.9%, Due 3/12)(1)                              |        |           | 17,625 |        |   | 17,512     |        |   | 17,330
|                                                |  |                                                           |  |                                                              |       
|Coastal Sunbelt Real Estate, Inc.               |  | Real Estate Investments                                   |  | Subordinated Unsecured Debt (15.0%, Due 7/12)                |        |           | 2,108  |        |   | 2,094      |        |   | 2,094 
|                                                |  | Series A-2 Preferred Stock (12.0%, 20,000 shares)         |  |                                                              |        |           |        | 2,439  |   |            | 2,892 
|                                                |  | Warrants to purchase Class B Common Stock                 |  |                                                              |        |           |        |       |   |            |      
|                                                |  |                                                           |  |                                                              |       
|Construction Trailer Specialist, Inc.(2)        |  | Auto Parts                                                |  | Senior Debt (8.2%, Due 7/12)(1)                              |        |           | 3,327  |        |   | 3,271      |        |   | 3,271 
|                                                |  | Subordinated Debt (15.0%, Due 1/13)(1)                    |  |                                                              | 5,053  |           |        | 5,014  |   |            | 5,005 
|                                                |  |                                                           |  |                                                              |       
|Country Road Communications LLC(2)              |  | Communications-Other                                      |  | Subordinated Debt (11.5%, Due 7/13)(1)                       |        |           | 13,000 |        |   | 12,930     |        |   | 12,696
|                                                |  |                                                           |  |                                                              |       
|Crescent Publishing Company, LLC(2)             |  | Newspaper                                                 |  | Senior Debt (16.0%, Due 12/08)(1)                            |        |           | 846    |        |   | 791        |        |   | 791   
|                                                |  |                                                           |  |                                                              |       
|Cruz Bay Publishing, Inc.                       |  | Publishing                                                |  | Subordinated Debt (9.8%, Due 12/13)(1)                       |        |           | 20,000 |        |   | 19,851     |        |   | 18,354
|                                                |  |                                                           |  |                                                              |       
|CWP/RMK Acquisition Corp.(2)                    |  | Home Furnishings                                          |  | Senior Debt (8.3%, Due 6/11)(1)                              |        |           | 6,267  |        |   | 6,228      |        |   | 5,647 
|                                                |  | Subordinated Debt (12.8%, Due 12/12)(1)                   |  |                                                              | 11,929 |           |        | 11,015 |   |            | 3,549 
|                                                |  | Common Stock (500 shares)                                 |  |                                                              |        |           |        | 500    |   |            |      
|                                                |  |                                                           |  |                                                              |       
|Cyrus Networks, LLC                             |  | Business Services                                         |  | Senior Debt (6.5%, Due 7/13)(1)                              |        |           | 4,814  |        |   | 4,777      |        |   | 4,560 
|                                                |  | Subordinated Debt (9.8%, Due 1/14)(1)                     |  |                                                              | 5,355  |           |        | 5,345  |   |            | 4,941 
|                                                |  |                                                           |  |                                                              |       
|Dayton Parts Holdings, LLC(2)                   |  | Auto Parts                                                |  | Subordinated Debt (8.1%, Due 6/11)(1)                        |        |           | 21,500 |        |   | 21,367     |        |   | 20,490
|                                                |  | Preferred LLC Interest (10.0%, 16,470 units)              |  |                                                              |        |           |        | 589    |   |            | 589   
|                                                |  | Class A Common LLC Interest (8.0%, 10,980 units)          |  |                                                              |        |           |        | 408    |   |            | 410   
|                                                |  |                                                           |  |                                                              |       
|Empower IT Holdings, Inc.(2)                    |  | Information Services                                      |  | Senior Debt (9.3%, Due 5/12)(1)                              |        |           | 3,784  |        |   | 3,728      |        |   | 3,728 
|                                                |  | Subordinated Debt (14.5%, Due 6/12)(1)                    |  |                                                              | 5,058  |           |        | 5,030  |   |            | 5,030 
|                                                |  |                                                           |  |                                                              |       
|Equibrand Holding Corporation(2)                |  | Leisure Activities                                        |  | Senior Debt (9.8%, Due 9/10)(1)                              |        |           | 4,640  |        |   | 4,595      |        |   | 4,595 
|                                                |  | Subordinated Debt (16.0%, Due 3/11)(1)                    |  |                                                              | 9,154  |           |        | 9,115  |   |            | 9,115 
|                                                |  |                                                           |  |                                                              |       
|Flexsol Packaging Corp.                         |  | Plastic Products                                          |  | Subordinated Debt (13.3%, Due 12/12)(1)                      |        |           | 3,081  |        |   | 3,059      |        |   | 1,134 
|                                                |  |                                                           |  |                                                              |       
|G&L Investment Holdings, LLC(2)                 |  | Insurance                                                 |  | Subordinated Debt (10.3%, Due 5/14)(1)                       |        |           | 17,500 |        |   | 16,885     |        |   | 15,846
|                                                |  | Series A Preferred Shares (14.0%, 5,000,000 shares)       |  |                                                              |        |           |        | 5,612  |   |            | 5,612 
|                                                |  | Class C Shares (621,907 shares)                           |  |                                                              |        |           |        | 529    |   |            | 363   
|                                                |  |                                                           |  |                                                              |       
|Golden Knight II CLO, Ltd.                      |  | Diversified Financial Services                            |  | Income Notes (8.0%, Due 4/19)                                |        |           |       |        |   | 3,647      |        |   | 1,811 
|                                                |  |                                                           |  |                                                              |       
|GoldenSource Holdings Inc.(6)                   |  | Technology                                                |  | Warrants to purchase Class A Common Stock (expire 10/08)     |        |           |        |        |   |           |        |   |      
|                                                |  |                                                           |  |                                                              |       
|GSDM Holdings, LLC(2)                           |  | Healthcare                                                |  | Senior Debt (8.0%, Due 2/13)(1)                              |        |           | 9,000  |        |   | 8,899      |        |   | 8,899 
|                                                |  | Subordinated Debt (14.0%, Due 8/13)                       |  |                                                              | 7,769  |           |        | 7,725  |   |            | 7,711 
|                                                |  | Series B Preferred Units (12.5%, 4,213,333 units)         |  |                                                              |        |           |        | 4,397  |   |            | 5,010 
|                                                |  |                                                           |  |                                                              |       
|Home Interiors & Gifts, Inc.(6)(10)             |  | Home Furnishings                                          |  | Senior Debt (8.0%, Due 3/11)                                 |        |           | 4,141  |        |   | 3,991      |        |   | 908   
|                                                |  |                                                           |  |                                                              |       
|Jenzabar, Inc.                                  |  | Technology                                                |  | Senior Preferred Stock (11.0%, 5,000 shares)                 |        |           |        |        |   | 7,338      |        |   | 7,338 
|                                                |  | Subordinated Preferred Stock (109,800 shares)             |  |                                                              |        |           |        | 1,098  |   |            | 1,098 
|                                                |  | Warrants to purchase Common Stock (expire 4/16)           |  |                                                              |        |           |        | 422    |   |            | 29,774
|                                                |  |                                                           |  |                                                              |       
|Jupitermedia Corporation(6)                     |  | Information Services                                      |  | Common Stock (148,373 shares)                                |        |           |        |        |   | 2,115      |        |   | 172   
|                                                |  |                                                           |  |                                                              |       
|Legacy Cabinets, Inc.                           |  | Home Furnishings                                          |  | Subordinated Debt (12.1%, Due 8/13)(1)                       |        |           | 2,328  |        |   | 2,313      |        |   | 1,387 
|                                                |  |                                                           |  |                                                              |       
|Marietta Intermediate Holding Corporation(6)    |  | Cosmetics                                                 |  | Subordinated Debt (12.0%, Due 12/11)(1)                      |        |           | 2,195  |        |   | 2,028      |        |   | 279   

The accompanying notes are an integral part of these financial statements



7



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

September 30, 2008 (unaudited)

(dollars in thousands)



|                                                                                      |  |                                                                 |  |                                                 |        |           |        |           |         |            |           |   |       
|------------------------------------------------------------------------------------- |  | --------------------------------------------------------------- |  | ----------------------------------------------- | ------ | --------- | ------ | --------- | ------- | ---------- | --------- | - | ------
|Portfolio Company                                                                     |  | Industry                                                        |  | Investment(8)                                   |        | Principal |        | Cost      |         | Fair Value
|Maverick Healthcare Equity, LLC                                                       |  | Healthcare                                                      |  | Subordinated Debt (13.5%, Due 4/14)(1)          |        | $         | 12,548 |           | $       | 12,441     |           | $ | 12,167
|                                                                                      |  | Preferred Units (10.0%, 1,250,000 units)                        |  |                                                 |        |           |        | 1,358     |         |            | 1,358    
|                                                                                      |  | Class A Common Units (1,250,000 units)                          |  |                                                 |        |           |        |          |         |            |         
|                                                                                      |  |                                                                 |  |                                                 |       
|MCI Holdings LLC(2)                                                                   |  | Healthcare                                                      |  | Subordinated Debt (12.7%, Due 4/13)(1)          |        |           | 31,233 |           |         | 31,056     |           |   | 31,056
|                                                                                      |  | Class A LLC Interest (4,712,042 units)                          |  |                                                 |        |           |        | 3,000     |         |            | 7,914    
|                                                                                      |  |                                                                 |  |                                                 |       
|Metropolitan Telecommunications Holding Company(2)                                    |  | Communications-CLEC                                             |  | Senior Debt (10.9%, Due 6/10-9/10)(1)           |        |           | 15,795 |           |         | 15,611     |           |   | 15,611
|                                                                                      |  | Subordinated Debt (14.8%, Due 12/10)(1)                         |  |                                                 | 10,929 |           |        | 10,836    |         |            | 10,836   
|                                                                                      |  | Warrants to purchase Common Stock (expire 9/13)                 |  |                                                 |        |           |        | 1,843     |         |            | 10,613   
|                                                                                      |  |                                                                 |  |                                                 |       
|Miles Media Group, LLC(2)                                                             |  | Publishing                                                      |  | Senior Debt (12.0%, Due 6/13)(1)                |        |           | 18,243 |           |         | 17,870     |           |   | 17,870
|                                                                                      |  |                                                                 |  |                                                 |       
|NDSSI Holdings, LLC(2)                                                                |  | Electronics                                                     |  | Senior Debt (9.9%, Due 9/13-3/14)(1)            |        |           | 19,921 |           |         | 19,675     |           |   | 19,675
|                                                                                      |  | Subordinated Debt (15.0%, Due 9/14)(1)                          |  |                                                 | 21,016 |           |        | 20,939    |         |            | 20,939   
|                                                                                      |  | Series A Preferred Units (516,691 units)                        |  |                                                 |        |           |        | 718       |         |            | 718      
|                                                                                      |  | Class A Common LLC Interest (1,000,000 units)                   |  |                                                 |        |           |        | 333       |         |            | 1,251    
|                                                                                      |  |                                                                 |  |                                                 |       
|New Century Companies, Inc.(6)                                                        |  | Industrial Equipment                                            |  | Warrants to purchase Common Stock (expire 6/10) |        |           |        |           |         |           |           |   |      
|                                                                                      |  |                                                                 |  |                                                 |       
|New England Precision Grinding Holdings, LLC                                          |  | Industrial Products                                             |  | Senior Debt (9.5%, Due 10/13)(1)                |        |           | 26,000 |           |         | 25,765     |           |   | 25,765
|                                                                                      |  | Common Units (1,000,000 units)                                  |  |                                                 |        |           |        | 1,000     |         |            | 1,010    
|                                                                                      |  |                                                                 |  |                                                 |       
|PartMiner, Inc.(2)                                                                    |  | Information Services                                            |  | Senior Debt (9.3%, Due 6/09)(1)                 |        |           | 854    |           |         | 842        |           |   | 842   
|                                                                                      |  |                                                                 |  |                                                 |       
|Philadelphia Newspapers, LLC(6)                                                       |  | Newspaper                                                       |  | Subordinated Unsecured Debt (16.5%, Due 6/14)   |        |           | 5,082  |           |         | 5,070      |           |   | 842   
|                                                                                      |  |                                                                 |  |                                                 |       
|Powercom Corporation(2)                                                               |  | Communications-CLEC                                             |  | Senior Debt (11.5%, Due 2/10)                   |        |           | 1,428  |           |         | 1,428      |           |   | 1,361 
|                                                                                      |  | Warrants to purchase Class A Common Stock (expire 6/14)         |  |                                                 |        |           |        | 286       |         |            |         
|                                                                                      |  |                                                                 |  |                                                 |       
|Quantum Medical Holdings, LLC(2)                                                      |  | Laboratory Instruments                                          |  | Senior Debt (9.5%, Due 12/10-5/11)(1)           |        |           | 17,449 |           |         | 17,375     |           |   | 17,375
|                                                                                      |  | Subordinated Debt (15.0%, Due 12/11)(1)                         |  |                                                 | 18,032 |           |        | 17,902    |         |            | 17,876   
|                                                                                      |  | Preferred LLC Interest (1,000,000 units)                        |  |                                                 |        |           |        | 537       |         |            | 1,357    
|                                                                                      |  |                                                                 |  |                                                 |       
|Restaurant Technologies, Inc.                                                         |  | Food Services                                                   |  | Subordinated Debt (16.6%, Due 2/12)(1)          |        |           | 34,588 |           |         | 34,319     |           |   | 34,319
|                                                                                      |  | Series A-4 Convertible Preferred Stock (7,813 shares)           |  |                                                 |        |           |        | 336       |         |            | 221      
|                                                                                      |  | Series B Preferred Stock (499 shares)                           |  |                                                 |        |           |        | 16        |         |            | 17       
|                                                                                      |  |                                                                 |  |                                                 |       
|Sagamore Hill Broadcasting, LLC(2)                                                    |  | Broadcasting                                                    |  | Senior Debt (11.8%, Due 8/12)(1)                |        |           | 25,800 |           |         | 25,654     |           |   | 25,654
|                                                                                      |  |                                                                 |  |                                                 |       
|Summit Business Media Intermediate Holding Company, LLC                               |  | Information Services                                            |  | Subordinated Debt (10.7%, Due 7/14)(1)          |        |           | 6,000  |           |         | 5,995      |           |   | 5,286 
|                                                                                      |  |                                                                 |  |                                                 |       
|Teleguam Holdings, LLC(2)                                                             |  | Communications-Other                                            |  | Subordinated Debt (9.8%, Due 10/12)(1)          |        |           | 20,000 |           |         | 19,819     |           |   | 18,587
|                                                                                      |  |                                                                 |  |                                                 |       
|The e-Media Club I, LLC(6)                                                            |  | Investment Fund                                                 |  | LLC Interest (74 units)                         |        |           |        |           |         | 88         |           |   | 17    
|                                                                                      |  |                                                                 |  |                                                 |       
|The Matrixx Group, Incorporated                                                       |  | Plastic Products                                                |  | Subordinated Debt (15.5%, Due 11/14)(1)         |        |           | 14,149 |           |         | 14,149     |           |   | 13,830
|                                                                                      |  |                                                                 |  |                                                 |       
|ValuePage, Inc.(6)                                                                    |  | Communications-Other                                            |  | Senior Debt (12.8%, Due 6/08)                   |        |           | 1,219  |           |         | 1,013      |           |   | 28    
|                                                                                      |  |                                                                 |  |                                                 |       
|VOX Communications Group Holdings, LLC(2)                                             |  | Broadcasting                                                    |  | Senior Debt (15.3%, Due 3/09)(1)                |        |           | 11,196 |           |         | 10,706     |           |   | 10,655
|                                                                                      |  | Convertible Preferred Subordinated Notes (12.5%, Due 6/15-6/17) |  |                                                 | 1,856  |           |        | 1,414     |         |            | 728      
|                                                                                      |  |                                                                 |  |                                                 |       
|VS&A-PBI Holding LLC(6)                                                               |  | Publishing                                                      |  | LLC Interest                                    |        |           |        |           |         | 500        |           |   |      
|                                                                                      |  |                                                                 |  |                                                 |       
|Wireco Worldgroup Inc.                                                                |  | Industrial Equipment                                            |  | Senior Debt (6.0%, Due 2/14)(1)                 |        |           | 3,940  |           |         | 3,962      |           |   | 3,647 
|                                                                                      |  |                                                                 |  |                                                 |       
|Xpressdocs Holdings, Inc.(2)                                                          |  | Business Services                                               |  | Senior Debt (8.9%, Due 7/11-12/11)(1)           |        |           | 15,606 |           |         | 15,517     |           |   | 15,517
|                                                                                      |  | Subordinated Debt (16.0%, Due 7/12)(1)                          |  |                                                 | 6,350  |           |        | 6,312     |         |            | 6,312    
|                                                                                      |  | Series A Preferred Stock (161,870 shares)                       |  |                                                 |        |           |        | 500       |         |            | 367      
|                                                                                      |  |                                                                 |  |                                                 |        |           |        |           |         |            |           |   |       
|                                                                                      |  |                                                                 | 
|Total Non-Affiliate Investments (represents 48.2% of total investments at fair value) |  |                                                                 |  |                                                 |        | 617,751   |        |           | 624,768
|                                                                                      |  |                                                                 |  |                                                 |        |           |        |           |         |            |           |   |       
|                                                                                      |  |                                                                 |  |                                                
|Total Investments                                                                     |  |                                                                 |  |                                                 |        |           | $      | 1,487,535 |         | $          | 1,296,469
|                                                                                      |  |                                                                 |  |                                                 |        |           |        |           |         |            |           |   |       
|                                                                                      |  |                                                                 |  |                                                 |       
|Put Options Granted                                                                   |  |                                                                 |  |                                                 |        |           |        |           |         |            |           |   |       
|                                                                                      |  |                                                                 |  |                                                 |       
|Total Sleep Holdings, Inc.(2) (6) (9)                                                 |  | Healthcare                                                      |  | Put option granted (expires 4/09)               |        |           |        |           | $       | 1,000      |           | $ | 1,000 
|                                                                                      |  |                                                                 |  |                                                 |        |           |        |           |         |            |           |   |       
|                                                                                      |  |                                                                 |  |                                                
|Total Put Options Granted                                                             |  |                                                                 |  |                                                 |        |           | $      | 1,000     |         | $          | 1,000    
|                                                                                      |  |                                                                 |  |                                                 |        |           |        |           |         |            |           |   |       

The accompanying notes are an integral part of these financial statements



8



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

September 30, 2008 (unaudited)

(dollars in thousands)



|                          |  |                                               |  |              |   |  |          |  |          |        |      |   |           |  |   |      |  
|------------------------- |  | --------------------------------------------- |  | ------------ | - |  | -------- |  | -------- | ------ | ---- | - | --------- |  | - | ---- | -
|Counterparty              |  | Instrument                                    |  | InterestRate |   |  | Expiring |  | Notional |        | Cost |   | FairValue | 
|Interest Rate Swaps       |  |                                               |  |              |   |  |          |  |          |        |      |   |           |  |   |      |  
|SunTrust Bank             |  | Interest Rate SwapPay Fixed/Receive Floating |  | 10.0         | % |  | 11/10    |  | $        | 16,000 |      | $ |          |  | $ | (98  | )
|                          |  | Interest Rate SwapPay Fixed/Receive Floating |  | 14.0         | % |  | 11/10    |  |          | 8,000  |      |   |          |  |   | (48  | )
|                          |  |                                               |  |              |   |  |          |  |          |        |      |   |           |  |   |      |  
|Total Interest Rate Swaps |  |                                               |  |              |   |  |          |  | $        | 24,000 |      | $ |          |  | $ | (146 | )
|                          |  |                                               |  |              |   |  |          |  |          |        |      |   |           |  |   |      |  

The accompanying notes are an integral part of these financial statements



9



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2007

(dollars in thousands)



|                                                                                                |  |                                                    |  |                                                                    |        |           |        |          |         |                |         |   |       
|----------------------------------------------------------------------------------------------- |  | -------------------------------------------------- |  | ------------------------------------------------------------------ | ------ | --------- | ------ | -------- | ------- | -------------- | ------- | - | ------
|Portfolio Company                                                                               |  | Industry                                           |  | Investment(8)                                                      |        | Principal |        | Cost(11) |         | Fair Value(11)
|Control Investments: Majority-owned (5):                                                        |  |                                                    |  |                                                                    |        |           |        |          |         |                |        
|                                                                                                |  |                                                    |  |                                                                    |       
|Avenue Broadband LLC(2)                                                                         |  | Cable                                              |  | Subordinated Debt (14.0%, Due 3/14)(1)                             |        | $         | 13,050 |          | $       | 12,922         |         | $ | 12,922
|                                                                                                |  | Preferred Units (10.0%, 17,100 units)(1)           |  |                                                                    |        |           |        | 17,236   |         |                | 17,236 
|                                                                                                |  | Warrants to purchase Class B Common Stock          |  |                                                                    |        |           |        |         |         |                |       
|                                                                                                |  |                                                    |  |                                                                    |       
|Broadview Networks Holdings, Inc.                                                               |  | Communications- CLEC                               |  | Series A Preferred Stock (12.0%, 87,254 shares)                    |        |           |        |          |         | 78,267         |         |   | 87,986
|                                                                                                |  | Series A-1 Preferred Stock (12.0%, 100,702 shares) |  |                                                                    |        |           |        | 73,206   |         |                | 101,551
|                                                                                                |  | Class A Common Stock (4,698,987 shares)            |  |                                                                    |        |           |        |         |         |                |       
|                                                                                                |  |                                                    |  |                                                                    |       
|Central Sun Media, Inc.(6)                                                                      |  | Real Estate Investments                            |  | Class A Common Stock (93 shares) Class B Common Stock
(300 shares) |        |           |        |          |         |              |         |   | 75   
|                                                                                                |  |                                                    |  |                                                                    |       
|Chesapeake Tower Holdings, LLC                                                                  |  | Communications- Other                              |  | Senior Debt (10.8%, Due 5/10)                                      |        |           | 400    |          |         | 397            |         |   | 397   
|                                                                                                |  | Preferred LLC Interest (8.0%, 3,139 units)         |  |                                                                    |        |           |        | 3,139    |         |                | 3,139  
|                                                                                                |  | Class A Common LLC Interest (4,000 units)          |  |                                                                    |        |           |        |         |         |                |       
|                                                                                                |  |                                                    |  |                                                                    |       
|Cleartel Communications, Inc.(2) (6)                                                            |  | Communications- CLEC                               |  | Subordinated Debt (13.3%, Due 5/08-3/11)                           |        |           | 28,255 |          |         | 26,533         |         |   | 25,230
|                                                                                                |  | Series B Preferred Stock (8.0%, 57,862 shares)     |  |                                                                    |        |           |        | 50,613   |         |                |       
|                                                                                                |  | Common Stock (744,777 shares)                      |  |                                                                    |        |           |        | 62,125   |         |                |       
|                                                                                                |  | Guaranty ($6,030)                                  |  |                                                                    |        |           |        |          |         |                |        
|                                                                                                |  |                                                    |  |                                                                    |       
|Coastal Sunbelt, LLC(2)                                                                         |  | Food Services                                      |  | Senior Debt (9.3%, Due 1/12-7/12)(1)                               |        |           | 16,100 |          |         | 15,938         |         |   | 15,938
|                                                                                                |  | Subordinated Debt (14.8%, Due 1/13)(1)             |  |                                                                    | 14,996 |           |        | 14,862   |         |                | 14,862 
|                                                                                                |  | Preferred LLC Interest (12.0%, 123,250 units)      |  |                                                                    |        |           |        | 13,030   |         |                | 18,220 
|                                                                                                |  | Warrants to purchase Class B Common Stock          |  |                                                                    |        |           |        |         |         |                |       
|                                                                                                |  |                                                    |  |                                                                    |       
|GMC Television Broadcasting, LLC(2)                                                             |  | Broadcasting                                       |  | Senior Debt (10.2%, Due 4/12-6/12)(1)                              |        |           | 19,624 |          |         | 19,390         |         |   | 19,390
|                                                                                                |  | Subordinated Debt (14.0%, Due 6/13)(1)             |  |                                                                    | 8,000  |           |        | 7,928    |         |                | 7,928  
|                                                                                                |  | Class B Voting Units (8.0%, 86,700 units)          |  |                                                                    |        |           |        | 9,071    |         |                | 10,027 
|                                                                                                |  |                                                    |  |                                                                    |       
|Intran Media, LLC                                                                               |  | Other Media                                        |  | Senior Debt (9.6%, Due 12/11)(1)                                   |        |           | 12,000 |          |         | 11,832         |         |   | 11,832
|                                                                                                |  | Preferred Units (10.0%, 86,000 units)              |  |                                                                    |        |           |        | 9,095    |         |                | 8,260  
|                                                                                                |  |                                                    |  |                                                                    |       
|JetBroadband Holdings, LLC(2)                                                                   |  | Cable                                              |  | Subordinated Unsecured Debt (14.8%, Due 8/15-2/16)                 |        |           | 24,143 |          |         | 23,924         |         |   | 23,924
|                                                                                                |  | Preferred Units (10.0%, 133,204 units)             |  |                                                                    |        |           |        | 18,471   |         |                | 21,816 
|                                                                                                |  |                                                    |  |                                                                    |       
|Jet Plastica Investors, LLC(2)                                                                  |  | Plastic Products                                   |  | Subordinated Debt (14.0%, Due 3/13)(1)                             |        |           | 26,647 |          |         | 26,439         |         |   | 26,439
|                                                                                                |  | Preferred LLC Interest (8.0%, 301,595 units)       |  |                                                                    |        |           |        | 33,365   |         |                | 36,535 
|                                                                                                |  |                                                    |  |                                                                    |       
|JUPR Holdings, Inc.(2)                                                                          |  | Information Services                               |  | Senior Debt (11.8%, Due 3/10)(1)                                   |        |           | 2,039  |          |         | 1,908          |         |   | 1,908 
|                                                                                                |  | Series A Preferred Stock (10.0%, 100,000 shares)   |  |                                                                    |        |           |        | 11,908   |         |                | 12,908 
|                                                                                                |  | Common Stock (770,000 shares)                      |  |                                                                    |        |           |        |         |         |                | 3,244  
|                                                                                                |  | Standby Letter of Credit ($175)                    |  |                                                                    |        |           |        |          |         |                |        
|                                                                                                |  |                                                    |  |                                                                    |       
|LMS Intellibound Investors, LLC(2)                                                              |  | Logistics                                          |  | Senior Debt (8.9%, Due 5/12-8/12)(1)                               |        |           | 23,661 |          |         | 23,443         |         |   | 23,443
|                                                                                                |  | Subordinated Debt (15.0%, Due 11/12)(1)            |  |                                                                    | 17,130 |           |        | 16,984   |         |                | 16,984 
|                                                                                                |  | Preferred Units (12.0%, 19,650 units)              |  |                                                                    |        |           |        | 21,227   |         |                | 29,578 
|                                                                                                |  | Warrants to purchase Class B Common Stock          |  |                                                                    |        |           |        |         |         |                |       
|                                                                                                |  |                                                    |  |                                                                    |       
|MTP Holding, LLC(6)                                                                             |  | Communications- Other                              |  | Common LLC Interest (79,171 units)                                 |        |           |        |          |         | 55             |         |   | 770   
|                                                                                                |  |                                                    |  |                                                                    |       
|Orbitel Holdings, LLC(2)                                                                        |  | Cable                                              |  | Senior Debt (10.9%, Due 3/12)(1)                                   |        |           | 15,750 |          |         | 15,509         |         |   | 15,509
|                                                                                                |  | Preferred LLC Interest (10.0%, 120,000 units)      |  |                                                                    |        |           |        | 13,069   |         |                | 13,526 
|                                                                                                |  | Standby Letter of Credit ($117)                    |  |                                                                    |        |           |        |          |         |                |        
|                                                                                                |  |                                                    |  |                                                                    |       
|RadioPharmacy Investors, LLC(2)                                                                 |  | Healthcare                                         |  | Senior Debt (9.6%, Due 12/10)(1)                                   |        |           | 7,000  |          |         | 6,891          |         |   | 6,891 
|                                                                                                |  | Subordinated Debt (15.0%, Due 12/11)(1)            |  |                                                                    | 9,542  |           |        | 9,542    |         |                | 9,542  
|                                                                                                |  | Preferred LLC Interest (8.0%, 70,000 units)        |  |                                                                    |        |           |        | 8,123    |         |                | 8,175  
|                                                                                                |  |                                                    |  |                                                                    |       
|Superior Industries Investors, LLC(2)                                                           |  | Sporting Goods                                     |  | Subordinated Debt (14.0%, Due 3/13)(1)                             |        |           | 17,671 |          |         | 17,530         |         |   | 17,530
|                                                                                                |  | Preferred LLC Units (8.0%, 125,400 units)          |  |                                                                    |        |           |        | 13,866   |         |                | 29,429 
|                                                                                                |  |                                                    |  |                                                                    |       
|TNR Entertainment Corp.(2) (6)                                                                  |  | Entertainment                                      |  | Senior Debt (13.1%, Due 9/09)                                      |        |           | 16,076 |          |         | 15,152         |         |   | 15,152
|                                                                                                |  | Subordinated Debt (16.0%, Due 9/09)                |  |                                                                    | 12,998 |           |        | 12,317   |         |                | 12,317 
|                                                                                                |  | Series A Preferred Stock (12.5%, 351,563 shares)   |  |                                                                    |        |           |        | 9,000    |         |                | 3,173  
|                                                                                                |  | Common Stock (1,806 shares)                        |  |                                                                    |        |           |        | 3,000    |         |                |       
|                                                                                                |  | Warrants to purchase Common Stock (expire 9/17)    |  |                                                                    |        |           |        |         |         |                |       
|                                                                                                |  |                                                    |  |                                                                    |       
|Total Sleep Holdings, Inc.(2) (9)                                                               |  | Healthcare                                         |  | Subordinated Debt (15.0%, Due 9/11)                                |        |           | 28,388 |          |         | 25,498         |         |   | 25,498
|                                                                                                |  | Unsecured Note (0.0%, Due 6/11)                    |  |                                                                    | 375    |           |        | 309      |         |                | 309    
|                                                                                                |  | Series A Preferred Stock (10.0%, 3,700 shares)     |  |                                                                    |        |           |        | 3,700    |         |                | 224    
|                                                                                                |  | Common Stock (2,592,920 shares)                    |  |                                                                    |        |           |        | 1,000    |         |                |       
|                                                                                                |  |                                                    |  |                                                                    |       
|Working Mother Media, Inc.(6)                                                                   |  | Publishing                                         |  | Senior Debt (8.5%, Due 12/08)                                      |        |           | 15,779 |          |         | 11,649         |         |   | 11,649
|                                                                                                |  | Class A Preferred Stock (13.0%, 12,497 shares)     |  |                                                                    |        |           |        | 12,497   |         |                | 4,185  
|                                                                                                |  | Class B Preferred Stock (13.0%, 1 share)           |  |                                                                    |        |           |        | 1        |         |                |       
|                                                                                                |  | Class C Preferred Stock (13.0%, 1 share)           |  |                                                                    |        |           |        | 1        |         |                |       
|                                                                                                |  | Common Stock (510 shares)                          |  |                                                                    |        |           |        | 1        |         |                |       
|                                                                                                |  | Guaranty ($119)                                    |  |                                                                    |        |           |        |          |         |                |        
|                                                                                                |  |                                                    |  |                                                                    |        |           |        |          |         |                |         |   |       
|                                                                                                |  |                                                    | 
|Total Control Investments: Majority-owned (represents 46.9% of total investments at fair value) |  |                                                    |  |                                                                    |        | 781,963   |        |          | 725,651
|                                                                                                |  |                                                    |  |                                                                    |        |           |        |          |         |                |         |   |       

The accompanying notes are an integral part of these financial statements



10



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2007

(dollars in thousands)



|                                                                                                   |  |                                                             |                                                 |                                            |        |           |        |          |         |                |       |   |       
|-------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------- | ----------------------------------------------- | ------------------------------------------ | ------ | --------- | ------ | -------- | ------- | -------------- | ----- | - | ------
|Portfolio Company                                                                                  |  | Industry                                                    |                                                 | Investment(8)                              |        | Principal |        | Cost(11) |         | Fair Value(11)
|Control Investments: Non-majority owned(4):                                                        |  |                                                             |                                                 |                                            |        |           |        |          |        
|                                                                                                   |  |                                                             |                                                 |                                            |       
|Crystal Media Network, LLC(6) (7)                                                                  |  | Broadcasting                                                |                                                 | LLC Interest                               |        |           |        |          | $       | 3,060          |       | $ | 2,641 
|                                                                                                   |  |                                                             |                                                 |                                            |       
|National Product Services, Inc.(2)                                                                 |  | Business Services                                           |                                                 | Senior Debt (12.8%, Due 6/09)              |        | $         | 13,153 |          |         | 7,347          |       |   | 13,153
|                                                                                                   |  | Subordinated Debt (16.0%, Due 6/09)                         |                                                 |                                            | 13,622 |           |        | 11,739   |         |                | 4,814
|                                                                                                   |  | Common Stock (995,428 shares)                               |                                                 |                                            |        |           |        |         |         |                |     
|                                                                                                   |  |                                                             |                                                 |                                            |       
|PremierGarage Holdings, LLC(2)                                                                     |  | Home Furnishings                                            |                                                 | Senior Debt (9.7%, Due 6/10-12/10)(1)      |        |           | 9,800  |          |         | 9,728          |       |   | 9,728 
|                                                                                                   |  | Preferred LLC Units (8.0%, 445 units)                       |                                                 |                                            |        |           |        | 4,971    |         |                | 4,683
|                                                                                                   |  | Common LLC Units (356 units)                                |                                                 |                                            |        |           |        |         |         |                |     
|                                                                                                   |  |                                                             |                                                 |                                            |        |           |        |          |         |                |       |   |       
|                                                                                                   |  |                                                             |                                                
|Total Control Investments: Non-majority-owned (represents 2.3% of total investments at fair value) |  |                                                             |                                                 |                                            |        | 36,845    |        |          | 35,019 
|                                                                                                   |  |                                                             |                                                 |                                            |        |           |        |          |         |                |       |   |       
|                                                                                                   |  |                                                             |                                                
|Total Control Investments: (represents 49.2% of total investments at fair value)                   |  |                                                             |                                                 |                                            |        | 818,808   |        |          | 760,670
|                                                                                                   |  |                                                             |                                                 |                                            |        |           |        |          |         |                |       |   |       
|                                                                                                   |  |                                                             |                                                
|Affiliate Investments(3):                                                                          |  |                                                             |                                                 |                                            |        |           |        |          |        
|                                                                                                   |  |                                                             |                                                 |                                            |       
|Advanced Sleep Concepts, Inc.(2)                                                                   |  | Home Furnishings                                            |                                                 | Senior Debt (13.2%, Due 10/11)(1)          |        |           | 6,825  |          |         | 6,608          |       |   | 6,608 
|                                                                                                   |  | Subordinated Debt (16.0%, Due 4/12)(1)                      |                                                 |                                            | 4,727  |           |        | 4,620    |         |                | 4,620
|                                                                                                   |  | Common Stock (423 shares)                                   |                                                 |                                            |        |           |        | 525      |         |                | 299  
|                                                                                                   |  | Warrants to purchase Common Stock (expire 10/16)            |                                                 |                                            |        |           |        | 348      |         |                | 198  
|                                                                                                   |  |                                                             |                                                 |                                            |       
|Cherry Hill Holdings, Inc.(2)                                                                      |  | Entertainment                                               |                                                 | Senior Debt (13.0%, Due 8/11)(1)           |        |           | 11,282 |          |         | 11,184         |       |   | 11,184
|                                                                                                   |  | Series A Preferred Stock (10.0%, 750 shares)                |                                                 |                                            |        |           |        | 850      |         |                | 850  
|                                                                                                   |  |                                                             |                                                 |                                            |       
|Stratford School Holdings, Inc.(2)                                                                 |  | Education                                                   |                                                 | Senior Debt (9.4%, Due 7/11-9/11)(1)       |        |           | 13,100 |          |         | 12,890         |       |   | 12,890
|                                                                                                   |  | Subordinated Debt (14.0%, Due 12/11)(1)                     |                                                 |                                            | 6,717  |           |        | 6,682    |         |                | 6,682
|                                                                                                   |  | Series A Convertible Preferred Stock (12.0%, 10,000 shares) |                                                 |                                            |        |           |        |         |         |                | 5,409
|                                                                                                   |  | Warrants to purchase Common Stock (expire 5/15)(1)          |                                                 |                                            |        |           |        | 67       |         |                | 1,850
|                                                                                                   |  |                                                             |                                                 |                                            |       
|Sunshine Media Delaware, LLC(2) (6)                                                                |  | Publishing                                                  |                                                 | Class A LLC Interest (8.0%, 563,808 units) |        |           |        |          |         | 564            |       |   | 592   
|                                                                                                   |  | Common Stock (145 shares)                                   |                                                 |                                            |        |           |        | 581      |         |                | 610  
|                                                                                                   |  | Option to acquire Warrants to purchase                      |                                                 |                                            |        |           |        |         |         |                |     
|                                                                                                   |  | Class B LLC Interest (expire 5/14)                          |                                                 |                                            |        |           |        |          |         |                |      
|                                                                                                   |  |                                                             |                                                 |                                            |       
|Velocity Technology Enterprises, Inc.(2)                                                           |  | Business Services                                           |                                                 | Senior Debt (9.0%, Due 12/12)(1)           |        |           | 21,764 |          |         | 21,612         |       |   | 21,612
|                                                                                                   |  | Series A Preferred Stock (1,506,602 shares)                 |                                                 |                                            |        |           |        | 1,500    |         |                | 1,500
|XFone, Inc.(6)                                                                                     |  | Communications- Other                                       |                                                 | Common Stock (868,946 shares)              |        |           |        |          |         | 2,485          |       |   | 2,697 
|                                                                                                   |  |                                                             | Warrants to purchase Common Stock (expire 3/11) |                                            |        |           |        |          |        |                |       | 
|                                                                                                   |  |                                                             |                                                 |                                            |        |           |        |          |         |                |       |   |       
|Total Affiliate Investments (represents 5.0% of total investments at fair value)                   |  |                                                             |                                                 |                                            |        | 70,516    |        |          | 77,601 
|                                                                                                   |  |                                                             |                                                 |                                            |        |           |        |          |         |                |       |   |       

The accompanying notes are an integral part of these financial statements



11



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2007

(dollars in thousands)



|                                                |  |                                                              |  |                                                                         |        |           |            |          |   |                |        |   |           
|----------------------------------------------- |  | ------------------------------------------------------------ |  | ----------------------------------------------------------------------- | ------ | --------- | ---------- | -------- | - | -------------- | ------ | - | ----------
|Portfolio Company                               |  | Industry                                                     |  | Investment(8)                                                           |        | Principal |            | Cost(11) |   | Fair Value(11)
|Non-Affiliate Investments (less than 5% owned): |  |                                                              |  |                                                                         |        |           |            |          |  
|                                                |  |                                                              |  |                                                                         |       
|Active Brands International, Inc.(2)            |  | Consumer Products                                            |  | Senior Debt (9.4%, Due 6/12)(1)                                         |        | $         | 21,750     |          | $ | 21,603         |        | $ | 21,603    
|                                                |  | Subordinated Debt (14.0%, Due 9/12)(1)                       |  |                                                                         | 13,135 |           |            | 12,842   |   |                | 12,842
|                                                |  | Class A-1 Common Stock (3,056 shares)                        |  |                                                                         |        |           |            | 3,056    |   |                | 3,056 
|                                                |  | Warrants to purchase Class A-1 Common Stock (expire 6/17)    |  |                                                                         |        |           |            | 331      |   |                | 526   
|                                                |  |                                                              |  |                                                                         |       
|Allens T.V. Cable Service, Inc.                |  | Cable                                                        |  | Senior Debt (11.3%, Due 12/12)(1)                                       |        |           | 7,780      |          |   | 7,729          |        |   | 7,729     
|                                                |  | Subordinated Debt (11.7%, Due 12/12)(1)                      |  |                                                                         | 2,233  |           |            | 2,157    |   |                | 2,157 
|                                                |  | Warrants to purchase Common Stock (expire 11/15)             |  |                                                                         |        |           |            |         |   |                | 139   
|                                                |  |                                                              |  |                                                                         |       
|Amerifit Nutrition, Inc.(2)                     |  | Healthcare                                                   |  | Senior Debt (11.3%, Due 3/10)(1)                                        |        |           | 4,644      |          |   | 4,624          |        |   | 4,624     
|                                                |  |                                                              |  |                                                                         |       
|B & H Education, Inc.(2)                        |  | Education                                                    |  | Senior Debt (9.3%, Due 3/10)(1)                                         |        |           | 2,824      |          |   | 2,806          |        |   | 2,806     
|                                                |  | Series A-1 Convertible Preferred Stock (12.0%, 5,384 shares) |  |                                                                         |        |           |            | 1,330    |   |                | 2,330 
|                                                |  |                                                              |  |                                                                         |       
|BLI Holdings, Inc.(2)                           |  | Drugs                                                        |  | Subordinated Debt (14.9%, Due 3/10)(1)                                  |        |           | 10,239     |          |   | 10,147         |        |   | 10,147    
|                                                |  |                                                              |  |                                                                         |       
|CEI Holdings Inc.                               |  | Cosmetics                                                    |  | Senior Debt (7.5%, Due 3/14)(1)                                         |        |           | 4,933      |          |   | 4,944          |        |   | 4,451     
|                                                |  |                                                              |  |                                                                         |       
|Cervalis LLC                                    |  | Business Services                                            |  | Senior Debt (8.6%, Due 3/12)(1)                                         |        |           | 15,000     |          |   | 14,870         |        |   | 14,870    
|                                                |  |                                                              |  |                                                                         |       
|Coastal Sunbelt Real Estate, Inc.               |  | Real Estate Investments                                      |  | Subordinated Unsecured Debt (15.0%, Due 7/12)                           |        |           | 2,061      |          |   | 2,045          |        |   | 2,045     
|                                                |  | Series A-2 Preferred Stock (12.0%, 20,000 shares)            |  |                                                                         |        |           |            | 2,237    |   |                | 2,353 
|                                                |  | Warrants to purchase Class B Common Stock                    |  |                                                                         |        |           |            |         |   |                |      
|                                                |  |                                                              |  |                                                                         |       
|Communicom Broadcasting, LLC(2)                 |  | Broadcasting                                                 |  | Senior Debt (11.8%, Due 2/11)(1)                                        |        |           | 11,138     |          |   | 11,062         |        |   | 11,062    
|                                                |  |                                                              |  |                                                                         |       
|Construction Trailer Specialist, Inc.(2)        |  | Auto Parts                                                   |  | Senior Debt (10.4%, Due 7/12)(1) Subordinated Debt (15.0%, Due 1/13)(1) |        |           | 7,0595,104 |          |   | 6,9755,058     |        |   | 6,9755,058
|                                                |  |                                                              |  |                                                                         |       
|Country Road Communications LLC(2)              |  | Communications-Other                                         |  | Subordinated Debt (12.6%, Due 7/13)(1)                                  |        |           | 13,000     |          |   | 12,919         |        |   | 12,919    
|                                                |  |                                                              |  |                                                                         |       
|Crescent Publishing Company, LLC(2)             |  | Newspaper                                                    |  | Senior Debt (14.7%, Due 6/09)(1)                                        |        |           | 7,679      |          |   | 7,532          |        |   | 7,532     
|                                                |  |                                                              |  |                                                                         |       
|Cruz Bay Publishing, Inc.                       |  | Publishing                                                   |  | Subordinated Debt (11.9%, Due 12/13)(1)                                 |        |           | 20,000     |          |   | 19,830         |        |   | 19,830    
|                                                |  |                                                              |  |                                                                         |       
|CWP/RMK Acquisition Corp.(2)                    |  | Home Furnishings                                             |  | Senior Debt (10.7%, Due 6/11)(1)                                        |        |           | 6,189      |          |   | 6,135          |        |   | 6,135     
|                                                |  | Subordinated Debt (15.2%, Due 12/12)(1)                      |  |                                                                         | 11,928 |           |            | 11,838   |   |                | 11,838
|                                                |  | Common Stock (500 shares)                                    |  |                                                                         |        |           |            | 500      |   |                | 6     
|                                                |  |                                                              |  |                                                                         |       
|Cyrus Networks, LLC                             |  | Business Services                                            |  | Senior Debt (9.3%, Due 7/13)(1) Subordinated Debt (12.1%, Due 1/14)(1)  |        |           | 4,1834,601 |          |   | 4,1284,601     |        |   | 4,1284,601
|                                                |  |                                                              |  |                                                                         |       
|Dayton Parts Holdings, LLC(2)                   |  | Auto Parts                                                   |  | Subordinated Debt (9.9%, Due 6/11)(1)                                   |        |           | 21,500     |          |   | 21,331         |        |   | 21,331    
|                                                |  | Preferred LLC Interest (10.0%, 16,470 units)                 |  |                                                                         |        |           |            | 589      |   |                | 589   
|                                                |  | Class A Common LLC Interest (8.0%, 10,980 units)             |  |                                                                         |        |           |            | 408      |   |                | 440   
|                                                |  |                                                              |  |                                                                         |       
|Empower IT Holdings, Inc.(2)                    |  | Information Services                                         |  | Senior Debt (11.5%, Due 5/12)(1)                                        |        |           | 5,563      |          |   | 5,466          |        |   | 5,466     
|                                                |  | Subordinated Debt (14.5%, Due 6/12)(1)                       |  |                                                                         | 5,058  |           |            | 5,058    |   |                | 5,058 
|                                                |  |                                                              |  |                                                                         |       
|Equibrand Holding Corporation(2)                |  | Leisure Activities                                           |  | Senior Debt (11.8%, Due 9/10)(1)                                        |        |           | 4,640      |          |   | 4,599          |        |   | 4,599     
|                                                |  | Subordinated Debt (16.0%, Due 3/11)(1)                       |  |                                                                         | 9,063  |           |            | 9,012    |   |                | 9,012 
|                                                |  |                                                              |  |                                                                         |       
|Flexsol Packaging Corp.                         |  | Plastic Products                                             |  | Subordinated Debt (14.2%, Due 12/12)(1)                                 |        |           | 3,000      |          |   | 2,997          |        |   | 2,022     
|                                                |  |                                                              |  |                                                                         |       
|G&L Investment Holdings, LLC(2)                 |  | Insurance                                                    |  | Subordinated Debt (12.6%, Due 5/14)(1)                                  |        |           | 17,500     |          |   | 16,727         |        |   | 16,727    
|                                                |  | Series A Preferred Shares (14.0%, 5,000,000 shares)          |  |                                                                         |        |           |            | 5,061    |   |                | 5,061 
|                                                |  | Class C Shares (621,907 shares)                              |  |                                                                         |        |           |            | 622      |   |                | 622   
|                                                |  |                                                              |  |                                                                         |       
|Golden Knight II CLO, Ltd.                      |  | Diversified Financial Services                               |  | Income Notes (Due 4/19)                                                 |        |           |            |          |   | 3,575          |        |   | 2,756     
|                                                |  |                                                              |  |                                                                         |       
|GoldenSource Holdings Inc.(6)                   |  | Technology                                                   |  | Warrants to purchase Class A Common Stock (expire 10/08)                |        |           |            |          |   |               |        |   |          
|                                                |  |                                                              |  |                                                                         |       
|GSDM Holdings, LLC(2)                           |  | Healthcare                                                   |  | Senior Debt (9.9%, Due 2/13)(1)                                         |        |           | 9,000      |          |   | 8,874          |        |   | 8,874     
|                                                |  | Subordinated Debt (14.0%, Due 8/13)                          |  |                                                                         | 7,652  |           |            | 7,601    |   |                | 7,601 
|                                                |  | Series B Preferred Units (12.5%, 4,213,333 units)            |  |                                                                         |        |           |            | 4,397    |   |                | 4,397 
|                                                |  |                                                              |  |                                                                         |       
|Home Interiors & Gifts, Inc.(6)(10)             |  | Home Furnishings                                             |  | Senior Debt (10.3%, Due 3/11)                                           |        |           | 4,141      |          |   | 3,990          |        |   | 2,147     
|                                                |  |                                                              |  |                                                                         |       
|Jenzabar, Inc.                                  |  | Technology                                                   |  | Senior Preferred Stock (11.0%, 5,000 shares)                            |        |           |            |          |   | 6,925          |        |   | 6,925     
|                                                |  | Subordinated Preferred Stock (109,800 shares)                |  |                                                                         |        |           |            | 1,098    |   |                | 1,098 
|                                                |  | Warrants to purchase Common Stock (expire 4/16)              |  |                                                                         |        |           |            | 421      |   |                | 26,044
|                                                |  |                                                              |  |                                                                         |       
|Jupitermedia Corporation(6)                     |  | Information Services                                         |  | Common Stock (148,373 shares)                                           |        |           |            |          |   | 2,114          |        |   | 567       
|                                                |  |                                                              |  |                                                                         |       
|Legacy Cabinets, Inc.                           |  | Home Furnishings                                             |  | Subordinated Debt (12.3%, Due 8/13)(1)                                  |        |           | 3,000      |          |   | 2,993          |        |   | 2,993     
|                                                |  |                                                              |  |                                                                         |       
|Marietta Intermediate Holding Corporation       |  | Cosmetics                                                    |  | Subordinated Debt (14.7%, Due 12/11)(1)                                 |        |           | 2,058      |          |   | 2,065          |        |   | 1,797     

The accompanying notes are an integral part of these financial statements



12



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2007

(dollars in thousands)



|                                                        |  |                                                                 |  |                                                  |        |           |        |          |   |                |        |   |       
|------------------------------------------------------- |  | --------------------------------------------------------------- |  | ------------------------------------------------ | ------ | --------- | ------ | -------- | - | -------------- | ------ | - | ------
|Portfolio Company                                       |  | Industry                                                        |  | Investment(8)                                    |        | Principal |        | Cost(11) |   | Fair Value(11)
|Maverick Healthcare Equity, LLC                         |  | Healthcare                                                      |  | Subordinated Debt (13.5%, Due 4/14)(1)           |        | $         | 12,500 |          | $ | 12,378         |        | $ | 12,378
|                                                        |  | Preferred Units (10.0%, 1,250,000 units)                        |  |                                                  |        |           |        | 1,269    |   |                | 1,269 
|                                                        |  | Class A Common Units (1,250,000 units)                          |  |                                                  |        |           |        |         |   |                |      
|MCI Holdings LLC(2)                                     |  | Healthcare                                                      |  | Subordinated Debt (12.7%, Due 4/13)(1)           |        |           | 30,606 |          |   | 30,395         |        |   | 30,395
|                                                        |  | Class A LLC Interest (4,712,042 units)                          |  |                                                  |        |           |        | 3,000    |   |                | 3,752 
|Metropolitan Telecommunications Holding
Company(2)      |  | Communications-CLEC                                             |  | Senior Debt (12.0%, Due 6/10-9/10)(1)            |        |           | 18,388 |          |   | 18,046         |        |   | 18,046
|                                                        |  | Subordinated Debt (15.8%, Due 12/10)(1)                         |  |                                                  | 10,929 |           |        | 10,929   |   |                | 10,929
|                                                        |  | Warrants to purchase Common Stock (expire 9/13)                 |  |                                                  |        |           |        | 1,843    |   |                | 9,863 
|MicroCal Holdings, LLC(2)                               |  | Laboratory Instruments                                          |  | Senior Debt (9.4%, Due 3/10-9/10)(1)             |        |           | 10,940 |          |   | 10,867         |        |   | 10,867
|                                                        |  | Subordinated Debt (14.5%, Due 3/11)(1)                          |  |                                                  | 9,115  |           |        | 9,115    |   |                | 9,115 
|Micro Dental Laboratories(2)                            |  | Healthcare                                                      |  | Subordinated Debt (15.0%, Due 1/08)(1)           |        |           | 12,567 |          |   | 12,567         |        |   | 12,567
|Miles Media Group, LLC(2)                               |  | Publishing                                                      |  | Senior Debt (11.6%, Due 6/13)(1)                 |        |           | 19,374 |          |   | 18,932         |        |   | 18,932
|NDSSI Holdings, LLC(2)                                  |  | Electronics                                                     |  | Senior Debt (10.1%, Due 12/10-12/11)(1)          |        |           | 19,897 |          |   | 19,691         |        |   | 19,691
|                                                        |  | Subordinated Debt (15.0%, Due 12/12)(1)                         |  |                                                  | 19,957 |           |        | 19,865   |   |                | 19,865
|                                                        |  | Class A Common LLC Interest (1,000,000 units)                   |  |                                                  |        |           |        | 333      |   |                | 965   
|New Century Companies, Inc.(6)                          |  | Industrial Equipment                                            |  | Warrants to purchase Common Stock (expire 6/10)  |        |           |        |          |   |               |        |   |      
|New England Precision Grinding Holdings, LLC            |  | Industrial Products                                             |  | Senior Debt (11.7%, Due 10/13)(1)                |        |           | 26,000 |          |   | 25,723         |        |   | 25,723
|                                                        |  | Common Units (1,000,000 units)                                  |  |                                                  |        |           |        | 1,000    |   |                | 1,000 
|PartMiner, Inc.(2)                                      |  | Information Services                                            |  | Senior Debt (11.8%, Due 6/09)(1)                 |        |           | 2,343  |          |   | 2,320          |        |   | 2,320 
|Philadelphia Newspapers, LLC                            |  | Newspaper                                                       |  | Subordinated Unsecured Debt (16.5%, Due 6/14)(1) |        |           | 5,041  |          |   | 5,029          |        |   | 5,029 
|Powercom Corporation(2)                                 |  | Communications-CLEC                                             |  | Senior Debt (10.0%, Due 2/10)                    |        |           | 1,878  |          |   | 1,878          |        |   | 1,878 
|                                                        |  | Warrants to purchase Class A Common Stock (expire 6/14)         |  |                                                  |        |           |        | 286      |   |                |      
|Quantum Medical Holdings, LLC(2)                        |  | Laboratory Instruments                                          |  | Senior Debt (10.8%, Due 5/11)(1)                 |        |           | 15,500 |          |   | 15,394         |        |   | 15,394
|                                                        |  | Subordinated Debt (15.0%, Due 12/11)(1)                         |  |                                                  | 18,032 |           |        | 17,872   |   |                | 17,872
|                                                        |  | Preferred LLC Interest (1,000,000 units)                        |  |                                                  |        |           |        | 484      |   |                | 1,279 
|Restaurant Technologies, Inc.                           |  | Food Services                                                   |  | Subordinated Debt (14.0%, Due 2/12)(1)           |        |           | 30,389 |          |   | 30,176         |        |   | 30,176
|                                                        |  | Series A-4 Convertible Preferred Stock (7,813 shares)           |  |                                                  | 25,450 |           |        | 336      |   |                | 275   
|Sagamore Hill Broadcasting, LLC(2)                      |  | Broadcasting                                                    |  | Senior Debt (10.9%, Due 8/12)(1)                 |        |           |        |          |   | 25,276         |        |   | 25,276
|Summit Business Media Intermediate Holding Company, LLC |  | Information Services                                            |  | Subordinated Debt (11.8%, Due 12/13)(1)          |        |           | 6,000  |          |   | 5,994          |        |   | 5,994 
|Teleguam Holdings, LLC(2)                               |  | Communications-Other                                            |  | Subordinated Debt (12.5%, Due 10/12)(1)          |        |           | 20,000 |          |   | 19,839         |        |   | 19,839
|The e-Media Club I, LLC(6)                              |  | Investment Fund                                                 |  | LLC Interest (74 units)                          |        |           |        |          |   | 88             |        |   | 20    
|The Matrixx Group, Incorporated(2)                      |  | Plastic Products                                                |  | Subordinated Debt (13.8%, Due 9/13)(1)           |        |           | 16,266 |          |   | 16,126         |        |   | 16,126
|ValuePage, Inc.(6)                                      |  | Communications-Other                                            |  | Senior Debt (12.8%, Due 6/08)                    |        |           | 1,187  |          |   | 1,038          |        |   | 28    
|VS&A-PBI Holding LLC(6)                                 |  | Publishing                                                      |  | LLC Interest                                     |        |           |        |          |   | 500            |        |   |      
|VOX Communications Group Holdings, LLC(2)               |  | Broadcasting                                                    |  | Senior Debt (13.5%, Due 3/09)(1)                 |        |           | 11,280 |          |   | 10,899         |        |   | 10,899
|                                                        |  | Convertible Preferred Subordinated Notes (12.5%, Due 6/15-6/17) |  |                                                  | 1,554  |           |        | 1,302    |   |                | 882   

The accompanying notes are an integral part of these financial statements



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MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2007

(dollars in thousands)



|                                                                                      |  |                      |  |                                              |  |           |        |          |         |                |       |   |          
|------------------------------------------------------------------------------------- |  | -------------------- |  | -------------------------------------------- |  | --------- | ------ | -------- | ------- | -------------- | ----- | - | ---------
|Portfolio Company                                                                     |  | Industry             |  | Investment(8)                                |  | Principal |        | Cost(11) |         | Fair Value(11)
|Wiesner Publishing Company, LLC                                                       |  | Publishing           |  | Warrants to purchase LLC Units (expire 6/12) |  |           |        |          | $       | 406            |       | $ | 3,740    
|Wireco Worldgroup Inc.                                                                |  | Industrial Equipment |  | Senior Debt (7.1%, Due 2/14)(1)              |  | $         | 3,970  |          |         | 3,997          |       |   | 3,898    
|Xpressdocs Holdings, Inc.(2)                                                          |  | Business Services    |  | Senior Debt (8.7%, Due 7/11-12/11)(1)        |  |           | 16,105 |          |         | 15,977         |       |   | 15,977   
|                                                                                      |  |                      |  | Subordinated Debt (14.0%, Due 7/12)(1)       |  |           | 6,230  |          |         | 6,185          |       |   | 6,185    
|                                                                                      |  |                      |  | Series A Preferred Stock (161,870 shares)    |  |           |        |          |         | 500            |       |   | 487      
|                                                                                      |  |                      |  |                                              |  |           |        |          |         |                |       |   |          
|Total Non-Affiliate Investments (represents 45.8% of total investments at fair value) |  |                      |  |                                              |  | 675,077   |        |          | 706,819
|                                                                                      |  |                      |  |                                              |  |           |        |          |         |                |       |   |          
|Total Investments                                                                     |  |                      |  |                                              |  |           |        |          | $       | 1,564,401      |       | $ | 1,545,090
|                                                                                      |  |                      |  |                                              |  |           |        |          |         |                |       |   |          
|Put/Call Options Granted or Written                                                   |  |                      |  |                                              |  |           |        |          |         |                |      
|Crystal Media Network, LLC(6) (7)                                                     |  | Broadcasting         |  | Call options written                         |  |           |        |          | $       |               |       | $ | 419      
|Total Sleep Holdings, Inc.(2) (6) (9)                                                 |  | Healthcare           |  | Put option granted (expires 4/09)            |  |           |        |          |         | 1,000          |       |   | 1,000    
|                                                                                      |  |                      |  |                                              |  |           |        |          |         |                |       |   |          
|Total Put/Call Options Granted or Written                                             |  |                      |  |                                              |  |           | $      | 1,000    |         | $              | 1,419
|                                                                                      |  |                      |  |                                              |  |           |        |          |         |                |       |   |          



|(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 4Borrowings to the Condensed 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.
Non-majority owned control investments represent companies in which we own more than 25%, but not more than 50%, of the portfolio companys voting securities.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Majority-owned control investments represent companies in which we own more than 50% of the portfolio companys
voting securities.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

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

|(7) | In August 2006, we sold 50.1% of our equity in Crystal Media Network, LLC, or Crystal Media. As part of the transaction,
we also issued a written call option to the buyer on up to an additional 10% ownership interest in Crystal Media for $110. In February 2008, the buyer exercised the option. We included the fair value of this call option in other liabilities on our
Consolidated Balance Sheet as of December 31, 2007.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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) | During the second quarter of 2007, we acquired 61% of the common stock of Total Sleep Holdings, Inc., or Total Sleep. In
connection with this transaction, we granted an option to a private equity firm to put an additional 34% of Total Sleeps common stock to us for $1,000. This put option expires April 30, 2009, if not exercised earlier. This put option was
outstanding as of September 30, 2008 and December 31, 2007. We included the fair value of this put option in other liabilities on our Consolidated Balance Sheets.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Home Interiors & Gifts, Inc., filed for Chapter 11 bankruptcy protection on April 29, 2008.
|---- | -------------------------------------------------------------------------------------------

|(11) | We modified the Consolidated Schedule of Investments from the presentation in our Annual Report on Form
10-K for the fiscal year ended December 31, 2007 to incorporate unearned fees into the cost and fair value of the associated debt investments in our portfolio. Concurrent with the adoption of SFAS No. 157Fair Value
Measurements, or SFAS 157, we changed our balance sheet presentation for all periods to reclassify unearned fees to the associated debt investments. Before 2008, we reported unearned fees as a single line item on our Consolidated Schedule of
Investments. This change did not impact the aggregate cost or fair value of our investment portfolio or our financial position or results of operations. See Note 3Fair Value Measurements for additional information about our
implementation of SFAS 157.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | On July 28, 2008, we converted our debt securities in TNR Entertainment Corp. into preferred equity of TNR Holdings
Corp. and invested $2.0 million in debt. The amounts reported herein, include Legacy Common Stock and Legacy Warrants related to TNR Entertainment Corp.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of these financial statements



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MCG Capital Corporation



Notes to Condensed Consolidated Financial
Statements

(Unaudited)

NOTE 1DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

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 treated 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.

BASIS
OF PRESENTATION AND USE OF ESTIMATES

We prepared the
accompanying unaudited Condensed Consolidated Financial Statements in accordance with the accounting policies described in our Annual Report on Form 10-Kfor the year ended December 31, 2007 and the interim reporting requirements of Form
10-Q. Accordingly, these financial statements are unaudited and certain information and note disclosures included in our annual financial statements have been condensed or omitted in accordance with accounting principles generally accepted in the
United States of America. We believe we have made all adjustments necessary for a fair statement of financial position, operating results and cash flows for interim periods. We have reclassified certain prior period information to conform to our
current presentation. 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 interim Condensed Consolidated Financial Statements and related notes are reasonable, actual results could differ materially.



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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 I, LLC, MCG Finance V, LLC, MCG Finance VII, LLC and MCG Finance VIII, LLC. 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.

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, 2007.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

Effective
January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157Fair Value Measurements, or SFAS 157. 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 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.

NEW ACCOUNTING PRONOUNCEMENTS

In February 2008, FASB Staff Position No. 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. We deferred the adoption of SFAS 157 for our nonfinancial assets and liabilities.
We are assessing the potential impact that adoption of SFAS 157 for our nonfinancial assets and liabilities may have on our financial statements.

On
October 10, 2008, FASB Staff Position No. 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. The 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.

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 nonforfeitable 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 nonforfeitable 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 are assessing the impact that the adoption of FSP EITF 03-06-1 will have on the presentation of our earnings per share. We will adopt FSP EITF 03-06-1
beginning on January 1, 2009.

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 will adopt this standard no later than January 1, 2009. We do not expect that the adoption of this standard will have a material impact on our financial position or results of
operations.



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MCG Capital Corporation





NOTE 2INVESTMENT PORTFOLIO

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



|                                 |                    |                    |                           |  |                   |                    |  |                           |           |  |       |  
|-------------------------------- | ------------------ | ------------------ | ------------------------- |  | ----------------- | ------------------ |  | ------------------------- | --------- |  | ----- | -
|(dollars in thousands)           |                    | September 30, 2008 |                           |  | December 31, 2007 |                   
|                                 | Investmentsat Cost |                    | Percent ofTotal Portfolio |  |                   | Investmentsat Cost |  | Percent ofTotal Portfolio |          
|Debt investments(a)              |                    |                    |                           |  |                   |                    |  |                           |           |  |       |  
|Senior secured debt              |                    | $                  | 386,563                   |  | 26.0              | %                  |  | $                         | 476,853   |  | 30.5  | %
|Subordinated debt                |                    |                    |                           |  |                   |                    |  |                           |           |  |       |  
|Secured                          |                    |                    | 520,546                   |  | 35.0              |                    |  |                           | 532,213   |  | 34.0  |  
|Unsecured                        |                    |                    | 34,881                    |  | 2.3               |                    |  |                           | 32,609    |  | 2.1   |  
|                                 |                    |                    |                           |  |                   |                    |  |                           |           |  |       |  
|Total debt investments           |                    |                    | 941,990                   |  | 63.3              |                    |  |                           | 1,041,675 |  | 66.6  |  
|                                 |                    |                    |                           |  |                   |                    |  |                           |           |  |       |  
|Equity investments               |                    |                    |                           |  |                   |                    |  |                           |           |  |       |  
|Preferred equity                 |                    |                    | 458,080                   |  | 30.8              |                    |  |                           | 434,007   |  | 27.7  |  
|Common/Common equivalents equity |                    |                    | 87,465                    |  | 5.9               |                    |  |                           | 88,719    |  | 5.7   |  
|                                 |                    |                    |                           |  |                   |                    |  |                           |           |  |       |  
|Total equity investments         |                    |                    | 545,545                   |  | 36.7              |                    |  |                           | 522,726   |  | 33.4  |  
|                                 |                    |                    |                           |  |                   |                    |  |                           |           |  |       |  
|Total investments(a)             |                    | $                  | 1,487,535                 |  | 100.0             | %                  |  | $                         | 1,564,401 |  | 100.0 | %
|                                 |                    |                    |                           |  |                   |                    |  |                           |           |  |       |  



|(a) | Concurrent with our January 1, 2008 adoption of SFAS 157, we netted unearned fees against the associated debt
investments for both September 30, 2008 and December 31, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



|                                 |                          |                    |                           |  |                   |                          |  |                           |           |  |       |  
|-------------------------------- | ------------------------ | ------------------ | ------------------------- |  | ----------------- | ------------------------ |  | ------------------------- | --------- |  | ----- | -
|(dollars in thousands)           |                          | September 30, 2008 |                           |  | December 31, 2007 |                         
|                                 | Investments atFair Value |                    | Percent ofTotal Portfolio |  |                   | Investments atFair Value |  | Percent ofTotal Portfolio |          
|Debt investments(a)              |                          |                    |                           |  |                   |                          |  |                           |           |  |       |  
|Senior secured debt              |                          | $                  | 383,493                   |  | 29.6              | %                        |  | $                         | 479,214   |  | 31.0  | %
|Subordinated debt                |                          |                    |                           |  |                   |                          |  |                           |           |  |       |  
|Secured                          |                          |                    | 453,336                   |  | 35.0              |                          |  |                           | 522,742   |  | 33.9  |  
|Unsecured                        |                          |                    | 29,967                    |  | 2.3               |                          |  |                           | 32,189    |  | 2.1   |  
|                                 |                          |                    |                           |  |                   |                          |  |                           |           |  |       |  
|Total debt investments           |                          |                    | 866,796                   |  | 66.9              |                          |  |                           | 1,034,145 |  | 67.0  |  
|                                 |                          |                    |                           |  |                   |                          |  |                           |           |  |       |  
|Equity investments               |                          |                    |                           |  |                   |                          |  |                           |           |  |       |  
|Preferred equity                 |                          |                    | 369,513                   |  | 28.5              |                          |  |                           | 447,229   |  | 28.9  |  
|Common/Common equivalents equity |                          |                    | 60,160                    |  | 4.6               |                          |  |                           | 63,716    |  | 4.1   |  
|                                 |                          |                    |                           |  |                   |                          |  |                           |           |  |       |  
|Total equity investments         |                          |                    | 429,673                   |  | 33.1              |                          |  |                           | 510,945   |  | 33.0  |  
|                                 |                          |                    |                           |  |                   |                          |  |                           |           |  |       |  
|Total investments(a)             |                          | $                  | 1,296,469                 |  | 100.0             | %                        |  | $                         | 1,545,090 |  | 100.0 | %
|                                 |                          |                    |                           |  |                   |                          |  |                           |           |  |       |  



|(a) | Concurrent with our January 1, 2008 adoption of SFAS 157, we netted unearned fees against the associated debt
investments for both September 30, 2008 and December 31, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our debt instruments bear contractual variable interest rates
ranging from 4.9% to 16.6%, a portion of which may be deferred. As of September 30, 2008, approximately 58.9% of the fair value of our loan portfolio was at variable rates based on a LIBOR benchmark or prime rate and 41.1% of the fair value of
our loan portfolio was at fixed rates. As of September 30, 2008, approximately 24.9% of our loan portfolio had floors ranging from 1.5% to 3.0% of the LIBOR base index. 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.



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



|                                          |           |                       |                    |  |                      |           |  |                    |        |  |      |  
|----------------------------------------- | --------- | --------------------- | ------------------ |  | -------------------- | --------- |  | ------------------ | ------ |  | ---- | -
|(dollars in thousands)                    |           | September 30, 2008(a) |                    |  | December 31, 2007(a) |          
|                                          | FairValue |                       | % of LoanPortfolio |  |                      | FairValue |  | % of LoanPortfolio |       
|Loans greater than 90 days past due       |           |                       |                    |  |                      |           |  |                    |        |  |      |  
|On non-accrual status                     |           | $                     | 1,778              |  | 0.21                 | %         |  | $                  | 28     |  |     | %
|Not on non-accrual status                 |           |                       |                   |  |                     |           |  |                    |       |  |     |  
|                                          |           |                       |                    |  |                      |           |  |                    |        |  |      |  
|Total loans greater than 90 days past due |           | $                     | 1,778              |  | 0.21                 | %         |  | $                  | 28     |  |     | %
|                                          |           |                       |                    |  |                      |           |  |                    |        |  |      |  
|Loans on non-accrual status(b)            |           |                       |                    |  |                      |           |  |                    |        |  |      |  
|0 to 90 days past due                     |           | $                     | 34,976             |  | 4.03                 | %         |  | $                  | 67,378 |  | 6.52 | %
|Greater than 90 days past due             |           |                       | 1,778              |  | 0.21                 |           |  |                    | 28     |  |     |  
|                                          |           |                       |                    |  |                      |           |  |                    |        |  |      |  
|Total loans on non-accrual status(b)      |           | $                     | 36,754             |  | 4.24                 | %         |  | $                  | 67,406 |  | 6.52 | %
|                                          |           |                       |                    |  |                      |           |  |                    |        |  |      |  



|(a) | Concurrent with our January 1, 2008 adoption of SFAS 157, we netted unearned fees against the associated debt
investments for both September 30, 2008 and December 31, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | The $30.7 million decrease from December 31, 2007 to September 30, 2008 primarily resulted from unrealized
depreciation on loans to Cleartel Communications, Inc. of $25.2 million, as well as an $11.6 million decrease resulting from the sale of Working Mother Media, Inc., and $1.4 million of decreases in the fair value of loans that were on non-accrual
status as of December 31, 2007. In addition, the conversion of certain debt in TNR Entertainment Corp. to equity in TNR Holding Corp., resulted in a $25.8 million reduction in non-accrual loans. These decreases were partially offset by the placement
of $33.3 million of other loans on non-accrual status, including $27.7 million of loans made to portfolio companies in the broadcasting industry.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



|                                                              |                       |                    |                           |  |                   |                       |  |                           |           |  |       |  
|------------------------------------------------------------- | --------------------- | ------------------ | ------------------------- |  | ----------------- | --------------------- |  | ------------------------- | --------- |  | ----- | -
|(dollars in thousands)                                        |                       | September 30, 2008 |                           |  | December 31, 2007 |                      
|                                                              | Investmentsat Cost(b) |                    | Percent ofTotal Portfolio |  |                   | Investmentsat Cost(b) |  | Percent ofTotal Portfolio |          
|TelecommunicationsCLEC (competitive local exchange carriers) |                       | $                  | 336,767                   |  | 22.6              | %                     |  | $                         | 323,726   |  | 20.7  | %
|Communicationsother                                          |                       |                    | 36,160                    |  | 2.4               |                       |  |                           | 39,872    |  | 2.6   |  
|Healthcare                                                    |                       |                    | 132,586                   |  | 8.9               |                       |  |                           | 140,168   |  | 9.0   |  
|Cable                                                         |                       |                    | 115,279                   |  | 7.8               |                       |  |                           | 111,017   |  | 7.1   |  
|Business services                                             |                       |                    | 90,847                    |  | 6.1               |                       |  |                           | 88,459    |  | 5.7   |  
|Food services                                                 |                       |                    | 79,260                    |  | 5.3               |                       |  |                           | 74,342    |  | 4.8   |  
|Broadcasting                                                  |                       |                    | 79,198                    |  | 5.3               |                       |  |                           | 87,988    |  | 5.6   |  
|Logistics                                                     |                       |                    | 51,232                    |  | 3.4               |                       |  |                           | 61,654    |  | 3.9   |  
|Entertainment                                                 |                       |                    | 59,946                    |  | 4.0               |                       |  |                           | 51,503    |  | 3.3   |  
|Plastic products                                              |                       |                    | 83,234                    |  | 5.6               |                       |  |                           | 78,927    |  | 5.0   |  
|Sporting goods                                                |                       |                    | 32,505                    |  | 2.2               |                       |  |                           | 31,396    |  | 2.0   |  
|Electronics                                                   |                       |                    | 41,665                    |  | 2.8               |                       |  |                           | 39,889    |  | 2.6   |  
|Technology                                                    |                       |                    | 8,858                     |  | 0.6               |                       |  |                           | 8,444     |  | 0.5   |  
|Laboratory instruments                                        |                       |                    | 35,814                    |  | 2.4               |                       |  |                           | 53,732    |  | 3.4   |  
|Publishing                                                    |                       |                    | 39,366                    |  | 2.7               |                       |  |                           | 64,962    |  | 4.2   |  
|Consumer products                                             |                       |                    | 35,951                    |  | 2.4               |                       |  |                           | 37,832    |  | 2.4   |  
|Home furnishings                                              |                       |                    | 49,613                    |  | 3.3               |                       |  |                           | 52,256    |  | 3.3   |  
|Auto parts                                                    |                       |                    | 30,649                    |  | 2.1               |                       |  |                           | 34,361    |  | 2.2   |  
|Education                                                     |                       |                    | 11,910                    |  | 0.8               |                       |  |                           | 23,775    |  | 1.5   |  
|Industrial products                                           |                       |                    | 26,765                    |  | 1.8               |                       |  |                           | 26,723    |  | 1.7   |  
|Insurance                                                     |                       |                    | 23,026                    |  | 1.6               |                       |  |                           | 22,410    |  | 1.4   |  
|Information services                                          |                       |                    | 17,710                    |  | 1.2               |                       |  |                           | 34,768    |  | 2.2   |  
|Leisure activities                                            |                       |                    | 13,710                    |  | 0.9               |                       |  |                           | 13,611    |  | 0.9   |  
|Other media                                                   |                       |                    | 21,205                    |  | 1.5               |                       |  |                           | 20,927    |  | 1.3   |  
|Other(a)                                                      |                       |                    | 34,279                    |  | 2.3               |                       |  |                           | 41,659    |  | 2.7   |  
|                                                              |                       |                    |                           |  |                   |                       |  |                           |           |  |       |  
|Total                                                         |                       | $                  | 1,487,535                 |  | 100.0             | %                     |  | $                         | 1,564,401 |  | 100.0 | %
|                                                              |                       |                    |                           |  |                   |                       |  |                           |           |  |       |  



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

|(b) | Concurrent with our January 1, 2008 adoption of SFAS 157, we netted unearned fees against the associated debt
investments for both September 30, 2008 and December 31, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|                        |                             |                    |                           |  |                   |                             |  |                           |           |  |       |  
|----------------------- | --------------------------- | ------------------ | ------------------------- |  | ----------------- | --------------------------- |  | ------------------------- | --------- |  | ----- | -
|(dollars in thousands)  |                             | September 30, 2008 |                           |  | December 31, 2007 |                            
|                        | Investments atFair Value(b) |                    | Percent ofTotal Portfolio |  |                   | Investments atFair Value(b) |  | Percent ofTotal Portfolio |          
|TelecommunicationsCLEC |                             | $                  | 183,722                   |  | 14.2              | %                           |  | $                         | 255,483   |  | 16.5  | %
|Communicationsother    |                             |                    | 33,658                    |  | 2.6               |                             |  |                           | 39,789    |  | 2.6   |  
|Healthcare              |                             |                    | 129,693                   |  | 10.0              |                             |  |                           | 136,496   |  | 8.8   |  
|Cable                   |                             |                    | 117,510                   |  | 9.1               |                             |  |                           | 114,958   |  | 7.4   |  
|Business services       |                             |                    | 82,410                    |  | 6.4               |                             |  |                           | 87,327    |  | 5.7   |  
|Food services           |                             |                    | 80,209                    |  | 6.2               |                             |  |                           | 79,471    |  | 5.1   |  
|Broadcasting            |                             |                    | 67,177                    |  | 5.2               |                             |  |                           | 88,105    |  | 5.7   |  
|Logistics               |                             |                    | 64,477                    |  | 5.0               |                             |  |                           | 70,005    |  | 4.5   |  
|Entertainment           |                             |                    | 51,248                    |  | 3.9               |                             |  |                           | 42,676    |  | 2.8   |  
|Plastic products        |                             |                    | 47,860                    |  | 3.7               |                             |  |                           | 81,122    |  | 5.3   |  
|Sporting goods          |                             |                    | 47,115                    |  | 3.6               |                             |  |                           | 46,959    |  | 3.0   |  
|Electronics             |                             |                    | 42,583                    |  | 3.3               |                             |  |                           | 40,521    |  | 2.6   |  
|Technology              |                             |                    | 38,210                    |  | 2.9               |                             |  |                           | 34,067    |  | 2.2   |  
|Laboratory instruments  |                             |                    | 36,608                    |  | 2.8               |                             |  |                           | 54,527    |  | 3.5   |  
|Publishing              |                             |                    | 36,423                    |  | 2.8               |                             |  |                           | 59,538    |  | 3.9   |  
|Consumer products       |                             |                    | 32,438                    |  | 2.5               |                             |  |                           | 38,027    |  | 2.5   |  
|Home furnishings        |                             |                    | 32,225                    |  | 2.5               |                             |  |                           | 49,255    |  | 3.2   |  
|Auto parts              |                             |                    | 29,765                    |  | 2.3               |                             |  |                           | 34,393    |  | 2.2   |  
|Education               |                             |                    | 27,010                    |  | 2.1               |                             |  |                           | 31,967    |  | 2.1   |  
|Industrial products     |                             |                    | 26,775                    |  | 2.1               |                             |  |                           | 26,723    |  | 1.7   |  
|Insurance               |                             |                    | 21,821                    |  | 1.7               |                             |  |                           | 22,410    |  | 1.5   |  
|Information services    |                             |                    | 15,058                    |  | 1.2               |                             |  |                           | 37,465    |  | 2.4   |  
|Leisure activities      |                             |                    | 13,710                    |  | 1.0               |                             |  |                           | 13,611    |  | 0.9   |  
|Other media             |                             |                    | 13,527                    |  | 1.0               |                             |  |                           | 20,092    |  | 1.3   |  
|Other(a)                |                             |                    | 25,237                    |  | 1.9               |                             |  |                           | 40,103    |  | 2.6   |  
|                        |                             |                    |                           |  |                   |                             |  |                           |           |  |       |  
|Total                   |                             | $                  | 1,296,469                 |  | 100.0             | %                           |  | $                         | 1,545,090 |  | 100.0 | %
|                        |                             |                    |                           |  |                   |                             |  |                           |           |  |       |  



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

|(b) | Concurrent with our January 1, 2008 adoption of SFAS 157, we netted unearned fees against the associated debt
investments for both September 30, 2008 and December 31, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On July 31, 2006, we issued a call option to a private
investor in connection with the sale of 50.1% of our ownership of Crystal Media Network, LLC, or Crystal Media. The call option allowed the private investor to acquire an additional 10% of the ownership of Crystal Media from us for $110,000. We
included the fair value of this call option in other liabilities on our Consolidated Balance Sheet as of December 31, 2007. In February 2008, the private investor exercised the call option. No other call options were issued or
outstanding during the nine months ended September 30, 2008.

During 2007, we granted an option to a private equity firm to put an additional 34% of
the common stock of Total Sleep Holdings, Inc., to us for $1.0 million. This put option expires April 30, 2009, if not exercised earlier. As of September 30, 2008 and December 31, 2007, we included the $1.0 million fair
value of this put option in other liabilities on our Consolidated Balance Sheets. No other put options were issued or outstanding during the nine months ended September 30, 2008.

NOTE 3FAIR VALUE MEASUREMENT

We adopted SFAS 157 effective January 1, 2008. In part, 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.



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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 Sheetand by SFAS 157 hierarchy:



|                                         |                                               |                          |                                                                     |  |   |                                                                       |   |  |                                                      |           |   |  |   |           |  
|---------------------------------------- | --------------------------------------------- | ------------------------ | ------------------------------------------------------------------- |  | - | --------------------------------------------------------------------- | - |  | ---------------------------------------------------- | --------- | - |  | - | --------- | -
|(in thousands)                           |                                               | As of September 30, 2008 |                                                                    
|                                         | Quoted MarketPrices in ActiveMarkets(Level 1) |                          | Internal Models withSignificantobservable MarketParameters(Level 2) |  |   | Internal Modelswith
SignificantUnobservableMarket Parameters(Level 3) |   |  | Total Fair ValueReported inConsolidatedBalance Sheet |          
|Assets                                   |                                               |                          |                                                                     |  |   |                                                                       |   |  |                                                      |           |   |  |   |           |  
|Investments:                             |                                               |                          |                                                                     |  |   |                                                                       |   |  |                                                      |           |   |  |   |           |  
|Non-affiliate investments                |                                               | $                        | 172                                                                 |  | $ | 10,421                                                                |   |  | $                                                    | 614,175   |   |  | $ | 624,768   |  
|Affiliate investments                    |                                               |                          |                                                                    |  |   | 2,319                                                                 |   |  |                                                      | 66,179    |   |  |   | 68,498    |  
|Control investments                      |                                               |                          |                                                                    |  |   |                                                                      |   |  |                                                      | 603,203   |   |  |   | 603,203   |  
|                                         |                                               |                          |                                                                     |  |   |                                                                       |   |  |                                                      |           |   |  |   |           |  
|Total assets reported at fair value      |                                               | $                        | 172                                                                 |  | $ | 12,740                                                                |   |  | $                                                    | 1,283,557 |   |  | $ | 1,296,469 |  
|                                         |                                               |                          |                                                                     |  |   |                                                                       |   |  |                                                      |           |   |  |   |           |  
|Liabilities                              |                                               |                          |                                                                     |  |   |                                                                       |   |  |                                                      |           |   |  |   |           |  
|Put option(a)                            |                                               |                          |                                                                    |  |   |                                                                      |   |  |                                                      | (1,000    | ) |  |   | (1,000    | )
|Interest rate swap(b)                    |                                               |                          |                                                                    |  |   | (146                                                                  | ) |  |                                                      |          |   |  |   | (146      | )
|                                         |                                               |                          |                                                                     |  |   |                                                                       |   |  |                                                      |           |   |  |   |           |  
|Total liabilities reported at fair value |                                               | $                        |                                                                    |  | $ | (146                                                                  | ) |  | $                                                    | (1,000    | ) |  | $ | (1,146    | )
|                                         |                                               |                          |                                                                     |  |   |                                                                       |   |  |                                                      |           |   |  |   |           |  



|(a) | Represents the fair value of a put option on a control investment that we included in other liabilities on our
Consolidated Balance Sheets.See Note 2Investments for additional information.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

VALUATION
METHODOLOGIES

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, which comprise 44.4% of our investment portfolio, represent equity and
debt securities in which we own the majority of the portfolio company and generally control its board of directors. 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
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | 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 and Non-Control InvestmentsNon-majority owned control investments, which comprise 2.1% of our investment
portfolio, represent debt and equity securities that we own 25% to 50% of the portfolio companys equity. Non-control investments, which comprise 53.5% of our investment portfolio, represent affiliate and non-affiliate debt and equity
securities for which we do not have a controlling interest. Quoted prices are not available for 98.1% of our non-control investments, which represent 52.5% of our investment portfolio. For our non-majority owned equity investments and our
non-control equity investments, we use the same market and income approaches used to value our control investments. For non-majority owned control debt investments and non-control debt investments, we estimate fair value using a yield approach based
on the expected future cash flows discounted at the loans effective interest 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 September 30, 2008, these securities represented approximately 1.0% 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. Over the last four quarters, independent valuation firms performed
independent valuations or reviewed valuations of 52 portfolio companies, representing $1,224.7 million, or 94.5%, of the fair value of our total portfolio investments and $384.7 million, or 89.5%, of the fair value of our equity portfolio
investments. 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.



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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.

The following table provides a reconciliation of fair value changes during the
nine-month period from December 31, 2007 to September 30, 2008 and for the three-month period from June 30, 2008 through September 30, 2008 for all investments for which we determine fair value using unobservable (Level 3)
factors.



|                                                                                                   |                          |                                                             |         |                      |  |   |                    |   |  |       |          |        |  |   |           |       
|-------------------------------------------------------------------------------------------------- | ------------------------ | ----------------------------------------------------------- | ------- | -------------------- |  | - | ------------------ | - |  | ----- | -------- | ------ |  | - | --------- | ------
|(in thousands)                                                                                     |                          | Fair value measurements using unobservable inputs (Level 3) |        
|                                                                                                   | Non-affiliateInvestments |                                                             |         | AffiliateInvestments |  |   | ControlInvestments |   |  | Total |         
|Nine months ended September 30, 2008:                                                              |                          |                                                             |         |                      |  |   |                    |   |  |       |          |        |  |   |           |       
|Fair value December 31, 2007(a)                                                                    |                          | $                                                           | 689,181 |                      |  | $ | 74,904             |   |  | $     | 759,251  | (a)(b) |  | $ | 1,523,336 | (a)(b)
|Realized/unrealized (losses) gains(b)                                                              |                          |                                                             | (13,278 | )                    |  |   | 5,108              |   |  |       | (166,000 | )(a)   |  |   | (174,170  | )(a)  
|Purchases, issuances and settlements, net                                                          |                          |                                                             | (61,728 | )                    |  |   | (13,833            | ) |  |       | 8,952    |        |  |   | (66,609   | )     
|Transfers in (out) of Level 3                                                                      |                          |                                                             |        |                      |  |   |                   |   |  |       |         |        |  |   |          |       
|                                                                                                   |                          |                                                             |         |                      |  |   |                    |   |  |       |          |        |  |   |           |       
|Fair value as of September 30, 2008                                                                |                          | $                                                           | 614,175 |                      |  | $ | 66,179             |   |  | $     | 602,203  | (b)    |  | $ | 1,282,557 | (b)   
|                                                                                                   |                          |                                                             |         |                      |  |   |                    |   |  |       |          |        |  |   |           |       
|Change in unrealized (losses) gains related to financial instruments held at September 30, 2008(c) |                          | $                                                           | (18,622 | )                    |  | $ | 5,124              |   |  | $     | (151,447 | )(a)   |  | $ | (164,945  | )(a)  
|                                                                                                   |                          |                                                             |         |                      |  |   |                    |   |  |       |          |        |  |   |           |       
|Three months ended September 30, 2008:                                                             |                          |                                                             |         |                      |  |   |                    |   |  |       |          |        |  |   |           |       
|Fair value June 30, 2008(a)                                                                        |                          | $                                                           | 648,014 |                      |  | $ | 77,501             |   |  | $     | 689,760  | (b)    |  | $ | 1,415,275 | (b)   
|Realized/unrealized (losses) gains(b)                                                              |                          |                                                             | (6,176  | )                    |  |   | 4,374              |   |  |       | (76,509  | )      |  |   | (78,311   | )     
|Purchases, issuances and settlements, net                                                          |                          |                                                             | (27,663 | )                    |  |   | (15,696            | ) |  |       | (11,048  | )      |  |   | (54,407   | )     
|Transfers in (out) of Level 3                                                                      |                          |                                                             |        |                      |  |   |                   |   |  |       |         |        |  |   |          |       
|                                                                                                   |                          |                                                             |         |                      |  |   |                    |   |  |       |          |        |  |   |           |       
|Fair value as of September 30, 2008                                                                |                          | $                                                           | 614,175 |                      |  | $ | 66,179             |   |  | $     | 602,203  | (b)    |  | $ | 1,282,557 | (b)   
|                                                                                                   |                          |                                                             |         |                      |  |   |                    |   |  |       |          |        |  |   |           |       
|Change in unrealized (losses) gains related to financial instruments held at September 30, 2008(c) |                          | $                                                           | (11,520 | )                    |  | $ | 4,374              |   |  | $     | (61,685  | )      |  | $ | (68,831   | )     
|                                                                                                   |                          |                                                             |         |                      |  |   |                    |   |  |       |          |        |  |   |           |       



|(a) | Includes a call option with a fair value of $419 to Crystal Media that we included in other liabilities on our
Consolidated Balance Sheetas of December 31, 2007. This option was exercised during the first quarter of 2008. See Note 2Investments for additional information.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Includes a put option with a $1,000 fair value that we included in other liabilities on our Consolidated Balance
Sheets as ofSeptember 30, 2008 and December 31, 2007.See Note 2Investments for additional information.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | We report unrealized gains and losses on our Consolidated Statements of Operations, under the caption Net
unrealized (depreciation) appreciation on investments.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTE 4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             |  | September 30, 2008 |                   | December 31, 2007
|                                       |  | PotentialMaximumBorrowing |  |                    | Amountoutstanding |                   | PotentialMaximumBorrowing |   | Amountoutstanding
|Unsecured Notes                        |  | October 2010              |  | $                  | 50,000            |                   |                           | $ | 50,000            |  | $ | 50,000    |  | $ | 50,000 
|Unsecured Notes                        |  | October 2012              |  |                    | 25,000            |                   |                           |   | 25,000            |  |   | 25,000    |  |   | 25,000 
|Commercial Loan Trust 2006-2           |  | August 2008               |  |                    |                  |                   |                           |   |                  |  |   | 200,000   |  |   | 136,422
|                                       |  |                           |  |                    |                  
|Commercial Loan Funding Trust Facility |  |                           |  |                    |                   |                   |                           |   |                   |  |   |           |  |   |        
|Class A Variable Funding Certificate   |  | November 2010(a)          |  |                    | 218,750           |                   |                           |   | 161,468           |  |   | 218,750   |  |   | 113,213
|Class B Variable Funding Certificate   |  | November 2010(a)          |  |                    | 31,250            |                   |                           |   | 25,800            |  |   | 31,250    |  |   | 8,300  
|                                       |  |                           |  |                    |                  
|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            |                   |                           |   | 26,100            |  |   | 50,000    |  |   | 45,100 
|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            |  | April 2018                |  |                    | 45,000            |                   |                           |   | 45,000            |  |   | 45,000    |  |   | 45,000 
|Series 2006-1 Class D Notes            |  | April 2018                |  |                    | 47,500            |                   |                           |   | 47,500            |  |   | 47,500    |  |   | 47,500 
|                                       |  |                           |  |                    |                  
|Unsecured Revolving Line of Credit     |  | May 2009                  |  |                    | 70,000            |                   |                           |   | 19,500            |  |   |          |  |   |       
|                                       |  |                           |  |                    |                  
|Revolving Unsecured Credit Facility    |  | May 2008                  |  |                    |                  |                   |                           |   |                  |  |   | 100,000   |  |   | 30,500 
|                                       |  |                           |  |                    |                  
|SBIC (Maximum borrowing potential)(b)  |  | (c)                       |  |                    | 130,000           | (b)               |                           |   | 2,600             |  |   | 100,000   |  |   |       
|                                       |  |                           |  |                    |                   |                   |                           |   |                   |  |   |           |  |   |        
|Total borrowings                       |  |                           |  | $                  | 917,500           |                   |                           | $ | 652,968           |  | $ | 1,117,500 |  | $ | 751,035
|                                       |  |                           |  |                    |                   |                   |                           |   |                   |  |   |           |  |   |        



|(a) | Renewable each April at the lenders discretion.
|--- | ------------------------------------------------

|(b) | As of September 30, 2008, we have 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 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 September 30, 2008. Based on our current funded capital, Solutions Capital I, LP, may, subject to compliance with the SBAs customary procedures, borrow up to $53.3 million to originate
investments. To access the entire $130.0 million, we would have to fund an additional $46.4 million.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | We may originate new borrowings through September 2012. We must repay borrowings under the SBIC program within ten years
after the borrowing date, which will occur between September 2018 and September 2022.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a BDC, we are required to meet a coverage ratio
of total assets to total borrowings and other senior securities of at least 200%. As of September 30, 2008, our ratio of total assets to total borrowings and other senior securities was 207%. Based on our balances of total assets, total
borrowings and other securities as of September 30, 2008, we had $43.3 million of room beyond the minimum thresholds of the BDC asset coverage requirement.

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. Some of our debt facilities contain cross-default provisions,
whereby a default under one of our debt facilities could constitute a default under other debt facilities. Additional information about these facilities is provided below.

Unsecured Notes. In October 2005, we issued $50.0 million of unsecured notes, at a fixed interest rate of 6.73% per annum. In October 2007, we issued an additional $25.0 million of 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.

Commercial Loan Trust 2006-2. In May 2006, we established, through MCG Commercial
Loan Trust 2006-2, a $200.0 million warehouse credit facility with Merrill Lynch Capital Corporation. The warehouse credit facility originally allowed MCG Commercial Loan Trust 2006-2 to acquire up to $250.0 million of commercial loans
with borrowings of up to $200.0 million, subject to certain covenants, concentration



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limitations and other restrictions. The warehouse credit facility was secured primarily by the assets of MCG Commercial Loan Trust 2006-2, including
commercial loans that we sold to the trust. Under the terms of the credit and warehouse agreement, the loans could be senior secured loans, second lien loans or unsecured loans, subject to certain limitations. We intended to repay this facility with
proceeds from a placement of debt in the collateralized loan obligation, or CLO, market. However, due to the severe dislocation that occurred in the CLO market, a CLO transaction was not possible in the near-term.

On October 23, 2007, we entered into an amendment to extend the maturity date for this facility from November 30, 2007 through February 29,
2008. On February 12, 2008, this facility was again amended to extend the maturity until August 31, 2008. Under the terms of the most recent amendment, we were required to reduce the balance outstanding under this facility to not more than
$82.5 million, $55.0 million and $27.5 million outstanding at April 21, 2008, May 31, 2008 and July 21, 2008, respectively. The remaining balance was due on August 31, 2008. The amendment reduced the advance
rate under the facility from 75% to 70% for non-senior loans, but remained at 75% for senior loans. In addition, the amendment increased the interest rate for advances from LIBOR plus 0.75% to LIBOR plus 1.5%. We paid a $250,000 modification fee in
connection with this amendment. We repaid the remaining balance and terminated this facility on August 4, 2008.

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. Advances under the Class A VFC may be up to 70% of eligible collateral. Advances under the Class B VFC may be up to 10% of eligible collateral. As of September 30, 2008, there was $257.6 million of collateral under this
facility.

The warehouse facility matures in November 2010, subject to annual liquidity renewals. 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. On May 1, 2008, SunTrust renewed its annual liquidity commitment for this facility. In connection with
this renewal, interest rates for Class A and Class B advances increased to the commercial paper rate plus 1.50% and 2.50%, respectively. Previously, the Class A and Class B advances bore interest at the commercial paper rate plus 0.75% and
1.50%, respectively. The facility commitment fee increased to 0.30% from 0.20%. In addition, we paid a $750,000, or 0.30%, facility renewal fee.

The next liquidity renewal is scheduled for April 2009. We expect to renew before that date. However, in the event we are unsuccessful in renewing this facility, the facility contains a six-month standstill provision, which begins on
April 30, 2009, and during which we would be entitled to our current payment stream, and, after which we would be required to repay the principal as our portfolio companies make payments over the following twelve months. After this 18-month
period, SunTrust could elect to sell the remaining assets to repay the facility in full. We believe that we will be able to repay this facility in full before the end of this 18-month repayment period.

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 $455.6 million as of September 30, 2008 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.



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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.

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. 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. The facility is scheduled to mature on May 29, 2009 and may be renewed at
the lenders discretion.

Revolving Unsecured Credit Facility.On May 30, 2008, in conjunction with the consummation of our
new unsecured revolving line of credit facility with SunTrust Bank, we repaid and terminated an earlier unsecured revolving credit facility established with HVB. Under that facility, we could borrow up to $130.0 million. Advances made under the
HVB unsecured credit facility bore interest at LIBOR plus 2.00%, the prime rate plus 0.50%, or the Federal Funds rate plus 2.25%.

SBIC
Facility.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.
The license allows Solutions Capital I, LP to borrow up to $130.0 million under the SBIC program, based on our current commitments. The SBA has approved the full $130.0 million commitment, 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 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 September 30, 2008. Based on our current funded capital, Solutions Capital I, LP,
may, subject to compliance with the SBAs customary procedures, borrow up to $53.3 million to originate new investments. To access the entire $130.0 million, we would have to fund an additional $46.4 million. As of September 30, 2008, we
had $21.4 million of investments in the SBIC facility.

Once drawn, the SBIC debt bears an interim interest rate of LIBOR plus 30 basis
points. Currently, none 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 September 30, 2008, $2.6 million was outstanding under this facility at a fixed rate of 6.44%, which is based on a 3.80% treasury rate as of September 24, 2008 plus a 264 basis point spread.

In September 2007, we applied for exemptive relief from the Securities and Exchange Commission, or SEC, similar to relief granted to other BDCs that own
and operate SBICs. When granted, such an exemption allows a BDC, among other things, to exclude from its consolidated BDC asset coverage ratio the debt issued by a subsidiary formed under the SBIC Act. In October 2008, the SEC granted this exemptive
relief. See Note 12Subsequent Events for additional information about this exemptive relief.



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Repayments based on the contractual principal collections of the outstanding loans that comprise the collateral,
where applicable, were as follows:



|               |  |   |        
|-------------- |  | - | -------
|(in thousands) |  |  
|2008           |  | $ |       
|2009           |  |   | 19,500 
|2010           |  |   | 237,268
|2011           |  |   |       
|2012           |  |   | 25,000 
|Thereafter     |  |   | 371,200
|               |  |   |        
|Total          |  | $ | 652,968
|               |  |   |        

Actual repayments could differ significantly due to prepayments by our borrowers and modifications of our
borrowers existing loan agreements.

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



|                      |  |                   |         |                  |   |        
|--------------------- |  | ----------------- | ------- | ---------------- | - | -------
|(in thousands)        |  | September 30,2008 |         | December 31,2007
|LIBOR                 |  | $                 | 388,100 |                  | $ | 554,522
|Commercial paper rate |  |                   | 187,268 |                  |   | 121,513
|Fixed rate            |  |                   | 77,600  |                  |   | 75,000 
|                      |  |                   |         |                  |   |        
|Total borrowings      |  | $                 | 652,968 |                  | $ | 751,035
|                      |  |                   |         |                  |   |        

NOTE 5CAPITAL STOCK

STOCKHOLDERS RIGHTS OFFERING

On March 28, 2008, we issued transferable rights to our stockholders of record 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 entitled holders to purchase one new share of common stock for every right held. When the rights expired on April 18, 2008, the rights offering was oversubscribed by 67%, which
resulted in the issuance of all 9.5 million shares of our common stock. The subscription price for the rights offering was $6.36 per share, or 88% of the volume-weighted average sales price, or VWAP, of our common stock on the NASDAQ
Global Select Market on the five trading days ending on the expiration date. The VWAP was $7.23 per share. Estimated net proceeds after payment of dealer-manager fees and before other offering expenses totaled $57.7 million, which we used to
make investments in middle-market companies; repay indebtedness; provide working capital and for other corporate purposes. See Note 8(Loss) Earnings Per Share for additional details regarding this rights offering.

APPROVAL OF PROPOSAL TO ISSUE STOCK BELOW NET
ASSET VALUE PER SHARE

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 our stock, or NAV, unless our stockholders approve such a sale and our Board of Directors makes
certain determinations. On April 23, 2008, our stockholders approved a proposal authorizing us to issue shares of our common stock for a twelve-month period, with the approval of our Board of Directors, at a price below the then-current NAV.
The approval expires on the earlier of April 23, 2009 or on the date of our 2009 Annual Meeting of Stockholders.

NOTE
6SHARE-BASED COMPENSATION

EMPLOYEE SHARE-BASED
COMPENSATION

We may award shares of restricted common stock under the 2006 Employee Restricted Stock Plan, or the Employee Plan.
During the nine months ended September 30, 2008, we granted 1,211,000 shares of restricted stock under the Employee Plan, including 648,000 shares of restricted common stock granted as part of the MCG Capital Corporate Retention Program,
or the Retention Program. Shares granted under this program will vest in March 2011. For additional information about the Retention program, see Note 9Corporate Restructuring. In addition to the shares granted under the Retention
Program, during the nine months ended September 30, 2008, we also awarded 413,000 shares of restricted common stock under the Employee Plan to employees that will vest over four years and granted a service-based award of 150,000 shares of
restricted common stock to a named executive



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officer, which was scheduled to vest quarterly beginning in December 2008 and ending in September 2011. During the nine months ended September 30, 2008,
the forfeiture provision lapsed on 390,000 shares of restricted stock pursuant to the Employee Plans time and performance requirements. In addition, we placed 12,000 shares of restricted stock into a trust pending certain triggering events or
the expiration of the associated forfeiture period.

During the nine months ended September 30, 2008 and 2007, we recognized $5.5 million and
$7.1 million, respectively, of compensation expense related to restricted stock held by employees, including $87,000 and $199,000, respectively, of dividends paid on restricted shares that secured non-recourse employee loans. As of
September 30, 2008, a total of $13.5 million of compensation cost remains to be recognized for shares of restricted stock that previously had been granted to employees, which we will recognize over the remaining 2.6-year weighted-average
requisite service period.

NON-EMPLOYEE DIRECTOR SHARE-BASED
COMPENSATION

During the nine months ended September 30, 2008 and 2007, we recognized $194,000 and $108,000, respectively, of
compensation costs in connection with share-based compensation issued to non-employee directors under the 2006 Non-employee Director Restricted Stock Plan, or the Director Plan. We included these compensation costs in general and
administrative expense on our Consolidated Statements of Operations. As of September 30, 2008, a total of $282,000 of compensation cost remains to be recognized for shares of restricted stock previously granted to non-employee directors
that we will recognize over the remaining 1.7-year weighted-average requisite service period.

In April 2008, we issued 15,000 shares of restricted stock
to two of our non-employee directors, pursuant to the Director Plan, upon the stockholders vote for the renewal of term. We are expensing these shares over three years.

SUMMARY OF EMPLOYEE AND NON EMPLOYEE DIRECTOR SHARE-BASED
COMPENSATION

The following table summarizes our restricted stock award activity during the nine months ended September 30, 2008:



|                                                          |  |           |   |  |                                       |      
|--------------------------------------------------------- |  | --------- | - |  | ------------------------------------- | -----
|                                                          |  | Shares    |   |  | Weighted-AverageGrant Date Fair Value
|Subject to forfeiture provisions at December 31, 2007     |  | 928,000   |   |  | $                                     | 18.65
|Granted                                                   |  | 1,226,000 |   |  |                                       | 5.44 
|Forfeiture period lapsed                                  |  | (390,000  | ) |  |                                       | 16.87
|Forfeited                                                 |  | (188,000  | ) |  |                                       | 14.28
|                                                          |  |           |   |  |                                       |      
|Subject to forfeiture provisions at September 30, 2008(a) |  | 1,576,000 |   |  |                                       | 9.27 
|                                                          |  |           |   |  |                                       |      



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

NOTE 7INCOME TAXES AND DISTRIBUTIONS

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 have met our estimated distribution
requirements as a regulated investment company for 2008 and do not expect to make additional distributions to our stockholders during 2008.

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 and nine months ended September 30, 2008, we recorded income tax provisions of $236,000 and
$568,000, respectively, primarily attributable to unrealized gains on investments held by our subsidiaries.

From December 2001 through September 30,
2008, we declared $11.78 of distributions per share. Each year, we mail statements on Form 1099-DIV to our stockholders, which 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 tax 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 2006, 2005, 2004 and 2003 represented a return of capital.



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Historically, we have declared dividends that we pay the following quarter. The following table summarizes the
dividends that we declared and paid during the three and nine months ended September 30, 2008:



|                   |  |                     |      |      |   |     
|------------------ |  | ------------------- | ---- | ---- | - | ----
|                   |  | Dividends per share
|                   |  | Declared            |      | Paid
|Quarter ended:     |  |                     |      |      |   |     
|March 31, 2008     |  | $                   | 0.44 |      | $ | 0.44
|June 30, 2008      |  |                     | 0.27 |      |   | 0.44
|September 30, 2008 |  |                     |     |      |   | 0.27
|                   |  |                     |      |      |   |     
|Total year-to-date |  | $                   | 0.71 |      | $ | 1.15
|                   |  |                     |      |      |   |     

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. If we determined
the tax attributes of the distributions we paid during the nine months ended September 30, 2008, none of our dividends would be from ordinary income, 98.8%, or $1.14 per share, would represent a return of stockholder capital and 1.2%, or $0.01
per share, would be from capital gains income. However, we cannot provide stockholders with assurance that this ratio will represent the taxable attributes of stockholder distributions for fiscal year 2008.

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 September 30, 2008 and December 31, 2007:



|                                                                      |  |                   |           |   |                  |   |           |  
|--------------------------------------------------------------------- |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|(in thousands)                                                        |  | September 30,2008 |           |   | December 31,2007 |  
|Cost for federal income tax purposes                                  |  | $                 | 1,429,128 |   |                  | $ | 1,521,625 |  
|                                                                      |  |                   |           |   |                  |   |           |  
|Gross unrealized appreciation                                         |  |                   |           |   |                  |   |           |  
|Unrealized appreciation of fair value of portfolio investments (GAAP) |  | $                 | 106,572   |   |                  |   | 134,089   |  
|Book to tax differences                                               |  |                   | 89,525    |   |                  |   | 75,614    |  
|                                                                      |  |                   |           |   |                  |   |           |  
|Gross unrealized appreciationtax basis                               |  |                   | 196,097   |   |                  |   | 209,703   |  
|                                                                      |  |                   |           |   |                  |   |           |  
|Gross unrealized depreciation                                         |  |                   |           |   |                  |   |           |  
|Unrealized depreciation of fair value of portfolio investments (GAAP) |  |                   | (297,638  | ) |                  |   | (153,400  | )
|Book to tax differences                                               |  |                   | (31,118   | ) |                  |   | (32,838   | )
|                                                                      |  |                   |           |   |                  |   |           |  
|Gross unrealized depreciationtax basis                               |  |                   | (328,756  | ) |                  |   | (186,238  | )
|                                                                      |  |                   |           |   |                  |   |           |  
|Net unrealized (depreciation) appreciationtax basis                  |  |                   | (132,659  | ) |                  |   | 23,465    |  
|                                                                      |  |                   |           |   |                  |   |           |  
|Total investments at fair value (GAAP)                                |  | $                 | 1,296,469 |   |                  | $ | 1,545,090 |  
|                                                                      |  |                   |           |   |                  |   |           |  



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The following table reconciles GAAP net income to taxable net income for the nine months ended September 30,
2008 and the year ended December 31, 2007:



|                                                                                |  |                                     |          |   |                             |   |         |  
|------------------------------------------------------------------------------- |  | ----------------------------------- | -------- | - | --------------------------- | - | ------- | -
|(in thousands)                                                                  |  | Nine months endedSeptember 30, 2008 |          |   | Year endedDecember 31, 2007 |  
|Net (loss) income                                                               |  | $                                   | (133,948 | ) |                             | $ | 86,636  |  
|Difference between book and tax losses on investments(a)                        |  |                                     | (73,343  | ) |                             |   | (12,186 | )
|Net change in unrealized depreciation on investments not taxable until realized |  |                                     | 171,482  |   |                             |   | 34,637  |  
|Timing difference related to deductibility of long-term incentive compensation  |  |                                     | 4,474    |   |                             |   | 4,207   |  
|Taxable interest (loss) income on non-accrual loans(b)                          |  |                                     | (1,720   | ) |                             |   | 17,040  |  
|Dividend income accrued for GAAP purposes that is not yet taxable               |  |                                     | (17,429  | ) |                             |   | (49,390 | )
|Distributions from taxable subsidiaries                                         |  |                                     | 1,146    |   |                             |   | 24,395  |  
|Federal tax provision                                                           |  |                                     | 568      |   |                             |   | 1,864   |  
|Other, net                                                                      |  |                                     | 342      |   |                             |   | (1,051  | )
|                                                                                |  |                                     |          |   |                             |   |         |  
|Taxable (loss) income before deductions for distributions                       |  | $                                   | (48,428  | ) |                             | $ | 106,152 |  
|                                                                                |  |                                     |          |   |                             |   |         |  



|(a) | Results for the nine months ended September 30, 2008, primarily reflect the write-off, for tax purposes, of the
common stock of Cleartel.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|(b) | Results for the nine months ended September 30, 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.

NOTE 8(LOSS) EARNINGS PER SHARE

The following table summarizes our calculation of basic and diluted (loss) earnings per share for the three and nine months ended September 30, 2008 and 2007:



|                                                                                   |      |                                 |         |                                |  |      |        |  |      |          |   |  |   |       
|---------------------------------------------------------------------------------- | ---- | ------------------------------- | ------- | ------------------------------ |  | ---- | ------ |  | ---- | -------- | - |  | - | ------
|(in thousands, except per share amounts)                                           |      | Three months endedSeptember 30, |         | Nine months endedSeptember 30,
|                                                                                   | 2008 |                                 |         | 2007                           |  | 2008 |        |  | 2007
|Numerator:                                                                         |      |                                 |         |                                |  |      |        |  |      |          |   |  |   |       
|Net (loss) income                                                                  |      | $                               | (66,946 | )                              |  | $    | 23,019 |  | $    | (133,948 | ) |  | $ | 91,519
|                                                                                   |      |                                 |         |                                |  |      |        |  |      |          |   |  |   |       
|Denominator:                                                                       |      |                                 |         |                                |  |      |        |  |      |          |   |  |   |       
|Basic weighted-average shares outstanding                                          |      |                                 | 74,296  |                                |  |      | 62,298 |  |      | 70,066   |   |  |   | 60,245
|Adjustment for bonus element of rights offering                                    |      |                                 |        |                                |  |      | 3,239  |  |      | 1,460    |   |  |   | 3,133 
|                                                                                   |      |                                 |         |                                |  |      |        |  |      |          |   |  |   |       
|Basic weighted-average shares outstanding                                          |      |                                 | 74,296  |                                |  |      | 65,537 |  |      | 71,526   |   |  |   | 63,378
|Dilutive effect of restricted stock on which forfeiture provisions have not lapsed |      |                                 |        |                                |  |      | 19     |  |      |         |   |  |   | 3     
|                                                                                   |      |                                 |         |                                |  |      |        |  |      |          |   |  |   |       
|Diluted average shares outstanding                                                 |      |                                 | 74,296  |                                |  |      | 65,556 |  |      | 71,526   |   |  |   | 63,381
|                                                                                   |      |                                 |         |                                |  |      |        |  |      |          |   |  |   |       
|(Loss) earnings per share:                                                         |      |                                 |         |                                |  |      |        |  |      |          |   |  |   |       
|Basic                                                                              |      | $                               | (0.90   | )                              |  | $    | 0.35   |  | $    | (1.87    | ) |  | $ | 1.44  
|Diluted                                                                            |      | $                               | (0.90   | )                              |  | $    | 0.35   |  | $    | (1.87    | ) |  | $ | 1.44  

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 Statement
of Financial Standards 128Earnings Per Share, or 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. For additional information about the rights offering see Note 5Capital Stock.



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We use the treasury stock method to calculate diluted earnings per share. We include performance-based restricted
stock in our calculation of diluted earnings per share when we believe it is probable the performance criteria will be met and the forfeiture provisions have not lapsed. During the three and nine months ended September 30, 2008, we excluded
39,000 shares of common stock from the calculation of diluted (loss) earnings per share since their effect would have been anti-dilutive.

NOTE 9CORPORATE RESTRUCTURING

On August 6, 2008, we reduced our workforce by 27%,
including 18 current employees, as well as 10 vacant positions that we otherwise would have filled. As of September 30, 2008, our headcount was 74 employees. The workforce reduction focused primarily on sizing the organization at an appropriate
level for our expected near-term objectives. Affected employees received severance packages including severance pay and continuation of benefits. In addition, employees who had previously been granted shares of restricted common stock will receive
continued vesting of this stock over the three- to nine-month periods during which they will receive severance benefits. In total, 22,100 shares of restricted common stock will vest during these employees respective severance periods. We are
accounting for the vesting of this restricted common stock in accordance with SFAS 123(R)Share-Based Payment.

In addition, as of
August 6, 2008, we closed and are seeking to sublet our facility in Atlanta, Georgia, which has a lease that will expire in February 2013. We are also seeking to sublet a portion of our facility in Richmond, Virginia and terminate, at minimal
cost, our obligation for a portion of our facility in Arlington, Virginia. As of September 30, 2008, we continued to use the Richmond and Arlington facilities and did not have a firm expectation if, or when, we would cease to use these
facilities. As a result, no restructuring charges have been reflected for either our Arlington or Richmond facilities.

Through September 30, 2008, we
have incurred $1.0 million of restructuring expenses, which are included in general and administrative expenses on our Consolidated Statements of Operations. We expect we will incur approximately $450,000 to $600,000 of additional
restructuring charges during the remainder of 2008. We are accounting for these costs in accordance with SFAS 146Accounting for Costs Associated with Exit or Disposal Activities.The following table summarizes the restructuring charges
recognized during the quarter ended September 30, 2008:



|                           |  |                                 |    
|-------------------------- |  | ------------------------------- | ---
|(In thousands)             |  | Three monthsendedSeptember 2008
|Severance benefits         |  | $                               | 857
|Facility closure           |  |                                 | 75 
|Other                      |  |                                 | 22 
|                           |  |                                 |    
|Total restructuring charge |  | $                               | 954
|                           |  |                                 |    

We include liabilities associated with our restructuring in Other Liabilities on our Consolidated Balance
Sheet. The following table summarizes changes in the balance of our restructuring liabilities during the three months ended September 2008:



|                              |                      |                                      |      |                    |  |   |       |   |  |   |      |  
|----------------------------- | -------------------- | ------------------------------------ | ---- | ------------------ |  | - | ----- | - |  | - | ---- | -
|(In thousands)                |                      | Three months endedSeptember 30, 2008 |     
|                              | SeveranceBenefits(a) |                                      |      | FacilityClosure(b) |  |   | Total |  
|Balance at June 30, 2008      |                      | $                                    |     |                    |  | $ |      |   |  | $ |     |  
|Additions                     |                      |                                      | 743  |                    |  |   | 174   |   |  |   | 917  |  
|Cash payments                 |                      |                                      | (283 | )                  |  |   | (13   | ) |  |   | (296 | )
|Accretion                     |                      |                                      | 3    |                    |  |   |      |   |  |   | 3    |  
|                              |                      |                                      |      |                    |  |   |       |   |  |   |      |  
|Balance at September 30, 2008 |                      | $                                    | 463  |                    |  | $ | 161   |   |  | $ | 624  |  
|                              |                      |                                      |      |                    |  |   |       |   |  |   |      |  



|(a) | Includes the cost of severance and continuation of benefits. In addition, includes share-based compensation expenses
associated with the lapsing of forfeiture restrictions associated with restricted stock awards for affected employees. In total, the forfeiture provisions on 22,100 shares of restricted stock will lapse over the employees respective three- to
six-month vesting periods.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Represents the fair value of the remaining lease payments for our Atlanta facility totaling $372, net of the fair value
of estimated sublease income of $211.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 10CONTINGENCIES AND
COMMITMENTS

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



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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 $15.3 million of
additional taxes, interest and penalties. If, in the future, our belief changes and we believe it is more likely than not that we will not prevail, we will accrue the estimated amounts due.

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.



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NOTE 11FINANCIAL HIGHLIGHTS

Following is a schedule of financial highlights:



|                                                                                                   |  |                                |         |    |      |   |         |   
|-------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | -- | ---- | - | ------- | --
|                                                                                                   |  | Nine months endedSeptember 30, |        
|                                                                                                   |  | 2008                           |         |    | 2007 |  
|Per share data                                                                                     |  |                                |         |    |      |   |         |   
|Net asset value at beginning of period(a)(c)                                                       |  | $                              | 12.73   |    |      | $ | 12.83   |   
|Net (loss) income                                                                                  |  |                                |         |    |      |   |         |   
|Net operating income before investment gains and losses(b)(c)                                      |  |                                | 0.66    |    |      |   | 1.14    |   
|Net change in unrealized (depreciation) appreciation on investments(b)(c)                          |  |                                | (2.40   | )  |      |   | 0.25    |   
|Net realized (losses) gains on investments(b) (c)                                                  |  |                                | (0.12   | )  |      |   | 0.09    |   
|Income tax provision(b)(c)                                                                         |  |                                | (0.01   | )  |      |   | (0.04   | ) 
|                                                                                                   |  |                                |         |    |      |   |         |   
|Net (loss) income(b)(c)                                                                            |  |                                | (1.87   | )  |      |   | 1.44    |   
|                                                                                                   |  |                                |         |    |      |   |         |   
|Net decrease in net assets resulting from distributions(b) (c)                                     |  |                                | (0.71   | )  |      |   | (1.32   | ) 
|                                                                                                   |  |                                |         |    |      |   |         |   
|Net (decrease) increase in stockholders equity relating to stock-based transactions:              |  |                                |         |    |      |   |         |   
|Issuance of shares of common stock                                                                 |  |                                | (0.61   | )  |      |   | 0.26    |   
|Dilutive effect of restricted stock issuance and restricted stock subject to forfeiture provisions |  |                                | (0.29   | )  |      |   | (0.17   | ) 
|Net increase in stockholders equity from other stock transactions(b)
(c)                          |  |                                | 0.11    |    |      |   | 0.10    |   
|                                                                                                   |  |                                |         |    |      |   |         |   
|Net (decrease) increase in stockholders equity relating to stock-based transactions(c)            |  |                                | (0.79   | )  |      |   | 0.19    |   
|                                                                                                   |  |                                |         |    |      |   |         |   
|Exclude dilutive effect of bonus element from rights offering(e)                                   |  |                                | 0.03    |    |      |   | 0.08    |   
|                                                                                                   |  |                                |         |    |      |   |         |   
|Net asset value at end of period(a)(c)                                                             |  | $                              | 9.39    |    |      | $ | 13.22   |   
|                                                                                                   |  |                                |         |    |      |   |         |   
|                                                                                                   |  |                               
|Market price per share at end of period                                                            |  | $                              | 2.62    |    |      | $ | 14.39   |   
|                                                                                                   |  |                               
|Total return(d)                                                                                    |  |                                | (67.47  | )% |      |   | (22.69  | )%
|                                                                                                   |  |                               
|Shares of common stock outstanding(c)                                                              |  |                                |         |    |      |   |         |   
|Weighted-average (diluted)(b)                                                                      |  |                                | 71,526  |    |      |   | 63,381  |   
|End of period                                                                                      |  |                                | 76,117  |    |      |   | 65,541  |   
|                                                                                                   |  |                               
|Net assets                                                                                         |  |                                |         |    |      |   |         |   
|Average (annualized)                                                                               |  |                                | 812,392 |    |      |   | 783,198 |   
|End of period                                                                                      |  |                                | 714,679 |    |      |   | 866,309 |   
|                                                                                                   |  |                               
|Ratios (annualized)                                                                                |  |                                |         |    |      |   |         |   
|Operating expenses to average net assets                                                           |  |                                | 9.56    | %  |      |   | 11.03   | % 
|Net operating income to average net assets                                                         |  |                                | 7.77    | %  |      |   | 12.43   | % 



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

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

|(c) | In accordance with SFAS 128, for the purposes of computing the basic and diluted number of shares, we adjusted
the number of common shares outstanding prior to April 29, 2008 by a factor of 1.052 to reflect the impact of a bonus element associated with our rights offering to acquire shares of common stock issued to stockholders on April 29, 2008
(the date that the common stock was issued in conjunction with the stockholders rights offering). See Note 5Capital Stock and Note 8(Loss) Earnings Per Share in the Notes to our Condensed Consolidated Financial
Statements for additional information about the rights offering, the associated bonus element, and its estimated impact on our net asset value per common share.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | Total return = [(ending market price per share  beginning market price per share + dividends paid
per share) / beginning market price].
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|(e) | Eliminates the adjustment for the bonus element from the rights offering. The bonus element was applied to the
weighted-average shares of common stock outstanding. However, the net asset value at the beginning and end of period reflect the actual number of shares outstanding.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTE 12SUBSEQUENT EVENTS

In September 25, 2007, we applied for exemptive relief from the SEC similar to relief granted to other BDCs that own and operate SBICs. On September 30, 2008,
the SEC published a notice of application for an exemptive order under the 1940 Act. On October 28, 2008, the SEC issued an order that granted us this exemptive relief. This exemptive relief permits us to, among other things, effectively
exclude debt issued by the SBA to Solutions Capital I, LP from our aggregate borrowings for purposes of calculating our consolidated BDC asset coverage ratio.



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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 as of September 30, 2008, including the consolidated schedule of
investments, and the related consolidated statements of operations, for the three- and nine-month periods ended September 30, 2008 and 2007, and the consolidated statements of changes in net assets, cash flows, and financial highlights for the
nine-month periods ended September 30, 2008 and 2007. 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 U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of MCG Capital Corporation as of December 31, 2007,
including the consolidated schedule of investments, and the related consolidated statements of operations, changes in net assets, cash flows, and financial highlights for the year then ended (not presented herein), and in our report dated
February 27, 2008 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, 2007, including the consolidated
schedule of investments, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/
ERNST & YOUNG LLP

McLean, Virginia

October 29,
2008



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Selected Financial Data

The following table summarizes key financial data for MCG Capital Corporation for the three and nine months ended September 30, 2008 and 2007. You should refer to
this data when reading our Managements Discussion and Analysis of Financial Condition and Results of Operationsand our unaudited Condensed Consolidated Financial Statements and notes thereto.



|                                                                                                                     |      |                                 |           |                                |  |      |           |  |      |          |   |  |   |        
|-------------------------------------------------------------------------------------------------------------------- | ---- | ------------------------------- | --------- | ------------------------------ |  | ---- | --------- |  | ---- | -------- | - |  | - | -------
|(dollars in thousands except per share and other period-end data)                                                    |      | Three months endedSeptember 30, |           | Nine months endedSeptember 30,
|                                                                                                                     | 2008 |                                 |           | 2007                           |  | 2008 |           |  | 2007
|Income statement data                                                                                                |      |                                 |           |                                |  |      |           |  |      |          |   |  |   |        
|Revenue                                                                                                              |      | $                               | 31,296    |                                |  | $    | 47,082    |  | $    | 105,392  |   |  | $ | 137,412
|Net operating income before investment (losses) gains and income tax provision                                       |      |                                 | 13,014    |                                |  |      | 24,248    |  |      | 47,230   |   |  |   | 72,788 
|Distributable net operating income (DNOI)(a)                                                                       |      |                                 | 14,904    |                                |  |      | 26,368    |  |      | 52,724   |   |  |   | 79,914 
|Net (loss) income                                                                                                    |      |                                 | (66,946   | )                              |  |      | 23,019    |  |      | (133,948 | ) |  |   | 91,519 
|                                                                                                                     |      |                                 |           |                               
|Per common share data                                                                                                |      |                                 |           |                                |  |      |           |  |      |          |   |  |   |        
|Net operating income before investment (losses) gains and income tax provision per common sharebasic and diluted(c) |      | $                               | 0.18      |                                |  | $    | 0.37      |  | $    | 0.66     |   |  | $ | 1.15   
|DNOI per common sharebasic and diluted(a)(c)                                                                        |      | $                               | 0.20      |                                |  | $    | 0.40      |  | $    | 0.74     |   |  | $ | 1.26   
|(Loss) earnings per common sharebasic and diluted(c)                                                                |      | $                               | (0.90     | )                              |  | $    | 0.35      |  | $    | (1.87    | ) |  | $ | 1.44   
|Cash dividends declared per common share                                                                             |      | $                               |          |                                |  | $    | 0.44      |  | $    | 0.71     |   |  | $ | 1.32   
|                                                                                                                     |      |                                 |           |                               
|Selected period-end balances                                                                                         |      |                                 |           |                                |  |      |           |  |      |          |   |  |   |        
|Total fair value of investment portfolio                                                                             |      | $                               | 1,296,469 |                                |  | $    | 1,514,957 |  |      |          |   |  |   |        
|Total assets                                                                                                         |      |                                 | 1,386,054 |                                |  |      | 1,579,386 |  |      |          |   |  |   |        
|Borrowings                                                                                                           |      |                                 | 652,968   |                                |  |      | 659,780   |  |      |          |   |  |   |        
|Total stockholders equity                                                                                           |      |                                 | 714,679   |                                |  |      | 866,309   |  |      |          |   |  |   |        
|Net asset value per common share outstanding(b)                                                                      |      | $                               | 9.39      |                                |  | $    | 13.22     |  |      |          |   |  |   |        
|                                                                                                                     |      |                                 |           |                               
|Other period-end data                                                                                                |      |                                 |           |                                |  |      |           |  |      |          |   |  |   |        
|Average size of investment                                                                                           |      | $                               | 17,760    |                                |  | $    | 17,616    |  |      |          |   |  |   |        
|Number of portfolio companies                                                                                        |      |                                 | 73        |                                |  |      | 86        |  |      |          |   |  |   |        
|Number of employees                                                                                                  |      |                                 | 74        |                                |  |      | 94        |  |      |          |   |  |   |        
|                                                                                                                     |      |                                 |           |                               
|Reconciliation of DNOI to net operating income before investment gains and losses and income tax provision           |      |                                 |           |                                |  |      |           |  |      |          |   |  |   |        
|Net operating income before investment (losses) gains and income tax provision                                       |      | $                               | 13,014    |                                |  | $    | 24,248    |  | $    | 47,230   |   |  | $ | 72,788 
|Amortization of employee restricted stock awards(d)                                                                  |      |                                 | 1,890     |                                |  |      | 2,120     |  |      | 5,494    |   |  |   | 7,126  
|                                                                                                                     |      |                                 |           |                                |  |      |           |  |      |          |   |  |   |        
|DNOI(d)                                                                                                              |      | $                               | 14,904    |                                |  | $    | 26,368    |  | $    | 52,724   |   |  | $ | 79,914 
|                                                                                                                     |      |                                 |           |                                |  |      |           |  |      |          |   |  |   |        
|Weighted average common shares outstanding                                                                           |      |                                 |           |                                |  |      |           |  |      |          |   |  |   |        
|Basic                                                                                                                |      |                                 | 74,296    |                                |  |      | 65,537    |  |      | 71,526   |   |  |   | 63,378 
|Diluted                                                                                                              |      |                                 | 74,296    |                                |  |      | 65,556    |  |      | 71,526   |   |  |   | 63,381 



|(a) | DNOI is net operating income before investment (losses) gains and income tax 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) | Based on common shares outstanding at period-end.
|--- | -------------------------------------------------

|(c) | In accordance with SFAS 128Earnings Per Share, for the purposes of computing the basic and diluted number
of shares, we adjusted the number of common shares outstanding prior to April 29, 2008 by a factor of 1.052 to reflect the impact of a bonus element associated with our rights offering to acquire shares of common stock issued to stockholders on
April 29, 2008 (the date that the common stock was issued in conjunction with the stockholders rights offering). See Note 5Capital Stock and Note 8(Loss) Earnings Per Share in the Notes to our Condensed
Consolidated Financial Statements for additional information about the rights offering, the associated bonus element, and its estimated impact on our net asset value per common share.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | Results for the three and nine months ended September 30, 2008, include $88 of amortization of employee restricted
stock awards associated with our corporate restructuring. These expenses are reported as general and administrative expenses on our Consolidated Statements of Operations.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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, the cause of net unrealized losses and our ability to recover any such losses, the performance of our portfolio companies, the continued engagement of third party independent valuation firms to
conduct independent valuations of investments in our portfolio, our current strategic direction, including opportunistically monetizing assets and the amount and timing of such monetizations, the preservation of liquidity, building our cash
position, deleveraging our balance sheet and increasing our BDC asset coverage ratio, the amount of additional borrowings and excess capacity available to us in relation to our BDC asset coverage ratio, the level and timing of originations, the
application of tax losses, the projected savings through expense reductions, the timing and amount of dividend distributions, the evaluation of potential share repurchases, the compliance with credit facility covenants and our ability to renew,
extend the maturity date of and repay such facilities, the ability to increase shareholder value, the 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.

Overview

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 customers 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 all of our borrowings (including accrued interest payable) and any preferred stock we may issue in the future, of at least 200%. In addition, we have



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

For the three months ended September 30, 2008, which represents our third quarter, we reported a net loss of $66.9 million, or $0.90 per fully diluted share, compared to net income of $23.0 million, or $0.35 per
fully diluted share, for the three months ended September 30, 2007. Our net operating income during the third quarter of 2008 was $13.0 million, or $0.18 per fully diluted share, compared to $24.2 million, or $0.37 per fully diluted share,
during the third quarter of 2007.

The $66.9 million net loss reported for the three months ended September 30, 2008, primarily reflects the
recognition of $79.7 million of net investment losses during the third quarter of 2008. These investment losses included $9.5 million of realized losses on our investments and $70.2 million of unrealized depreciation, which represents
valuation write-downs of several portfolio investments, including $48.2 million of unrealized depreciation on our investment in Broadview Network Holdings, Inc., or Broadview. The unrealized depreciation recognized on our Broadview investment and
our other portfolio investments was due predominantly to a reduction in the multiples used to estimate the fair value of our investments and, to a lesser extent, the performance of some portfolio companies. The unrealized depreciation that we
recognized on our Broadview investment this quarter is not indicative of the overall performance of that company; rather, it primarily reflects a decline in the multiple used to estimate the fair value of the investment. Broadview continues to
perform satisfactorily.

The $13.0 million of net operating income that we reported for the quarter ended September 30, 2008 was consistent with our
expectations for the quarter. The $11.2 million, or 46.3%, decrease in net operating income during the third quarter of 2008 from the same quarter in 2007 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. A decrease in fee income resulting from lower origination activity also
contributed to the decrease in our net operating income during the quarter ended September 30, 2008.

While the market has been extremely challenging
and we have recorded valuation write-downs on our portfolio, we have managed our liquidity and BDC asset coverage ratio effectively through portfolio monetizations during the quarter. Our principal focus is on the opportunistic monetization of
certain debt and equity investments in our portfolio so as to deleverage our balance sheet and build cash reserves, which we believe will enable us to improve shareholder value. We intend to build our cash position to a level that would give us the
flexibility, if necessary, to repay our debt obligations in the event they are not renewed and to evaluate potential share repurchases and the resumption of shareholder distributions as the equity portfolio recovers from recent market disruptions.
We expect that originations will not resume unless market conditions improve.

During the quarter ended September 30, 2008, we successfully monetized
approximately $66.0 million of portfolio investments. The proceeds from five of these monetizations correlated closely with the reported fair value of the associated investments as of June 30, 2008; while we sold one investment for $5.3 million
less than the fair value reported as of June 30, 2008. While we expect to continue to monetize our assets at similar levels over the course of the next several quarters, the timing of such monetizations is dependent largely upon future market
conditions.

We are also focused on preserving our liquidity. In this regard, last quarter we announced the elimination of dividends for the balance of
2008, which was expected to preserve $40.0 million in capital. In addition, we made expense reductions that we anticipate will result in $12.0 million to $14.0 million of savings through December 2009. 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. This action would preserve over $80.0 million in capital versus the dividend paid during the third quarter of 2008 of $0.27 per share. 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.



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Recent Developments

In October 2008, we received exemptive relief from the Securities and Exchange Commission, or SEC, that is similar to relief granted to other BDCs that own and operate
subsidiaries established under the Small Business Investment Act of 1958, as amended, or SBICs. This exemptive relief permits us to, among other things, effectively exclude debt issued by the U.S. Small Business Administration, or SBA, to
Solutions Capital I, LP, one of our wholly owned subsidiaries, from our consolidated BDC asset coverage ratio. We believe that the access to the SBIC facility can be an important part of our strategy because any borrowings would effectively be
excluded from our BDC asset coverage ratio and, subject to SBA approval, could be used for follow-on investments in our portfolio companies.

Portfolio Composition and Investment Activity

As of September 30, 2008, the fair value of our investment
portfolio was $1,296.5 million, which represents a $248.6 million, or 16.1%, decrease from the $1,545.1 million fair value as of December 31, 2007. The following sections describe the composition of our investment portfolio as of
September 30, 2008 and describe key changes in our portfolio during the nine months ended September 30, 2008.

PORTFOLIO
COMPOSITION

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



|                                 |                          |                    |                           |  |                   |                          |  |                           |           |  |       |  
|-------------------------------- | ------------------------ | ------------------ | ------------------------- |  | ----------------- | ------------------------ |  | ------------------------- | --------- |  | ----- | -
|(dollars in thousands)           |                          | September 30, 2008 |                           |  | December 31, 2007 |                         
|                                 | Investments atFair Value |                    | Percent ofTotal Portfolio |  |                   | Investments atFair Value |  | Percent ofTotal Portfolio |          
|Debt investments(a)              |                          |                    |                           |  |                   |                          |  |                           |           |  |       |  
|Senior secured debt              |                          | $                  | 383,493                   |  | 29.6              | %                        |  | $                         | 479,214   |  | 31.0  | %
|Subordinated debt                |                          |                    |                           |  |                   |                          |  |                           |           |  |       |  
|Secured                          |                          |                    | 453,336                   |  | 35.0              |                          |  |                           | 522,742   |  | 33.9  |  
|Unsecured                        |                          |                    | 29,967                    |  | 2.3               |                          |  |                           | 32,189    |  | 2.1   |  
|                                 |                          |                    |                           |  |                   |                          |  |                           |           |  |       |  
|Total debt investments           |                          |                    | 866,796                   |  | 66.9              |                          |  |                           | 1,034,145 |  | 67.0  |  
|                                 |                          |                    |                           |  |                   |                          |  |                           |           |  |       |  
|Equity investments               |                          |                    |                           |  |                   |                          |  |                           |           |  |       |  
|Preferred equity                 |                          |                    | 369,513                   |  | 28.5              |                          |  |                           | 447,229   |  | 28.9  |  
|Common/Common equivalents equity |                          |                    | 60,160                    |  | 4.6               |                          |  |                           | 63,716    |  | 4.1   |  
|                                 |                          |                    |                           |  |                   |                          |  |                           |           |  |       |  
|Total equity investments         |                          |                    | 429,673                   |  | 33.1              |                          |  |                           | 510,945   |  | 33.0  |  
|                                 |                          |                    |                           |  |                   |                          |  |                           |           |  |       |  
|Total investments(a)             |                          | $                  | 1,296,469                 |  | 100.0             | %                        |  | $                         | 1,545,090 |  | 100.0 | %
|                                 |                          |                    |                           |  |                   |                          |  |                           |           |  |       |  



|(a) | Concurrent with our January 1, 2008 adoption of SFAS 157, we netted unearned fees against the associated debt
investments for both September 30, 2008 and December 31, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|                        |                             |                    |                           |  |                   |                             |  |                           |           |  |       |  
|----------------------- | --------------------------- | ------------------ | ------------------------- |  | ----------------- | --------------------------- |  | ------------------------- | --------- |  | ----- | -
|(dollars in thousands)  |                             | September 30, 2008 |                           |  | December 31, 2007 |                            
|                        | Investments atFair Value(b) |                    | Percent ofTotal Portfolio |  |                   | Investments atFair Value(b) |  | Percent ofTotal Portfolio |          
|TelecommunicationsCLEC |                             | $                  | 183,722                   |  | 14.2              | %                           |  | $                         | 255,483   |  | 16.5  | %
|Communicationsother    |                             |                    | 33,658                    |  | 2.6               |                             |  |                           | 39,789    |  | 2.6   |  
|Healthcare              |                             |                    | 129,693                   |  | 10.0              |                             |  |                           | 136,496   |  | 8.8   |  
|Cable                   |                             |                    | 117,510                   |  | 9.1               |                             |  |                           | 114,958   |  | 7.4   |  
|Business services       |                             |                    | 82,410                    |  | 6.4               |                             |  |                           | 87,327    |  | 5.7   |  
|Food services           |                             |                    | 80,209                    |  | 6.2               |                             |  |                           | 79,471    |  | 5.1   |  
|Broadcasting            |                             |                    | 67,177                    |  | 5.2               |                             |  |                           | 88,105    |  | 5.7   |  
|Logistics               |                             |                    | 64,477                    |  | 5.0               |                             |  |                           | 70,005    |  | 4.5   |  
|Entertainment           |                             |                    | 51,248                    |  | 3.9               |                             |  |                           | 42,676    |  | 2.8   |  
|Plastic products        |                             |                    | 47,860                    |  | 3.7               |                             |  |                           | 81,122    |  | 5.3   |  
|Sporting goods          |                             |                    | 47,115                    |  | 3.6               |                             |  |                           | 46,959    |  | 3.0   |  
|Electronics             |                             |                    | 42,583                    |  | 3.3               |                             |  |                           | 40,521    |  | 2.6   |  
|Technology              |                             |                    | 38,210                    |  | 2.9               |                             |  |                           | 34,067    |  | 2.2   |  
|Laboratory instruments  |                             |                    | 36,608                    |  | 2.8               |                             |  |                           | 54,527    |  | 3.5   |  
|Publishing              |                             |                    | 36,423                    |  | 2.8               |                             |  |                           | 59,538    |  | 3.9   |  
|Consumer products       |                             |                    | 32,438                    |  | 2.5               |                             |  |                           | 38,027    |  | 2.5   |  
|Home furnishings        |                             |                    | 32,225                    |  | 2.5               |                             |  |                           | 49,255    |  | 3.2   |  
|Auto parts              |                             |                    | 29,765                    |  | 2.3               |                             |  |                           | 34,393    |  | 2.2   |  
|Education               |                             |                    | 27,010                    |  | 2.1               |                             |  |                           | 31,967    |  | 2.1   |  
|Industrial products     |                             |                    | 26,775                    |  | 2.1               |                             |  |                           | 26,723    |  | 1.7   |  
|Insurance               |                             |                    | 21,821                    |  | 1.7               |                             |  |                           | 22,410    |  | 1.5   |  
|Information services    |                             |                    | 15,058                    |  | 1.2               |                             |  |                           | 37,465    |  | 2.4   |  
|Leisure activities      |                             |                    | 13,710                    |  | 1.0               |                             |  |                           | 13,611    |  | 0.9   |  
|Other media             |                             |                    | 13,527                    |  | 1.0               |                             |  |                           | 20,092    |  | 1.3   |  
|Other(a)                |                             |                    | 25,237                    |  | 1.9               |                             |  |                           | 40,103    |  | 2.6   |  
|                        |                             |                    |                           |  |                   |                             |  |                           |           |  |       |  
|Total                   |                             | $                  | 1,296,469                 |  | 100.0             | %                           |  | $                         | 1,545,090 |  | 100.0 | %
|                        |                             |                    |                           |  |                   |                             |  |                           |           |  |       |  



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

|(b) | Concurrent with our January 1, 2008 adoption of SFAS 157, we netted unearned fees against the associated debt
investments for both September 30, 2008 and December 31, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of September 30, 2008, our ten largest portfolio
companies comprised 41.9% of the fair value of our investment portfolio. These ten customers accounted for 31.3% of our total revenue during the nine months ended September 30, 2008. As of September 30, 2008, approximately 16.8% of the
fair value of our portfolio was invested in companies in the communications industry, of which 14.2% were competitive local exchange carriers, or CLECs. Our largest portfolio company, Broadview, which is a CLEC that represents 11.2% 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 nine months ended September 30, 2008, we made $103.1 million of originations and advances to eight existing
portfolio companies compared to $510.9 of originations and advances during the nine moths ended September 30, 2007. The following table summarizes our total portfolio investment activity during the nine months ended September 30, 2008 and
2007:



|                                                    |         |                                |           |         |  |   |           |  
|--------------------------------------------------- | ------- | ------------------------------ | --------- | ------- |  | - | --------- | -
|(in thousands)                                      |         | Nine months endedSeptember 30, |          
|                                                    | 2008(a) |                                |           | 2007(a) | 
|Beginning investment portfolio                      |         | $                              | 1,545,090 |         |  | $ | 1,248,073 |  
|Originations and advances                           |         |                                | 103,097   |         |  |   | 509,930   |  
|Gross payments/reductions/sales of securities       |         |                                | (172,675  | )       |  |   | (263,156  | )
|Net unrealized (losses) gains                       |         |                                | (175,032  | )       |  |   | 15,942    |  
|Net realized (losses) gains                         |         |                                | (9,173    | )       |  |   | 15,085    |  
|Amortization of (additions to) unearned income      |         |                                | 1,885     |         |  |   | (828      | )
|Reversals of unrealized depreciation (appreciation) |         |                                | 3,277     |         |  |   | (10,089   | )
|                                                    |         |                                |           |         |  |   |           |  
|Ending investment portfolio                         |         | $                              | 1,296,469 |         |  | $ | 1,514,957 |  
|                                                    |         |                                |           |         |  |   |           |  



|(a) | Concurrent with our January 1, 2008 adoption of SFAS 157, we netted unearned fees against the associated debt
investments for both September 30, 2008 and September 30, 2007.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table shows our gross originations and advances
during the nine months ended September 30, 2008 and 2007 by security type:



|                                      |      |                                 |            |      |       |   |  |            |         |  |       |  
|------------------------------------- | ---- | ------------------------------- | ---------- | ---- | ----- | - |  | ---------- | ------- |  | ----- | -
|(dollars in thousands)                |      | Nine months ended September 30, |           
|                                      | 2008 |                                 |            | 2007 |      
|                                      | $    |                                 | % of Total |      |       | $ |  | % of Total |        
|Debt investments                      |      |                                 |            |      |       |   |  |            |         |  |       |  
|Senior secured debt                   |      | $                               | 36,741     |      | 35.6  | % |  | $          | 236,863 |  | 46.5  | %
|Subordinated debt                     |      |                                 |            |      |       |   |  |            |         |  |       |  
|Secured                               |      |                                 | 39,671     |      | 38.5  |   |  |            | 133,995 |  | 26.3  |  
|Unsecured                             |      |                                 | 2,218      |      | 2.2   |   |  |            | 24,559  |  | 4.8   |  
|                                      |      |                                 |            |      |       |   |  |            |         |  |       |  
|Total debt investments                |      |                                 | 78,630     |      | 76.3  |   |  |            | 395,417 |  | 77.6  |  
|                                      |      |                                 |            |      |       |   |  |            |         |  |       |  
|Equity investments                    |      |                                 |            |      |       |   |  |            |         |  |       |  
|Preferred equity                      |      |                                 | 24,430     |      | 23.7  |   |  |            | 108,210 |  | 21.2  |  
|Common/common equivalents equity      |      |                                 | 37         |      |      |   |  |            | 6,303   |  | 1.2   |  
|                                      |      |                                 |            |      |       |   |  |            |         |  |       |  
|Total equity investments              |      |                                 | 24,467     |      | 23.7  |   |  |            | 114,513 |  | 22.4  |  
|                                      |      |                                 |            |      |       |   |  |            |         |  |       |  
|Total gross originations and advances |      | $                               | 103,097    |      | 100.0 | % |  | $          | 509,930 |  | 100.0 | %
|                                      |      |                                 |            |      |       |   |  |            |         |  |       |  

The following table shows our gross payments, reductions, and sales of securities during the nine months ended
September 30, 2008 and 2007 by security type:



|                                                         |      |                                 |            |      |       |   |  |            |         |  |       |  
|-------------------------------------------------------- | ---- | ------------------------------- | ---------- | ---- | ----- | - |  | ---------- | ------- |  | ----- | -
|(dollars in thousands)                                   |      | Nine months ended September 30, |           
|                                                         | 2008 |                                 |            | 2007 |      
|                                                         | $    |                                 | % of Total |      |       | $ |  | % of Total |        
|Debt investments                                         |      |                                 |            |      |       |   |  |            |         |  |       |  
|Senior secured debt                                      |      | $                               | 100,993    |      | 58.5  | % |  | $          | 127,908 |  | 48.6  | %
|Subordinated debt                                        |      |                                 |            |      |       |   |  |            |         |  |       |  
|Secured                                                  |      |                                 | 42,183     |      | 24.4  |   |  |            | 96,974  |  | 36.9  |  
|Unsecured                                                |      |                                 |           |      |      |   |  |            | 1,555   |  | 0.6   |  
|                                                         |      |                                 |            |      |       |   |  |            |         |  |       |  
|Total debt investments                                   |      |                                 | 143,176    |      | 82.9  |   |  |            | 226,437 |  | 86.1  |  
|                                                         |      |                                 |            |      |       |   |  |            |         |  |       |  
|Equity investments                                       |      |                                 |            |      |       |   |  |            |         |  |       |  
|Preferred equity                                         |      |                                 | 17,712     |      | 10.3  |   |  |            | 14,014  |  | 5.3   |  
|Common/common equivalents equity                         |      |                                 | 11,787     |      | 6.8   |   |  |            | 22,705  |  | 8.6   |  
|                                                         |      |                                 |            |      |       |   |  |            |         |  |       |  
|Total equity investments                                 |      |                                 | 29,499     |      | 17.1  |   |  |            | 36,719  |  | 13.9  |  
|                                                         |      |                                 |            |      |       |   |  |            |         |  |       |  
|Total gross payments, reductions and sales of securities |      | $                               | 172,675    |      | 100.0 | % |  | $          | 263,156 |  | 100.0 | %
|                                                         |      |                                 |            |      |       |   |  |            |         |  |       |  



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During the nine months ended September 30, 2008 and 2007, our gross payments, reductions and sales of securities by
transaction type included:



|                                                          |      |                                |         |  |   |        
|--------------------------------------------------------- | ---- | ------------------------------ | ------- |  | - | -------
|(in thousands)                                            |      | Nine months endedSeptember 30,
|                                                          | 2008 |                                | 2007   
|Principal repayments                                      |      | $                              | 83,384  |  | $ | 173,758
|Scheduled principal amortization                          |      |                                | 39,430  |  |   | 36,770 
|Sale of equity investments                                |      |                                | 22,726  |  |   | 31,783 
|Senior loan sales                                         |      |                                | 18,733  |  |   | 4,603  
|Collection of accrued paid-in-kind interest and dividends |      |                                | 8,402   |  |   | 16,242 
|                                                          |      |                                |         |  |   |        
|Total gross payments, reductions and sales of securities  |      | $                              | 172,675 |  | $ | 263,156
|                                                          |      |                                |         |  |   |        

SIGNIFICANT CHANGES IN PORTFOLIO

During the quarter ended September 30, 2008, we generated approximately $66.0 million of additional liquidity by successfully monetizing our investments in six
portfolio companies. In July 2008, we sold our equity investment in JUPR Holdings, Inc., or JUPR, to Forrester Research, Inc., for $23.0 million of cash plus approximately $700,000 of cash on the balance sheet, of which, we received
$18.4 million for our equity investment, $1.0 million for the repayment of our debt investment, and the remainder of which was used for closing costs, option payouts, and a working capital adjustment reserve. In connection with this
transaction, in July 2008, we realized $6.0 million of previously unrealized gains on our equity investment in JUPR. Earlier in July 2008, JUPR made a $1.0 million payment to us on its outstanding debt.

In August 2008, we redeemed all of our outstanding warrants in Wiesner Publishing Company, LLC for $5.8 million, resulting in a realized gain of $5.3 million.
We redeemed these warrants in connection with the sale of the assets of WiesnerMedia, LLC to Summit Business Media Intermediate Holding Company, LLC, one of our non-affiliate investments, in July 2008. In September 2008, we sold substantially all of
the assets of Working Mother Media, Inc. for net proceeds of $4.3 million, which resulted in a $5.3 million loss in addition to a previous $15.4 million fair value adjustment.

During the quarter ended September 30, 2008, also we monetized debt investments totaling $35.8 million through the repayments and sales of debt obligations of MicroCal Holdings, LLC, Stratford School Holdings,
LLC, and B & H Education, Inc. No gains or losses were recognized on these transactions.

During July 2008, in connection with a $15.0 million
debt and equity investment by NCR Corporation, or NCR, into TNR Holdings Corp., or TNR Holdings, we also converted our securities into preferred equity of TNR Holdings, and invested $2.0 million in debt. The following table summarizes the
conversion of our debt investment in TNR Holdings into equity.



|                          |  |                                     |         |  
|------------------------- |  | ----------------------------------- | ------- | -
|(dollars in thousands)    |  | Nine months endedSeptember 30, 2008 |        
|Debt investments          |  |                                     |         |  
|Senior secured debt       |  | $                                   | (16,324 | )
|Secured subordinated debt |  |                                     | (12,437 | )
|                          |  |                                     |         |  
|Total debt investments    |  |                                     | (28,761 | )
|Preferred equity          |  |                                     | 28,761  |  
|                          |  |                                     |         |  
|Net                       |  | $                                   |        |  
|                          |  |                                     |         |  

In addition to the conversion shown in the above table, we also originated $2.0 million of senior debt to TNR
Holdings during the quarter ended September 30, 2008.



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##### Table of Contents

Asset Quality

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



|                 |  |                                                                                                                                                                 
|---------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|InvestmentRating |  | Summary Description                                                                                                                                             
|1                |  | Capital gain expected or realized                                                                                                                               
|                 | 
|2                |  | Full return of principal and interest or dividend expected with customer performing in accordance with plan                                                     
|                 | 
|3                |  | Full return of principal and interest or dividend expected, but customer requires closer monitoring                                                             
|                 | 
|4                |  | Some loss of interest or dividend expected, but still 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

The following table shows the distribution of our investments on our 1 to 5 investment rating scale at fair
value as of September 30, 2008 and December 31, 2007:



|                       |  |                          |           |     |                     |       |   |                          |   |           |                     |  |       |  
|---------------------- |  | ------------------------ | --------- | --- | ------------------- | ----- | - | ------------------------ | - | --------- | ------------------- |  | ----- | -
|(dollars in thousands) |  | September 30, 2008       |           |     | December 31, 2007   |      
|Investment Rating      |  | Investments atFair Value |           |     | % of TotalPortfolio |       |   | Investments atFair Value |   |           | % of TotalPortfolio | 
|1                      |  | $                        | 848,115   | (a) |                     | 65.4  | % |                          | $ | 1,107,050 | (a)                 |  | 71.6  | %
|2                      |  |                          | 172,376   |     |                     | 13.3  |   |                          |   | 207,668   |                     |  | 13.4  |  
|3                      |  |                          | 263,988   |     |                     | 20.4  |   |                          |   | 180,193   |                     |  | 11.7  |  
|4                      |  |                          |          |     |                     |      |   |                          |   | 20,113    |                     |  | 1.3   |  
|5                      |  |                          | 11,990    |     |                     | 0.9   |   |                          |   | 30,066    |                     |  | 2.0   |  
|                       |  |                          |           |     |                     |       |   |                          |   |           |                     |  |       |  
|                       |  | $                        | 1,296,469 |     |                     | 100.0 | % |                          | $ | 1,545,090 |                     |  | 100.0 | %
|                       |  |                          |           |     |                     |       |   |                          |   |           |                     |  |       |  



|(a) | As of September 30, 2008 and December 31, 2007, Investment Rating 1 includes $469.1 million and
$620.6 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 the fair value of loans more than 90 days past due and loans on non-accrual status:



|                                          |  |                       |        |                    |                      |   |           |   |                    |  |      |  
|----------------------------------------- |  | --------------------- | ------ | ------------------ | -------------------- | - | --------- | - | ------------------ |  | ---- | -
|                                          |  | September 30, 2008(a) |        |                    | December 31, 2007(a) |  
|(dollars in thousands)                    |  | FairValue             |        | % of LoanPortfolio |                      |   | FairValue |   | % of LoanPortfolio | 
|Loans greater than 90 days past due       |  |                       |        |                    |                      |   |           |   |                    |  |      |  
|On non-accrual status                     |  | $                     | 1,778  |                    | 0.21                 | % |           | $ | 28                 |  |     | %
|Not on non-accrual status                 |  |                       |       |                    |                     |   |           |   |                   |  |     |  
|                                          |  |                       |        |                    |                      |   |           |   |                    |  |      |  
|Total loans greater than 90 days past due |  | $                     | 1,778  |                    | 0.21                 | % |           | $ | 28                 |  |     | %
|                                          |  |                       |        |                    |                      |   |           |   |                    |  |      |  
|Loans on non-accrual status(b)            |  |                       |        |                    |                      |   |           |   |                    |  |      |  
|0 to 90 days past due                     |  | $                     | 34,976 |                    | 4.03                 | % |           | $ | 67,378             |  | 6.52 | %
|Greater than 90 days past due             |  |                       | 1,778  |                    | 0.21                 |   |           |   | 28                 |  |     |  
|                                          |  |                       |        |                    |                      |   |           |   |                    |  |      |  
|Total loans on non-accrual status(b)      |  | $                     | 36,754 |                    | 4.24                 | % |           | $ | 67,406             |  | 6.52 | %
|                                          |  |                       |        |                    |                      |   |           |   |                    |  |      |  



|(a) | Concurrent with our January 1, 2008 adoption of SFAS 157, we netted unearned fees against the associated debt
investments for both September 30, 2008 and December 31, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | The $30.7 million decrease from December 31, 2007 to September 30, 2008 primarily resulted from unrealized
depreciation on loans to Cleartel Communications, Inc. of $25.2 million, as well as an $11.6 million decrease resulting from the sale of Working Mother Media, Inc., and $1.4 million of decreases in the fair value of loans that were on non-accrual
status as of December 31, 2007. In addition, the conversion of certain debt in TNR Entertainment Corp. to equity in TNR Holding Corp., resulted in a $25.8 million reduction in non-accrual loans. These decreases were partially offset by the placement
of $33.3 million of other loans on non-accrual status, including $27.7 million of loans made to portfolio companies in the broadcasting industry.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

One of the largest decreases in the fair value of non-accrual loans resulted from a reduction in the fair value of our investment in Cleartel. Cleartel, a CLEC that primarily serves residential customers, is one of
our control investments. Since the first quarter of 2007, this investment has been, and will continue to be, on non-accrual status



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for the foreseeable future. As of December 31, 2007, our Cleartel investment had a fair value of $25.2 million, which represented 1.6% of the fair
value of our investments. During the first nine months of fiscal 2008, we advanced $8.0 million to Cleartel to support its operations. Subsequently, as of June 30, 2008, we concluded that the fair value of this investment was zero. In
addition, we own preferred stock and 100% of the common stock of Cleartel, both of which had fair values of zero as of September 30, 2008 and December 31, 2007.

Results of Operations

Comparison of the Three Months Ended
September 30, 2008 and 2007

The following table summarizes the components of our net (loss) income for the three months ended September 30,
2008 and 2007:



|                                                                      |  |                                 |         |          |      |   |        |  |   |            |   |  |       |   
|--------------------------------------------------------------------- |  | ------------------------------- | ------- | -------- | ---- | - | ------ |  | - | ---------- | - |  | ----- | --
|                                                                      |  | Three months endedSeptember 30, |         | Variance |     
|(dollars in thousands)                                                |  | 2008                            |         |          | 2007 |   | $      |  |   | Percentage |  
|Revenue                                                               |  |                                 |         |          |      |   |        |  |   |            |   |  |       |   
|Interest and dividend income                                          |  |                                 |         |          |      |   |        |  |   |            |   |  |       |   
|Interest income                                                       |  | $                               | 26,825  |          |      | $ | 31,132 |  | $ | (4,307     | ) |  | (13.8 | )%
|Dividend income                                                       |  |                                 | 2,751   |          |      |   | 12,607 |  |   | (9,856     | ) |  | (78.2 | ) 
|Loan fees                                                             |  |                                 | 807     |          |      |   | 1,390  |  |   | (583       | ) |  | (41.9 | ) 
|                                                                      |  |                                 |         |          |      |   |        |  |   |            |   |  |       |   
|Total interest and dividend income                                    |  |                                 | 30,383  |          |      |   | 45,129 |  |   | (14,746    | ) |  | (32.7 | ) 
|Advisory fees and other income                                        |  |                                 | 913     |          |      |   | 1,953  |  |   | (1,040     | ) |  | (53.3 | ) 
|                                                                      |  |                                 |         |          |      |   |        |  |   |            |   |  |       |   
|Total revenue                                                         |  |                                 | 31,296  |          |      |   | 47,082 |  |   | (15,786    | ) |  | (33.5 | ) 
|                                                                      |  |                                 |         |          |      |   |        |  |   |            |   |  |       |   
|Operating expenses                                                    |  |                                 |         |          |      |   |        |  |   |            |   |  |       |   
|Interest expense                                                      |  |                                 | 7,991   |          |      |   | 11,888 |  |   | (3,897     | ) |  | (32.8 | ) 
|Employee compensation                                                 |  |                                 |         |          |      |   |        |  |   |            |   |  |       |   
|Salaries and benefits                                                 |  |                                 | 4,081   |          |      |   | 6,186  |  |   | (2,105     | ) |  | (34.0 | ) 
|Amortization of employee restricted stock                             |  |                                 | 1,802   |          |      |   | 2,120  |  |   | (318       | ) |  | (15.0 | ) 
|                                                                      |  |                                 |         |          |      |   |        |  |   |            |   |  |       |   
|Total employee compensation                                           |  |                                 | 5,883   |          |      |   | 8,306  |  |   | (2,423     | ) |  | (29.2 | ) 
|General and administrative expense                                    |  |                                 | 4,408   |          |      |   | 2,640  |  |   | 1,768      |   |  | 67.0  |   
|                                                                      |  |                                 |         |          |      |   |        |  |   |            |   |  |       |   
|Total operating expenses                                              |  |                                 | 18,282  |          |      |   | 22,834 |  |   | (4,552     | ) |  | (19.9 | ) 
|                                                                      |  |                                 |         |          |      |   |        |  |   |            |   |  |       |   
|Net operating income before investment gains and income tax provision |  |                                 | 13,014  |          |      |   | 24,248 |  |   | (11,234    | ) |  | (46.3 | ) 
|Net investment (losses) gains before income tax provision             |  |                                 | (79,724 | )        |      |   | 2,205  |  |   | (81,929    | ) |  | NM    |   
|                                                                      |  |                                 |         |         
|Income tax provision                                                  |  |                                 | 236     |          |      |   | 3,434  |  |   | (3,198     | ) |  | (93.1 | ) 
|                                                                      |  |                                 |         |          |      |   |        |  |   |            |   |  |       |   
|Net (loss) income                                                     |  | $                               | (66,946 | )        |      | $ | 23,019 |  | $ | (89,965    | ) |  | NM    |   
|                                                                      |  |                                 |         |          |      |   |        |  |   |            |   |  |       |   



NM=Not Meaningful

TOTAL REVENUE

Total revenue includes interest and dividend income, loan fees and advisory fees and other income. During the three months ended September 30, 2008, our revenues were $31.3 million, which represents a
$15.8 million, or 33.5%, decrease from the same quarter in 2007. This decline was composed primarily of a $9.9 million, or 78.2%, decrease in dividend income; a $4.3 million, or 13.8%, decrease in interest income; a $1.0 million,
or 53.3%, decrease in advisory fees and other income; and a $0.6 million, or 41.9%, decrease in loan fee income. 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 those 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 September 30, 2008, the total yield on our average debt portfolio at fair value was 11.9% compared to
12.2% for the three months ended September 30, 2007. The weighted average LIBOR rate was 2.9% during the three months ended September 30, 2008, compared with 5.5% during the three months ended September 30, 2007. The spread to average
LIBOR on our average loan portfolio at fair value for the three months ended September 30, 2008 was 9.0% compared to 6.7% during the three months ended September 30, 2007, reflecting higher interest reset rates.



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During the three months ended September 30, 2008, interest income was $26.8 million, compared to
$31.1 million during the three months ended September 30, 2007, which represents a $4.3 million, or 13.8%, decrease. This decrease reflected a $6.0 million decrease resulting from the reduction in LIBOR and a $3.6 million
decrease from lower average loan balances. This decrease was partially offset by $4.7 million of increases resulting from the increase in our average spread to LIBOR and a $0.6 million increase resulting from a change in the average daily balance of
loans in 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 September 30, 2008 and 2007:



|                                        |  |                                 |        |   |      |   |        |  
|--------------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                                        |  | Three months endedSeptember 30, |       
|(in thousands)                          |  | 2008                            |        |   | 2007 |  
|Beginning PIK loan balance              |  | $                               | 19,965 |   |      | $ | 11,831 |  
|PIK interest earned during the period   |  |                                 | 3,659  |   |      |   | 4,346  |  
|Interest receivable converted to PIK    |  |                                 | 1,449  |   |      |   | 971    |  
|Principal payments of cash on PIK loans |  |                                 | (511   | ) |      |   | (1,454 | )
|PIK converted to other securities       |  |                                 | (889   | ) |      |   |       |  
|PIK loans purchased                     |  |                                 |       |   |      |   |       |  
|                                        |  |                                 |        |   |      |   |        |  
|Ending PIK loan balance                 |  | $                               | 23,673 |   |      | $ | 15,694 |  
|                                        |  |                                 |        |   |      |   |        |  

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 received 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. Our dividend activity for the three months ended September 30, 2008 and 2007 was as follows:



|                                         |  |                                 |        |   |      |   |        |  
|---------------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                                         |  | Three months endedSeptember 30, |       
|(in thousands)                           |  | 2008                            |        |   | 2007 |  
|Beginning accrued dividend balance       |  | $                               | 89,625 |   |      | $ | 52,324 |  
|Dividend income earned during the period |  |                                 | 2,751  |   |      |   | 12,607 |  
|Payment of dividends                     |  |                                 | (2,852 | ) |      |   | (79    | )
|                                         |  |                                 |        |   |      |   |        |  
|Ending accrued dividend balance          |  | $                               | 89,524 |   |      | $ | 64,852 |  
|                                         |  |                                 |        |   |      |   |        |  

Dividend income was $2.8 million during the three months ended September 30, 2008, which represents a
$9.9 million, or 78.2%, decrease from the same quarter last year. Approximately, $7.5 million of the decrease is due to our suspension of the accretion of dividends from our preferred stock investments in Broadview. We are entitled to dividends
on our Broadview preferred stock investment, which accumulate and compound quarterly at an annual rate of 12.0% on $291.6 million, but are not payable in cash on a current basis. While Broadview continues to perform in accordance with our
expectations, beginning in the second quarter of 2008, we ceased accreting dividends in Broadview because the fair value of our investment in Broadview reflects that companys enterprise value. Also contributing to the decrease in dividend
income during the quarter ended September 30, 2008, was the absence of $1.6 million of dividend income from our former investment in JUPR Holdings, Inc., or JUPR, which we sold during July 2008.

LOAN FEES

Loan fees include
origination fees on loans that are deferred and amortized into interest income over the life of the loan. When repayments or restructurings with 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. Loan fees decreased $0.6 million, or 41.9%, for the three months ended September 30, 2008 compared to the same period in 2007 primarily because of decreased loan origination activity.



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ADVISORY FEES AND OTHER INCOME

Advisory fees and other income primarily includes 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. Advisory
fees and other income was $0.9 million for the three months ended September 30, 2008, which represents a $1.0 million, or 53.3%, decrease from the three months ended September 30, 2007. This decrease resulted primarily from lower
loan origination activity during the three months ended September 30, 2008, as compared to the same period in 2007.

TOTAL
OPERATING EXPENSES

Total operating expenses include interest, employee compensation and general and administrative
expenses. During the three months ended September 30, 2008, we incurred $18.3 million of operating expenses, which represents a $4.6 million, or 19.9%, decrease from the same quarter last year. This decrease was composed of a
$3.9 million decrease in interest expense and a $2.4 million decrease in employee compensation costs. These decreases were partially offset by a $1.8 million increase in general and administrative expense. The reasons for these
variances are discussed in more detail below.

INTEREST EXPENSE

Interest expense was $8.0 million during the quarter ended September 30, 2008, representing a $3.9 million, or 32.8%, decrease from the same period last
year. The previously described reduction in average LIBOR from 5.5% during the three months ended September 30, 2007 to 2.9% during the three months ended September 30, 2008, resulted in a $4.4 million decrease in interest expense.
Interest expense also decreased $0.6 million because of a decrease in our weighted-average borrowings during the quarter ended September 30, 2008, from the same quarter last year. These decreases were partially offset by $0.7 million of
additional interest expense resulting from a widening of the interest rate spread from 1.0% during the three months ended September 30, 2007 to 1.4% during the three months ended September 30, 2008; as well as $0.4 million of
additional interest expense resulting from increases in our amortization of debt costs.

EMPLOYEE COMPENSATION

Employee compensation expense includes base salaries and benefits, variable annual incentive compensation and amortization of employee stock awards.
During the quarter ended September 30, 2008, our employee compensation expense was $5.9 million, which represents a $2.4 million, or 29.2%, decrease from the same quarter in 2007. Salaries and benefits decreased by $2.1 million, or 34.0%,
primarily because of the implementation of our corporate restructuring initiative, which included decreases in accrued bonuses for 2008 and a reduction in force beginning August 27, 2008.

During the quarter ended September 30, 2008, we recognized $1.8 million of compensation expense related to restricted stock awards, compared to
$2.1 million for the quarter ended September 30, 2007, which represents a $0.3 million, or 15.0%, decrease. The lapsing of forfeiture provisions for previously granted restricted stock accounted for the reduction in the amortization of
employee restricted stock, partially offset by additional amortization that we recognized on 666,000 shares of restricted stock awarded to employees during the quarter ended September 30, 2008 under our 2006 Employee Restricted Stock
Plan, including 648,000 shares of restricted stock granted as part of the MCG Capital Corporation Retention Program.

GENERAL
AND ADMINISTRATIVE

General and administrative expenses increased to $4.4 million during the three months ended
September 30, 2008, representing a $1.8 million, or 67.0%, increase over the same period in 2007. Approximately $1.0 million of this increase was attributable to corporate restructuring charges recognized in the quarter ended
September 30, 2008. In addition, depreciation expense and professional fees increased by $0.4 million and $0.3 million, respectively, and other miscellaneous general and administrative costs accounted for the remaining $0.1 million increase.



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NET OPERATING INCOME BEFORE NET
INVESTMENT (LOSSES) GAINS INCOME TAX PROVISION

Net operating
income before net investment (losses) gains and income tax provision for the three months ended September 30, 2008 totaled $13.0 million, compared with $24.2 million for the three months ended September 30, 2007. This decrease is
due to the items discussed above.

DISTRIBUTABLE NET OPERATING INCOME

Distributable net operating income, or DNOI, is net operating income before investment gains and losses and income tax provision, as determined in accordance with GAAP,
adjusted for amortization of employee restricted stock awards. Amortization of employee restricted stock awards represents non-cash company expense. DNOI includes 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.

DNOI for the three months ended September 30, 2008
was $14.9 million, or $0.20 per share, compared to $26.4 million, or $0.40 per share, for the three months ended September 30, 2007. The following table reconciles our reported net operating income before investment gains and losses
and provision for income taxes to DNOI for the quarters ended September 30, 2008 and 2007:



|                                                                                                                    |  |                                 |        |     |      |   |       
|------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | --- | ---- | - | ------
|                                                                                                                    |  | Three months endedSeptember 30,
|(in thousands, except per share data)                                                                               |  | 2008                            |        |     | 2007
|Net operating income before investment gains and losses and income tax provision                                    |  | $                               | 13,014 |     |      | $ | 24,248
|Amortization of employee restricted stock awards                                                                    |  |                                 | 1,890  | (c) |      |   | 2,120 
|                                                                                                                    |  |                                 |        |     |      |   |       
|DNOI                                                                                                                |  | $                               | 14,904 | (c) |      | $ | 26,368
|                                                                                                                    |  |                                 |        |     |      |   |       
|Weighted-average common shares outstanding(a)                                                                       |  |                                 |        |     |      |   |       
|Basic                                                                                                               |  |                                 | 74,296 |     |      |   | 65,537
|Diluted                                                                                                             |  |                                 | 74,296 |     |      |   | 65,556
|                                                                                                                    |  |                                
|(Loss) earnings per common sharebasic and diluted                                                                  |  | $                               | (0.90  | )   |      | $ | 0.35  
|Net operating income before investment gains and losses and income tax provision per common sharebasic and diluted |  | $                               | 0.18   |     |      | $ | 0.37  
|DNOI per common sharebasic and diluted(b)                                                                          |  | $                               | 0.20   |     |      | $ | 0.40  



|(a) | In accordance with SFAS 128Earnings Per Share, for the purposes of computing the basic and diluted number
of shares, we adjusted the number of common shares outstanding prior to April 29, 2008 by a factor of 1.052 to reflect the impact of a bonus element associated with our rights offering to acquire shares of common stock issued to stockholders on
April 29, 2008 (the date that the common stock was issued in conjunction with the stockholders rights offering). See Note 5Capital Stock and Note 8(Loss) Earnings Per Share in the Notes to our Condensed
Consolidated Financial Statements for additional information about the rights offering, the associated bonus element and its estimated impact on our net asset value per common share.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | DNOI is net operating income before investment (losses) gains and income tax 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Includes $88 of amortization of employee restricted stock awards associated with our corporate restructuring. These
expenses are reported as general and administrative expenses on our Consolidated Statements of Operations.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NET
INVESTMENT (LOSSES) GAINS BEFORE INCOME TAX PROVISION

During the three months ended September 30, 2008, we incurred $79.7 million of net investment losses before income tax provision, compared to a $2.2 million gain during the same period in 2007. These amounts represent the
total of net realized gains and losses, net unrealized (depreciation) appreciation, and reversals of unrealized (depreciation) appreciation. We reverse unrealized (depreciation) appreciation, upon realizing the loss or gain.



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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 September 30, 2008:



|                                     |  |                      |  |                                       |  |                     |         |   |                                       |   |         |                                                  |  |   |                |   |  |   |         |  
|------------------------------------ |  | -------------------- |  | ------------------------------------- |  | ------------------- | ------- | - | ------------------------------------- | - | ------- | ------------------------------------------------ |  | - | -------------- | - |  | - | ------- | -
|(dollars in thousands)               |  |                      |  | Three months ended September 30,
2008 | 
|Portfolio Company                    |  | Industry             |  | Type                                  |  | Realized(Loss)/Gain |         |   | Unrealized(Depreciation)/Appreciation |   |         | Reversal ofUnrealized(Appreciation)/Depreciation |  |   | Net(Loss)/Gain |  
|Broadview Networks Holdings, Inc.    |  | Communications       |  | Control                               |  | $                   |        |   |                                       | $ | (48,189 | )                                                |  | $ |               |   |  | $ | (48,189 | )
|Intran Media, LLC                    |  | Other Media          |  | Control                               |  |                     |        |   |                                       |   | (6,115  | )                                                |  |   |               |   |  |   | (6,115  | )
|Total Sleep Holdings, Inc.           |  | Healthcare           |  | Control                               |  |                     |        |   |                                       |   | (5,694  | )                                                |  |   |               |   |  |   | (5,694  | )
|Working Mother Media, Inc.           |  | Publishing           |  | Control                               |  |                     | (20,750 | ) |                                       |   |        |                                                  |  |   | 15,404         |   |  |   | (5,346  | )
|GMC Television Broadcasting, LLC     |  | Broadcasting         |  | Control                               |  |                     |        |   |                                       |   | (5,273  | )                                                |  |   |               |   |  |   | (5,273  | )
|National Product Services, Inc.      |  | Business Services    |  | Control                               |  |                     |        |   |                                       |   | (4,097  | )                                                |  |   |               |   |  |   | (4,097  | )
|Jet Plastica Investors, LLC          |  | Plastic Products     |  | Control                               |  |                     |        |   |                                       |   | (3,249  | )                                                |  |   |               |   |  |   | (3,249  | )
|Active Brands International, Inc.    |  | Consumer Products    |  | Non-affiliate                         |  |                     |        |   |                                       |   | (2,762  | )                                                |  |   |               |   |  |   | (2,762  | )
|Philadelphia Newspapers, LLC         |  | Newspaper            |  | Non-affiliate                         |  |                     |        |   |                                       |   | (1,596  | )                                                |  |   |               |   |  |   | (1,596  | )
|G&L Investment Holdings, LLC         |  | Insurance            |  | Non-affiliate                         |  |                     |        |   |                                       |   | (1,205  | )                                                |  |   |               |   |  |   | (1,205  | )
|Cruz Bay Publishing, Inc.            |  | Publishing           |  | Non-affiliate                         |  |                     |         |   |                                       |   | (1,083  | )                                                |  |   |               |   |  |   | (1,083  | )
|CWP/RMK Acquisition Corp.            |  | Home Furnishings     |  | Non-affiliate                         |  |                     |        |   |                                       |   | (1,037  | )                                                |  |   |               |   |  |   | (1,037  | )
|Coastal Sunbelt, LLC                 |  | Food Services        |  | Control                               |  |                     |        |   |                                       |   | (1,034  | )                                                |  |   |               |   |  |   | (1,034  | )
|Wiesner Publishing Company, LLC      |  | Publishing           |  | Non-affiliate                         |  |                     | 5,344   |   |                                       |   |        |                                                  |  |   | (5,503         | ) |  |   | (159    | )
|Stratford School Holdings, Inc.      |  | Education            |  | Affiliate                             |  |                     |        |   |                                       |   | 4,624   |                                                  |  |   |               |   |  |   | 4,624   |  
|MCI Holdings LLC                     |  | Healthcare           |  | Non-affiliate                         |  |                     |        |   |                                       |   | 2,458   |                                                  |  |   |               |   |  |   | 2,458   |  
|Avenue Broadband LLC                 |  | Cable                |  | Control                               |  |                     |        |   |                                       |   | 2,329   |                                                  |  |   |               |   |  |   | 2,329   |  
|Jenzabar, Inc.                       |  | Technology           |  | Non-affiliate                         |  |                     |        |   |                                       |   | 1,423   |                                                  |  |   |               |   |  |   | 1,423   |  
|JUPR Holdings, Inc.                  |  | Information Services |  | Control                               |  |                     | 5,994   |   |                                       |   |        |                                                  |  |   | (5,958         | ) |  |   | 36      |  
|Other (< $1 million net (loss) gain) |  |                      |  |                                       |  |                     | (51     | ) |                                       |   | (3,621  | )                                                |  |   | (83            | ) |  |   | (3,755  | )
|                                     |  |                      |  |                                       |  |                     |         |   |                                       |   |         |                                                  |  |   |                |   |  |   |         |  
|Total                                |  |                      |  |                                       |  | $                   | (9,463  | ) |                                       | $ | (74,121 | )                                                |  | $ | 3,860          |   |  | $ | (79,724 | )
|                                     |  |                      |  |                                       |  |                     |         |   |                                       |   |         |                                                  |  |   |                |   |  |   |         |  

As shown in the above table, we recorded $48.2 million of unrealized depreciation on Broadview, primarily
resulting from a reduction of the multiples that we used to estimate Broadviews fair value. In September 2008, we also sold substantially all of the assets of Working Mother Media, Inc., for net proceeds of $4.3 million, which resulted in a
$5.3 million loss in addition to $15.4 million of unrealized depreciation on this investment reported as of June 30, 2008. We also sold our investments in Wiesner Publishing Company, LLC and JUPR Holdings, Inc. for approximately fair value of
these investments reported as of June 30, 2008. These changes and the remaining unrealized depreciation shown in the above table predominantly resulted from a change in the multiples that we used to estimate the fair value of the investments
and, to a lesser extent, the performance of some portfolio companies.

The following table summarizes our gains and (losses) on investments and the change
in our unrealized appreciation and depreciation on investments for the three months ended September 30, 2007:



|                                    |  |                      |  |               |  |                                       |       |                                       |   |         |                                   |  |   |                 |   |  |   |         |  
|----------------------------------- |  | -------------------- |  | ------------- |  | ------------------------------------- | ----- | ------------------------------------- | - | ------- | --------------------------------- |  | - | --------------- | - |  | - | ------- | -
|(dollars in thousands)              |  |                      |  |               |  | Three months ended September 30, 2007 |      
|Portfolio Company                   |  | Industry             |  | Type          |  | RealizedGain                          |       | UnrealizedAppreciation/(Depreciation) |   |         | Reversal ofUnrealizedDepreciation |  |   | Net Gain/(Loss) |  
|Superior Industries Investors, LLC  |  | Sporting Goods       |  | Control       |  | $                                     |      |                                       | $ | 12,202  |                                   |  | $ |                |   |  | $ | 12,202  |  
|Jenzabar, Inc.                      |  | Technology           |  | Non-affiliate |  |                                       |      |                                       |   | 6,577   |                                   |  |   |                |   |  |   | 6,577   |  
|On Target Media, LLC                |  | Other Media          |  | Affiliate     |  |                                       |      |                                       |   | 5,431   |                                   |  |   |                |   |  |   | 5,431   |  
|Costal Sunbelt, LLC                 |  | Food Services        |  | Control       |  |                                       |      |                                       |   | 5,218   |                                   |  |   |                |   |  |   | 5,218   |  
|JetBroadband Holdings, LLC          |  | Cable                |  | Control       |  |                                       |      |                                       |   | 3,346   |                                   |  |   |                |   |  |   | 3,346   |  
|D&B Towers                          |  | Communications       |  | Control       |  |                                       |      |                                       |   | 1,641   |                                   |  |   |                |   |  |   | 1,641   |  
|JUPR Holdings, Inc.                 |  | Information Services |  | Non-affiliate |  |                                       |      |                                       |   | 1,573   |                                   |  |   |                |   |  |   | 1,573   |  
|InTran Media, LLC                   |  | Other Media          |  | Control       |  |                                       |      |                                       |   | (2,550  | )                                 |  |   |                |   |  |   | (2,550  | )
|Jet Plastica Investors, LLC         |  | Plastic Products     |  | Control       |  |                                       |      |                                       |   | (2,885  | )                                 |  |   |                |   |  |   | (2,885  | )
|TNR Entertainment Corp.             |  | Entertainment        |  | Control       |  |                                       |      |                                       |   | (3,000  | )                                 |  |   |                |   |  |   | (3,000  | )
|Cleartel Communications, Inc.       |  | Communications       |  | Control       |  |                                       |      |                                       |   | (24,647 | )                                 |  |   |                |   |  |   | (24,647 | )
|Other (<$1 million net (loss) gain) |  |                      |  |               |  |                                       | 3,240 |                                       |   | (1,470  | )                                 |  |   | (2,471          | ) |  |   | (701    | )
|                                    |  |                      |  |               |  |                                       |       |                                       |   |         |                                   |  |   |                 |   |  |   |         |  
|Total                               |  |                      |  |               |  | $                                     | 3,240 |                                       | $ | 1,436   |                                   |  | $ | (2,471          | ) |  | $ | 2,205   |  
|                                    |  |                      |  |               |  |                                       |       |                                       |   |         |                                   |  |   |                 |   |  |   |         |  

Our board of directors is responsible for determining the fair value of our portfolio investments on a quarterly
basis. As part of our process for determining the fair value of our portfolio investments, we retain independent valuation firms to perform independent valuations on certain of our portfolio companies and review certain of our fair value
determinations. Our board considers these independent valuations and reviews in its determinations of the fair value of our portfolio companies. We intend to continue to engage these independent valuation firms to conduct independent valuations and
review certain valuations of investments in our portfolio.



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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. Over the last four quarters, independent valuation firms performed independent valuations or reviewed valuations of 52 portfolio companies, representing $1,224.7 million, or
94.5%, of the fair value of our total portfolio investments and $384.7 million, or 89.5%, of the fair value of our equity portfolio investments.

INCOME TAX PROVISION

During the three months ended September 30, 2008 and 2007, we
recorded an income tax provision of $0.2 million and $3.4 million, respectively. Our income taxes relate primarily to unrealized gains and losses on investments owned by our taxable subsidiaries.

NET (LOSS) INCOME

During the three months ended September 30, 2008, we incurred a net loss of $66.9 million, compared to $23.0 million of net income during the three months ended September 30, 2007. The decrease in net income is
attributable to the items discussed above.

Comparison of the Nine Months Ended September 30, 2008 and 2007

The following table summarizes the components of our net income for the nine months ended September 30, 2008 and 2007:



|                                                                               |  |                                |          |          |      |   |         |  |   |            |   |  |       |   
|------------------------------------------------------------------------------ |  | ------------------------------ | -------- | -------- | ---- | - | ------- |  | - | ---------- | - |  | ----- | --
|                                                                               |  | Nine months endedSeptember 30, |          | Variance |     
|(dollars in thousands)                                                         |  | 2008                           |          |          | 2007 |   | $       |  |   | Percentage |  
|Revenue                                                                        |  |                                |          |          |      |   |         |  |   |            |   |  |       |   
|Interest and dividend income                                                   |  |                                |          |          |      |   |         |  |   |            |   |  |       |   
|Interest income                                                                |  | $                              | 82,873   |          |      | $ | 90,143  |  | $ | (7,270     | ) |  | (8.1  | )%
|Dividend income                                                                |  |                                | 17,429   |          |      |   | 35,582  |  |   | (18,153    | ) |  | (51.0 | ) 
|Loan fees                                                                      |  |                                | 2,620    |          |      |   | 3,462   |  |   | (842       | ) |  | (24.3 | ) 
|                                                                               |  |                                |          |          |      |   |         |  |   |            |   |  |       |   
|Total interest and dividend income                                             |  |                                | 102,922  |          |      |   | 129,187 |  |   | (26,265    | ) |  | (20.3 | ) 
|Advisory fees and other income                                                 |  |                                | 2,470    |          |      |   | 8,225   |  |   | (5,755     | ) |  | (70.0 | ) 
|                                                                               |  |                                |          |          |      |   |         |  |   |            |   |  |       |   
|Total revenue                                                                  |  |                                | 105,392  |          |      |   | 137,412 |  |   | (32,020    | ) |  | (23.3 | ) 
|                                                                               |  |                                |          |          |      |   |         |  |   |            |   |  |       |   
|Operating expenses                                                             |  |                                |          |          |      |   |         |  |   |            |   |  |       |   
|Interest expense                                                               |  |                                | 26,706   |          |      |   | 31,535  |  |   | (4,829     | ) |  | (15.3 | ) 
|Employee compensation                                                          |  |                                |          |          |      |   |         |  |   |            |   |  |       |   
|Salaries and benefits                                                          |  |                                | 13,673   |          |      |   | 18,052  |  |   | (4,379     | ) |  | (24.3 | ) 
|Amortization of employee restricted stock                                      |  |                                | 5,406    |          |      |   | 7,126   |  |   | (1,720     | ) |  | (24.1 | ) 
|                                                                               |  |                                |          |          |      |   |         |  |   |            |   |  |       |   
|Total employee compensation                                                    |  |                                | 19,079   |          |      |   | 25,178  |  |   | (6,099     | ) |  | (24.2 | ) 
|                                                                               |  |                                |          |         
|General and administrative expense                                             |  |                                | 12,377   |          |      |   | 7,911   |  |   | 4,466      |   |  | 56.5  |   
|                                                                               |  |                                |          |          |      |   |         |  |   |            |   |  |       |   
|Total operating expenses                                                       |  |                                | 58,162   |          |      |   | 64,624  |  |   | (6,462     | ) |  | (10.0 | ) 
|                                                                               |  |                                |          |          |      |   |         |  |   |            |   |  |       |   
|Net operating income before investment (losses) gains and income tax provision |  |                                | 47,230   |          |      |   | 72,788  |  |   | (25,558    | ) |  | (35.1 | ) 
|                                                                               |  |                                |          |         
|Net investment (losses) gains before income tax provision                      |  |                                | (180,610 | )        |      |   | 21,598  |  |   | (202,208   | ) |  | NM    |   
|                                                                               |  |                                |          |         
|Income tax provision                                                           |  |                                | 568      |          |      |   | 2,867   |  |   | (2,299     | ) |  | (80.2 | ) 
|                                                                               |  |                                |          |          |      |   |         |  |   |            |   |  |       |   
|Net (loss) income                                                              |  | $                              | (133,948 | )        |      | $ | 91,519  |  | $ | (225,467   | ) |  | NM    |   
|                                                                               |  |                                |          |          |      |   |         |  |   |            |   |  |       |   



NM=Not Meaningful

TOTAL REVENUE

During the nine months ended September 30, 2008, our total revenues were $105.4 million, which represents a $32.0 million, or 23.3%, decrease from the same period in 2007. This decline was composed
primarily of an $18.2 million, or 51.0%, decrease in dividend income; a $7.3 million, or 8.1%, decrease in interest income; a $5.8 million, or 70.0%, decrease in advisory fees and other income; and a $0.8 million, or 24.3%, decrease
in loan fees.



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##### Table of Contents

INTEREST INCOME

During the nine months ended September 30, 2008, the total yield on our average debt portfolio at fair value was 11.6% compared to 12.7% for the same nine-month period in 2007. The spread to average LIBOR on our
average loan portfolio at fair value for the nine months ended September 30, 2008 was 8.7% compared to 7.3% during the nine months ended September 30, 2007, reflecting timing differences between changes in LIBOR and subsequent reset dates
on LIBOR-based loans in our portfolio, as well as a widening of the margins on our debt investments.

During the nine months ended September 30, 2008,
interest income was $82.9 million, which represents a $7.3 million, or 8.1%, decrease. This decrease reflected a $12.1 million decrease resulting from a 241 basis point reduction in average LIBOR and a $5.8 million decrease
in interest income resulting from an increase in the average daily balance of loans that are on non-accrual status. In addition, interest income decreased $2.5 million as a result of the receipt of previously unaccrued income received from PIK
investments during the nine months ended September 30, 2007, which exceeded the previously unaccrued income received from PIK investments during the nine months ended September 30, 2008. These decreases were partially offset by a
$13.7 million increase in interest income resulting from a 135 basis point increase in our spread to LIBOR.

The following table shows our PIK related
activity for the nine months ended September 30, 2008 and 2007:



|                                        |  |                                |        |   |      |   |         |  
|--------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------- | -
|                                        |  | Nine months endedSeptember 30, |       
|(in thousands)                          |  | 2008                           |        |   | 2007 |  
|Beginning PIK loan balance              |  | $                              | 17,685 |   |      | $ | 11,104  |  
|PIK interest earned during the period   |  |                                | 10,855 |   |      |   | 13,830  |  
|Interest receivable converted to PIK    |  |                                | 4,170  |   |      |   | 1,738   |  
|Principal payments of cash on PIK loans |  |                                | (4,881 | ) |      |   | (10,650 | )
|PIK loans converted to other securities |  |                                | (4,156 | ) |      |   | (730    | )
|PIK loans purchased                     |  |                                |       |   |      |   | 402     |  
|                                        |  |                                |        |   |      |   |         |  
|Ending PIK loan balance                 |  | $                              | 23,673 |   |      | $ | 15,694  |  
|                                        |  |                                |        |   |      |   |         |  

DIVIDEND INCOME

Our dividend activity during the nine months ended September 30, 2008 and 2007 was as follows:



|                                         |  |                                |        |   |      |   |        |  
|---------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                         |  | Nine months endedSeptember 30, |       
|(in thousands)                           |  | 2008                           |        |   | 2007 |  
|Beginning accrued dividend balance       |  | $                              | 75,614 |   |      | $ | 33,553 |  
|Dividend income earned during the period |  |                                | 17,429 |   |      |   | 35,582 |  
|Payment of dividends                     |  |                                | (3,519 | ) |      |   | (4,283 | )
|                                         |  |                                |        |   |      |   |        |  
|Ending accrued dividend balance          |  | $                              | 89,524 |   |      | $ | 64,852 |  
|                                         |  |                                |        |   |      |   |        |  

Dividend income was $17.4 million during the nine months ended September 30, 2008, representing an
$18.2 million, or 51.0%, decrease from the same period last year. As discussed previously, during the second quarter in fiscal 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 nine months ended September 30, 2008, we accreted $8.0 million of dividends from our Broadview investment, which represents a $14.0 million, or 63.6%, decrease from the same period last year.
In addition, the sale of our equity investment in Superior Publishing Corporation in fiscal 2007 resulted in a $3.4 million decrease in the dividends that we recognized during the nine months ended September 30, 2008. In addition, the sale
of our equity holdings in JUPR Holdings, Inc., in July 2008, resulted in a $1.1 million decrease in dividend income during the nine months ended September 30, 2008.

ADVISORY FEES AND OTHER INCOME

Advisory
fees and other income were $2.5 million for the nine months ended September 30, 2008, which represents a $5.8 million, or 70.0%, decrease from the nine months ended September 30, 2007. This decrease was due primarily to lower
loan origination activity during the first nine months of 2008, which we anticipate will continue to remain below 2007 levels.



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TOTAL OPERATING EXPENSES

During the nine months ended September 30, 2008 and 2007, we incurred $58.1 million of operating expenses, representing a $6.5 million, or 10.0%, decrease.
This decrease resulted from a $6.1 million decrease in employee compensation expenses and a $4.8 million decrease in interest expense. These decreases were partially offset by a $4.4 million increase in general and administrative
expense. The reasons for these variances are discussed in more detail below.

INTEREST EXPENSE

Interest expense was $26.7 million, during the nine months ended September 30, 2008, which represents a $4.8 million, or 15.3%, decrease from the same
period last year. The previously described 241 basis point reduction in average LIBOR rates during the nine months ended September 30, 2008, resulted in a $12.1 million decrease in interest expense. This decrease was partially offset by:
$3.6 million of additional interest expense resulting from higher average borrowing balances; $3.0 million of additional interest expense, as a result of a widening of the interest rate spread from 1.0% during the nine months ended
September 30, 2007 to 1.7% during the nine months ended September 30, 2008; and $0.7 million from additional interest expense, resulting from increases in our amortization of debt costs.

EMPLOYEE COMPENSATION

During the nine
months ended September 30, 2008, our employee compensation expenses were $19.1 million, which represents a $6.1 million, or 24.2%, decrease from the same period in 2007. Salaries and benefits decreased by $4.4 million, or 24.3%,
primarily because of our corporate restructuring, which resulted in decreased incentive bonuses for 2008 and a 27% reduction in force. During the nine months ended September 30, 2008, we recognized $5.4 million of compensation expense
related to restricted stock awards, compared to $7.1 million for the comparable period in 2007, representing a $1.7 million, or 24.1%, decrease. The lapsing of forfeiture provisions for previously granted restricted stock accounted for the
reduction in the amortization of employee restricted stock, partially offset by additional amortization that we recognized on 1,211,000 shares of restricted stock awarded to employees during the nine months ended September 30, 2008 under our
2006 Employee Restricted Stock Plan, or Employee Plan, including 648,000 shares of restricted stock granted part of the Retention Program.

GENERAL AND ADMINISTRATIVE

General and administrative expenses increased to $12.4 million
during the nine months ended September 30, 2008, representing a $4.4 million, or 56.5%, increase over the same period in 2007. Approximately $1.0 million of this increase was attributable to corporate restructuring charges recognized
during the third quarter of 2008. In addition, depreciation expense increased $0.8 million, facilities costs increased $0.4 million, and professional and other fees increased by $0.7 million. In addition, approximately $0.7 million of this increase
was attributable to fees paid for borrowing facility transactions that were not consummated. Other miscellaneous general and administrative costs accounted for the remaining $0.9 million increase.

NET OPERATING INCOME BEFORE NET INVESTMENT (LOSSES)
GAINS AND INCOME TAX PROVISION

Net operating income before net investment
(losses) gains and income tax provision for the nine months ended September 30, 2008 totaled $47.2 million, compared with $72.8 million for the nine months ended September 30, 2007. This decrease is due to the items discussed
above.



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##### Table of Contents

DISTRIBUTABLE NET OPERATING INCOME

DNOI for the nine months ended September 30, 2008 was $52.7 million, or $0.74 per share, compared to $79.9 million, or $1.26 per share, for the nine months
ended September 30, 2007. The following table reconciles our reported net operating income before investment gains and losses and provision for income taxes to DNOI for the nine months ended September 30, 2008 and 2007:



|                                                                                                                          |  |                                |        |     |      |   |       
|------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | --- | ---- | - | ------
|                                                                                                                          |  | Nine months endedSeptember 30,
|(in thousands, except per share data)                                                                                     |  | 2008                           |        |     | 2007
|Net operating income before investment gains and losses and income tax provision                                          |  | $                              | 47,230 |     |      | $ | 72,788
|Amortization of employee restricted stock awards                                                                          |  |                                | 5,494  | (c) |      |   | 7,126 
|                                                                                                                          |  |                                |        |     |      |   |       
|DNOI(b)                                                                                                                   |  | $                              | 52,724 | (c) |      | $ | 79,914
|                                                                                                                          |  |                                |        |     |      |   |       
|Weighted-average common shares outstanding(a)                                                                             |  |                                |        |     |      |   |       
|Basic                                                                                                                     |  |                                | 71,526 |     |      |   | 63,378
|Diluted                                                                                                                   |  |                                | 71,526 |     |      |   | 63,381
|                                                                                                                          |  |                               
|(Loss) earnings per common sharebasic and diluted                                                                        |  | $                              | (1.87  | )   |      | $ | 1.44  
|Net operating income before investment gains and losses and provision for income taxes per common sharebasic and diluted |  | $                              | 0.66   |     |      | $ | 1.15  
|DNOI per sharebasic and diluted(b)                                                                                       |  | $                              | 0.74   |     |      | $ | 1.26  



|(a) | In accordance with SFAS 128Earnings Per Share, for the purposes of computing the basic and diluted number
of shares, we adjusted the number of common shares outstanding prior to April 29, 2008 by a factor of 1.052 to reflect the impact of a bonus element associated with our rights offering to acquire shares of common stock issued to stockholders on
April 29, 2008 (the date that the common stock was issued in conjunction with the stockholders rights offering). See Note 5Capital Stock and Note 8(Loss) Earnings Per Share in the Notes to our Condensed
Consolidated Financial Statements for additional information about the rights offering, the associated bonus element, and its estimated impact on our net asset value per common share.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | DNOI is net operating income before investment (losses) gains and income tax 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Includes $88 of amortization of employee restricted stock awards associated with our corporate restructuring. These
expenses are reported as general and administrative expenses on our Consolidated Statements of Operations.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NET INVESTMENT (LOSSES) GAINS BEFORE
INCOME TAX PROVISION

The following table summarizes our realized and unrealized (losses) and gains on
investments and our changes in our unrealized (depreciation) appreciation on investments for the nine months ended September 30, 2008:



|                                          |  |                                |  |               |  |                                      |         |   |                                       |   |          |                                                  |  |   |                 |   |  |   |          |  
|----------------------------------------- |  | ------------------------------ |  | ------------- |  | ------------------------------------ | ------- | - | ------------------------------------- | - | -------- | ------------------------------------------------ |  | - | --------------- | - |  | - | -------- | -
|(in thousands)                            |  |                                |  |               |  | Nine months ended September 30, 2008 |        
|Portfolio Company                         |  | Industry                       |  | Type          |  | Realized(Depreciation)/Appreciation  |         |   | Unrealized(Depreciation)/Appreciation |   |          | Reversal ofUnrealized(Appreciation)/Depreciation |  |   | Net (Loss)/Gain |  
|Broadview Networks Holdings, Inc.         |  | Communications                 |  | Control       |  | $                                    |        |   |                                       | $ | (52,242  | )                                                |  | $ |                |   |  | $ | (52,242  | )
|Jet Plastica Investors, LLC               |  | Plastic Products               |  | Control       |  |                                      |        |   |                                       |   | (36,300  | )                                                |  |   |                |   |  |   | (36,300  | )
|Cleartel Communications, Inc.             |  | Communications                 |  | Control       |  |                                      |        |   |                                       |   | (33,243  | )                                                |  |   |                |   |  |   | (33,243  | )
|Working Mother Media, Inc.                |  | Publishing                     |  | Control       |  |                                      | (20,750 | ) |                                       |   | (7,089   | )                                                |  |   | 15,404          |   |  |   | (12,435  | )
|GMC Television Broadcasting, LLC          |  | Broadcasting                   |  | Control       |  |                                      |        |   |                                       |   | (12,309  | )                                                |  |   |                |   |  |   | (12,309  | )
|CWP/RMK Acquisition Corp.                 |  | Home Furnishings               |  | Non-affiliate |  |                                      |        |   |                                       |   | (8,053   | )                                                |  |   |                |   |  |   | (8,053   | )
|Intran Media, LLC                         |  | Other Media                    |  | Control       |  |                                      |        |   |                                       |   | (6,843   | )                                                |  |   |                |   |  |   | (6,843   | )
|National Product Services, Inc.           |  | Business Services              |  | Control       |  |                                      |        |   |                                       |   | (6,111   | )                                                |  |   |                |   |  |   | (6,111   | )
|JetBroadband Holdings, LLC                |  | Cable                          |  | Control       |  |                                      |        |   |                                       |   | (5,232   | )                                                |  |   |                |   |  |   | (5,232   | )
|RadioPharmacy Investors, LLC              |  | Healthcare                     |  | Control       |  |                                      |        |   |                                       |   | (4,668   | )                                                |  |   |                |   |  |   | (4,668   | )
|Philadelphia Newspapers, LLC              |  | Newspaper                      |  | Non-affiliate |  |                                      |        |   |                                       |   | (4,228   | )                                                |  |   |                |   |  |   | (4,228   | )
|Coastal Sunbelt, LLC                      |  | Food Services                  |  | Control       |  |                                      |        |   |                                       |   | (4,127   | )                                                |  |   |                |   |  |   | (4,127   | )
|Active Brands International, Inc.         |  | Consumer Products              |  | Non-affiliate |  |                                      |        |   |                                       |   | (3,708   | )                                                |  |   |                |   |  |   | (3,708   | )
|PremierGarage Holdings, LLC               |  | Home Furnishings               |  | Control       |  |                                      |        |   |                                       |   | (3,210   | )                                                |  |   |                |   |  |   | (3,210   | )
|Orbitel Holdings, LLC                     |  | Cable                          |  | Control       |  |                                      |        |   |                                       |   | (2,533   | )                                                |  |   |                |   |  |   | (2,533   | )
|Cruz Bay Publishing, Inc.                 |  | Publishing                     |  | Non-affiliate |  |                                      |        |   |                                       |   | (1,497   | )                                                |  |   |                |   |  |   | (1,497   | )
|Marietta Intermediate Holding Corporation |  | Cosmetics                      |  | Non-affiliate |  |                                      |        |   |                                       |   | (1,481   | )                                                |  |   |                |   |  |   | (1,481   | )
|Home Interiors & Gifts, Inc.              |  | Home Furnishings               |  | Non-affiliate |  |                                      |        |   |                                       |   | (1,240   | )                                                |  |   |                |   |  |   | (1,240   | )
|Teleguam Holdings, LLC                    |  | Communications                 |  | Non-affiliate |  |                                      |        |   |                                       |   | (1,232   | )                                                |  |   |                |   |  |   | (1,232   | )
|G&L Investment Holdings, LLC              |  | Insurance                      |  | Non-affiliate |  |                                      |        |   |                                       |   | (1,205   | )                                                |  |   |                |   |  |   | (1,205   | )
|Golden Knight II CLO, Ltd.                |  | Diversified Financial Services |  | Non-affiliate |  |                                      |        |   |                                       |   | (1,017   | )                                                |  |   |                |   |  |   | (1,017   | )
|Sunshine Media Delaware, LLC              |  | Publishing                     |  | Affiliate     |  |                                      |        |   |                                       |   | (1,003   | )                                                |  |   |                |   |  |   | (1,003   | )
|Stratford School Holdings, Inc.           |  | Education                      |  | Affiliate     |  |                                      |        |   |                                       |   | 7,356    |                                                  |  |   |                |   |  |   | 7,356    |  
|Avenue Broadband LLC                      |  | Cable                          |  | Control       |  |                                      |        |   |                                       |   | 6,128    |                                                  |  |   |                |   |  |   | 6,128    |  
|LMS Intellibound Investors, LLC           |  | Logistics                      |  | Control       |  |                                      |        |   |                                       |   | 4,894    |                                                  |  |   |                |   |  |   | 4,894    |  
|MCI Holdings LLC                          |  | Healthcare                     |  | Non-affiliate |  |                                      |        |   |                                       |   | 4,162    |                                                  |  |   |                |   |  |   | 4,162    |  
|Jenzabar, Inc.                            |  | Technology                     |  | Non-affiliate |  |                                      |        |   |                                       |   | 3,729    |                                                  |  |   |                |   |  |   | 3,729    |  
|Wiesner Publishing Company, LLC           |  | Publishing                     |  | Non-affiliate |  |                                      | 5,344   |   |                                       |   | 2,169    |                                                  |  |   | (5,503          | ) |  |   | 2,010    |  
|JUPR Holdings, Inc.                       |  | Information                    |  | Control       |  |                                      | 5,994   |   |                                       |   | 1,714    |                                                  |  |   | (5,958          | ) |  |   | 1,750    |  
|Other (<$1 million net (loss) gain)       |  |                                |  |               |  |                                      | 284     |   |                                       |   | (6,759   | )                                                |  |   | (247            | ) |  |   | (6,722   | )
|                                          |  |                                |  |               |  |                                      |         |   |                                       |   |          |                                                  |  |   |                 |   |  |   |          |  
|Total                                     |  |                                |  |               |  | $                                    | (9,128  | ) |                                       | $ | (175,178 | )                                                |  | $ | 3,696           |   |  | $ | (180,610 | )
|                                          |  |                                |  |               |  |                                      |         |   |                                       |   |          |                                                  |  |   |                 |   |  |   |          |  

As shown in the above table, we recorded $52.2 million of unrealized depreciation on Broadview during the
nine months ended September 30, 2008, primarily because of a reduction in the multiples used in the estimate of the fair value of Broadview. We also took a $36.3 million unrealized loss on Jet Plastica Investors, LLC, or Jet Plastica,
during the nine months ended September 30, 2008. This loss on Jet Plastica is a result of underperformance related primarily to substantial increases in Jet Plasticas raw materials cost, which was caused by significant increases in oil
prices. We believe we may recover part, or all of this loss, if Jet Plastica is able to recover cost increases and improve its financial performance. We recorded a $33.2 million unrealized loss on Cleartel, which writes down the fair value of
our investment in Cleartel to zero. The remaining net unrealized depreciation changes predominantly resulted from a reduction in the multiples used to estimate the fair value of the investments and, to a lesser extent, the performance of some
portfolio companies.

In September 2008, we also sold substantially all the assets of Working Mother, for net proceeds of $4.3 million, which resulted in a
$5.3 million loss in addition to a reversal of our previously recorded $15.4 million unrealized loss on this investment. We also sold our investments in Wiesner Publishing Company, LLC and JUPR Holdings, Inc. for approximately the recorded fair
value of these investments as of June 30, 2008.



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The following table summarizes our gains and (losses) on investments and the change in our unrealized appreciation and
depreciation on investments for the nine months ended September 30, 2007:



|                                           |  |                      |  |               |  |                                      |        |                                       |   |         |                                                  |  |   |                 |   |  |   |         |  
|------------------------------------------ |  | -------------------- |  | ------------- |  | ------------------------------------ | ------ | ------------------------------------- | - | ------- | ------------------------------------------------ |  | - | --------------- | - |  | - | ------- | -
|(in thousands)                             |  |                      |  |               |  | Nine months ended September 30, 2007 |       
|Portfolio Company                          |  | Industry             |  | Type          |  | RealizedGain/(Loss)                  |        | UnrealizedAppreciation/(Depreciation) |   |         | Reversal ofUnrealized(Appreciation)/Depreciation |  |   | Net Gain/(Loss) |  
|Cleartel Communications, Inc.              |  | Communications       |  | Control       |  | $                                    |       |                                       | $ | (24,647 | )                                                |  | $ |                |   |  | $ | (24,647 | )
|TNR Entertainment Corp.                    |  | Entertainment        |  | Control       |  |                                      |       |                                       |   | (3,000  | )                                                |  |   |                |   |  |   | (3,000  | )
|Intran Media, LLC                          |  | Other Media          |  | Control       |  |                                      |       |                                       |   | (2,550  | )                                                |  |   |                |   |  |   | (2,550  | )
|RadioPharmacy Investors, LLC               |  | Healthcare           |  | Control       |  |                                      |       |                                       |   | (2,437  | )                                                |  |   |                |   |  |   | (2,437  | )
|Cornerstone Healthcare Group Holding, Inc. |  | Healthcare           |  | Non-affiliate |  |                                      |       |                                       |   | (1,216  | )                                                |  |   |                |   |  |   | (1,216  | )
|Superior Industries Investors, LLC         |  | Sporting Goods       |  | Control       |  |                                      |       |                                       |   | 14,954  |                                                  |  |   |                |   |  |   | 14,954  |  
|Jenzabar, Inc.                             |  | Technology           |  | Non-affiliate |  |                                      |       |                                       |   | 8,594   |                                                  |  |   |                |   |  |   | 8,594   |  
|On Target Media, LLC                       |  | Other Media          |  | Affiliate     |  |                                      |       |                                       |   | 6,980   |                                                  |  |   |                |   |  |   | 6,980   |  
|Coastal Sunbelt, LLC                       |  | Food Services        |  | Control       |  |                                      |       |                                       |   | 5,218   |                                                  |  |   |                |   |  |   | 5,218   |  
|Superior Publishing Corporation            |  | Newspaper            |  | Control       |  |                                      | 4,793  |                                       |   | (140    | )                                                |  |   | (740            | ) |  |   | 3,913   |  
|JetBroadband Holdings, LLC                 |  | Cable                |  | Control       |  |                                      |       |                                       |   | 3,346   |                                                  |  |   |                |   |  |   | 3,346   |  
|Jet Plastica Investors, LLC                |  | Plastic Products     |  | Control       |  |                                      |       |                                       |   | 3,272   |                                                  |  |   |                |   |  |   | 3,272   |  
|Stratford School Holdings, Inc.            |  | Education            |  | Affiliate     |  |                                      |       |                                       |   | 1,582   |                                                  |  |   |                |   |  |   | 1,582   |  
|JUPR Holdings, Inc.                        |  | Information Services |  | Control       |  |                                      |       |                                       |   | 1,573   |                                                  |  |   |                |   |  |   | 1,573   |  
|Dick Clark Productions, Inc.               |  | Broadcasting         |  | Non-affiliate |  |                                      | 5,978  |                                       |   |        |                                                  |  |   | (4,491          | ) |  |   | 1,487   |  
|Total Sleep Holdings, Inc.                 |  | Healthcare           |  | Control       |  |                                      |       |                                       |   | 1,407   |                                                  |  |   |                |   |  |   | 1,407   |  
|Crystal Media Network, LLC                 |  | Broadcasting         |  | Control       |  |                                      |       |                                       |   | 1,308   |                                                  |  |   |                |   |  |   | 1,308   |  
|National Product Services, Inc.            |  | Business Services    |  | Control       |  |                                      |       |                                       |   | 1,089   |                                                  |  |   |                |   |  |   | 1,089   |  
|Other(<$1 million net (loss) gain)         |  |                      |  |               |  |                                      | 5,301  |                                       |   | 501     |                                                  |  |   | (5,077          | ) |  |   | 725     |  
|                                           |  |                      |  |               |  |                                      |        |                                       |   |         |                                                  |  |   |                 |   |  |   |         |  
|Total                                      |  |                      |  |               |  | $                                    | 16,072 |                                       | $ | 15,834  |                                                  |  | $ | (10,308         | ) |  | $ | 21,598  |  
|                                           |  |                      |  |               |  |                                      |        |                                       |   |         |                                                  |  |   |                 |   |  |   |         |  

INCOME TAX PROVISION

During the nine months ended September 30, 2008, we recorded a $0.6 million income tax provision, compared to a $2.9 million provision during the nine months ended
September 30, 2007. Our income taxes primarily relate to unrealized gains and losses on investments owned by our taxable subsidiaries.

NET (LOSS) INCOME

During the nine months ended September 30, 2008, we incurred a
$133.9 million net loss, compared to $91.5 million of net income during the nine months ended September 30, 2007. This decrease 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 September 30, 2008 and December 31, 2007, we had $19.3 million and $23.3 million, respectively, in cash and cash equivalents. In
addition, at September 30, 2008 and December 31, 2007, we had $41.1 million and $37.0 million, respectively, in cash, securitization accounts, as well as $1.4 million and $4.0 million, respectively, of restricted cash.
We primarily invest cash on hand in interest-bearing deposit accounts. Cash, securitization accounts include principal and interest payments received on securitized loans, which in certain cases are held in designated bank accounts until monthly or
quarterly disbursements are made from the securitization trusts, as well as cash that we have earmarked for deposit into the securitization account pursuant to securitization requirements. In certain cases, we must use a portion of these amounts to
pay interest expense, reduce borrowings, or pay other amounts in accordance with the related securitization agreements, while in other cases we may 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 earn on temporary cash investments. Beginning in fiscal year 2008, we reformatted our Consolidated Statements of
Cash Flows to combine our operating and investing activities into one section. We believe that this presentation better reflects the nature of our business as a business development company.



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For the nine months ended September 30, 2008, our operating activities provided $122.6 million of net cash,
which represents a $283.2 million increase over the nine months ended September 30, 2007. This increase was due primarily to a $387.0 million decrease in portfolio investments, partially offset by an $82.0 million decrease in
principal collections related to investment repayments or sales and a $25.6 million decrease net operating income. During the nine months ended September 30, 2008, we used $126.6 million of cash for our financing activities, compared
to $150.8 million of cash provided during the nine months ended September 30, 2007. This change was due primarily to net payments on borrowings of $98.1 million for the nine months ended September 30, 2008 compared to
$137.9 million of proceeds from borrowings for the nine months ended September 30, 2007. In addition, the proceeds from common stock issuance decreased to $57.1 million during the nine months ended September 30, 2008 from $95.2
million during the same period in 2007.

CURRENT MARKET CONDITIONS

During the quarter ended September 30, 2008, the state of the economy in the U.S. and abroad continued to deteriorate to what many believe is a recession, which
could be long-term. 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, the government take-over of the nations two largest government-sponsored mortgage companies, and the passage of the $700 billion Emergency Economic Stabilization of 2008in early October 2008. In
addition, the stock market has declined significantly, with both the S&P 500 and the NASDAQ Global Select Market (on which MCG trades), declining by over 30% between June 30, 2008 and October 24, 2008. These events have significantly
constrained the availability of debt and equity capital for the market as a whole, and the financial services sector in particular. Further, these and other events have also led to rising unemployment, deteriorating consumer confidence and a general
reduction in spending by both consumers and businesses.

Consistent with other companies in the financial services sector, we have been affected adversely
by many of these events. Between June 30, 2008 and October 24, 2008, the closing price of our common stock dropped by nearly 80% and is trading at less than 10% of our net asset value, thereby limiting our ability to issue new equity. In
addition, the deterioration in consumer confidence and a general reduction in spending by both consumers and businesses has adversely affected 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 quarter ended September 30, 2008, we recognized nearly $70 million of unrealized
depreciation on our investment portfolio primarily because of this reduction in the multiples and, to a lesser extent, the performance of some of our portfolio companies.

During these difficult and challenging economic times, we believe it is important for us to adjust our strategies accordingly. As described more fully in the following section, titled Liquidity and Capital
Resources, we are instituting a number of measures to preserve liquidity and deleverage our balance sheet.

LIQUIDITY
AND CAPITAL RESOURCES

The current capital markets continue to be challenging for most companies in the
financial services sector, including MCG. As reported in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, we are focused on preserving liquidity. We continue to take a number of actions to achieve this goal, including the
opportunistic monetization of portions of our investment portfolio and 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. As reported in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, we anticipate that these expense reductions will save $12.0 million to $14.0 million through December 2009.

In addition, as previously reported in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, we announced the elimination of dividends for the
balance of 2008, which was expected to preserve $40.0 million in capital. 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. This action would preserve over $80.0 million in capital versus the dividend
paid during the third quarter of 2008 of $0.27 per share. 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



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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, and transactional events, as well as our then-current liquidity and BDC asset coverage ratio.

We are undertaking these measures to deleverage our balance sheet, build cash reserves, improve our BDC asset coverage ratio, and maximize value for our shareholders. We intend to increase our cash position to a level sufficient to give us
the flexibility to repay our debt obligations in the event they are not renewed, then evaluate potential share repurchases and the resumption of shareholder distributions as the equity portfolio recovers from recent market disruptions. We expect
that originations will not resume unless market conditions improve. From time to time, however, we may make advances to existing portfolio companies.

During the quarter ended September 30, 2008, we made significant progress toward implementing this strategy by successfully monetizing approximately $66.0 million of portfolio investments. The proceeds from five of these monetizations
correlated closely with the reported fair value of the associated investments as of June 30, 2008; while we sold one investment for $5.3 million less than the fair value reported as of June 30, 2008. We continue to focus on preserving our
net asset value through opportunistic monetizations. Therefore, while we will seek to monetize assets at similar levels over the course of the next several quarters, the timing of such monetizations is dependent largely upon future market
conditions.

As of September 30, 2008, our cash and cash equivalents totaled $19.3 million and we had $653.0 million of borrowings, including
$19.5 million of borrowings that mature within one year. In addition, we had $50.5 million of liquidity available on our unsecured revolving line of credit. As a BDC, we are required to meet a coverage ratio of total net assets to total
borrowings and other senior securities of at least 200%. As of September 30, 2008, our ratio of total net assets to total borrowings and other senior securities was 207%, which provided us with $43.3 million of room beyond the minimum
thresholds of the BDC asset coverage ratio.

Through the continuation of the liquidity preservation, portfolio monetization and debt repayment measures
outlined above, our cash and cash equivalents rose to $27.8 million by October 27, 2008, without drawing on our unsecured revolving line of credit. During October 2008, we used a portion of the proceeds from our monetizations to repay a portion
of our debt. In part, because of this action, our BDC asset coverage ratio rose to approximately 212% as of October 27, 2008 and we expect that this ratio will continue to improve as we complete additional monetizations of our investment
portfolio. Based on our balances of total assets, total borrowings and other securities as of October 27, 2008, we had $75.3 million of room beyond the minimum thresholds under the BDC asset coverage ratio.

Of our existing credit facilities, two have a maturity event within the next 12 months. First, we have a $250.0 million warehouse credit facility with SunTrust
Robinson Humphrey, Inc., or SunTrust, that has a backup liquidity renewal requirement in April 2009. At quarter end, our total outstanding borrowings on this credit facility were $187.3 million. We believe that the backup liquidity
facility will be renewed before April 2009; however, in the event that the liquidity facility is not renewed, then our credit facility with SunTrust has a six-month standstill provision, during which we would be entitled to our current payment
stream, and after which we would be required to repay the principal over the next twelve months as payments are made by our customers with respect to loans funded in the SunTrust credit facility. After this 18-month period, SunTrust could elect to
exercise its other remedies, including the right to sell the remaining assets in a commercially reasonable manner to repay in full the remaining outstanding balance under the credit facility. In the event that the backup liquidity facility is not
renewed prior to its maturity in April 2009, we believe that we would be able to repay the outstanding balance under the credit facility in full before the end of this 18-month repayment period from portfolio monetizations. Second, we have a $70.0
million unsecured revolver that matures in May 2009. At quarter end, our total outstanding borrowings under this facility were $19.5 million. We are in discussions with the lending group about extending the maturity of this
facility. However, in the event that we are not able to get such an extension, we believe that we would be able to repay this facility from cash resources on hand.

During the third quarter 2008, the SBA increased its commitment to reserve leverage for up to $130 million to Solutions Capital I, LP, one of our wholly owned subsidiaries. We may draw on this borrowing capacity to
fund new originations that provide debt and equity capital to qualifying small businesses, subject to additional funding by MCG and compliance with the SBAs capital requirements and customary procedures. In October 2008, we received exemptive
relief from the SEC that is similar to relief granted to other BDCs that own and operate SBICs. This exemptive relief effectively permits us to, among other things, exclude debt issued by the SBA to Solutions Capital I, LP from our consolidated BDC
asset coverage ratio.



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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.



|                                       |  |                  |  |                           |         |                   |                   |   |                           |  |                   |           |  |   |        
|-------------------------------------- |  | ---------------- |  | ------------------------- | ------- | ----------------- | ----------------- | - | ------------------------- |  | ----------------- | --------- |  | - | -------
|                                       |  |                  |  | September 30, 2008        |         | December 31, 2007
|(dollars in thousands)                 |  | Maturity Date    |  | PotentialMaximumBorrowing |         |                   | Amountoutstanding |   | PotentialMaximumBorrowing |  | Amountoutstanding
|Unsecured Notes                        |  | October 2010     |  | $                         | 50,000  |                   |                   | $ | 50,000                    |  | $                 | 50,000    |  | $ | 50,000 
|Unsecured Notes                        |  | October 2012     |  |                           | 25,000  |                   |                   |   | 25,000                    |  |                   | 25,000    |  |   | 25,000 
|Commercial Loan Trust 2006-2           |  | August 2008      |  |                           |        |                   |                   |   |                          |  |                   | 200,000   |  |   | 136,422
|                                       |  |                  |  |                           |        
|Commercial Loan Funding Trust Facility |  |                  |  |                           |         |                   |                   |   |                           |  |                   |           |  |   |        
|Class A Variable Funding Certificate   |  | November 2010(a) |  |                           | 218,750 |                   |                   |   | 161,468                   |  |                   | 218,750   |  |   | 113,213
|Class B Variable Funding Certificate   |  | November 2010(a) |  |                           | 31,250  |                   |                   |   | 25,800                    |  |                   | 31,250    |  |   | 8,300  
|                                       |  |                  |  |                           |        
|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  |                   |                   |   | 26,100                    |  |                   | 50,000    |  |   | 45,100 
|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            |  | April 2018       |  |                           | 45,000  |                   |                   |   | 45,000                    |  |                   | 45,000    |  |   | 45,000 
|Series 2006-1 Class D Notes            |  | April 2018       |  |                           | 47,500  |                   |                   |   | 47,500                    |  |                   | 47,500    |  |   | 47,500 
|                                       |  |                  |  |                           |        
|Unsecured Revolving Line of Credit     |  | May 2009         |  |                           | 70,000  |                   |                   |   | 19,500                    |  |                   |          |  |   |       
|                                       |  |                  |  |                           |        
|Revolving Unsecured Credit Facility    |  | May 2008         |  |                           |        |                   |                   |   |                          |  |                   | 100,000   |  |   | 30,500 
|                                       |  |                  |  |                           |        
|SBIC (Maximum borrowing potential)(b)  |  | (c)              |  |                           | 130,000 | (b)               |                   |   | 2,600                     |  |                   | 100,000   |  |   |       
|                                       |  |                  |  |                           |         |                   |                   |   |                           |  |                   |           |  |   |        
|Total borrowings                       |  |                  |  | $                         | 917,500 |                   |                   | $ | 652,968                   |  | $                 | 1,117,500 |  | $ | 751,035
|                                       |  |                  |  |                           |         |                   |                   |   |                           |  |                   |           |  |   |        



|(a) | Renewable each April at the lenders discretion.
|--- | ------------------------------------------------

|(b) | As of September 30, 2008, we have 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 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 September 30, 2008. Based on our current funded capital, Solutions Capital I, LP, may, subject to compliance with the SBAs customary procedures, borrow up to $53.3 million to originate
investments. To access the entire $130.0 million, we would have to fund an additional $46.4 million.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | We may originate new borrowings through September 2012. We must repay borrowings under the SBIC program within ten years
after the borrowing date, which will occur between September 2018 and September 2022.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a BDC, we are required to meet a coverage ratio
of total assets to total borrowings and other senior securities of at least 200%, which may affect our ability to incur additional debt. As of September 30, 2008, our ratio of total assets to total borrowings and other senior securities was
207%. Based on our balances of total assets, total borrowings and other securities as of September 30, 2008, we had up to $43.3 million of room under of our BDC asset coverage ratio requirement. Based on our balances of total assets, total
borrowings and other securities as of October 27, 2008, we had up to $75.3 million of room under our BDC asset coverage requirement. We expect that this figure will improve as we complete additional monetizations of our investment portfolio.

Each of our credit facilities has certain collateral requirements and/or financial covenants. Two of these financial covenants require that we maintain a
minimum shareholders equity of not less than $654 million and that we maintain an asset coverage ratio of not less than 200%, consistent with our BDC asset coverage requirements. As of September 30, 2008, we were in compliance with all
financial covenants under each of our borrowing facilities, although there can be no assurance regarding compliance in future periods. Two of our credit facilities also have maturity events in the next twelve months. We currently believe that we
will be able to obtain renewals or extensions of such maturities or, if not successful in such renewals or extension, to satisfy the obligations as they come due. 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.

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. Some of our debt facilities contain cross-default provisions, whereby a default under one of our debt facilities could constitute a default under other debt facilities. Additional information about
these facilities is provided below.



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Unsecured Notes. In October 2005, we issued $50.0 million of unsecured notes, at a fixed
interest rate of 6.73% per annum. In October 2007, we issued an additional $25.0 million of 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.

Commercial Loan Trust 2006-2. In May 2006, we established, through MCG Commercial Loan Trust 2006-2, a $200.0 million warehouse credit facility with Merrill Lynch Capital Corporation. The warehouse credit
facility originally allowed MCG Commercial Loan Trust 2006-2 to acquire up to $250.0 million of commercial loans with borrowings of up to $200.0 million, subject to certain covenants, concentration limitations and other restrictions. The
warehouse credit facility was secured primarily by the assets of MCG Commercial Loan Trust 2006-2, including commercial loans that we sold to the trust. Under the terms of the credit and warehouse agreement, the loans could be senior secured loans,
second lien loans or unsecured loans, subject to certain limitations. We intended to repay this facility with proceeds from a placement of debt in the collateralized loan obligation, or CLO, market. However, due to the severe dislocation that
occurred in the CLO market, a CLO transaction was not possible in the near-term.

On October 23, 2007, we entered into an amendment to
extend the maturity date for this facility from November 30, 2007 through February 29, 2008. On February 12, 2008, this facility was again amended to extend the maturity until August 31, 2008. Under the terms of the most recent
amendment, we were required to reduce the balance outstanding under this facility to not more than $82.5 million, $55.0 million and $27.5 million outstanding at April 21, 2008, May 31, 2008 and July 21, 2008,
respectively. The remaining balance was due on August 31, 2008. The amendment reduced the advance rate under the facility from 75% to 70% for non-senior loans, but remained at 75% for senior loans. In addition, the amendment increased the
interest rate for advances from LIBOR plus 0.75% to LIBOR plus 1.5%. We paid a $250,000 modification fee in connection with this amendment. We repaid the remaining balance and terminated this facility on August 4, 2008.

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. 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. Advances under the Class A VFC may be up to 70% of eligible collateral. Advances under the Class B VFC may be up to 10% of eligible collateral. As of
September 30, 2008, there was $257.6 million of collateral under this facility.

The warehouse facility matures in November 2010,
subject to annual liquidity renewals. 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. On May 1, 2008, SunTrust
renewed its annual liquidity commitment for this facility. In connection with this renewal, interest rates for Class A and Class B advances increased to the commercial paper rate plus 1.50% and 2.50%, respectively. Previously, the Class A
and Class B advances bore interest at the commercial paper rate plus 0.75% and 1.50%, respectively. The facility commitment fee increased to 0.30% from 0.20%. In addition, we paid a $750,000, or 0.30%, facility renewal fee.

The next liquidity renewal is scheduled for April 2009. We expect to renew before that date. However, in the event we are unsuccessful in renewing this
facility, the facility contains a six-month standstill provision, which begins on April 30, 2009, and during which we would be entitled to our current payment stream, and, after which we would be required to repay the principal as our portfolio
companies make payments over the following twelve months. After this 18-month period, SunTrust could elect to sell the remaining assets to repay the facility in full. We believe that we will be able to repay this facility in full before the end of
this 18-month repayment period.



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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 $455.6 million as of
September 30, 2008 that the trust purchased from us. We retain all of the equity in the securitization. The securitization includes a five-year reinvestment period, 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.

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. 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. The facility is scheduled to mature on May 29, 2009 and may be renewed at the lenders discretion.

Revolving Unsecured Credit Facility. On May 30, 2008, in conjunction with the consummation of our new unsecured revolving line
of credit facility with SunTrust Bank, we repaid and terminated an earlier unsecured revolving credit facility established with HVB. Under that facility, we could borrow up to $130.0 million. Advances made under the HVB unsecured credit
facility bore interest at LIBOR plus 2.00%, the prime rate plus 0.50%, or the Federal Funds rate plus 2.25%.

SBIC Facility.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. The license allows Solutions
Capital I, LP to borrow up to $130.0 million under the SBIC program, based on our current commitments. The SBA has approved the full $130.0 million commitment, subject to certain capital requirements and customary procedures. These funds
can be used to provide debt and equity capital to qualifying small businesses. These funds may not be used for working capital and also may not be used to fund originations in our portfolio companies, without the approval of the SBA.

To realize the full $130.0 million potential borrowing 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 September 30, 2008. Based on our current funded capital, Solutions Capital may, subject to compliance with the SBAs customary procedures, borrow up to $53.3 million to originate new investments. To access the
entire $130.0 million, we would have to fund an additional $46.4 million. As of September 30, 2008, we had $21.4 million of investments in the SBIC facility.

Once drawn, the SBIC debt bears an interim interest rate of LIBOR plus 30 basis points. Currently, none 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 September 30, 2008, $2.6 million was outstanding under this facility at a fixed rate of 6.44%, which
is based on a 3.80% treasury rate as of September 24, 2008 plus a 264 basis point spread. In addition, received exemptive relief from the SEC that is similar to relief granted to other BDCs that own and operate SBICs. This exemptive relief
permits us to, among other things, effectively exclude debt issued by the SBA to Solutions Capital I, LP from our consolidated BDC asset coverage ratio.



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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 nine months ended September 30, 2008 and 2007:



|                                                                                |  |                                |         |   |      |   |         |  
|------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                |  | Nine months endedSeptember 30, |        
|(dollars in thousands)                                                          |  | 2008                           |         |   | 2007 |  
|Weighted-average borrowings                                                     |  | $                              | 707,344 |   |      | $ | 628,236 |  
|Average LIBOR                                                                   |  |                                | 2.98    | % |      |   | 5.39    | %
|Average spread to LIBOR, excluding amortization of deferred debt issuance costs |  |                                | 1.66    | % |      |   | 1.01    | %
|Impact of amortization of deferred debt issuance costs                          |  |                                | 0.32    | % |      |   | 0.22    | %
|                                                                                |  |                                |         |   |      |   |         |  
|Total cost of funds                                                             |  |                                | 4.96    | % |      |   | 6.62    | %
|                                                                                |  |                                |         |   |      |   |         |  

The 4.96% weighted-average cost of funds for the nine months ended September 30, 2008 was 166 basis points
less than the same period in 2007. This decrease resulted from a 241 basis point decrease in average LIBOR, partially offset by a 65 basis point increase in the average spread to LIBOR.

LIQUIDITY AND CAPITAL RESOURCESCOMMON STOCK

We are a closed-end investment company that has elected to be regulated as a business development company, 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 expires on the earlier of April 23, 2009 or on the date of our 2009 Annual Meeting of Stockholders.

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 nine
months ended September 30, 2008, we granted 1,211,000 shares of restricted stock under the Employee Plan, including 648,000 shares of restricted common stock granted as part of the Retention Program. The 648,000 shares granted under the
Retention Program will vest in March 2011. In addition, to the shares granted under the Retention Program, during the nine months we also awarded 413,000 shares of restricted common stock to employees that will vest over four years and granted a
service-based award of 150,000 shares of restricted common stock to a named executive officer, which was scheduled to vest quarterly beginning in December 2008 and ending in September 2011. During the nine months ended September 30, 2008, the
forfeiture provision lapsed on 390,000 shares of restricted stock pursuant to the Employee Plans time and performance requirements.

In April 2008,
we issued 15,000 shares of restricted stock to two non-employee directors, pursuant to the 2006 Non-employee Director Restricted Stock Plan, upon the stockholders vote for the renewal of term. Pursuant to the terms of the associated restricted
stock agreements for these issuances, we will expense these shares over three years.

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 September 30, 2008, we had unused commitments to extend credit to our customers of $56.5 million,
which are not reflected on our balance sheet. From time to time, we provide guarantees or standby letters of credit on behalf of our portfolio companies. As of September 30, 2008, we had $6.3 million of guarantees and standby letters of
credit.

CONTRACTUAL OBLIGATIONS

The following table shows our contractual obligations as of September 30, 2008:



|                                          |  |                        |         |                 |   |           |  |           |         |              |   |        |  |   |        
|----------------------------------------- |  | ---------------------- | ------- | --------------- | - | --------- |  | --------- | ------- | ------------ | - | ------ |  | - | -------
|                                          |  | Payments Due by Period
|(in thousands) Contractual Obligations(a) |  | Total                  |         | Less than1 year |   | 1-3 years |  | 4-5 years |         | After 5years
|Borrowings(b)                             |  | $                      | 652,968 |                 | $ | 19,500    |  | $         | 237,268 |              | $ | 25,000 |  | $ | 371,200
|Future minimum rental obligations         |  |                        | 10,340  |                 |   | 2,512     |  |           | 4,729   |              |   | 3,099  |  |   |       
|                                          |  |                        |         |                 |   |           |  |           |         |              |   |        |  |   |        
|Total contractual obligations             |  | $                      | 663,308 |                 | $ | 22,012    |  | $         | 241,997 |              | $ | 28,099 |  | $ | 371,200
|                                          |  |                        |         |                 |   |           |  |           |         |              |   |        |  |   |        



|(a) | Excludes the unused commitments to extend credit to our customers of $56.5 million as discussed above.
|--- | ------------------------------------------------------------------------------------------------------

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

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, 2007:



|                  |  |                   |  |                  |  |        |     
|----------------- |  | ----------------- |  | ---------------- |  | ------ | ----
|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
|October 25, 2007  |  | November 21, 2007 |  | January 30, 2008 |  |        | 0.44
|July 26, 2007     |  | August 23, 2007   |  | October 30, 2007 |  |        | 0.44
|April 17, 2007    |  | May 24, 2007      |  | July 30, 2007    |  |        | 0.44
|February 15, 2007 |  | March 15, 2007    |  | April 27, 2007   |  |        | 0.44

We have met our estimated distribution requirements as a regulated investment company for 2008 and currently do
not expect to make additional distributions during 2008. 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. This action would preserve over $80.0 million in capital versus the dividend paid during the
third quarter of 2008 of $0.27 per share. 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.



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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, 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 September 30, 2008; however, we did pay a
dividend of $0.27 per share that had been declared in May 2008 for payment in July 2008. 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. If we determined the tax attributes of the distributions we paid
during the nine months ended September 30, 2008, none of our dividends would be from ordinary income, 98.8%, or $1.14 per share, would represent a return of stockholder capital and 1.2% or $0.01 per share would be from capital gains income.
However, we cannot provide stockholders with assurance that this ratio will represent the taxable attributes of stockholder distributions for fiscal year 2008.

The following table reconciles GAAP net income to taxable net income for the nine months ended September 30, 2008 and the year ended December 31, 2007:



|                                                                                |  |                                     |          |   |                             |   |         |  
|------------------------------------------------------------------------------- |  | ----------------------------------- | -------- | - | --------------------------- | - | ------- | -
|(in thousands)                                                                  |  | Nine months endedSeptember 30, 2008 |          |   | Year endedDecember 31, 2007 |  
|Net (loss) income                                                               |  | $                                   | (133,948 | ) |                             | $ | 86,636  |  
|Difference between book and tax losses on investments(a)                        |  |                                     | (73,343  | ) |                             |   | (12,186 | )
|Net change in unrealized depreciation on investments not taxable until realized |  |                                     | 171,482  |   |                             |   | 34,637  |  
|Timing difference related to deductibility of long-term incentive compensation  |  |                                     | 4,474    |   |                             |   | 4,207   |  
|Taxable interest (loss) income on non-accrual loans(b)                          |  |                                     | (1,720   | ) |                             |   | 17,040  |  
|Dividend income accrued for GAAP purposes that is not yet taxable               |  |                                     | (17,429  | ) |                             |   | (49,390 | )
|Distributions from taxable subsidiaries                                         |  |                                     | 1,146    |   |                             |   | 24,395  |  
|Federal tax provision                                                           |  |                                     | 568      |   |                             |   | 1,864   |  
|Other, net                                                                      |  |                                     | 342      |   |                             |   | (1,051  | )
|                                                                                |  |                                     |          |   |                             |   |         |  
|Taxable (loss) income before deductions for distributions                       |  | $                                   | (48,428  | ) |                             | $ | 106,152 |  
|                                                                                |  |                                     |          |   |                             |   |         |  



|(a) | Results for the nine months ended September 30, 2008, reflect the write-off, for tax purposes, of the common stock
of Cleartel.
|--- | -------------------------------------------------------------------------------------------------------------------------------

|(b) | Results for the nine months ended September 30, 2008, reflect the reversal of previously recognized interest 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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Critical Accounting Policies

The consolidated financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. 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 fiscal year ended December 31, 2007.

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. At
September 30, 2008, over 93.5% of our total assets represented investments of which 99.99% are valued at fair value and 0.01% are valued at market value based on readily ascertainable public market quotes at September 30, 2008.



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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, which comprise 44.4% of our investment portfolio, represent equity and
debt securities in which we own the majority of the portfolio company and generally control its board of directors. 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 and Non-Control InvestmentsNon-majority owned control investments, which comprise 2.1% of our investment
portfolio, represent debt and equity securities that we own 25% to 50% of the portfolio companys equity. Non-control investments, which comprise 53.5% of our investment portfolio, represent affiliate and non-affiliate debt and equity
securities for which we do not have a controlling interest. Quoted prices are not available for 98.1% of our non-control investments, which represent 52.5% of our investment portfolio. For our non-majority owned
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | equity investments and our non-control equity investments, we use the same market and income approaches used to value our control investments. For
non-majority owned control debt investments and non-control debt investments, we estimate fair value using a yield approach based on the expected future cash flows discounted at the loans effective interest 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 September 30, 2008, these securities represented approximately 1.0% 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. Over the last four quarters, independent valuation firms performed
independent valuations or reviewed valuations of 52 portfolio companies, representing $1,224.7 million, or 94.5%, of the fair value of our total portfolio investments and $384.7 million, or 89.5%, of the fair value of our equity portfolio
investments. 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, which 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. We deferred the adoption of SFAS 157 for our nonfinancial assets and liabilities. We are assessing the potential impact that adoption of SFAS 157 for our nonfinancial assets and liabilities may have on our
financial statements.

On October 10, 2008, FASB Staff Position No. 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. The 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.



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FAIR VALUE OPTION FOR FINANCIAL
ASSETS AND FINANCIAL LIABILITIES

In February 2007, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 159The Fair Value Option for Financial Assets and Financial Liabilities, or SFAS 159. Among other requirements, SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. SFAS 159 was effective for the first fiscal year that begins after November 15, 2008. Based upon our review, we have elected not to adopt SFAS 159 for financial liabilities that were in our
portfolio as of September 30, 2008. However, we may elect to apply SFAS 159 to future financial liabilities. The impact on our financials from the potential application of SFAS 159 to a future liability depends upon the attributes of the
specific financial liability.

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 nonforfeitable 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 nonforfeitable 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 are assessing the impact that the adoption of FSP EITF 03-06-1 will have on the presentation of our earnings per share.

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 will adopt this standard no later than January 1, 2009. We do not expect that the adoption of this standard will have a material impact on our financial position or results of
operations.



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

Interest rate sensitivity refers to the change in earnings that may result from changes in the level of interest rates. Changes in LIBOR,
prime interest rates and commercial paper interest rates affect our net interest income. As of September 30, 2008, approximately 58.9% of the fair value of our loan portfolio bore interest at a spread to LIBOR or prime, and 41.1% of the fair
value of our loan portfolio bore fixed rates. As of September 30, 2008, approximately 26.6% of our loan portfolio, at cost, had LIBOR floors between 1.5% to 3.0% on the LIBOR base index. 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.
As of September 30, 2008, we were not a party to any hedging arrangements.



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The following table shows a comparison of the interest rate base for our interest bearing cash, outstanding commercial
loans and our outstanding borrowings at September 30, 2008 and December 31, 2007:



|                          |  |                                          |         |                   |   |                                          |  |            |           |  |   |        
|------------------------- |  | ---------------------------------------- | ------- | ----------------- | - | ---------------------------------------- |  | ---------- | --------- |  | - | -------
|                          |  | September 30, 2008                       |         | December 31, 2007
|(in thousands)            |  | Interest BearingCash andCommercial Loans |         | Borrowings        |   | Interest BearingCash andCommercial Loans |  | Borrowings
|Repurchase Agreement Rate |  | $                                        | 49,716  |                   | $ |                                         |  | $          | 42,604    |  | $ |       
|Money Market Rate         |  |                                          | 866     |                   |   |                                         |  |            | 3,197     |  |   |       
|Prime Rate                |  |                                          | 42,027  |                   |   |                                         |  |            | 9,117     |  |   |       
|30-Day LIBOR              |  |                                          | 16,003  |                   |   |                                         |  |            | 34,695    |  |   |       
|60-Day LIBOR              |  |                                          | 12,930  |                   |   |                                         |  |            | 685       |  |   |       
|90-Day LIBOR              |  |                                          | 481,113 |                   |   | 388,100                                  |  |            | 584,339   |  |   | 554,522
|180-Day LIBOR             |  |                                          | 11,119  |                   |   |                                         |  |            | 14,984    |  |   |       
|9 month LIBOR             |  |                                          |        |                   |   |                                         |  |            |          |  |   |       
|Commercial Paper          |  |                                          |        |                   |   | 187,268                                  |  |            |          |  |   | 121,513
|Fixed Rate                |  |                                          | 378,798 |                   |   | 77,600                                   |  |            | 397,855   |  |   | 75,000 
|                          |  |                                          |         |                   |   |                                          |  |            |           |  |   |        
|Total                     |  | $                                        | 992,572 |                   | $ | 652,968                                  |  | $          | 1,087,476 |  | $ | 751,035
|                          |  |                                          |         |                   |   |                                          |  |            |           |  |   |        

Based on our September 30, 2008 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 |   |         | Net Income
|(200)                                     |  | $              | (8,229 | ) |                 | $ | (11,507 | )          |  | $ | 3,278
|(100)                                     |  |                | (4,554 | ) |                 |   | (5,754  | )          |  |   | 1,200
|100                                       |  |                | 6,037  |   |                 |   | 5,754   |            |  |   | 283  
|200                                       |  |                | 12,174 |   |                 |   | 11,507  |            |  |   | 667  
|300                                       |  |                | 18,312 |   |                 |   | 17,261  |            |  |   | 1,051



|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 September 30, 2008. 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 September 30, 2008, 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.

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 September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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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 $15.3 million of additional taxes,
interest and penalties. If, in the future, our belief changes and we believe it is more likely than not that we will not prevail, we will accrue the estimated amounts due.

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, including our financial statements and the related notes and the schedules and
exhibits to this Quarterly Report.

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, 2007 and Part II, Item 1A. Risk Factors of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.

The carrying value of investments in our portfolio determined in good faith by our board of directors may be materially different than the value if the securities were publicly traded.

In accordance with the 1940 Act, we carry our portfolio investments at market value or, if there is no readily available market value, at fair value as determined in
good faith by our board of directors. Whenever possible, we value securities at market value. However, a large percentage of our portfolio investments are not traded publicly. We value these investments quarterly at fair value as determined in good
faith by our board of directors pursuant to a valuation process utilizing the input of independent valuation firms, our valuation committee and our audit committee. Our board of directors uses several independent valuation firms to aid it in
determining the fair value of these investments. The types of factors that may be considered in fair value pricing of these investments include the nature and realizable value of any collateral, the portfolio company's ability to make payments and
its earnings, the markets in which the portfolio company does business, comparison to publicly-traded comparable companies, discounted cash flow and other relevant factors. Because such valuations, and particularly the valuations of private
securities and private companies, are inherently uncertain, 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 may differ materially from the amounts we may realize on any disposition of such investments. Our net asset value could be affected adversely if our determinations regarding the fair value of these
investments were materially higher than the values that we ultimately realize upon the disposal of such investments.

There can be no assurance that
recently enacted legislation authorizing the U.S. government to purchase large amounts of illiquid mortgages and mortgage-backed securities from financial institutions will help stabilize the U.S. financial system.

On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008, or EESA. The legislation was the result of a U.S.
Treasury Department proposal to the U.S. Congress on September 20, 2008 in response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions.
Pursuant to the EESA, the U.S. Treasury will have the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of
stabilizing and providing liquidity to the U.S. financial markets. There can be no assurance, however, that the EESA will have an impact on the financial markets,



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including the extreme levels of volatility and limited credit availability currently being experienced. The failure of the EESA to help stabilize the
financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit and the trading price of our common stock.

Further economic downturns or recessions could impair our portfolio companies financial position and operating results, which could, in turn,
harm our operating results and reduce our volume of new investments.

Many of the companies in which we have made or will make investments are, and may
be, susceptible to economic downturns or recessions. An economic downturn or recession may affect the ability of a company to repay our loans or engage in a liquidity event, such as a sale, recapitalization or initial public offering. Therefore, the
number of non-performing assets is likely to increase and the value of our portfolio is likely to decrease during these periods. Adverse economic conditions also may decrease the value of collateral securing some of our loans and the value of our
equity investments. A portfolio company's failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination 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.

The middle market businesses in which we invest are susceptible to a number of operational risks 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. 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. 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.

In addition, we record decreases in the fair values of our portfolio company investments as unrealized depreciation, which could affect certain covenants in our credit facilities. Two of these financial covenants
require that we maintain a minimum shareholders equity of not less than $654 million and that we maintain an asset coverage ratio of not less than 200%, consistent with our BDC asset coverage requirements. As of September 30, 2008, our
ratio of total assets to total borrowings and other senior securities was 207%. Based on our balances of total assets, total borrowings and other securities as of September 30, 2008, we only had $43.3 million of room under of our BDC asset
coverage ratio requirement. As of September 30, 2008, our shareholders equity was approximately $714.6 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.



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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 September 30, 2008, our investments in communications companies represented 16.8% of the fair value of our portfolio. Of
the 16.8% investment, 14.2% represented investments in CLECs and 2.6% represented investments in other communications companies. If an industry in which we have a significant investment, suffers from adverse business or economic conditions, a
significant portion of our investment portfolio could be affected adversely, which could adversely affect our financial position and results of operations.

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

Broadview, a CLEC
serving primarily business customers, is our largest portfolio investment. As of September 30, 2008, we held preferred stock in Broadview with a $145.3 million fair value. As of September 30, 2008 and December 31, 2007, our
investment in Broadview represented 11.2% and 12.3%, respectively, of the fair value of our investment portfolio. During the three months ended September 30, 2008, we recognized $48.2 million of unrealized depreciation on our investment in
Broadview primarily as a result of a reduction in the multiples used to estimate fair value. If these multiples decrease further or if Broadviews performance deteriorates in future periods, we may be required to recognize additional unrealized
depreciation on this investment.

Our investment in Broadviews preferred stock entitles us to a $291.6 million liquidation preference, prior to
any distributions to the holders of Broadview common stock. We are also entitled to dividends on our preferred stock investment that accumulate and compound quarterly at an annual rate of 12% on $291.6 million. These dividends are not payable
in cash on a current basis. We do not include accrued dividends in our taxable income until they are declared and paid. During the three months ended March 31, 2008, Broadview accounted for $8.0 million of our quarterly revenue. We did not
recognize any dividend income from Broadview after March 31, 2008.

In November 2007, Broadview filed a registration statement on Form S-1 to register
shares for an initial public offering, or IPO, of equity securities. The IPO markets have slowed considerably because of current market conditions. If, however, this IPO is successful, we would be required to convert our yielding preferred stock,
which represents a 46.6% ownership interest, which we would only be able to sell if registered under the Securities Act of 1933 or in limited amounts pursuant to an exemption from registration.

Our ability to recognize income from our preferred stock investment in Broadview in future periods depends on the performance and value of Broadview. Broadview continues
to perform in accordance with our expectations. However, we currently do not expect to accrue any further dividends on our Broadview investment.

Any
unrealized depreciation that we experience on our investment portfolio may be an indication of future realized losses, which could reduce our income available for distribution.

As a business development company, we must carry our investments at market value or, if no market value is ascertainable, at fair value as determined in good faith under the direction of our board of directors. We
record decreases in the fair value of our investments as unrealized depreciation. Any unrealized depreciation in our investment portfolio could result in realized losses in the future, if we sell these portfolio assets below our purchase price and
ultimately in reductions of our income available for distribution in future periods.

An extended continuation of the disruption in the capital markets
could materially damage our business.

Recent negative developments in the financial industry and credit markets may continue to have an adverse effect
on our financial condition and results of operations. Negative developments beginning in the latter half of 2007 in the sub-prime mortgage market and the securitization markets for such loans, together with other factors, have resulted in
uncertainty in the financial markets in general and a related general economic downturn, which have continued in 2008. Ongoing disruptive conditions may have a material adverse effect on our financial condition and results of operations. Negative
developments in the financial industry and the impact of new legislation in response to those developments could restrict our business operations and could adversely impact our results of operations and financial condition.



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We are susceptible to the risk of significant loss if we are forced to discount the value of our investments in order to
monetize those assets to provide liquidity to meet our liability maturities and to maintain compliance with our debt covenants. Our borrowings under certain of our credit facilities are collateralized by the assets in our investment portfolio. We
may be unable to monetize assets in a difficult market environment that precludes our target buyers from making investments. If the fair value of our assets declines substantially, we may fail to maintain the BDC asset coverage ratios stipulated by
the 1940 Act. Any such failure would affect our ability to issue senior securities, including borrowings, pay dividends and cause us to breach certain covenants in our credit facilities, which could materially impair our business operations. Our
liquidity could be impaired further by an inability to access the capital markets or to draw on our credit facilities. These situations may arise due to circumstances that we may be unable to control, such as inaccessibility to the credit markets, a
severe decline in the value of the U.S. dollar, a sharp economic downturn or an operational problem that affects third parties or us, and could materially damage our business.

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 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, to our stockholders 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 have met
our estimated distribution requirements as a RIC for 2008 and do not expect to make additional distributions to our stockholders during 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. If we are unable to obtain cash from other sources, we may fail to qualify as a RIC and, thus, may be subject to corporate-level
income tax. 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. 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.

If we cannot obtain additional capital because of either regulatory or market price constraints, we
could be forced to curtail or cease our lending and investment activities, our net asset value could decrease and our level of distributions and liquidity could be affected adversely.

The current economic and capital market conditions in the U.S. have resulted in a severe reduction in capital availability. Our ability to secure additional financing
and satisfy our financial obligations under indebtedness outstanding from time to time will depend upon our future operating performance, which is subject to then prevailing general economic and credit market conditions, including interest rate
levels and the availability of credit generally, and financial, business and other factors, many of which are beyond our control. The prolonged continuation or worsening of current credit market conditions would have a material adverse effect on our
ability to secure financing on favorable terms, if at all.

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

As of September 30, 2008, we had $653.0 million of outstanding borrowings under our debt facilities. As
of September 30, 2008, the weighted-average annual interest rate on all of our outstanding borrowings was 5.0%, 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 September 30, 2008 total assets of at least 2.3%. Our ability to service our debt depends largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures.



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In addition, our subsidiaries have sold some of our loans to trusts that serve as the vehicles for our securitization
facilities, and these trusts, which are bankruptcy remote, hold legal title to these assets. However, we bear losses of principal and interest from defaults on these loans held by the trusts up to the amount of our retained interest in the trusts,
which was $198.4 million as of September 30, 2008.

Our securitization facilities impose financial and operating covenants that restrict our
business activities, including limitations that could hinder our ability to finance additional loans and investments or to make the distributions required to maintain our status as a RIC under Subchapter M of the Internal Revenue Code and impact our
liquidity. In addition, some of our debt facilities, including our unsecured notes, include various affirmative and negative covenants, as well as financial covenants, and also contain 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. If such an acceleration were to occur, this would also
trigger the cross default provisions that exist in certain of our other debt facilities and make our obligations under these other facilities become due immediately.

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

As a business
development company, we generally are required to meet a coverage ratio of total assets to total borrowings and other senior securities, which include all of our borrowings and any preferred stock we may issue in the future, of at least 200%. If
this ratio declines below 200%, we may not be able to incur additional debt and may need to sell a portion of our investments to repay some debt when it is disadvantageous to do so, and we cannot make distributions until we are in compliance with
the 200% threshold requirement. At September 30, 2008, this ratio was 207%. We expect this ratio will improve as we complete additional monetizations of our investment portfolio. As of October 27, 2008, based on our balances of total
assets, total borrowings and other securities our asset ratio had risen to approximately 212% and we had approximately $75.3 million of room beyond the minimum thresholds our BDC asset coverage ratio requirements. While this BDC asset coverage ratio
should improve as we continue to monetize our investment portfolio and use a portion of the proceeds to deleverage our balance sheet, we cannot be certain that we will be able to attract buyers for certain of these investments or that all of our
debt investments will be repaid timely, if at all.

In addition, because substantially all 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, we would not be able to operate our business in the ordinary course.

As of September 30, 2008, we had $653.0 million of borrowings, of which $19.5 million will mature within one year. We entered into an agreement, effective May 30, 2008 for an unsecured revolving line of credit facility
with a $70.0 million commitment, to replace, in part, a revolving unsecured credit facility that we repaid in May 2008. The new $70.0 million facility is scheduled to mature in May 2009.

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
have 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



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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, we would not be able to initiate significant originations or to operate our business in the normal course. If we are unable to repay amounts outstanding under any of our facilities these facilities and are declared in default or are
unable to renew or refinance these facilities, we would not be able to operate our business in the normal course.

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 distributions, illiquidity and limited voting rights.

You may not receive future
distributions.

On August 6, 2008, we announced that we have met our estimated distribution requirements for 2008 and do not expect to 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 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 business development company, we
may be limited in our ability to make distributions. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of our status as a RIC for the applicable period. We cannot
assure you that you will receive any distributions or distributions at a particular level.

We may have difficulty paying our required distributions if
we recognize 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 regulated investment company if we do not
satisfy one or more of the applicable criteria under the respective regulatory frameworks.



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Our business depends on our key personnel.

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

Fluctuations in interest rates could 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 customers and originate new loans and investments, our non-performing assets could increase and the value of our portfolio
could decrease because our floating-rate loan customers may be unable to meet higher payment obligations. Due to the nature of the portfolio companies to which we provide fixed rate financing, fluctuations in market rates have a limited impact on
rates charged. As a result, an increase in market interest rates would generally 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 58.9% of the loans in our portfolio, based on amounts
outstanding at fair value as of September 30, 2008, were at variable rates based on a benchmark LIBOR or prime rate and approximately 41.1% were at fixed 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.

The
1940 Act prohibits us from selling shares of our common stock at a price below the current NAV unless our stockholders approve such a sale and our Board of Directors make certain determinations. On April 23, 2008, our stockholders approved a
proposal that allows us, with the approval of our Board of Directors, to sell shares of our common stock at a price below our then-current NAV per share. The approval expires on the earlier of April 23, 2009 or the date of our 2009 Annual
Meeting of Stockholders. If we raise additional funds by issuing more common stock, the percentage ownership of our stockholders at that time would decrease and they may experience dilution.

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



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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 a 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.

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

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

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

The Independent Committee has reported these matters to the SEC Staff and has also reported the results of the review to date to the SEC
Staff. The Independent Committees review concluded that certain violations of our code of business conduct and ethics did occur. However, the Independent Committee did not reach a conclusion regarding Section 402 of Sarbanes-Oxley. The
Independent Committee believes that it has fully cooperated with the SEC Staff, including any additional requests of information by the SEC Staff and will continue to do so. The SEC Staff may also require further information in the future, the
nature and scope of which cannot be determined at this time.

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

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

In recent weeks, 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.

Absent 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 The NASDAQ Stock Market LLC, or NASDAQ, indicating that we are not in compliance with NASDAQ Marketplace Rule 4450(a)(5). In accordance with NASDAQ Marketplace Rule 4450(e)(2), 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 4310(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.



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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.

Our stock price has been 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 weeks, 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. The trading price of our common stock has been, and is likely to continue to be, volatile. Our stock price could be subject to wide fluctuations in response to a variety of factors, including the following:



| |  |  | 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;
| | - |  | -------------------------------------------------------------------------



| |  |  | 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;
| | - |  | -----------------------------------



| |  |  | 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.



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

Not Applicable.



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



|              |  |                                                                                                                                                                                                                                                       
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                               
|10.1++        |  | Tenth Amendment to Sale and Servicing Agreement, dated July 9, 2008, 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.
|              | 
|10.2++p       |  | Employment Agreement by and between MCG Capital Corporation and Stephen J. Bacica, dated as of October 28, 2008                                                                                                                                       
|              | 
|10.3++p       |  | Form of Restricted Stock Agreement for Employees under 2008 Retention Program.                                                                                                                                                                        
|              | 
|15++          |  | Letter regarding Unaudited Interim Financial Information.                                                                                                                                                                                             
|              | 
|31.1++        |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of
2002.                                                
|              | 
|31.2++        |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of
2002.                                                
|              | 
|31.3++        |  | Certification of Chief Accounting Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of
2002.                                               
|              | 
|32.1**        |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                             
|              | 
|32.2**        |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                             
|              | 
|32.3**        |  | Certification of Chief Accounting Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                            



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

|** | Furnished Herewith
|-- | ------------------

|p | Management compensatory plan, contract or agreement.
|- | ----------------------------------------------------



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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: October 31, 2008 |  | By:                     |  | /s/ STEVEN F. TUNNEY    
|                       |  |                         |  | Steven F. Tunney        
|                       |  |                         |  | Chief Executive Officer 
|                       |  |                        
|Date: October 31, 2008 |  | By:                     |  | /s/ MICHAEL R. MCDONNELL
|                       |  |                         |  | Michael R. McDonnell    
|                       |  |                         |  | Chief Financial Officer 
|                       |  |                        
|Date: October 31, 2008 |  | By:                     |  | /s/ STEPHEN J. BACICA   
|                       |  |                         |  | Stephen J. Bacica       
|                       |  |                         |  | Chief Accounting Officer



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