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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the Quarter Ended September 30, 2007.



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

Commission File Number: 0-33377

MCG CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)



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

(703) 247-7500

(Registrants telephone number, including area code)

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

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

Large accelerated filer x                        Accelerated filer ̈Non-accelerated filer ̈

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

The number of shares of the registrants Common Stock, $.01 par value, outstanding as of October 31, 2007 was 65,585,543.



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##### Table of Contents

MCG CAPITAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2007

TABLE OF CONTENTS



|           |  |                                                                                                                    |  |   
|---------- |  | ------------------------------------------------------------------------------------------------------------------ |  | --
|PART I     |  | FINANCIAL INFORMATION                                                                                              |  | 3 
|           |  |                                                                                                                   
|Item 1.    |  | Financial Statements                                                                                               |  |   
|           |  |                                                                                                                   
|           |  | Consolidated Balance SheetsSeptember 30, 2007 (unaudited) and December 31, 2006                                   |  | 3 
|           |  |                                                                                                                   
|           |  | Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2007 and 2006  |  | 4 
|           |  |                                                                                                                   
|           |  | Consolidated Statements of Changes in Net Assets (unaudited) for the nine months ended September 30, 2007 and 2006 |  | 5 
|           |  |                                                                                                                   
|           |  | Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2007 and 2006            |  | 6 
|           |  |                                                                                                                   
|           |  | Consolidated Schedule of Investments as of September 30, 2007 (unaudited)                                          |  | 7 
|           |  |                                                                                                                   
|           |  | Consolidated Schedule of Investments as of December 31, 2006                                                       |  | 12
|           |  |                                                                                                                   
|           |  | Notes to Consolidated Financial Statements (unaudited)                                                             |  | 18
|           |  |                                                                                                                   
|           |  | Report of Independent Registered Public Accounting Firm                                                            |  | 31
|           |  |                                                                                                                   
|           |  | Selected Financial Data                                                                                            |  | 32
|           |  |                                                                                                                   
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                              |  | 33
|           |  |                                                                                                                   
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                         |  | 60
|           |  |                                                                                                                   
|Item 4.    |  | Controls and Procedures                                                                                            |  | 61
|           |  |                                                                                                                   
|PART II    |  | OTHER INFORMATION                                                                                                  |  | 61
|           |  |                                                                                                                   
|Item 1.    |  | Legal Proceedings                                                                                                  |  | 61
|           |  |                                                                                                                   
|Item 1A.   |  | Risk Factors                                                                                                       |  | 62
|           |  |                                                                                                                   
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                        |  | 69
|           |  |                                                                                                                   
|Item 3.    |  | Defaults Upon Senior Securities                                                                                    |  | 69
|           |  |                                                                                                                   
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                |  | 69
|           |  |                                                                                                                   
|Item 5.    |  | Other Information                                                                                                  |  | 69
|           |  |                                                                                                                   
|Item 6.    |  | Exhibits                                                                                                           |  | 70
|           | 
|Signatures |  | 76                                                                                                                



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##### Table of Contents

PART I. FINANCIAL INFORMATION

MCG Capital Corporation

Consolidated Balance Sheets

(in thousands, except per share amounts)



|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                                                |  | September 30,2007 |           |   | December 31,2006 |  
|                                                                                                                                                                                                                |  | (unaudited)       |           |   |                  |  
|Assets                                                                                                                                                                                                          |  |                   |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                                                                                                       |  | $                 | 11,953    |   |                  | $ | 21,691    |  
|Cash, securitization accounts                                                                                                                                                                                   |  |                   | 20,325    |   |                  |   | 15,931    |  
|Cash, restricted                                                                                                                                                                                                |  |                   | 4,490     |   |                  |   | 2,587     |  
|Investments at fair value                                                                                                                                                                                       |  |                   |           |   |                  |   |           |  
|Non-affiliate investments (cost of $670,660 and $595,885, respectively)                                                                                                                                         |  |                   | 700,813   |   |                  |   | 621,582   |  
|Affiliate investments (cost of $74,998 and $105,553, respectively)                                                                                                                                              |  |                   | 87,934    |   |                  |   | 109,890   |  
|Control investments (cost of $758,907 and $541,267, respectively)                                                                                                                                               |  |                   | 736,578   |   |                  |   | 526,140   |  
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Total investments (cost of $1,504,565 and $1,242,705, respectively)                                                                                                                                             |  |                   | 1,525,325 |   |                  |   | 1,257,612 |  
|Unearned income on commercial loans                                                                                                                                                                             |  |                   | (10,368   | ) |                  |   | (9,539    | )
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Total investments net of unearned income                                                                                                                                                                        |  |                   | 1,514,957 |   |                  |   | 1,248,073 |  
|Interest receivable                                                                                                                                                                                             |  |                   | 13,330    |   |                  |   | 10,451    |  
|Other assets                                                                                                                                                                                                    |  |                   | 14,331    |   |                  |   | 20,535    |  
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Total assets                                                                                                                                                                                                    |  | $                 | 1,579,386 |   |                  | $ | 1,319,268 |  
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Liabilities                                                                                                                                                                                                     |  |                   |           |   |                  |   |           |  
|Borrowings (maturing within one year of $224,280 and $167,983, respectively)                                                                                                                                    |  | $                 | 659,780   |   |                  | $ | 521,883   |  
|Interest payable                                                                                                                                                                                                |  |                   | 7,480     |   |                  |   | 5,198     |  
|Dividends payable                                                                                                                                                                                               |  |                   | 27,520    |   |                  |   | 24,652    |  
|Other liabilities                                                                                                                                                                                               |  |                   | 18,297    |   |                  |   | 14,398    |  
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                                                               |  |                   | 713,077   |   |                  |   | 566,131   |  
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Stockholders Equity                                                                                                                                                                                            |  |                   |           |   |                  |   |           |  
|Preferred stock, par value $.01, authorized 1 share, none issued and outstanding                                                                                                                                |  |                   |          |   |                  |   |          |  
|Common stock, par value $.01, authorized 200,000 shares on September 30, 2007 and December 31, 2006, 65,541 issued and outstanding on
September 30, 2007 and 58,694 issued and outstanding on December 31, 2006 |  |                   | 655       |   |                  |   | 587       |  
|Paid-in capital                                                                                                                                                                                                 |  |                   | 931,207   |   |                  |   | 828,795   |  
|Distributions in excess of earnings:                                                                                                                                                                            |  |                   |           |   |                  |   |           |  
|Paid-in capital                                                                                                                                                                                                 |  |                   | (78,072   | ) |                  |   | (78,072   | )
|Other                                                                                                                                                                                                           |  |                   | (7,677    | ) |                  |   | (12,365   | )
|Net unrealized appreciation on investments                                                                                                                                                                      |  |                   | 20,760    |   |                  |   | 14,907    |  
|Stockholder loans                                                                                                                                                                                               |  |                   | (564      | ) |                  |   | (715      | )
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Total stockholders equity                                                                                                                                                                                      |  |                   | 866,309   |   |                  |   | 753,137   |  
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|                                                                                                                                                                                                                |  |                  
|Total liabilities and stockholders equity                                                                                                                                                                      |  | $                 | 1,579,386 |   |                  | $ | 1,319,268 |  
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Net asset value per common share at period end                                                                                                                                                                  |  | $                 | 13.22     |   |                  | $ | 12.83     |  

See notes to consolidated financial statements



3



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##### Table of Contents

MCG Capital Corporation

Consolidated Statements of Operations (unaudited)

(in thousands, except per share amounts)



|                                                                                           |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------ |  | ------------------------------- | ------- | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                           |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                                                           |  | 2007                            |         |   | 2006                           |   |        | 2007 |  |   | 2006    |  
|Revenue                                                                                    |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Interest and dividend income                                                               |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Non-affiliate investments (less than 5% owned)                                             |  | $                               | 20,379  |   |                                | $ | 20,483 |      |  | $ | 58,684  |   |  | $ | 62,720  |  
|Affiliate investments (5% to 25% owned)                                                    |  |                                 | 3,447   |   |                                |   | 2,567  |      |  |   | 10,993  |   |  |   | 7,139   |  
|Control investments (more than 25% owned)                                                  |  |                                 | 21,570  |   |                                |   | 11,289 |      |  |   | 59,985  |   |  |   | 30,393  |  
|                                                                                           |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total interest and dividend income                                                         |  |                                 | 45,396  |   |                                |   | 34,339 |      |  |   | 129,662 |   |  |   | 100,252 |  
|Advisory fees and other income                                                             |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Non-affiliate investments (less than 5% owned)                                             |  |                                 | 1,145   |   |                                |   | 1,933  |      |  |   | 3,459   |   |  |   | 6,348   |  
|Affiliate investments (5% to 25% owned)                                                    |  |                                 | 57      |   |                                |   | 495    |      |  |   | 107     |   |  |   | 1,766   |  
|Control investments (more than 25% owned)                                                  |  |                                 | 484     |   |                                |   | 4,097  |      |  |   | 4,184   |   |  |   | 5,405   |  
|                                                                                           |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total advisory fees and other income                                                       |  |                                 | 1,686   |   |                                |   | 6,525  |      |  |   | 7,750   |   |  |   | 13,519  |  
|                                                                                           |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total revenue                                                                              |  |                                 | 47,082  |   |                                |   | 40,864 |      |  |   | 137,412 |   |  |   | 113,771 |  
|                                                                                           |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Operating expenses                                                                         |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Interest expense                                                                           |  |                                 | 11,888  |   |                                |   | 9,808  |      |  |   | 31,535  |   |  |   | 27,415  |  
|Employee compensation:                                                                     |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Salaries and benefits                                                                      |  |                                 | 6,186   |   |                                |   | 6,756  |      |  |   | 18,052  |   |  |   | 17,209  |  
|Amortization of employee restricted stock awards                                           |  |                                 | 2,120   |   |                                |   | 1,160  |      |  |   | 7,126   |   |  |   | 2,515   |  
|                                                                                           |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total employee compensation                                                                |  |                                 | 8,306   |   |                                |   | 7,916  |      |  |   | 25,178  |   |  |   | 19,724  |  
|General and administrative expense                                                         |  |                                 | 2,640   |   |                                |   | 3,076  |      |  |   | 7,911   |   |  |   | 6,919   |  
|                                                                                           |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                                   |  |                                 | 22,834  |   |                                |   | 20,800 |      |  |   | 64,624  |   |  |   | 54,058  |  
|                                                                                           |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net operating income before investment gains and losses and income tax provision (benefit) |  |                                 | 24,248  |   |                                |   | 20,064 |      |  |   | 72,788  |   |  |   | 59,713  |  
|                                                                                           |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net realized gains (losses) on investments                                                 |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Non-affiliate investments (less than 5% owned)                                             |  |                                 | 2,567   |   |                                |   |       |      |  |   | 8,508   |   |  |   | 693     |  
|Affiliate investments (5% to 25% owned)                                                    |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   | 9       |  
|Control investments (more than 25% owned)                                                  |  |                                 | 673     |   |                                |   | (2,243 | )    |  |   | 7,564   |   |  |   | (5,149  | )
|                                                                                           |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total net realized gains (losses) on investments                                           |  |                                 | 3,240   |   |                                |   | (2,243 | )    |  |   | 16,072  |   |  |   | (4,447  | )
|Net unrealized appreciation (depreciation) on investments                                  |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Non-affiliate investments (less than 5% owned)                                             |  |                                 | 4,253   |   |                                |   | 4,274  |      |  |   | 615     |   |  |   | 8,719   |  
|Affiliate investments (5% to 25% owned)                                                    |  |                                 | 6,458   |   |                                |   | (187   | )    |  |   | 8,709   |   |  |   | 1,501   |  
|Control investments (more than 25% owned)                                                  |  |                                 | (11,746 | ) |                                |   | 185    |      |  |   | (3,798  | ) |  |   | 9,511   |  
|                                                                                           |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total net unrealized appreciation (depreciation) on investments                            |  |                                 | (1,035  | ) |                                |   | 4,272  |      |  |   | 5,526   |   |  |   | 19,731  |  
|                                                                                           |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net investment gains before income tax provision (benefit)                                 |  |                                 | 2,205   |   |                                |   | 2,029  |      |  |   | 21,598  |   |  |   | 15,284  |  
|Income tax provision (benefit)                                                             |  |                                 | 3,434   |   |                                |   | (23    | )    |  |   | 2,867   |   |  |   | 3,569   |  
|                                                                                           |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net income                                                                                 |  | $                               | 23,019  |   |                                | $ | 22,116 |      |  | $ | 91,519  |   |  | $ | 71,428  |  
|                                                                                           |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Earnings per common share basic and diluted                                                |  | $                               | 0.37    |   |                                | $ | 0.42   |      |  | $ | 1.52    |   |  | $ | 1.34    |  
|Cash distributions declared per common share                                               |  | $                               | 0.44    |   |                                | $ | 0.42   |      |  | $ | 1.32    |   |  | $ | 1.26    |  
|Weighted average common shares outstanding                                                 |  |                                 | 62,298  |   |                                |   | 53,281 |      |  |   | 60,245  |   |  |   | 53,236  |  
|Weighted average common shares outstanding and dilutive common stock equivalents           |  |                                 | 62,317  |   |                                |   | 53,281 |      |  |   | 60,248  |   |  |   | 53,236  |  

See notes to consolidated financial statements



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##### Table of Contents

MCG Capital Corporation

Consolidated Statements of Changes in Net Assets (unaudited)

(in thousands, except per share amounts)



|                                                                                           |  |                                |         |   |      |   |         |  
|------------------------------------------------------------------------------------------ |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                           |  | Nine Months EndedSeptember 30, |        
|                                                                                           |  | 2007                           |         |   | 2006 |  
|Operations:                                                                                |  |                                |         |   |      |   |         |  
|Net operating income before investment gains and losses and income tax provision (benefit) |  | $                              | 72,788  |   |      | $ | 59,713  |  
|Net realized gains (losses) on investments                                                 |  |                                | 16,072  |   |      |   | (4,447  | )
|Net unrealized appreciation on investments                                                 |  |                                | 5,526   |   |      |   | 19,731  |  
|Income tax provision                                                                       |  |                                | (2,867  | ) |      |   | (3,569  | )
|                                                                                           |  |                                |         |   |      |   |         |  
|Net increase in net assets resulting from operations                                       |  |                                | 91,519  |   |      |   | 71,428  |  
|                                                                                           |  |                                |         |   |      |   |         |  
|                                                                                           |  |                               
|Shareholder distributions:                                                                 |  |                                |         |   |      |   |         |  
|Distributions declared                                                                     |  |                                | (80,978 | ) |      |   | (66,291 | )
|                                                                                           |  |                                |         |   |      |   |         |  
|Net decrease in net assets resulting from shareholder distributions                        |  |                                | (80,978 | ) |      |   | (66,291 | )
|                                                                                           |  |                                |         |   |      |   |         |  
|Capital share transactions:                                                                |  |                                |         |   |      |   |         |  
|Issuance of common stock                                                                   |  |                                | 95,246  |   |      |   | 139     |  
|Repayment of stockholder loans                                                             |  |                                | 151     |   |      |   | 2,726   |  
|Amortization of non-employee director restricted stock awards                              |  |                                | 108     |   |      |   |        |  
|Amortization of employee restricted stock awards                                           |  |                                | 7,126   |   |      |   | 2,515   |  
|                                                                                           |  |                                |         |   |      |   |         |  
|Net increase in net assets resulting from capital share transactions                       |  |                                | 102,631 |   |      |   | 5,380   |  
|                                                                                           |  |                                |         |   |      |   |         |  
|Total increase in net assets                                                               |  |                                | 113,172 |   |      |   | 10,517  |  
|Net assets at beginning of period                                                          |  |                                | 753,137 |   |      |   | 666,087 |  
|                                                                                           |  |                                |         |   |      |   |         |  
|Net assets at end of period                                                                |  | $                              | 866,309 |   |      | $ | 676,604 |  
|                                                                                           |  |                                |         |   |      |   |         |  
|                                                                                           |  |                               
|Net asset value per common share                                                           |  | $                              | 13.22   |   |      | $ | 12.67   |  
|                                                                                           |  |                               
|Common shares outstanding at end of period                                                 |  |                                | 65,541  |   |      |   | 53,382  |  

See notes to consolidated financial statements



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##### Table of Contents

MCG Capital Corporation

Consolidated Statements of Cash Flows (unaudited)

(in thousands)



|                                                                                     |  |                                 |          |   |      |   |          |  
|------------------------------------------------------------------------------------ |  | ------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                     |  | Nine Months Ended September 30, |         
|                                                                                     |  | 2007                            |          |   | 2006 |  
|Operating activities                                                                 |  |                                 |          |   |      |   |          |  
|Net income                                                                           |  | $                               | 91,519   |   |      | $ | 71,428   |  
|Adjustments to reconcile net income to net cash provided by operating activities:    |  |                                 |          |   |      |   |          |  
|Depreciation                                                                         |  |                                 | 271      |   |      |   | 238      |  
|Amortization of non-employee director restricted stock awards                        |  |                                 | 108      |   |      |   |         |  
|Amortization of employee restricted stock awards                                     |  |                                 | 7,126    |   |      |   | 2,515    |  
|Amortization of deferred debt issuance costs                                         |  |                                 | 1,069    |   |      |   | 3,737    |  
|Net realized (gains) losses on investments                                           |  |                                 | (16,072  | ) |      |   | 4,447    |  
|Net change in unrealized appreciation on investments                                 |  |                                 | (5,526   | ) |      |   | (19,731  | )
|(Increase) decrease in cashsecuritization accounts from interest collections        |  |                                 | (771     | ) |      |   | 4,125    |  
|Increase in interest receivable                                                      |  |                                 | (4,629   | ) |      |   | (32      | )
|Increase in accrued payment-in-kind interest and dividends                           |  |                                 | (34,870  | ) |      |   | (22,971  | )
|Decrease in other assets                                                             |  |                                 | 7,193    |   |      |   | 2,289    |  
|Increase (decrease) in unearned income                                               |  |                                 | 829      |   |      |   | (1,216   | )
|Increase in interest payable                                                         |  |                                 | 2,282    |   |      |   | 66       |  
|Increase in other liabilities                                                        |  |                                 | 3,778    |   |      |   | 8,391    |  
|                                                                                     |  |                                 |          |   |      |   |          |  
|Net cash provided by operating activities                                            |  |                                 | 52,307   |   |      |   | 53,286   |  
|                                                                                     |  |                                 |          |   |      |   |          |  
|Investing activities                                                                 |  |                                 |          |   |      |   |          |  
|Originations, draws and advances on loans                                            |  |                                 | (379,716 | ) |      |   | (308,119 | )
|Principal payments on loans                                                          |  |                                 | 216,057  |   |      |   | 308,838  |  
|Purchase of equity investments                                                       |  |                                 | (78,945  | ) |      |   | (71,856  | )
|Proceeds from sales of equity investments                                            |  |                                 | 30,548   |   |      |   | 2,665    |  
|Purchase of premises, equipment and software                                         |  |                                 | (809     | ) |      |   | (424     | )
|                                                                                     |  |                                 |          |   |      |   |          |  
|Net cash used in investing activities                                                |  |                                 | (212,865 | ) |      |   | (68,896  | )
|                                                                                     |  |                                 |          |   |      |   |          |  
|Financing activities                                                                 |  |                                 |          |   |      |   |          |  
|Net proceeds from borrowings                                                         |  |                                 | 137,897  |   |      |   | 48,152   |  
|(Increase) decrease in cashsecuritization accounts for paydown of principal on debt |  |                                 | (3,623   | ) |      |   | 22,670   |  
|Payment of financing costs                                                           |  |                                 | (533     | ) |      |   | (7,163   | )
|Distributions paid                                                                   |  |                                 | (78,318  | ) |      |   | (65,803  | )
|Issuance of common stock, net of costs                                               |  |                                 | 95,246   |   |      |   | 139      |  
|Repayment of stockholder loans                                                       |  |                                 | 151      |   |      |   | 2,726    |  
|                                                                                     |  |                                 |          |   |      |   |          |  
|Net cash provided by financing activities                                            |  |                                 | 150,820  |   |      |   | 721      |  
|                                                                                     |  |                                 |          |   |      |   |          |  
|Decrease in cash and cash equivalents                                                |  |                                 | (9,738   | ) |      |   | (14,889  | )
|Cash and cash equivalents at beginning of period                                     |  |                                 | 21,691   |   |      |   | 45,626   |  
|                                                                                     |  |                                 |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                           |  | $                               | 11,953   |   |      | $ | 30,737   |  
|                                                                                     |  |                                 |          |   |      |   |          |  
|Supplemental disclosures                                                             |  |                                 |          |   |      |   |          |  
|Interest paid                                                                        |  | $                               | 28,184   |   |      | $ | 23,612   |  
|Income taxes paid                                                                    |  |                                 | 1,029    |   |      |   | 268      |  

See notes to consolidated financial statements



6



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments (unaudited)

September 30, 2007

(dollars in
thousands)



|                                                                                                |  |                                                  |         |                                                                                                    |        |           |        |        |   |              |        |   |             
|----------------------------------------------------------------------------------------------- |  | ------------------------------------------------ | ------- | -------------------------------------------------------------------------------------------------- | ------ | --------- | ------ | ------ | - | ------------ | ------ | - | ------------
|Portfolio Company                                                                               |  | Industry                                         |         | Investment (8)                                                                                     |        | Principal |        | Cost   |   | Fair Value  
|Control Investments: Majority-owned (5):                                                        |  |                                                  |         |                                                                                                    |        |           |        |        |  
|Broadview Networks Holdings, Inc.                                                               |  | Communications- CLEC                             |         | Series A Preferred Stock (12.0%, 87,254 shares) Series
A-1 Preferred Stock (12.0%, 100,702 shares) |        |           |        |        | $ | 74,65969,042 |        | $ | 84,38097,385
|                                                                                                |  | 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)                                 |        |           |        |        |   |            |        |   |           
|Chesapeake Tower Holdings, LLC                                                                  |  | Communications- Other                            |         | Senior Debt (11.2%, Due 5/10) Preferred LLC Interest
(8.0%, 3,139 units)                           |        | $         | 400    |        |   | 4003,139     |        |   | 4003,139    
|                                                                                                |  |                                                  |         | Class A Common LLC Interest (4,000 units)                                                          |        |           |        |        |   |             |        |   |            
|Cleartel Communications, Inc. (2) (6)                                                           |  | Communications- CLEC                             |         | Subordinated Debt (14.5%, Due 12/08-3/11)                                                          |        |           | 93,368 |        |   | 84,221       |        |   | 60,372      
|                                                                                                |  | Subordinated Unsecured Debt (11.3%, Due 3/11)    |         |                                                                                                    | 652    |           |        | 186    |   |              |      
|                                                                                                |  | Series B Preferred Stock (8.0%, 57,862 shares)   |         |                                                                                                    |        |           |        | 50,614 |   |              |      
|                                                                                                |  | Common Stock (9 shares)                          |         |                                                                                                    |        |           |        | 540    |   |              |      
|                                                                                                |  | Guaranty ($7,998)                                |         |                                                                                                    |        |           |        |        |   |              |       
|Coastal Sunbelt, LLC (2)                                                                        |  | Food Services                                    |         | Senior Debt (9.4%, Due 1/12) (1)                                                                   |        |           | 8,800  |        |   | 8,800        |        |   | 8,800       
|                                                                                                |  | Subordinated Debt (15.0%, Due 1/13) (1)          |         |                                                                                                    | 7,924  |           |        | 7,924  |   |              | 7,924 
|                                                                                                |  | Preferred LLC Interest (12.0%, 55,800 units)     |         |                                                                                                    |        |           |        | 6,074  |   |              | 11,292
|                                                                                                |  | Warrants to purchase Class B Common Stock        |         |                                                                                                    |        |           |        |       |   |              |      
|GMC Television Broadcasting, LLC (2)                                                            |  | Broadcasting                                     |         | Senior Debt (10.6%, Due 4/12-6/12) (1)                                                             |        |           | 26,300 |        |   | 26,300       |        |   | 26,300      
|                                                                                                |  | Subordinated Debt (14.0%, Due 6/13) (1)          |         |                                                                                                    | 8,000  |           |        | 8,000  |   |              | 8,000 
|                                                                                                |  | Class A Units (15.0%, 30,000 units)              |         |                                                                                                    |        |           |        | 3,147  |   |              | 3,147 
|                                                                                                |  | Class B Voting Units (8.0%, 86,700 units)        |         |                                                                                                    |        |           |        | 8,896  |   |              | 8,896 
|JetBroadband Holdings,LLC (2) (12)                                                              |  | Cable                                            |         | Subordinated Unsecured Debt (14.8%, Due 8/15-2/16)                                                 |        |           | 23,506 |        |   | 23,506       |        |   | 23,506      
|                                                                                                |  | Preferred Units (10.0%, 133,204 units)           |         |                                                                                                    |        |           |        | 18,016 |   |              | 21,362
|                                                                                                |  | Standby Letter of Credit ($300)                  |         |                                                                                                    |        |           |        |        |   |              |       
|Jet Plastica Investors,LLC (2)                                                                  |  | Plastic Products                                 |         | Subordinated Debt (14.0%, Due 3/13) (1)                                                            |        |           | 26,512 |        |   | 26,512       |        |   | 26,512      
|                                                                                                |  | Preferred LLC Interest (8.0%, 301,595 units)     |         |                                                                                                    |        |           |        | 32,708 |   |              | 35,980
|JUPR Holdings, Inc. (2) (10)                                                                    |  | Information Services                             |         | Senior Debt (12.2%, Due 3/10) (1)                                                                  |        |           | 2,039  |        |   | 2,039        |        |   | 2,039       
|                                                                                                |  | Series A Preferred Stock (10.0%, 100,000 shares) |         |                                                                                                    |        |           |        | 11,656 |   |              | 12,656
|                                                                                                |  | Common Stock (770,000 shares)                    |         |                                                                                                    |        |           |        |       |   |              | 573   
|                                                                                                |  | Standby Letter of Credit ($225)                  |         |                                                                                                    |        |           |        |        |   |              |       
|                                                                                                |  | Guaranty ($1,156)                                |         |                                                                                                    |        |           |        |        |   |              |       
|LMS Intellibound Investors, LLC (2)                                                             |  | Logistics                                        |         | Senior Debt (9.3%, Due 5/12-8/12) (1)                                                              |        |           | 24,073 |        |   | 24,073       |        |   | 24,073      
|                                                                                                |  | Subordinated Debt (15.0%, Due 12/07-11/12) (1)   |         |                                                                                                    | 17,004 |           |        | 17,004 |   |              | 17,004
|                                                                                                |  | Preferred LLC Interest (12.0%, 19,650 units)     |         |                                                                                                    |        |           |        | 20,632 |   |              | 20,632
|                                                                                                |  | Warrants to purchase Class B Common Stock        |         |                                                                                                    |        |           |        |       |   |              |      
|MTP Holding, LLC (6) (13)                                                                       |  | Communications- Other                            |         | Common LLC Interest (79,171 units)                                                                 |        |           |        |        |   | 55           |        |   | 853         
|                                                                                                |  |                                                  |         |                                                                                                    |        |           |        |        |   |              |       
|Orbitel Holdings, LLC (2)                                                                       |  | Cable                                            |         | Senior Debt (11.5%, Due 3/12) (1)                                                                  |        |           | 15,350 |        |   | 15,350       |        |   | 15,350      
|                                                                                                |  | Preferred LLC Interest (10.0%, 120,000 units)    |         |                                                                                                    |        |           |        | 12,747 |   |              | 12,747
|                                                                                                |  | Standby Letter of Credit ($95)                   |         |                                                                                                    |        |           |        |        |   |              |       
|RadioPharmacy Investors, LLC (2)                                                                |  | Healthcare                                       |         | Senior Debt (9.9%, Due 12/10) (1)                                                                  |        |           | 7,000  |        |   | 7,000        |        |   | 7,000       
|                                                                                                |  | Subordinated Debt (15.0%, Due 12/11) (1)         |         |                                                                                                    | 9,470  |           |        | 9,470  |   |              | 9,470 
|                                                                                                |  | Preferred LLC Interest (8.0%, 70,000 units)      |         |                                                                                                    |        |           |        | 7,971  |   |              | 8,668 
|Superior Industries Investors, LLC (2)                                                          |  | Sporting Goods                                   |         | Subordinated Debt (14.0%, Due 3/13) (1)                                                            |        |           | 17,581 |        |   | 17,581       |        |   | 17,581      
|                                                                                                |  | Preferred LLC Interest (8.0%, 125,400 units)     |         |                                                                                                    |        |           |        | 13,587 |   |              | 28,541
|TNR Entertainment Corp. (2) (6) (14)                                                            |  | Entertainment                                    |         | Senior Debt (13.5%, Due 9/09-7/10) (1)                                                             |        |           | 15,859 |        |   | 15,325       |        |   | 15,325      
|                                                                                                |  | Subordinated Debt (16.0%, Due 9/09) (1)          |         |                                                                                                    | 12,786 |           |        | 12,436 |   |              | 12,436
|                                                                                                |  | Series A Preferred Stock (12.5%, 195,313 shares) |         |                                                                                                    |        |           |        | 5,000  |   |              | 5,000 
|                                                                                                |  | Common Stock (1,806 shares)                      |         |                                                                                                    |        |           |        | 3,000  |   |              |      
|                                                                                                |  | Warrants to purchase Common Stock (expire 9/17)  |         |                                                                                                    |        |           |        |       |   |              |      
|Total Sleep Holdings, Inc. (2) (11)                                                             |  | Healthcare                                       |         | Subordinated Debt (15.0%, Due 9/11)                                                                |        |           | 27,456 |        |   | 24,727       |        |   | 24,727      
|                                                                                                |  | Unsecured Note (0.0%, Due 6/11)                  |         |                                                                                                    | 375    |           |        | 375    |   |              | 375   
|                                                                                                |  | Series A Preferred Stock (10.0%, 3,700 shares)   |         |                                                                                                    |        |           |        | 3,700  |   |              | 2,136 
|                                                                                                |  | Common Stock (2,592,920 shares)                  |         |                                                                                                    |        |           |        | 1,000  |   |              |      
|Working Mother Media, Inc. (6)                                                                  |  | Publishing                                       |         | Senior Debt (9.0%, Due 12/08)                                                                      |        |           | 15,405 |        |   | 11,654       |        |   | 11,654      
|                                                                                                |  | Class A Preferred Stock (13.0%, 12,497 shares)   |         |                                                                                                    |        |           |        | 12,497 |   |              | 5,544 
|                                                                                                |  | Class B Preferred Stock (13.0%, 1 share)         |         |                                                                                                    |        |           |        | 1      |   |              |      
|                                                                                                |  | Class C Preferred Stock (13.0%, 1 share)         |         |                                                                                                    |        |           |        | 1      |   |              |      
|                                                                                                |  | Common Stock (510 shares)                        |         |                                                                                                    |        |           |        | 1      |   |              |      
|                                                                                                |  | Guaranty ($208)                                  |         |                                                                                                    |        |           |        |        |   |              |       
|Total Control Investments: Majority-owned (represents 44.7% of total investments at
fair value) |  |                                                  | 701,566 |                                                                                                    |        | 681,779  

See notes to consolidated financial statements



7



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments (unaudited)

September 30, 2007

(dollars in
thousands)



|                                                                                                   |  |                                                             |  |                                            |        |           |        |        |         |           |       |   |       
|-------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------- |  | ------------------------------------------ | ------ | --------- | ------ | ------ | ------- | --------- | ----- | - | ------
|Portfolio Company                                                                                  |  | Industry                                                    |  | Investment (8)                             |        | Principal |        | Cost   |         | FairValue
|Control Investments: Non-majority owned (4):                                                       |  |                                                             |  |                                            |        |           |        |        |        
|Crystal Media Network, LLC (6) (7)                                                                 |  | Broadcasting                                                |  | LLC Interest                               |        |           |        |        | $       | 3,060     |       | $ | 2,182 
|Intran Media, LLC                                                                                  |  | Other Media                                                 |  | Senior Debt (10.1%, Due 12/11 (1)          |        | $         | 12,200 |        |         | 12,200    |       |   | 12,200
|                                                                                                   |  | Preferred Units (10.0%, 86,000 units)                       |  |                                            |        |           |        | 9,095  |         |           | 6,545
|National Product Services, Inc. (2)                                                                |  | Business Services                                           |  | Senior Debt (12.9%, Due 6/09)              |        |           | 12,966 |        |         | 6,773     |       |   | 12,965
|                                                                                                   |  | Subordinated Debt (16.0%, Due 6/09)                         |  |                                            | 13,079 |           |        | 11,240 |         |           | 5,602
|                                                                                                   |  | Common Stock (995,428 shares)                               |  |                                            |        |           |        |       |         |           |     
|PremierGarage Holdings, LLC (2)                                                                    |  | Home Furnishings                                            |  | Senior Debt (10.2%, Due 6/10-12/10) (1)    |        |           | 10,100 |        |         | 10,100    |       |   | 10,100
|                                                                                                   |  | Preferred LLC Units (8.0%, 445 units)                       |  |                                            |        |           |        | 4,873  |         |           | 4,873
|                                                                                                   |  | Common LLC Units (356 units)                                |  |                                            |        |           |        |       |         |           | 332  
|Total Control Investments: Non-majority-owned (represents 3.6% of total investments at fair value) |  |                                                             |  |                                            |        | 57,341    |        |        | 54,799 
|Total Control Investments: (represents 48.3% of total investments at fair value)                   |  |                                                             |  |                                            |        | 758,907   |        |        | 736,578
|Affiliate Investments (3):                                                                         |  |                                                             |  |                                            |        |           |        |        |        
|Advanced Sleep Concepts, Inc. (2)                                                                  |  | Home Furnishings                                            |  | Senior Debt (12.5%, Due 10/11) (1)         |        |           | 6,790  |        |         | 6,790     |       |   | 6,790 
|                                                                                                   |  | Subordinated Debt (16.0%, Due 04/12) (1)                    |  |                                            | 4,679  |           |        | 4,679  |         |           | 4,679
|                                                                                                   |  | Common Stock (423 shares)                                   |  |                                            |        |           |        | 524    |         |           | 437  
|                                                                                                   |  | Warrants to purchase Common Stock (expire 10/16)            |  |                                            |        |           |        | 348    |         |           | 290  
|Cherry Hill Holdings, Inc. (2)                                                                     |  | Entertainment                                               |  | Senior Debt (13.0%, Due 8/11) (1)          |        |           | 11,793 |        |         | 11,793    |       |   | 11,793
|                                                                                                   |  | Series A Preferred Stock (10.0%, 750 shares)                |  |                                            |        |           |        | 831    |         |           | 831  
|iVerify.US Inc. (6)                                                                                |  | Communications-Other                                        |  | Preferred Stock (8.0%, 54 shares)          |        |           |        |        |         | 578       |       |   | 102   
|                                                                                                   |  | Common Stock (20 shares)                                    |  |                                            |        |           |        | 550    |         |           | 5    
|On Target Media, LLC                                                                               |  | Other Media                                                 |  | Class A LLC Interest (10.0%, 68 units)     |        |           |        |        |         | 1,977     |       |   | 1,977 
|                                                                                                   |  | Class B LLC Interest (68 units)                             |  |                                            |        |           |        |       |         |           | 8,593
|Stratford School Holdings, Inc. (2)                                                                |  | Education                                                   |  | Senior Debt (9.8%, Due 7/11-9/11) (1)      |        |           | 13,100 |        |         | 13,100    |       |   | 13,100
|                                                                                                   |  | Subordinated Debt (14.0%, Due 12/11) (1)                    |  |                                            | 6,717  |           |        | 6,717  |         |           | 6,717
|                                                                                                   |  | Series A Convertible Preferred Stock (12.0%, 10,000 shares) |  |                                            |        |           |        | 150    |         |           | 4,243
|                                                                                                   |  | Warrants to purchase Common Stock (expire 5/15)             |  |                                            |        |           |        | 67     |         |           | 1,451
|Sunshine Media Delaware, LLC (2) (6)                                                               |  | Publishing                                                  |  | Class A LLC Interest (8.0%, 563,808 units) |        |           |        |        |         | 564       |       |   | 564   
|                                                                                                   |  | Common Stock (145 shares)                                   |  |                                            |        |           |        | 581    |         |           | 581  
|                                                                                                   |  | Option to acquire Warrants to purchase                      |  |                                            |        |           |        |       |         |           |     
|                                                                                                   |  | Class B LLC Interest (expire 5/14)                          |  |                                            |        |           |        |        |         |           |      
|Velocity Technology Enterprises, Inc. (2)                                                          |  | Business Services                                           |  | Senior Debt (9.4%, Due 12/12) (1)          |        |           | 21,764 |        |         | 21,764    |       |   | 21,764
|                                                                                                   |  | Series A Preferred Stock (1,506,602 shares)                 |  |                                            |        |           |        | 1,500  |         |           | 1,500
|XFone, Inc. (6)                                                                                    |  | Communications-Other                                        |  | Common Stock (868,946 shares)              |        |           |        |        |         | 2,485     |       |   | 2,517 
|                                                                                                   |  | Warrants to purchase Common Stock(expire 3/11)              |  |                                            |        |           |        |       |         |           |     
|Total Affiliate Investments (represents 5.8% of total investments at fair value)                   |  |                                                             |  |                                            |        | 74,998    |        |        | 87,934 



See notes to consolidated financial
statements



8



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments (unaudited)

September 30, 2007

(dollars in thousands)



|                                                |  |                                                              |  |                                                                           |        |           |              |        |   |              |        |   |             
|----------------------------------------------- |  | ------------------------------------------------------------ |  | ------------------------------------------------------------------------- | ------ | --------- | ------------ | ------ | - | ------------ | ------ | - | ------------
|Portfolio Company                               |  | Industry                                                     |  | Investment (8)                                                            |        | Principal |              | Cost   |   | Fair Value  
|Non-Affiliate Investments (less than 5% owned): |  |                                                              |  |                                                                           |        |           |              |        |  
|Active Brands International, Inc. (2)(9)        |  | Consumer Products                                            |  | Senior Debt (9.5%, Due 6/12) (1) Subordinated Debt
(14.0%, Due 9/12) (1)  |        | $         | 29,50013,068 |        | $ | 29,50013,068 |        | $ | 29,50013,068
|                                                |  |                                                              |  | Class A-1 Common Stock (3,056 shares)                                     |        |           |              |        |   | 3,056        |        |   | 2,995       
|                                                |  |                                                              |  | Warrants to purchase Class A-1 Common Stock (expire 6/17)                 |        |           |              |        |   | 331          |        |   | 504         
|Allens T.V. Cable Service, Inc.                |  | Cable                                                        |  | Senior Debt (12.2%, Due 12/12) (1)                                        |        |           | 7,748        |        |   | 7,748        |        |   | 7,748       
|                                                |  | Subordinated Debt (12.1%, Due 12/12) (1)                     |  |                                                                           | 2,199  |           |              | 2,199  |   |              | 2,199 
|                                                |  | Warrants to purchase Common Stock (expire 11/15)             |  |                                                                           |        |           |              |       |   |              |      
|Amerifit Nutrition, Inc. (2)                    |  | Healthcare                                                   |  | Senior Debt (11.8%, Due 3/10) (1)                                         |        |           | 4,803        |        |   | 4,803        |        |   | 4,803       
|B & H Education, Inc. (2)                       |  | Education                                                    |  | Senior Debt (9.7%, Due 3/10) (1)                                          |        |           | 3,250        |        |   | 3,250        |        |   | 3,250       
|                                                |  | Series A-1 Convertible Preferred Stock (12.0%, 5,384 shares) |  |                                                                           |        |           |              | 1,292  |   |              | 2,292 
|Badoud Enterprises, Inc. (2)                    |  | Newspaper                                                    |  | Senior Debt (10.2%, Due 9/11) (1)                                         |        |           | 4,199        |        |   | 4,199        |        |   | 4,199       
|Bare Escentuals, Inc.                           |  | Cosmetics                                                    |  | Senior Debt (8.1%, Due 2/12) (1)                                          |        |           | 2,277        |        |   | 2,277        |        |   | 2,257       
|BLI Holdings, Inc. (2)                          |  | Drugs                                                        |  | Subordinated Debt (15.5%, Due 3/10) (1)                                   |        |           | 10,187       |        |   | 10,187       |        |   | 10,187      
|Builders FirstSource, Inc.                      |  | Building & Development                                       |  | Senior Debt (7.6%, Due 8/11) (1)                                          |        |           | 2,111        |        |   | 2,111        |        |   | 2,038       
|CEI Holdings, Inc.                              |  | Cosmetics                                                    |  | Senior Debt (7.6%, Due 3/14) (1)                                          |        |           | 5,970        |        |   | 5,970        |        |   | 5,433       
|Cervalis LLC                                    |  | Business Services                                            |  | Senior Debt (8.9%, Due 3/12) (1)                                          |        |           | 10,000       |        |   | 10,000       |        |   | 10,000      
|Coastal Sunbelt Real Estate, Inc.               |  | Real Estate Investments                                      |  | Subordinated Unsecured Debt (15.0%, Due 7/12)                             |        |           | 2,045        |        |   | 2,045        |        |   | 2,045       
|                                                |  | Series A-2 Preferred Stock (12.0%, 20,000 shares)            |  |                                                                           |        |           |              | 2,177  |   |              | 2,644 
|                                                |  | Warrants to purchase Class B Common Stock                    |  |                                                                           |        |           |              |       |   |              |      
|Communicom Broadcasting, LLC (2)                |  | Broadcasting                                                 |  | Senior Debt (11.7%, Due 2/11) (1)                                         |        |           | 11,110       |        |   | 11,110       |        |   | 11,110      
|Community Media Group Inc. (2)                  |  | Newspaper                                                    |  | Senior Debt (9.5%, Due 9/10) (1)                                          |        |           | 18,748       |        |   | 18,748       |        |   | 18,748      
|Construction Trailer Specialist, Inc. (2)       |  | Auto Parts                                                   |  | Senior Debt (10.5%, Due 7/12) (1) Subordinated Debt (15.0%, Due 1/13) (1) |        |           | 7,1285,104   |        |   | 7,1285,104   |        |   | 7,1285,104  
|Cornerstone Healthcare Group Holding, Inc. (6)  |  | Healthcare                                                   |  | Subordinated Unsecured Debt (14.0%, Due 7/12)                             |        |           | 7,279        |        |   | 7,026        |        |   | 5,810       
|Country Road Communications LLC (2)             |  | Communications-Other                                         |  | Subordinated Debt (13.1%, Due 7/13) (1)                                   |        |           | 13,000       |        |   | 13,000       |        |   | 13,000      
|Crescent Publishing Company, LLC (2)            |  | Newspaper                                                    |  | Senior Debt (15.3%, Due 6/09) (1)                                         |        |           | 7,725        |        |   | 7,725        |        |   | 7,725       
|Cruz Bay Publishing, Inc.                       |  | Publishing                                                   |  | Subordinated Debt (12.4%, Due 12/13) (1)                                  |        |           | 20,000       |        |   | 20,000       |        |   | 20,000      
|CWP/RMK Acquisition Corp. (2)                   |  | Home Furnishings                                             |  | Senior Debt (8.7%, Due 6/11) (1)                                          |        |           | 6,345        |        |   | 6,345        |        |   | 6,345       
|                                                |  | Subordinated Debt (13.2%, Due 12/12) (1)                     |  |                                                                           | 11,928 |           |              | 11,928 |   |              | 11,928
|                                                |  | Common Stock (500 shares)                                    |  |                                                                           |        |           |              | 500    |   |              | 48    
|Cyrus Networks, LLC                             |  | Information Services                                         |  | Senior Debt (9.6%, Due 7/13) (1) Subordinated Debt (12.6%, Due 1/14) (1)  |        |           | 4,0964,504   |        |   | 4,0964,504   |        |   | 4,0964,504  
|Dayton Parts Holdings, LLC (2)                  |  | Auto Parts                                                   |  | Subordinated Debt (10.2%, Due 6/11) (1)                                   |        |           | 21,500       |        |   | 21,500       |        |   | 21,500      
|                                                |  | Preferred LLC Interest (10.0%, 16,470 units)                 |  |                                                                           |        |           |              | 589    |   |              | 589   
|                                                |  | Class A Common LLC Interest (8.0%, 10,980 units)             |  |                                                                           |        |           |              | 408    |   |              | 467   
|D&B Towers, LLC                                 |  | Communications-Other                                         |  | Senior Debt (15.4%, Due 6/08) (1)                                         |        |           | 5,552        |        |   | 5,552        |        |   | 5,552       
|The e-Media Club I, LLC (6)                     |  | Investment Fund                                              |  | LLC Interest (74 units)                                                   |        |           |              |        |   | 89           |        |   | 20          
|EAS Group, Inc.                                 |  | Technology                                                   |  | Subordinated Debt (19.0%, Due 4/11) (1)                                   |        |           | 11,579       |        |   | 11,579       |        |   | 11,579      
|Empower IT Holdings, Inc. (2)                   |  | Information Services                                         |  | Senior Debt (12.1%, Due 5/12) (1)                                         |        |           | 6,063        |        |   | 6,063        |        |   | 6,063       
|                                                |  | Subordinated Debt (14.5%, Due 6/12) (1)                      |  |                                                                           | 5,116  |           |              | 5,116  |   |              | 5,116 
|Equibrand Holding Corporation (2)               |  | Leisure Activities                                           |  | Senior Debt (12.2%, Due 9/10) (1)                                         |        |           | 4,640        |        |   | 4,640        |        |   | 4,640       
|                                                |  | Subordinated Debt (16.0%, Due 3/11) (1)                      |  |                                                                           | 9,403  |           |              | 9,403  |   |              | 9,403 
|Flexsol Packaging Corp.                         |  | Plastic Products                                             |  | Subordinated Debt (14.4%, Due 12/12) (1)                                  |        |           | 3,000        |        |   | 3,000        |        |   | 2,550       

See notes to consolidated financial statements



9



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments (unaudited)

September 30, 2007

(dollars in thousands)



|                                          |  |                                                         |  |                                                          |        |           |        |        |   |            |        |   |       
|----------------------------------------- |  | ------------------------------------------------------- |  | -------------------------------------------------------- | ------ | --------- | ------ | ------ | - | ---------- | ------ | - | ------
|Portfolio Company                         |  | Industry                                                |  | Investment (8)                                           |        | Principal |        | Cost   |   | Fair Value
|Golden Knight II CLO, Ltd.                |  | Diversified Financial Services                          |  | Income Notes (due 4/19)                                  |        |           |        |        | $ | 3,575      |        | $ | 3,092 
|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)                             |        | $         | 5,000  |        |   | 5,000      |        |   | 5,000 
|                                          |  | Subordinated Debt (13.0%, Due 8/13)                     |  |                                                          | 5,517  |           |        | 5,517  |   |            | 5,517 
|                                          |  |                                                         |  | Series B Preferred Units (22.0%, 3,133,333 units)        |        |           |        |        |   | 3,245      |        |   | 3,245 
|Home Interiors & Gifts, Inc.              |  | Home Furnishings                                        |  | Senior Debt (10.4%, Due 3/11)                            |        |           | 4,219  |        |   | 4,219      |        |   | 2,532 
|Jenzabar, Inc.                            |  | Technology                                              |  | Senior Preferred Stock (11.0%, 5,000 shares)             |        |           |        |        |   | 6,788      |        |   | 6,788 
|                                          |  | Subordinated Preferred Stock (109,800 shares)           |  |                                                          |        |           |        | 1,098  |   |            | 1,098 
|                                          |  | Warrants to purchase Common Stock (expire 4/16)         |  |                                                          |        |           |        | 421    |   |            | 25,774
|Jupitermedia Corporation (6)              |  | Information Services                                    |  | Common Stock (148,373 shares)                            |        |           |        |        |   | 2,114      |        |   | 939   
|Legacy Cabinets, Inc.                     |  | Home Furnishings                                        |  | Subordinated Debt (12.8%, Due 8/13) (1)                  |        |           | 3,000  |        |   | 3,000      |        |   | 3,000 
|Marietta Intermediate Holding Corporation |  | Cosmetics                                               |  | Subordinated Debt (13.2%, Due 12/11) (1)                 |        |           | 2,039  |        |   | 2,039      |        |   | 1,804 
|The Matrixx Group, Incorporated (2)       |  | Plastic Products                                        |  | Subordinated Debt (13.8%, Due 9/13) (1)                  |        |           | 16,184 |        |   | 16,184     |        |   | 16,184
|MCI Holdings LLC (2)                      |  | Healthcare                                              |  | Subordinated Debt (12.7%, Due 4/13) (1)                  |        |           | 30,399 |        |   | 30,399     |        |   | 30,399
|                                          |  | Class A LLC Interest (4,712,042 units)                  |  |                                                          |        |           |        | 3,000  |   |            | 3,534 
|Metropolitan Telecommunications           |  | Communications-CLEC                                     |  | Senior Debt (12.3%, Due 6/10-9/10) (1)                   |        |           | 19,025 |        |   | 19,025     |        |   | 19,025
|                                          |  | Subordinated Debt (16.2%, Due 12/10) (1)                |  |                                                          | 10,929 |           |        | 10,929 |   |            | 10,929
|Holding Company (2)                       |  |                                                         |  | Warrants to purchase Common Stock (expire 9/13)          |        |           |        |        |   | 1,843      |        |   | 8,751 
|MicroCal Holdings, LLC (2)                |  | Laboratory Instruments                                  |  | Senior Debt (9.8%, Due 3/10-9/10) (1)                    |        |           | 11,340 |        |   | 11,340     |        |   | 11,340
|                                          |  | Subordinated Debt (14.5%, Due 3/11) (1)                 |  |                                                          | 9,115  |           |        | 9,115  |   |            | 9,115 
|Micro Dental Laboratories (2)             |  | Healthcare                                              |  | Senior Debt (10.8%, Due 12/07) (1)                       |        |           | 3,798  |        |   | 3,798      |        |   | 3,798 
|                                          |  | Subordinated Debt (15.0%, Due 12/07) (1)                |  |                                                          | 15,505 |           |        | 15,505 |   |            | 15,505
|Miles Media Group, LLC (2)                |  | Publishing                                              |  | Senior Debt (11.4%, Due 6/13) (1)                        |        |           | 18,100 |        |   | 18,100     |        |   | 18,100
|NDSSI Holdings, LLC (2) (15)              |  | Electronics                                             |  | Senior Debt (10.5%, Due 12/10-12/11) (1)                 |        |           | 19,897 |        |   | 19,897     |        |   | 19,897
|                                          |  | Subordinated Debt (15.0%, Due 12/12) (1)                |  |                                                          | 19,606 |           |        | 19,606 |   |            | 19,606
|                                          |  | Class A Common LLC Interest (1,000,000 units)           |  |                                                          |        |           |        | 333    |   |            | 701   
|New Century Companies, Inc. (6)           |  | Industrial Equipment                                    |  | Warrants to purchase Common Stock (expire 6/10)          |        |           |        |        |   |           |        |   |      
|PartMiner, Inc. (2)                       |  | Information Services                                    |  | Senior Debt (12.2%, Due 6/09) (1)                        |        |           | 2,341  |        |   | 2,341      |        |   | 2,341 
|Philadelphia Newspapers, LLC              |  | Newspaper                                               |  | Subordinated Unsecured Debt (16.5%, Due 6/14) (1)        |        |           | 5,000  |        |   | 5,000      |        |   | 5,000 
|Powercom Corporation (2)                  |  | Communications-CLEC                                     |  | Senior Debt (12.0%, Due 12/06)                           |        |           | 1,798  |        |   | 1,798      |        |   | 1,798 
|                                          |  | Warrants to purchase Class A Common Stock (expire 6/14) |  |                                                          |        |           |        | 286    |   |            |      
|Quantum Medical Holdings, LLC (2)         |  | Laboratory Instruments                                  |  | Senior Debt (11.2%, Due 5/11) (1)                        |        |           | 15,500 |        |   | 15,500     |        |   | 15,500
|                                          |  | Subordinated Debt (15.0%, Due 12/11) (1)                |  |                                                          | 18,032 |           |        | 18,032 |   |            | 18,032
|                                          |  | Preferred LLC Interest (1,000,000 units)                |  |                                                          |        |           |        | 427    |   |            | 1,137 

See notes to consolidated financial statements



10



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments (unaudited)

September 30, 2007

(dollars in thousands)



|                                                                                      |  |                                                                 |  |                                              |       |           |        |       |   |           |            |       |   |        | 
|------------------------------------------------------------------------------------- |  | --------------------------------------------------------------- |  | -------------------------------------------- | ----- | --------- | ------ | ----- | - | --------- | ---------- | ----- | - | ------ | 
|Portfolio Company                                                                     |  | Industry                                                        |  | Investment (8)                               |       | Principal |        | Cost  |   |           | Fair Value |      
|Restaurant Technologies, Inc.                                                         |  | Food Services                                                   |  | Subordinated Debt (14.0%, Due 2/12) (1)      |       | $         | 28,055 |       | $ | 28,055    |            |       | $ | 28,055 | 
|                                                                                      |  | Series A-4 Convertible Preferred Stock (7,813 shares)           |  |                                              |       |           |        | 336   |   |           |            | 336   |  
|Sagamore Hill Broadcasting, LLC (2)                                                   |  | Broadcasting                                                    |  | Senior Debt (11.6%, Due 8/12) (1)            |       |           | 25,500 |       |   | 25,500    |            |       |   | 25,500 | 
|Summit Business Media Intermediate Holding Company, LLC                               |  | Information Services                                            |  | Subordinated Debt (12.1%, Due 12/13) (1)     |       |           | 6,000  |       |   | 6,000     |            |       |   | 6,000  | 
|Teleguam Holdings, LLC (2)                                                            |  | Communications-Other                                            |  | Subordinated Debt (12.5%, Due 10/12) (1)     |       |           | 20,000 |       |   | 20,000    |            |       |   | 20,000 | 
|ValuePage, Inc. (6)                                                                   |  | Communications-Other                                            |  | Senior Debt (12.8%, Due 6/08)                |       |           | 1,177  |       |   | 1,070     |            |       |   | 509    | 
|VS&A-PBI Holding LLC (6)                                                              |  | Publishing                                                      |  | LLC Interest                                 |       |           |        |       |   | 500       |            |       |   |       | 
|VOX Communications Group Holdings, LLC (2)                                            |  | Broadcasting                                                    |  | Senior Debt (13.6%, Due 12/07-6/10) (1)      |       |           | 11,222 |       |   | 11,000    |            |       |   | 11,000 | 
|                                                                                      |  | Convertible Preferred Subordinated Notes (12.5%, Due 6/15-6/17) |  |                                              | 1,509 |           |        | 1,302 |   |           |            | 717   |  
|Wiesner Publishing Company, LLC (6)                                                   |  | Publishing                                                      |  | Warrants to purchase LLC Units (expire 6/12) |       |           |        |       |   | 406       |            |       |   | 3,524  | 
|Wire Rope Corporation of America, Inc.                                                |  | Industrial Equipment                                            |  | Senior Debt (7.4%, Due 2/14) (1)             |       |           | 3,980  |       |   | 3,980     |            |       |   | 3,880  | 
|Xpressdocs Holdings, Inc. (2)                                                         |  | Business Services                                               |  | Senior Debt (9.4%, Due 7/11-12/11) (1)       |       |           | 16,980 |       |   | 16,980    |            |       |   | 16,980 | 
|                                                                                      |  | Subordinated Debt (14.0%, Due 7/12) (1)                         |  |                                              | 6,191 |           |        | 6,191 |   |           |            | 6,191 |  
|                                                                                      |  | Series A Preferred Stock (161,870 shares)                       |  |                                              |       |           |        | 500   |   |           |            | 453   |  
|Total Non-Affiliate Investments (represents 45.9% of total investments at fair value) |  |                                                                 |  |                                              |       | 670,660   |        |       |   | 700,813   |           
|Total Investments                                                                     |  |                                                                 |  |                                              |       | 1,504,565 |        |       |   | 1,525,325 |           
|Unearned Income                                                                       |  |                                                                 |  |                                              |       | (10,368   | )      |       |   | (10,368   | )         
|                                                                                      |  |                                                                 |  |                                              |       |           |        |       |   |           |            |       |   |        | 
|Total Investments Net of Unearned Income                                              |  |                                                                 |  |                                              | $     | 1,494,197 |        |       | $ | 1,514,957 |           
|                                                                                      |  |                                                                 |  |                                              |       |           |        |       |   |           |            |       |   |        | 
|                                                                                      |  |                                                                 | 
|Put/Call Options Granted or Written                                                   |  |                                                                 |  |                                              |       |           |        |       |   |           |           
|Crystal Media Network, LLC (7)                                                        |  | Broadcasting                                                    |  | Call options written                         |       |           |        |       | $ |          |            |       | $ | 327    | 
|Total Sleep Holdings, Inc. (2) (11)                                                   |  | Healthcare                                                      |  | Put option granted                           |       |           |        |       |   | 1,000     |            |       |   | 1,000  | 
|Total Put/Call Options Granted or Written                                             |  |                                                                 |  |                                              | $     | 1,000     |        |       | $ | 1,327     |           
|                                                                                      |  |                                                                 |  |                                              |       |           |        |       |   |           |            |       |   |        | 



See notes to consolidated financial
statements



11



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2006

(dollars in
thousands)



|                                                                                                |  |                                                    |  |                                                 |        |           |        |        |         |           |        |   |       
|----------------------------------------------------------------------------------------------- |  | -------------------------------------------------- |  | ----------------------------------------------- | ------ | --------- | ------ | ------ | ------- | --------- | ------ | - | ------
|Portfolio Company                                                                               |  | Industry                                           |  | Investment (8)                                  |        | Principal |        | Cost   |         | FairValue
|Control Investments: Majority-owned (5):                                                        |  |                                                    |  |                                                 |        |           |        |        |        
|Broadview Networks Holdings, Inc.                                                               |  | Communications-CLEC                                |  | Series A Preferred Stock (12.0%, 87,254 shares) |        |           |        |        | $       | 64,318    |        | $ | 74,165
|                                                                                                |  | Series A-1 Preferred Stock (12.0%, 100,702 shares) |  |                                                 |        |           |        | 57,380 |         |           | 85,597
|                                                                                                |  | Class A Common Stock (4,698,987 shares)            |  |                                                 |        |           |        |       |         |           |      
|Chesapeake Tower Holdings, LLC                                                                  |  | Communications-Other                               |  | Senior Debt (11.4%, Due 5/10)                   |        | $         | 400    |        |         | 400       |        |   | 400   
|                                                                                                |  | Preferred LLC Interest (8.0%, 3,139 units)         |  |                                                 |        |           |        | 3,139  |         |           | 3,139 
|                                                                                                |  | Class A Common LLC Interest (4,000 units)          |  |                                                 |        |           |        |       |         |           |      
|Cleartel Communications, Inc. (2)                                                               |  | Communications-CLEC                                |  | Subordinated Debt (14.7%, Due12/10-12/11)       |        |           | 71,962 |        |         | 71,962    |        |   | 71,962
|                                                                                                |  | Series B Preferred Stock (8.0%, 57,862 shares)     |  |                                                 |        |           |        | 50,613 |         |           | 612   
|                                                                                                |  | Common Stock (9 shares)                            |  |                                                 |        |           |        | 540    |         |           |      
|                                                                                                |  | Guaranty ($7,125)                                  |  |                                                 |        |           |        |        |         |           |       
|Helicon Cable Holdings, LLC (2) (12)                                                            |  | Cable                                              |  | Senior Debt (10.4%, Due 12/12) (1)              |        |           | 12,250 |        |         | 12,250    |        |   | 12,250
|                                                                                                |  | Subordinated Debt (14.3%, Due 6/13) (1)            |  |                                                 | 7,187  |           |        | 7,187  |         |           | 7,187 
|                                                                                                |  | Preferred LLC Interest (10.0%, 82,500 units)       |  |                                                 |        |           |        | 9,180  |         |           | 9,180 
|                                                                                                |  | Standby Letter of Credit ($300)                    |  |                                                 |        |           |        |        |         |           |       
|Jet Plastica Investors, LLC (2)                                                                 |  | Plastic Products                                   |  | Subordinated Debt (14.0%, Due 3/13) (1)         |        |           | 26,159 |        |         | 26,159    |        |   | 26,159
|                                                                                                |  | Preferred LLC Interest (8.0%, 301,595 units)       |  |                                                 |        |           |        | 30,893 |         |           | 30,893
|JupiterKagan, Inc. (2) (10)                                                                     |  | Information Services                               |  | Senior Debt (12.1%, Due 3/10) (1)               |        |           | 5,349  |        |         | 5,349     |        |   | 5,349 
|                                                                                                |  | Series A Preferred Stock (10.0%, 100,000 shares)   |  |                                                 |        |           |        | 10,000 |         |           | 10,000
|                                                                                                |  | Common Stock (770,000 shares)                      |  |                                                 |        |           |        |       |         |           |      
|                                                                                                |  | Standby Letter of Credit ($225)                    |  |                                                 |        |           |        |        |         |           |       
|                                                                                                |  | Guaranty ($1,353)                                  |  |                                                 |        |           |        |        |         |           |       
|Midwest Tower Partners, LLC (2) (13)                                                            |  | Communications-Other                               |  | Senior Debt (10.0%, 8/07)                       |        |           | 9,781  |        |         | 9,781     |        |   | 9,781 
|                                                                                                |  | Subordinated Debt (14.3%, Due 2/08) (1)            |  |                                                 | 17,485 |           |        | 17,485 |         |           | 17,485
|                                                                                                |  | Preferred LLC Interest (14.0%, 17,697 units)       |  |                                                 |        |           |        | 2,438  |         |           | 2,438 
|                                                                                                |  | Common LLC Interest (79,171 units)                 |  |                                                 |        |           |        | 201    |         |           | 5,213 
|RadioPharmacy Investors, LLC (2)                                                                |  | Healthcare                                         |  | Senior Debt ( 9.9%, Due 12/10) (1)              |        |           | 7,000  |        |         | 7,000     |        |   | 7,000 
|                                                                                                |  | Subordinated Debt (15.0%, Due 12/11) (1)           |  |                                                 | 9,258  |           |        | 9,258  |         |           | 9,258 
|                                                                                                |  | Preferred LLC Interest (8.0%, 70,000 units)        |  |                                                 |        |           |        | 7,522  |         |           | 10,657
|Superior Industries Investors, LLC (2)                                                          |  | Sporting Goods                                     |  | Subordinated Debt (14.0%, Due 3/13-3/15) (1)    |        |           | 14,083 |        |         | 14,083    |        |   | 14,083
|                                                                                                |  | Preferred LLC Interest (8.0%, 125,400 units)       |  |                                                 |        |           |        | 12,837 |         |           | 12,837
|Superior Publishing Corporation (2)                                                             |  | Newspaper                                          |  | Subordinated Debt (20.0%, Due 10/10) (1)        |        |           | 20,731 |        |         | 19,022    |        |   | 19,022
|                                                                                                |  | Series A Preferred Stock (12.0%, 7,999 shares)     |  |                                                 |        |           |        | 7,999  |         |           | 9,244 
|                                                                                                |  | Common Stock (100 shares)                          |  |                                                 |        |           |        | 365    |         |           |      
|Working Mother Media, Inc. (6)                                                                  |  | Publishing                                         |  | Senior Debt (8.8%, Due 12/08)                   |        |           | 17,869 |        |         | 11,546    |        |   | 11,546
|                                                                                                |  | Class A Preferred Stock (13.0%, 12,497 shares)     |  |                                                 |        |           |        | 12,497 |         |           | 5,019 
|                                                                                                |  | Class B Preferred Stock (13.0%, 1 share)           |  |                                                 |        |           |        | 1      |         |           |      
|                                                                                                |  | Class C Preferred Stock (13.0%, 1 share)           |  |                                                 |        |           |        | 1      |         |           |      
|                                                                                                |  | Common Stock (510 shares)                          |  |                                                 |        |           |        | 1      |         |           |      
|                                                                                                |  | Guaranty ($476)                                    |  |                                                 |        |           |        |        |         |           |       
|Total Control investments: Majority-owned (represents 37.5% of total investments at fair value) |  |                                                    |  |                                                 |        | 481,407   |        |        | 470,476
|Control Investments: Non-majority owned (4):                                                    |  |                                                    |  |                                                 |        |           |        |        |        
|Crystal Media Network, LLC (6) (7)                                                              |  | Broadcasting                                       |  | LLC Interest                                    |        |           |        |        |         | 3,060     |        |   | 547   

See notes to consolidated financial statements



12



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2006

(dollars in thousands)



|                                                                                                   |  |                                                                              |                                                     |                                         |        |           |        |        |         |           |        |       |       
|-------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------- | --------------------------------------------------- | --------------------------------------- | ------ | --------- | ------ | ------ | ------- | --------- | ------ | ----- | ------
|Portfolio Company                                                                                  |  | Industry                                                                     |                                                     | Investment (8)                          |        | Principal |        | Cost   |         | FairValue
|Intran Media, LLC                                                                                  |  | Other Media                                                                  |                                                     | Senior Debt (9.9%, Due 12/11) (1)       |        | $         | 12,000 |        | $       | 12,000    |        | $     | 12,000
|                                                                                                   |  | Preferred Units (10.0%, 86,000 units)                                        |                                                     |                                         |        |           |        | 8,661  |         |           | 8,661 
|National Product Services, Inc. (2)                                                                |  | Business Services                                                            |                                                     | Senior Debt (13.2%, Due 6/09)           |        |           | 12,316 |        |         | 5,710     |        |       | 12,365
|                                                                                                   |  | Subordinated Debt (16.0%, Due 6/09)                                          |                                                     |                                         | 11,594 |           |        | 10,225 |         |           | 3,035 
|                                                                                                   |  | Common Stock (995,428 shares)                                                |                                                     |                                         |        |           |        |       |         |           |      
|Platinum Wireless, Inc. (6)                                                                        |  | Communications-Other                                                         |                                                     | Common Stock (2,937 shares)             |        |           |        |        |         | 4,640     |        |       | 3,764 
|                                                                                                   |  | Option to purchase Common Stock (expire 12/31/13)                            |                                                     |                                         |        |           |        | 272    |         |           |      
|PremierGarage Holdings, LLC (2)                                                                    |  | Home Furnishings                                                             |                                                     | Senior Debt (10.1%, Due 6/10-12/10)     |        |           | 10,700 |        |         | 10,700    |        |       | 10,700
|                                                                                                   |  | Preferred LLC Units (8.0%, 445 units)                                        |                                                     |                                         |        |           |        | 4,592  |         |           | 4,592 
|                                                                                                   |  | Common LLC Units (356 units)                                                 |                                                     |                                         |        |           |        |       |         |           |      
|Total Control Investments: Non-majority-owned (represents 4.4% of total investments at fair value) |  |                                                                              |                                                     |                                         |        | 59,860    |        |        | 55,664 
|Total Control Investments: (represents 41.9% of total investments at fair value)                   |  |                                                                              |                                                     |                                         |        | 541,267   |        |        | 526,140
|Affiliate Investments (3):                                                                         |  |                                                                              |                                                     |                                         |        |           |        |        |        
|Advanced Sleep Concepts, Inc. (2)                                                                  |  | Home Furnishings                                                             |                                                     | Senior Debt (13.8%, Due 10/11) (1)      |        |           | 7,000  |        |         | 7,000     |        |       | 7,000 
|                                                                                                   |  |                                                                              | Subordinated Debt (16.0%, Due 4/12) (1)             |                                         |        | 4,540     |        |        | 4,540   |           |        | 4,540
|                                                                                                   |  |                                                                              | Common Stock (423 shares)                           |                                         |        |           |        |        | 524     |           |        | 524  
|                                                                                                   |  |                                                                              | Warrants to purchase Common Stock (expire 10/12/16) |                                         |        |           |        |        | 348     |           |        | 348  
|Cherry Hill Holdings, Inc. (2)                                                                     |  | Entertainment                                                                |                                                     | Senior Debt (12.9%, Due 8/11) (1)       |        |           | 12,122 |        |         | 12,122    |        |       | 12,122
|                                                                                                   |  | Series A Preferred Stock (10.0%, 750 shares)                                 |                                                     |                                         |        |           |        | 775    |         |           | 775   
|iVerify.US Inc. (6)                                                                                |  | Communications-Other                                                         |                                                     | Preferred Stock (8.0%, 54 shares)       |        |           |        |        |         | 578       |        |       |      
|                                                                                                   |  | Common Stock (20 shares)                                                     |                                                     |                                         |        |           |        | 550    |         |           |      
|NYL Brands Holdings, Inc. (2) (9)                                                                  |  | ConsumerProducts                                                             |                                                     | Subordinated Debt (13.0%, Due 2/11) (1) |        |           | 10,000 |        |         | 10,000    |        |       | 10,000
|                                                                                                   |  | Class A Common Stock (1,500 shares)                                          |                                                     |                                         |        |           |        | 1,500  |         |           | 1,500 
|                                                                                                   |  | Warrants to purchase Common Stock                                            |                                                     |                                         |        |           |        | 331    |         |           | 526   
|                                                                                                   |  | (expire 2/3/16)                                                              |                                                     |                                         |        |           |        |        |         |           |       
|On Target Media, LLC                                                                               |  | Other Media                                                                  |                                                     | Class A LLC Interest (10.0%, 68 units)  |        |           |        |        |         | 1,836     |        |       | 1,836 
|                                                                                                   |  | Class B LLC Interest (68 units)                                              |                                                     |                                         |        |           |        |       |         |           | 1,613 
|Stratford School Holdings, Inc. (2)                                                                |  | Education                                                                    |                                                     | Senior Debt (9.9%, Due 7/11-9/11) (1)   |        |           | 14,500 |        |         | 14,500    |        |       | 14,500
|                                                                                                   |  | Subordinated Debt (14.0%, Due 12/11) (1)                                     |                                                     |                                         | 6,924  |           |        | 6,924  |         |           | 6,924 
|                                                                                                   |  | Series A Convertible Preferred Stock (12.0%, 10,000 shares)                  |                                                     |                                         |        |           |        | 60     |         |           | 2,997 
|                                                                                                   |  | Warrants to purchase Common Stock (expire 5/31/15)                           |                                                     |                                         |        |           |        | 68     |         |           | 1,026 
|Sunshine Media Delaware, LLC (2)                                                                   |  | Publishing                                                                   |                                                     | Senior Debt (14.7%, Due 12/08)          |        |           | 13,632 |        |         | 12,281    |        |       | 12,281
|                                                                                                   |  | Class A LLC Interest (8.0%, 563,808 units)                                   |                                                     |                                         |        |           |        | 564    |         |           | 329   
|                                                                                                   |  | Option to acquire Warrants to purchase Class B LLC Interest (expire 5/31/14) |                                                     |                                         |        |           |        |       |         |           |      
|TNR Entertainment Corp. (2) (14)                                                                   |  | Entertainment                                                                |                                                     | Senior Debt (10.4%, Due 7/10) (1)       |        |           | 12,500 |        |         | 12,500    |        |       | 12,500
|                                                                                                   |  | Subordinated Debt (17.5%, Due 1/11) (1)                                      |                                                     |                                         | 13,067 |           |        | 13,067 |         |           | 13,067
|                                                                                                   |  | Series D Preferred Stock (1,806,452 shares)                                  |                                                     |                                         |        |           |        | 3,000  |         |           | 3,000 
|                                                                                                   |  | Warrants to purchase Series D Preferred Stock (expire 7/31/16)               |                                                     |                                         |        |           |        |       |         |           |      
|XFone, Inc (6)                                                                                     |  | Communications-Other                                                         |                                                     | Common Stock (868,946 shares)           |        |           |        |        |         | 2,485     |        |       | 2,482 
|                                                                                                   |  | Warrants to purchase Common Stock (expire 3/3/11)                            |                                                     |                                         |        |           |        |       |         |           |      
|Total Affiliate Investments (represents 8.7% of total investments at fair value)                   |  |                                                                              |                                                     |                                         |        | 105,553   |        |        | 109,890

See notes to consolidated financial statements



13



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2006

(dollars in thousands)



|                                                |  |                                                              |                                                  |                                                                           |        |           |            |        |     |            |        |     |           
|----------------------------------------------- |  | ------------------------------------------------------------ | ------------------------------------------------ | ------------------------------------------------------------------------- | ------ | --------- | ---------- | ------ | --- | ---------- | ------ | --- | ----------
|Portfolio Company                               |  | Industry                                                     |                                                  | Investment (8)                                                            |        | Principal |            | Cost   |     | FairValue 
|Non-Affiliate Investments (less than 5% owned): |  |                                                              |                                                  |                                                                           |        |          
|Allens T.V. Cable Service, Inc.                |  | Cable                                                        |                                                  | Senior Debt (12.1%, Due 12/12) (1)                                        |        | $         | 7,998      |        | $   | 7,998      |        | $   | 7,998     
|                                                |  | Subordinated Debt (12.1%, Due 12/12) (1)                     |                                                  |                                                                           | 2,096  |           |            | 2,096  |     |            | 2,096 
|                                                |  | Warrants to purchase Common Stock (expire 11/30/15)          |                                                  |                                                                           |        |           |            |       |     |            |      
|Amerifit Nutrition, Inc. (2)                    |  | Healthcare                                                   |                                                  | Senior Debt (12.0%, Due 3/10) (1)                                         |        |           | 5,569      |        |     | 5,569      |        |     | 5,569     
|B & H Education, Inc. (2)                       |  | Education                                                    |                                                  | Senior Debt (10.4%, Due 3/10) (1)                                         |        |           | 4,000      |        |     | 4,000      |        |     | 4,000     
|                                                |  | Series A-1 Convertible Preferred Stock (12.0%, 5,384 shares) |                                                  |                                                                           |        |           |            | 1,188  |     |            | 1,540 
|Badoud Enterprises, Inc. (2)                    |  | Newspaper                                                    |                                                  | Senior Debt (10.4%, Due 9/11) (1)                                         |        |           | 4,799      |        |     | 4,799      |        |     | 4,799     
|BLI Holdings, Inc. (2)                          |  | Drugs                                                        |                                                  | Subordinated Debt (13.1%, Due 3/10) (1)                                   |        |           | 10,000     |        |     | 10,000     |        |     | 10,000    
|Builders FirstSource, Inc.                      |  | Building & Development                                       |                                                  | Senior Debt (7.9%, Due 8/11) (1)                                          |        |           | 886        |        |     | 886        |        |     | 873       
|Cambridge Information Group, Inc. (2)           |  | Information Services                                         |                                                  | Subordinated Debt (12.9%, Due 11/11) (1)                                  |        |           | 8,500      |        |     | 8,500      |        |     | 8,500     
|CEI Holdings, Inc.                              |  | Cosmetics                                                    |                                                  | Subordinated Debt (13.1%, Due 12/11) (1)                                  |        |           | 4,755      |        |     | 4,755      |        |     | 4,755     
|Communications & Power Industries, Inc.         |  | Aerospace & Defense                                          |                                                  | Senior Debt (7.6%, Due 7/10) (1)                                          |        |           | 741        |        |     | 741        |        |     | 744       
|Communicom Broadcasting, LLC (2)                |  | Broadcasting                                                 |                                                  | Senior Debt (12.4%, Due 2/11) (1)                                         |        |           | 8,068      |        |     | 8,068      |        |     | 8,068     
|Community Media Group, Inc. (2)                 |  | Newspaper                                                    |                                                  | Senior Debt (9.9%, Due 9/10) (1)                                          |        |           | 19,730     |        |     | 19,730     |        |     | 19,730    
|Cornerstone Healthcare Group Holding, Inc.      |  | Healthcare                                                   |                                                  | Subordinated Unsecured Debt (14.0%, Due 7/12) (1)                         |        |           | 7,206      |        |     | 7,206      |        |     | 7,206     
|Country Road Communications LLC (2)             |  | Communications-Other                                         |                                                  | Subordinated Debt (13.3%, Due 7/13) (1)                                   |        |           | 13,000     |        |     | 13,000     |        |     | 13,000    
|Creative Loafing, Inc. (2)                      |  | Newspaper                                                    |                                                  | Senior Debt (12.0%, Due 6/10) (1)                                         |        |           | 18,275     |        |     | 18,275     |        |     | 18,275    
|Crescent Publishing Company, LLC (2)            |  | Newspaper                                                    |                                                  | Senior Debt (15.1%, Due 6/09-6/10) (1)                                    |        |           | 7,503      |        |     | 7,503      |        |     | 7,503     
|Cruz Bay Publishing, Inc.                       |  | Publishing                                                   |                                                  | Subordinated Debt (12.4%, Due 12/13)                                      |        |           | 20,000     |        |     | 20,000     |        |     | 20,000    
|CWP/RMK Acquisition Corp.                       |  | Home Furnishings                                             |                                                  | Senior Debt (8.9%, Due 6/11) (1)                                          |        |           | 6,250      |        |     | 6,250      |        |     | 6,250     
|                                                |  | Subordinated Debt (13.4%, Due 12/12) (1)                     |                                                  |                                                                           | 11,750 |           |            | 11,750 |     |            | 11,750
|                                                |  | Common Stock (500 shares)                                    |                                                  |                                                                           |        |           |            | 500    |     |            | 500   
|Dayton Parts Holdings, LLC (2)                  |  | Auto Parts                                                   |                                                  | Subordinated Debt (12.5%, Due 6/11) (1)                                   |        |           | 16,000     |        |     | 16,000     |        |     | 16,000    
|                                                |  |                                                              | Preferred LLC Interest (10.0%, 16,470 units)     |                                                                           |        |           |            |        | 589 |            |        | 589
|                                                |  |                                                              | Class A Common LLC Interest (8.0%, 10,980 units) |                                                                           |        |           |            |        | 408 |            |        | 609
|D&B Towers, LLC                                 |  | Communications-Other                                         |                                                  | Senior Debt (15.4%, Due 6/08) (1)                                         |        |           | 5,412      |        |     | 5,412      |        |     | 5,062     
|dick clark productions, inc. (2)(6)             |  | Broadcasting                                                 |                                                  | Common Stock (235,714 shares)                                             |        |           |            |        |     | 210        |        |     | 510       
|                                                |  | Warrants to purchase Common Stock (expire 7/25/11)           |                                                  |                                                                           |        |           |            | 858    |     |            | 5,049 
|The e-Media Club I, LLC (6)                     |  | Investment Fund                                              |                                                  | LLC Interest (74 units)                                                   |        |           |            |        |     | 88         |        |     | 34        
|EAS Group, Inc.                                 |  | Technology                                                   |                                                  | Subordinated Unsecured Debt (16.0%, Due 4/11) (1)                         |        |           | 11,529     |        |     | 11,529     |        |     | 11,529    
|Empower IT Holdings, Inc. (2)                   |  | Information Services                                         |                                                  | Senior Debt (11.9%, Due 5/12) (1) Subordinated Debt (14.5%, Due 6/12) (1) |        |           | 7,9595,116 |        |     | 7,9595,116 |        |     | 7,9595,116
|Equibrand Holding Corporation (2)               |  | Leisure Activities                                           |                                                  | Senior Debt (12.4%, Due 9/10) (1)                                         |        |           | 4,640      |        |     | 4,640      |        |     | 4,640     
|                                                |  | Subordinated Debt (15.8%, Due 3/11) (1)                      |                                                  |                                                                           | 9,674  |           |            | 9,674  |     |            | 9,674 
|Flexsol Packaging Corp.                         |  | Plastic Products                                             |                                                  | Subordinated Debt (13.5%, Due 12/12) (1)                                  |        |           | 3,000      |        |     | 3,000      |        |     | 2,955     
|GoldenSource Holdings Inc. (6)                  |  | Technology                                                   |                                                  | Warrants to purchase Class A Common Stock (expire 10/31/08)               |        |           |            |        |     |           |        |     |          
|Home Interiors & Gifts, Inc.                    |  | Home Furnishings                                             |                                                  | Senior Debt (10.4%, Due 3/11)                                             |        |           | 4,492      |        |     | 4,492      |        |     | 3,308     

See notes to consolidated financial statements



14



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2006

(dollars in thousands)



|                                                    |  |                                                            |  |                                                                                                                                    |        |           |              |        |   |                   |        |   |                  
|--------------------------------------------------- |  | ---------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------- | ------ | --------- | ------------ | ------ | - | ----------------- | ------ | - | -----------------
|Portfolio Company                                   |  | Industry                                                   |  | Investment (8)                                                                                                                     |        | Principal |              | Cost   |   | FairValue        
|Jenzabar, Inc.                                      |  | Technology                                                 |  | Senior Preferred Stock (11.0%, 5,000 shares)                                                                                       |        |           |              |        | $ | 6,381             |        | $ | 6,381            
|                                                    |  | Subordinated Preferred Stock (109,800 shares)              |  |                                                                                                                                    |        |           |              | 1,098  |   |                   | 1,098 
|                                                    |  | Warrants to purchase Common Stock (expire 4/30/16)         |  |                                                                                                                                    |        |           |              | 422    |   |                   | 17,180
|The Joseph F. Biddle Publishing Company (2)         |  | Newspaper                                                  |  | Senior Debt (8.9%, Due 12/11) (1)                                                                                                  |        | $         | 7,050        |        |   | 7,050             |        |   | 7,050            
|Jupitermedia Corporation (6)                        |  | Information Services                                       |  | Common Stock (148,373 shares)                                                                                                      |        |           |              |        |   | 2,114             |        |   | 1,175            
|Legacy Cabinets, Inc                                |  | Home Furnishings                                           |  | Subordinated Debt (12.9%, Due 8/13) (1)                                                                                            |        |           | 3,000        |        |   | 3,000             |        |   | 3,000            
|Marietta Intermediate Holding Corporation           |  | Cosmetics                                                  |  | Subordinated Debt (14.8%, Due 12/11) (1)                                                                                           |        |           | 2,000        |        |   | 2,000             |        |   | 1,517            
|MCI Holdings LLC (2)                                |  | Healthcare                                                 |  | Subordinated Debt (12.7%, Due 3/12-4/13) (1)                                                                                       |        |           | 29,791       |        |   | 29,791            |        |   | 29,791           
|                                                    |  | Class A LLC Interest (4,712,042 units)                     |  |                                                                                                                                    |        |           |              | 3,000  |   |                   | 3,388 
|Metropolitan Telecommunications Holding Company (2) |  | Communications-CLEC                                        |  | Senior Debt (12.5%, Due 6/10-9/10) (1) Subordinated Debt (16.4%, Due 12/10) (1) Warrants to purchase Common Stock (expire 9/30/13) |        |           | 20,72510,929 |        |   | 20,72510,9291,843 |        |   | 20,72510,9298,320
|MicroCal Holdings, LLC (2)                          |  | Laboratory Instruments                                     |  | Senior Debt (9.9%, Due 3/10-9/10) (1)                                                                                              |        |           | 12,800       |        |   | 12,800            |        |   | 12,800           
|                                                    |  | Subordinated Debt (14.5%, Due 3/11) (1)                    |  |                                                                                                                                    | 9,115  |           |              | 9,115  |   |                   | 9,115 
|Micro Dental Laboratories (2)                       |  | Healthcare                                                 |  | Senior Debt (10.7%, Due 5/11-11/11) (1)                                                                                            |        |           | 13,186       |        |   | 13,186            |        |   | 13,186           
|                                                    |  | Subordinated Debt (15.0%, Due 5/12) (1)                    |  |                                                                                                                                    | 6,999  |           |              | 6,999  |   |                   | 6,999 
|Miles Media Group, LLC (2)                          |  | Publishing                                                 |  | Senior Debt (11.9%, Due 6/12) (1)                                                                                                  |        |           | 9,150        |        |   | 9,150             |        |   | 9,150            
|                                                    |  | Subordinated Debt (16.4%, Due 12/12) (1)                   |  |                                                                                                                                    | 4,000  |           |              | 4,000  |   |                   | 4,000 
|                                                    |  | Warrants to purchase LLC Units (expire 6/09 and 6/15)      |  |                                                                                                                                    |        |           |              | 439    |   |                   | 2,119 
|National Display Holdings, LLC (2) (15)             |  | Electronics                                                |  | Senior Debt (11.4%, Due 12/11) (1)                                                                                                 |        |           | 10,000       |        |   | 10,000            |        |   | 10,000           
|                                                    |  | Subordinated Debt (15.0%, Due 12/12) (1)                   |  |                                                                                                                                    | 13,682 |           |              | 13,682 |   |                   | 13,682
|                                                    |  | Class A Common LLC Interest (1,000,000 units)              |  |                                                                                                                                    |        |           |              | 1,000  |   |                   | 1,152 
|New Century Companies, Inc. (6)                     |  | Industrial Equipment                                       |  | Warrants to purchase Common Stock (expire 6/30/10)                                                                                 |        |           |              |        |   |                  |        |   |                 
|PartMiner, Inc. (2)                                 |  | Information Services                                       |  | Senior Debt (14.9%, Due 6/09) (1)                                                                                                  |        |           | 3,341        |        |   | 3,341             |        |   | 3,341            
|Philadelphia Newspapers, LLC                        |  | Newspaper                                                  |  | Subordinated Unsecured Debt (16.0%, Due 6/14) (1)                                                                                  |        |           | 5,017        |        |   | 5,017             |        |   | 5,017            
|Powercom Corporation (2)                            |  | Communications-CLEC                                        |  | Senior Debt (12.0%, Due 12/06)                                                                                                     |        |           | 1,798        |        |   | 1,798             |        |   | 1,798            
|                                                    |  | Warrants to purchase Class A Common Stock (expire 6/30/14) |  |                                                                                                                                    |        |           |              | 286    |   |                   |      
|Quantum Medical Holdings, LLC (2)                   |  | Laboratory Instruments                                     |  | Senior Debt (11.1%, Due 12/10- 5/11) (1)                                                                                           |        |           | 17,500       |        |   | 17,500            |        |   | 17,500           
|                                                    |  | Subordinated Debt (15.0%, Due 12/11) (1)                   |  |                                                                                                                                    | 18,032 |           |              | 18,032 |   |                   | 18,032
|                                                    |  | Preferred LLC Interest (1,000,000 units)                   |  |                                                                                                                                    |        |           |              | 421    |   |                   | 955   
|Restaurant Technologies, Inc.                       |  | Food Services                                              |  | Subordinated Debt (16.0%, Due 2/12) (1)                                                                                            |        |           | 20,923       |        |   | 20,923            |        |   | 20,923           
|                                                    |  | Series A-4 Convertible Preferred Stock (7,813 shares)      |  |                                                                                                                                    |        |           |              | 281    |   |                   | 281   
|Sagamore Hill Broadcasting, LLC (2)                 |  | Broadcasting                                               |  | Senior Debt (11.4%, Due 11/09) (1)                                                                                                 |        |           | 14,000       |        |   | 14,000            |        |   | 14,000           

See notes to consolidated financial statements



15



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2006

(dollars in thousands)



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

See notes to consolidated financial statements



16



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

September 30, 2007 and December 31,
2006

(dollars in thousands)



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

|(2) | Some of the securities listed are issued by one or more affiliates of the listed portfolio company.
|--- | ---------------------------------------------------------------------------------------------------

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

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

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

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

|(7) | In August 2006, MCG sold 50.1% of its equity in Crystal Media Network, LLC (Crystal Media). As part of the transaction, MCG also issued a written call option to the
buyer on up to an additional 10% ownership interest in Crystal Media for $110. The option expires January 31, 2008. This call option is included in other liabilities at fair value on MCGs consolidated balance sheets.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(9) | During the first quarter of 2007, NYL Brands Holdings, Inc. changed its name to Active Brands International, Inc. During the second quarter of 2007, MCG converted its 1,500 Class A
shares to non-voting Class A-1 shares. As a result, Active Brands has been classified as a non-affiliate investment since June 30, 2007.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | During the second quarter of 2007, JupiterKagan, Inc. changed its name to JUPR Holdings, Inc.
|---- | ---------------------------------------------------------------------------------------------

|(11) | MCG acquired 61% of Total Sleep Holdings, Inc. common stock during the second quarter of 2007 which resulted in it being classified as a majority owned control investment since June
30, 2007. In connection with this transaction, MCG granted a put option to a private equity firm to put an additional 34% of the common stock of Total Sleep Holdings, Inc. to MCG for a price of $1,000. This put option expires April 30, 2009 if not
exercised prior to that date. This put option is outstanding at September 30, 2007 and is included in other liabilities at fair value on MCGs consolidated balance sheets.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Helicon Cable Holdings, LLC refinanced and paid off its senior and subordinated secured debt during the third quarter of 2007, at which time a new unsecured facility to the
operating company and a new unsecured facility to the holding company were funded. JetBroadband Holdings, LLC replaced Helicon Cable Holdings, LLC as the parent entity of the portfolio company in connection with a concurrent restructuring of the
equity.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) | MCGs investment in MTP Holdings, LLC was previously listed as an investment in Midwest Tower Partners, LLC. Midwest Tower Partners, LLC is a subsidiary of MTP Holdings, LLC.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) | During the third quarter of 2007, all of the existing preferred stock and preferred stock warrants of TNR Entertainment Corp. (TNR) were converted to common stock and
common stock warrants. In addition, MCG purchased shares of TNRs voting preferred stock constituting a majority of the outstanding voting securities of TNR. As a result, TNR is classified as a majority control investment at September 30, 2007.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(15) | During the third quarter of 2007, National Display Holdings, LLC changed its name to NDSSI Holdings, LLC.
|---- | ---------------------------------------------------------------------------------------------------------

See notes to consolidated financial statements.



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited)

(in thousands, except per share data)

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

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

The Company conducts some of its activities through wholly owned special purpose financing subsidiaries. These subsidiaries are bankruptcy remote,
special purpose entities to which the Company transfers certain loans. Each financing subsidiary in turn transfers the loans to a Delaware statutory trust. The transfers of the loans to the Delaware statutory trusts are structured as on-balance
sheet securitizations for accounting purposes.

On October 24, 2007, the Company announced that its wholly owned subsidiary, Solutions
Capital I, LP, received a license from the United States Small Business Administration (SBA) to operate as a small business investment company (SBIC) under the Small Business Investment Act of 1958, as amended. In
connection with the formation of Solutions Capital I, LP, the Company organized another wholly owned subsidiary, Solutions Capital GP, LLC, as a Delaware limited liability company. Solutions Capital GP, LLC will act as the general
partner of Solutions Capital I, LP, while the Company will be the sole limited partner. See Note 9, Subsequent Events, for further discussion of Solutions Capital I, LP.

The Company also uses wholly owned subsidiaries, all of which are structured as Delaware corporations, to hold the assets of one or more of its portfolio
companies. Some of these subsidiaries have wholly owned subsidiaries, all of which are Delaware corporations, that hold the assets of certain of the Companys portfolio companies.

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

Interim consolidated financial statements of MCG are prepared in
accordance with generally accepted accounting principles (GAAP) for interim financial information and pursuant to the requirements of reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying
annual consolidated financial statements prepared in accordance with GAAP are omitted. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial
statements for the interim periods, have been included. The results of operations for the three and nine months ended September 30, 2007 are not necessarily indicative of results that ultimately may be achieved for the year. The interim unaudited
consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Companys Form 10-K for the fiscal year ended December 31, 2006, as filed with the SEC.
Certain prior period information has been reclassified to conform to current year presentation.

Taxable subsidiaries

The Company currently qualifies as a regulated investment company (a RIC) for federal income tax purposes, which allows it to avoid paying
corporate income taxes on any income or gains that it distributes to its shareholders. The Company has certain wholly owned taxable subsidiaries (the Taxable Subsidiaries), each of which holds one or more of the Companys portfolio
investments that are listed on the Consolidated Schedule of



18



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



Investments. The Taxable Subsidiaries are consolidated with the Company for GAAP purposes, such that the Companys consolidated financial statements
reflect its investments in the portfolio companies owned by the Taxable Subsidiaries. The purpose of the Taxable Subsidiaries is to permit the Company to hold portfolio companies that are organized as limited liability companies (LLCs)
(or other forms of passthrough entities) and still satisfy the RIC tax requirement that at least 90% of the Companys gross revenue for income tax purposes must consist of investment income. Absent the Taxable Subsidiaries, a
proportionate amount of any gross income of an LLC (or other passthrough entity) portfolio investment would flow through directly to the Company. To the extent that such income did not consist of investment income, it could jeopardize the
ability of the Company to qualify as a RIC and therefore cause the Company to incur significant amounts of federal income taxes. Where the LLCs (or other pass-through entities) are owned by the Taxable Subsidiaries, however, their income is taxed to
the Taxable Subsidiaries and does not flow through to the Company, thereby helping the Company preserve its RIC status and resultant tax advantages. The Taxable Subsidiaries are not consolidated for income tax purposes and may generate income tax
expense as a result of their ownership of the portfolio companies. This income tax expense, if any, is reflected in the Companys Consolidated Statement of Operations.

Note 2Investments

The composition of MCGs investments as of September 30, 2007 and
December 31, 2006, at cost, was as follows, excluding unearned income:



|                                 |  |                    |           |                              |                   |   |                    |   |                              |  |       |  
|-------------------------------- |  | ------------------ | --------- | ---------------------------- | ----------------- | - | ------------------ | - | ---------------------------- |  | ----- | -
|                                 |  | September 30, 2007 |           |                              | December 31, 2006 |  
|                                 |  | Investments atCost |           | Percentage ofTotal Portfolio |                   |   | Investmentsat Cost |   | Percentage ofTotal Portfolio | 
|Senior secured debt              |  | $                  | 494,274   |                              | 32.8              | % |                    | $ | 384,490                      |  | 30.9  | %
|Subordinated debt                |  |                    |           |                              |                   |   |                    |   |                              |  |       |  
|Secured                          |  |                    | 551,671   |                              | 36.7              |   |                    |   | 506,681                      |  | 40.8  |  
|Unsecured                        |  |                    | 39,440    |                              | 2.6               |   |                    |   | 25,233                       |  | 2.0   |  
|                                 |  |                    |           |                              |                   |   |                    |   |                              |  |       |  
|Total debt investments           |  |                    | 1,085,385 |                              | 72.1              |   |                    |   | 916,404                      |  | 73.7  |  
|                                 |  |                    |           |                              |                   |   |                    |   |                              |  |       |  
|Preferred equity                 |  |                    | 391,141   |                              | 26.0              |   |                    |   | 296,942                      |  | 23.9  |  
|Common/Common equivalents equity |  |                    | 28,039    |                              | 1.9               |   |                    |   | 29,359                       |  | 2.4   |  
|                                 |  |                    |           |                              |                   |   |                    |   |                              |  |       |  
|Total equity investments         |  |                    | 419,180   |                              | 27.9              |   |                    |   | 326,301                      |  | 26.3  |  
|                                 |  |                    |           |                              |                   |   |                    |   |                              |  |       |  
|Total                            |  | $                  | 1,504,565 |                              | 100.0             | % |                    | $ | 1,242,705                    |  | 100.0 | %
|                                 |  |                    |           |                              |                   |   |                    |   |                              |  |       |  

The composition of MCGs investments as of September 30, 2007 and December 31, 2006, at
fair value, was as follows, excluding unearned income:



|                                 |  |                          |           |                              |                   |   |                          |   |                              |  |       |  
|-------------------------------- |  | ------------------------ | --------- | ---------------------------- | ----------------- | - | ------------------------ | - | ---------------------------- |  | ----- | -
|                                 |  | September 30, 2007       |           |                              | December 31, 2006 |  
|                                 |  | Investments atFair Value |           | Percentage ofTotal Portfolio |                   |   | Investments atFair Value |   | Percentage ofTotal Portfolio | 
|Senior secured debt              |  | $                        | 497,488   |                              | 32.6              | % |                          | $ | 389,721                      |  | 31.0  | %
|Subordinated debt                |  |                          |           |                              |                   |   |                          |   |                              |  |       |  
|Secured                          |  |                          | 521,499   |                              | 34.2              |   |                          |   | 494,992                      |  | 39.3  |  
|Unsecured                        |  |                          | 37,453    |                              | 2.5               |   |                          |   | 24,666                       |  | 2.0   |  
|                                 |  |                          |           |                              |                   |   |                          |   |                              |  |       |  
|Total debt investments           |  |                          | 1,056,440 |                              | 69.3              |   |                          |   | 909,379                      |  | 72.3  |  
|                                 |  |                          |           |                              |                   |   |                          |   |                              |  |       |  
|Preferred equity                 |  |                          | 401,273   |                              | 26.3              |   |                          |   | 285,150                      |  | 22.7  |  
|Common/Common equivalents equity |  |                          | 67,612    |                              | 4.4               |   |                          |   | 63,083                       |  | 5.0   |  
|                                 |  |                          |           |                              |                   |   |                          |   |                              |  |       |  
|Total equity investments         |  |                          | 468,885   |                              | 30.7              |   |                          |   | 348,233                      |  | 27.7  |  
|                                 |  |                          |           |                              |                   |   |                          |   |                              |  |       |  
|Total                            |  | $                        | 1,525,325 |                              | 100.0             | % |                          | $ | 1,257,612                    |  | 100.0 | %
|                                 |  |                          |           |                              |                   |   |                          |   |                              |  |       |  



19



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



The Companys debt instruments generally provide for a contractual variable interest rate
generally ranging from approximately 8% to 16%, a portion of which may be deferred. At September 30, 2007, approximately 65% of loans in the portfolio, based on amounts outstanding at fair value, were at variable rates determined on the basis of a
benchmark LIBOR or prime rate and approximately 35% were at fixed rates. In addition, at September 30, 2007, approximately 27% of the loan portfolio, at fair value, has floors of between 1.50% and 3.0% on the LIBOR base index. The Companys
loans generally have stated maturities at origination that range from four to eight years. Customers typically pay an origination fee based on a percentage of the commitment amount. They also often pay a fee based on any undrawn commitments.

When one of the Companys loans becomes more than 90 days past due, or if the Company otherwise does not expect the customer to be
able to service its debt and other obligations, the Company will, as a general matter, place the loan on non-accrual status and will generally cease recognizing interest income on that loan 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, the Company may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection. The
following table summarizes the Companys loans greater than 90 days past due and loans on non-accrual status, at fair value, at September 30, 2007 and December 31, 2006:



|                                                             |  |                    |         |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|------------------------------------------------------------ |  | ------------------ | ------- | ------------------ | ----------------- | - | ------------------- | --- | - | --------- | - | ------------------ |  | --- | ------------------- |  | --- | -
|                                                             |  | September 30, 2007 |         |                    | December 31, 2006 |  
|                                                             |  | Fair Value         |         | % of LoanPortfolio |                   |   | % of TotalPortfolio |     |   | FairValue |   | % of LoanPortfolio |  |     | % of TotalPortfolio | 
|Loans greater than 90 days past due                          |  |                    |         |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|On non-accrual status                                        |  | $                  | 6,320   |                    | 0.6               | % |                     | 0.4 | % |           | $ | 20,129             |  | 2.2 | %                   |  | 1.6 | %
|Not on non-accrual status                                    |  |                    | 1,798   |                    | 0.2               |   |                     | 0.1 |   |           |   | 1,798              |  | 0.2 |                     |  | 0.1 |  
|                                                             |  |                    |         |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|Total loans greater than 90 days past due                    |  | $                  | 8,118   |                    | 0.8               | % |                     | 0.5 | % |           | $ | 21,927             |  | 2.4 | %                   |  | 1.7 | %
|                                                             |  |                    |         |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|Loans on non-accrual status                                  |  |                    |         |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|0 to 90 days past due                                        |  | $                  | 100,504 |                    | 9.5               | % |                     | 6.6 | % |           | $ | 15,259             |  | 1.7 | %                   |  | 1.2 | %
|Greater than 90 days past due                                |  |                    | 6,320   |                    | 0.6               |   |                     | 0.4 |   |           |   | 20,129             |  | 2.2 |                     |  | 1.6 |  
|                                                             |  |                    |         |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|Total loans on non-accrual status                            |  | $                  | 106,824 |                    | 10.1              | % |                     | 7.0 | % |           | $ | 35,388             |  | 3.9 | %                   |  | 2.8 | %
|                                                             |  |                    |         |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|Loans on non-accrual status or greater than 90 days past due |  | $                  | 108,622 |                    | 10.3              | % |                     | 7.1 | % |           | $ | 37,186             |  | 4.1 | %                   |  | 2.9 | %
|                                                             |  |                    |         |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  



20



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



The table below shows the composition of MCGs portfolio by industry (excluding unearned income)
at cost as of September 30, 2007 and December 31, 2006:



|                                                                |  |                    |           |                              |                   |   |                    |   |                              |  |       |  
|--------------------------------------------------------------- |  | ------------------ | --------- | ---------------------------- | ----------------- | - | ------------------ | - | ---------------------------- |  | ----- | -
|                                                                |  | September 30, 2007 |           |                              | December 31, 2006 |  
|                                                                |  | Investments atCost |           | Percentage ofTotal Portfolio |                   |   | Investments atCost |   | Percentage ofTotal Portfolio | 
|Telecommunications  CLEC (competitive local exchange carriers) |  | $                  | 313,143   |                              | 20.8              | % |                    | $ | 280,394                      |  | 22.6  | %
|Other Communications                                            |  |                    | 46,829    |                              | 3.1               |   |                    |   | 81,605                       |  | 6.6   |  
|Healthcare                                                      |  |                    | 132,536   |                              | 8.8               |   |                    |   | 112,536                      |  | 9.1   |  
|Broadcasting                                                    |  |                    | 98,315    |                              | 6.5               |   |                    |   | 38,440                       |  | 3.1   |  
|Cable                                                           |  |                    | 79,566    |                              | 5.3               |   |                    |   | 38,711                       |  | 3.1   |  
|Plastic Products                                                |  |                    | 78,404    |                              | 5.2               |   |                    |   | 60,052                       |  | 4.9   |  
|Business Services                                               |  |                    | 74,948    |                              | 5.0               |   |                    |   | 51,765                       |  | 4.2   |  
|Publishing                                                      |  |                    | 64,305    |                              | 4.3               |   |                    |   | 71,623                       |  | 5.8   |  
|Logistics                                                       |  |                    | 61,709    |                              | 4.1               |   |                    |   |                             |  |      |  
|Laboratory Instruments                                          |  |                    | 54,414    |                              | 3.6               |   |                    |   | 57,868                       |  | 4.6   |  
|Home Furnishings                                                |  |                    | 53,306    |                              | 3.5               |   |                    |   | 53,696                       |  | 4.3   |  
|Food Services                                                   |  |                    | 51,189    |                              | 3.4               |   |                    |   | 21,204                       |  | 1.7   |  
|Entertainment                                                   |  |                    | 48,385    |                              | 3.2               |   |                    |   | 41,464                       |  | 3.3   |  
|Consumer Products                                               |  |                    | 45,955    |                              | 3.1               |   |                    |   | 19,158                       |  | 1.5   |  
|Information Services                                            |  |                    | 43,929    |                              | 2.9               |   |                    |   | 48,379                       |  | 3.9   |  
|Electronics                                                     |  |                    | 39,836    |                              | 2.7               |   |                    |   | 24,682                       |  | 2.0   |  
|Newspaper                                                       |  |                    | 35,672    |                              | 2.4               |   |                    |   | 89,760                       |  | 7.2   |  
|Auto Parts                                                      |  |                    | 34,729    |                              | 2.3               |   |                    |   | 16,997                       |  | 1.4   |  
|Sporting Goods                                                  |  |                    | 31,168    |                              | 2.1               |   |                    |   | 26,920                       |  | 2.2   |  
|Education                                                       |  |                    | 24,576    |                              | 1.6               |   |                    |   | 26,740                       |  | 2.1   |  
|Other Media                                                     |  |                    | 23,272    |                              | 1.5               |   |                    |   | 22,497                       |  | 1.8   |  
|Technology                                                      |  |                    | 19,886    |                              | 1.3               |   |                    |   | 19,430                       |  | 1.6   |  
|Leisure Activities                                              |  |                    | 14,043    |                              | 0.9               |   |                    |   | 14,314                       |  | 1.2   |  
|Other (a)                                                       |  |                    | 34,450    |                              | 2.4               |   |                    |   | 24,470                       |  | 1.8   |  
|                                                                |  |                    |           |                              |                   |   |                    |   |                              |  |       |  
|                                                                |  | $                  | 1,504,565 |                              | 100.0             | % |                    | $ | 1,242,705                    |  | 100.0 | %
|                                                                |  |                    |           |                              |                   |   |                    |   |                              |  |       |  



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



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



The table below shows the composition of MCGs portfolio by industry (excluding unearned income)
at fair value as of September 30, 2007 and December 31, 2006:



|                                                                |  |                          |           |                              |                   |   |                          |   |                              |  |       |  
|--------------------------------------------------------------- |  | ------------------------ | --------- | ---------------------------- | ----------------- | - | ------------------------ | - | ---------------------------- |  | ----- | -
|                                                                |  | September 30, 2007       |           |                              | December 31, 2006 |  
|                                                                |  | Investments atFair Value |           | Percentage ofTotal Portfolio |                   |   | Investments atFair Value |   | Percentage ofTotal Portfolio | 
|Telecommunications  CLEC (competitive local exchange carriers) |  | $                        | 282,640   |                              | 18.5              | % |                          | $ | 274,108                      |  | 21.8  | %
|Other Communications                                            |  |                          | 46,077    |                              | 3.0               |   |                          |   | 83,988                       |  | 6.7   |  
|Healthcare                                                      |  |                          | 129,987   |                              | 8.5               |   |                          |   | 112,088                      |  | 8.9   |  
|Broadcasting                                                    |  |                          | 96,852    |                              | 6.4               |   |                          |   | 39,851                       |  | 3.2   |  
|Cable                                                           |  |                          | 82,912    |                              | 5.4               |   |                          |   | 38,711                       |  | 3.1   |  
|Plastic Products                                                |  |                          | 81,226    |                              | 5.3               |   |                          |   | 60,007                       |  | 4.8   |  
|Business Services                                               |  |                          | 75,455    |                              | 5.0               |   |                          |   | 51,230                       |  | 4.1   |  
|Logistics                                                       |  |                          | 61,709    |                              | 4.1               |   |                          |   |                             |  |      |  
|Publishing                                                      |  |                          | 59,967    |                              | 3.9               |   |                          |   | 68,020                       |  | 5.4   |  
|Food Services                                                   |  |                          | 56,407    |                              | 3.7               |   |                          |   | 21,204                       |  | 1.7   |  
|Laboratory Instruments                                          |  |                          | 55,124    |                              | 3.6               |   |                          |   | 58,402                       |  | 4.6   |  
|Home Furnishings                                                |  |                          | 51,354    |                              | 3.4               |   |                          |   | 52,512                       |  | 4.2   |  
|Sporting Goods                                                  |  |                          | 46,122    |                              | 3.0               |   |                          |   | 26,920                       |  | 2.1   |  
|Consumer Products                                               |  |                          | 46,067    |                              | 3.0               |   |                          |   | 19,353                       |  | 1.5   |  
|Entertainment                                                   |  |                          | 45,385    |                              | 3.0               |   |                          |   | 41,464                       |  | 3.3   |  
|Technology                                                      |  |                          | 45,239    |                              | 3.0               |   |                          |   | 36,188                       |  | 2.9   |  
|Information Services                                            |  |                          | 44,327    |                              | 2.9               |   |                          |   | 47,440                       |  | 3.8   |  
|Electronics                                                     |  |                          | 40,204    |                              | 2.6               |   |                          |   | 24,834                       |  | 2.0   |  
|Newspaper                                                       |  |                          | 35,672    |                              | 2.3               |   |                          |   | 90,640                       |  | 7.2   |  
|Auto Parts                                                      |  |                          | 34,788    |                              | 2.3               |   |                          |   | 17,198                       |  | 1.4   |  
|Education                                                       |  |                          | 31,053    |                              | 2.1               |   |                          |   | 30,987                       |  | 2.5   |  
|Other Media                                                     |  |                          | 29,315    |                              | 1.9               |   |                          |   | 24,110                       |  | 1.9   |  
|Leisure Activities                                              |  |                          | 14,043    |                              | 0.9               |   |                          |   | 14,314                       |  | 1.1   |  
|Other (a)                                                       |  |                          | 33,400    |                              | 2.2               |   |                          |   | 24,043                       |  | 1.8   |  
|                                                                |  |                          |           |                              |                   |   |                          |   |                              |  |       |  
|                                                                |  | $                        | 1,525,325 |                              | 100.0             | % |                          | $ | 1,257,612                    |  | 100.0 | %
|                                                                |  |                          |           |                              |                   |   |                          |   |                              |  |       |  



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



22



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



As of September 30, 2007 and December 31, 2006, the Company has one issued call option outstanding.
On July 31, 2006, in connection with the sale of 50.1% of the ownership of Crystal Media Network, LLC (CMN) to a private investor, the Company issued an option to the private investor to acquire an additional 10% of the ownership of
CMN from the Company for $110. The option to acquire 10% of CMN expires January 31, 2008 if not exercised prior to that date and is outstanding as of September 30, 2007 and December 31, 2006. This call option is included in other liabilities at fair
value on the Companys consolidated balance sheets. The following table summarizes the call options issued for the nine months ended September 30, 2007:



|                                                        |  |                                    |   |           |   |    
|------------------------------------------------------- |  | ---------------------------------- | - | --------- | - | ---
|                                                        |  | Nine MonthsEndedSeptember 30, 2007
|                                                        |  | Cost                               |   | FairValue
|Call options outstanding at the beginning of the period |  | $                                  |  |           | $ |   
|Call options written                                    |  |                                    |  |           |   |   
|Call options closed                                     |  |                                    |  |           |   |   
|Call options expired                                    |  |                                    |  |           |   |   
|Call options exercised                                  |  |                                    |  |           |   |   
|Change in fair value of call options                    |  |                                    |  |           |   | 327
|                                                        |  |                                    |   |           |   |    
|Call options outstanding at the end of the period       |  | $                                  |  |           | $ | 327
|                                                        |  |                                    |   |           |   |    

In addition, one put option granted by the Company was outstanding at September 30, 2007. During
2007, the Company granted a put option to a private equity firm to put an additional 34% of the common stock of Total Sleep Holdings, Inc. to the Company for a price of $1,000. This put option expires April 30, 2009 if not exercised prior to that
date. This put option is included in other liabilities at fair value on the Companys consolidated balance sheets. The following table summarizes put options granted for the nine months ended September 30, 2007:

|                                                       |  |                                      |       |           |   |      
|------------------------------------------------------ |  | ------------------------------------ | ----- | --------- | - | -----
|                                                       |  | Nine Months Ended September 30, 2007
|                                                       |  | Cost                                 |       | FairValue
|Put options outstanding at the beginning of the period |  | $                                    |      |           | $ |     
|Put options granted                                    |  |                                      | 1,000 |           |   | 1,000
|Put options closed                                     |  |                                      |      |           |   |     
|Put options expired                                    |  |                                      |      |           |   |     
|Put options exercised                                  |  |                                      |      |           |   |     
|Change in fair value of put options                    |  |                                      |      |           |   |     
|                                                       |  |                                      |       |           |   |      
|Put options outstanding at the end of the period       |  | $                                    | 1,000 |           | $ | 1,000
|                                                       |  |                                      |       |           |   |      



23



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



Note 3Borrowings

The following is a summary of the Companys borrowings as of September 30, 2007 and December 31, 2006:



|                                       |  |                  |  |                    |         |                   |   |                |  |                   |         |  |   |        
|-------------------------------------- |  | ---------------- |  | ------------------ | ------- | ----------------- | - | -------------- |  | ----------------- | ------- |  | - | -------
|                                       |  |                  |  | September 30, 2007 |         | December 31, 2006
|                                       |  | Maturity Date    |  | FacilityAmount     |         | AmountOutstanding |   | FacilityAmount |  | AmountOutstanding
|Unsecured Notes                        |  | October 2010     |  | $                  | 50,000  |                   | $ | 50,000         |  | $                 | 50,000  |  | $ | 50,000 
|Commercial Loan Trust 2006-2           |  | November 2007(1) |  |                    | 200,000 |                   |   | 152,068        |  |                   | 200,000 |  |   | 84,040 
|Commercial Loan Funding Trust Facility |  | November 2010(2) |  |                    |        |                   |   |               |  |                   | 250,000 |  |   | 83,943 
|Class A Variable Funding Certificates  |  |                  |  |                    | 218,750 |                   |   | 60,212         |  |                   |        |  |   |       
|Class B Variable Funding Certificates  |  |                  |  |                    | 31,250  |                   |   |               |  |                   |        |  |   |       
|Term Securitization                    |  | April 2018       |  |                    |         |                   |   |                |  |                   |         |  |   |        
|Series 2006-1 Class A-1 Notes          |  |                  |  |                    | 106,250 |                   |   | 106,250        |  |                   | 106,250 |  |   | 106,250
|Series 2006-1 Class A-2 Notes          |  |                  |  |                    | 50,000  |                   |   | 43,000         |  |                   | 50,000  |  |   | 11,400 
|Series 2006-1 Class A-3 Notes          |  |                  |  |                    | 85,000  |                   |   | 85,000         |  |                   | 85,000  |  |   | 35,000 
|Series 2006-1 Class B Notes            |  |                  |  |                    | 58,750  |                   |   | 58,750         |  |                   | 58,750  |  |   | 58,750 
|Series 2006-1 Class C Notes            |  |                  |  |                    | 45,000  |                   |   | 45,000         |  |                   | 45,000  |  |   | 45,000 
|Series 2006-1 Class D Notes            |  |                  |  |                    | 47,500  |                   |   | 47,500         |  |                   | 47,500  |  |   | 47,500 
|Revolving Unsecured Credit Facility    |  | June 2008        |  |                    | 100,000 |                   |   | 12,000         |  |                   | 100,000 |  |   |       
|                                       |  |                  |  |                    |         |                   |   |                |  |                   |         |  |   |        
|Total                                  |  |                  |  | $                  | 992,500 |                   | $ | 659,780        |  | $                 | 992,500 |  | $ | 521,883
|                                       |  |                  |  |                    |         |                   |   |                |  |                   |         |  |   |        

---

|(1) | Amended in October 2007 to extend the maturity date to February 29, 2008. See Note 9, Subsequent Events, for further discussion of this facility.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Renewable at lenders discretion each July.
|--- | -------------------------------------------

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

Unsecured Notes. On October 11, 2005, the Company issued $50,000 of investment grade five-year unsecured notes in a private placement. The notes were rated BBB- by Fitch Ratings, Inc. and have
a fixed interest rate of 6.73% per year payable semi-annually. Bayerische Hypo-Und Vereinsbank, AG, New York Branch (HVB) acted as the placement agent for the issuance. See Note 9, Subsequent Events, for further discussion of this
facility.

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



24



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



The Company uses this facility to fund the origination of loans that will collateralize a future term
securitization. Advances under the facility, equal to 80% of the value of commercial loans purchased by the trust, bear interest based on LIBOR plus 0.75% and interest is payable monthly. The facility is scheduled to terminate on the earlier of
November 30, 2007 or the completion of a term securitization and may be extended under certain circumstances. As of September 30, 2007 the Company had $152,068 outstanding under this facility. See Note 9, Subsequent Events, for further
discussion of this facility including amendments made subsequent to September 30, 2007.

MCG Commercial Loan Funding Trust. The
Company has, through MCG Commercial Loan Funding Trust, a $250,000 warehouse financing facility funded through Three Pillars Funding LLC, an asset-backed commercial paper conduit administered by SunTrust Capital Markets, Inc. The warehouse financing
facility operates like a revolving credit facility that is primarily secured by the assets of MCG Commercial Loan Funding Trust, including commercial loans sold by the Company to the trust. The pool of commercial loans in the trust must meet certain
requirements, including, but not limited to, term, average life, investment rating, agency rating and industry diversity requirements. There are also certain requirements relating to portfolio performance, including required minimum portfolio yield
and limitations on delinquencies and charge-offs. Such limitations, requirements, and associated defined terms are as provided for in the documents governing the facility. This facility is funded through two separate Variable Funding Certificates,
(VFC), a $218,750 Class A VFC and a $31,250 Class B VFC. Advances under the Class A VFC may be up to 70% of eligible collateral. Advances under the Class B VFC may be up to 10% of eligible collateral. The facility is scheduled
to terminate on November 30, 2010, but is subject to annual renewal and may be extended under certain circumstances. In July 2007, this facility was renewed through July 25, 2008. As of September 30, 2007, the Company had $60,212 Class A
VFC and no Class B VFC outstanding under this facility.

In July 2007, the Company amended the Commercial Loan Funding Trust Facility.
Pursuant to this amendment, the interest rates for Class A advances and Class B advances were reduced to the commercial paper rate plus 0.75% and 1.50%, respectively, per annum. The Class A advances and Class B advances previously bore interest at
the commercial paper rate plus 0.95% and 1.75%, respectively, per annum.

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

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

The Class A-1, Class B, Class C and Class D Notes are term notes. The Class A-2 Notes are a
revolving class of secured notes and have a revolving period of five years. The Class A-3 Notes are a delayed draw class of secured notes, which were drawn in full during April 2007. All of the notes are secured by the assets of MCG Commercial
Loan Trust 2006-1, including commercial loans totaling $486,835 as of September 30, 2007, which were purchased by the trust from the Company. Additional commercial loans will be purchased by the trust from the Company primarily using the proceeds
from the Class A-2 revolving notes. The pool of commercial loans in



25



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



the trust must meet certain requirements, including, but not limited to, asset mix and concentration, collateral coverage, term, agency rating, minimum
coupon, minimum spread and sector diversity requirements. As of September 30, 2007, the Company had $385,500 of these notes outstanding.

Revolving Unsecured Credit Facility. This facility is a $100,000 unsecured revolving credit facility established with HVB. The facility allows for additional lenders with HVB acting as the agent. The $100,000 commitment is maintained
by four lenders. HVB, Chevy Chase Bank, Sovereign Bank, and Royal Bank of Canada maintain commitments of $50,000, $10,000, $15,000, and $25,000, respectively. Advances under this credit facility bear interest at LIBOR plus 2.00%, the prime rate plus
0.50%, or the Federal Funds rate plus 2.25%, and there is a commitment fee of 0.25% per annum on undrawn amounts. The credit facility contains customary terms and conditions, including, without limitation, affirmative and negative covenants
such as information reporting, minimum stockholders equity, minimum asset coverage ratio, minimum cash net operating income, and a minimum ratio of earnings before interest and taxes to interest expense. The credit facility also contains
customary events of default with customary cure and notice, including, without limitation, nonpayment, misrepresentation in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, change of control, change of
management, and material adverse change. As of September 30, 2007 the Company had $12,000 outstanding under this credit facility.

Borrowings outstanding, by interest rate benchmark, as of September 30, 2007 and December 31, 2006 were as follows:



|                      |  |                    |         |                   |   |        
|--------------------- |  | ------------------ | ------- | ----------------- | - | -------
|                      |  | September 30, 2007 |         | December 31, 2006
|LIBOR                 |  | $                  | 549,568 |                   | $ | 387,940
|Commercial paper rate |  |                    | 60,212  |                   |   | 83,943 
|Fixed rate            |  |                    | 50,000  |                   |   | 50,000 
|                      |  |                    |         |                   |   |        
|                      |  | $                  | 659,780 |                   | $ | 521,883
|                      |  |                    |         |                   |   |        

Note 4Share Based Compensation

Employee Share Based Compensation

During the
nine months ended September 30, 2007, the Company granted approximately 936 restricted shares under the 2006 Employee Restricted Stock Plan. The forfeiture provisions will lapse quarterly with respect to 836 of these restricted shares through
September 30, 2011. The remaining 100 of these restricted shares are subject to both time-and performance-based forfeiture provisions that lapse annually through February 28, 2008. During the nine months ended September 30, 2007, approximately 11
restricted shares were forfeited.

During the three months ended September 30, 2007 and 2006, the Company recognized compensation expense
related to employee restricted stock of approximately $2,120 and $1,160, respectively. During the nine months ended September 30, 2007 and 2006, the Company recognized compensation expense related to employee restricted stock of approximately $7,126
and $2,515, respectively. In addition, dividends paid on restricted shares securing non-recourse employee loans totaled $61 and $88 for the quarter ended September 30, 2007 and 2006, respectively, and are included in salaries and benefits in the
Consolidated Statements of Operations. Dividends paid on restricted shares securing non-recourse employee loans and on forfeited shares totaled $199 and $966 for the nine months ended September 30, 2007 and 2006, respectively, and are included in
salaries and benefits in the Consolidated Statements of Operations. At September 30, 2007, total unrecognized compensation cost related to restricted stock granted to employees was approximately $17,610 and is expected to be recognized over a
weighted average remaining requisite service period of approximately 2.8 years.



26



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



Additionally, pursuant to employment agreements with certain executives dated September 18, 2006 the
Company will grant to these executives 100 restricted shares, under the 2006 Plan, that will be subject to both service and performance conditions. Forfeiture provisions will lapse with respect to these 100 restricted shares annually each February
28 from 2009 to 2010. As of September 30, 2007, these 100 shares are not yet considered granted under FAS 123R because the performance conditions have not yet been established. Therefore, the Company has not recorded any compensation expense related
to these 100 shares.

Non-Employee Director Share Based Compensation

Compensation cost related to restricted shares issued to non-employee directors under the 2006 Non-Employee Director Restricted Stock Plan was approximately $108 and $0 during the nine months ended September 30, 2007
and 2006, respectively. The compensation cost related to restricted shares granted to non-employee directors is considered part of the overall compensation to these directors for their services as directors of the Company, therefore this cost is
included as a component of general and administrative expense on the Companys Consolidated Statement of Operations for the nine months ended September 30, 2007. At September 30, 2007, total unrecognized compensation cost related to restricted
stock granted to non-employee directors was approximately $369 and is expected to be recognized over a weighted average remaining requisite service period of approximately 2.3 years.

The following table summarizes the Companys restricted stock award activity during the nine months ended September 30, 2007:



|                                                                        |  |        |   |  |                                       |      
|----------------------------------------------------------------------- |  | ------ | - |  | ------------------------------------- | -----
|                                                                        |  | Shares |   |  | Weighted AverageGrant Date Fair Value
|Restricted stock subject to forfeiture provisions at December 31, 2006  |  | 458    |   |  | $                                     | 16.50
|Restricted stock granted                                                |  | 951    |   |  |                                       | 19.58
|Restricted stock for which forfeiture provisions lapsed                 |  | (329   | ) |  |                                       | 18.80
|Restricted stock forfeited                                              |  | (21    | ) |  |                                       | 19.42
|                                                                        |  |        |   |  |                                       |      
|Restricted stock subject to forfeiture provisions at September 30, 2007 |  | 1,059  |   |  | $                                     | 18.54
|                                                                        |  |        |   |  |                                       |      

Note 5Income Taxes and Distributions

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

During the nine months ended September 30, 2007, the Company recorded an income tax provision of $2,867 primarily related to unrealized gains on the Companys investments and the performance of certain of the
Companys investments that are held in taxable subsidiaries.

Since December 2001, the Company has declared distributions totaling
$11.07 per share. Each year a statement on Form 1099-DIV identifying the source of the distribution (i.e., paid from ordinary income, paid from



27



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



net capital gains on the sale of securities, and/or a return of paid-in-capital surplus which is a nontaxable distribution) is mailed to the Companys
stockholders. To the extent the Companys taxable earnings fall below the total amount of its distributions for that fiscal year, a portion of those distributions may be deemed a tax return of capital to the Companys stockholders. For the
fiscal years ended December 31, 2006, 2005, 2004, and 2003 a portion of the distributions to the Companys stockholders was deemed a return of capital. For the quarter ended September 30, 2007, the Company declared a distribution of $0.44
per share which brings total year-to-date distributions to $1.32 per share. The determination of the tax attributes of the Companys distributions is made annually as of the end of the Companys fiscal year based upon its taxable income
for the full year and distributions paid for the full year, therefore a determination made on a quarterly basis may not be representative of the actual tax attributes of its distributions for a full year. If the Company determined the tax attributes
of its distributions year-to-date as of September 30, 2007, 84% would be from ordinary income, 16% would be from capital gains and none would be a return of capital for stockholders, however, there can be no certainty to shareholders that this
determination is representative of what the tax attributes of its 2007 distributions to shareholders will actually be.

The following table
is a reconciliation of GAAP net income to taxable net income for the nine months ended September 30, 2007 and the year ended December 31, 2006:



|                                                                                              |  |                                     |         |   |                              |   |         |  
|--------------------------------------------------------------------------------------------- |  | ----------------------------------- | ------- | - | ---------------------------- | - | ------- | -
|                                                                                              |  | Nine Months EndedSeptember 30, 2007 |         |   | Year Ended December 31, 2006 |  
|Net income                                                                                    |  | $                                   | 91,519  |   |                              | $ | 100,949 |  
|Net change in unrealized appreciation on investments not taxable until realized               |  |                                     | (5,526  | ) |                              |   | (34,604 | )
|Differences between GAAP and tax related to deductibility of long-term incentive compensation |  |                                     | 3,247   |   |                              |   | 2,468   |  
|Interest income on non-accrual loans that is taxable                                          |  |                                     | 12,378  |   |                              |   | 3,612   |  
|Dividend income accrued for GAAP purposes which is not yet taxable                            |  |                                     | (32,180 | ) |                              |   | (22,266 | )
|Distributions from taxable subsidiaries                                                       |  |                                     | 13,644  |   |                              |   | 654     |  
|Federal tax expense                                                                           |  |                                     | 2,528   |   |                              |   | 2,661   |  
|Other, net                                                                                    |  |                                     | (5,078  | ) |                              |   | (93     | )
|                                                                                              |  |                                     |         |   |                              |   |         |  
|Taxable income before deductions for distributions                                            |  | $                                   | 80,532  |   |                              | $ | 53,381  |  
|                                                                                              |  |                                     |         |   |                              |   |         |  

Note 6Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per common share for the three and nine months ended September 30, 2007 and
2006:



|                                                                                   |  |                                 |        |                                 |   |        |  |      |        |  |   |       
|---------------------------------------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                                                                   |  | Three Months EndedSeptember 30, |        | Nine Months Ended September 30,
|                                                                                   |  | 2007                            |        | 2006                            |   | 2007   |  | 2006
|Basic                                                                              |  |                                 |        |                                 |   |        |  |      |        |  |   |       
|Net income                                                                         |  | $                               | 23,019 |                                 | $ | 22,116 |  | $    | 91,519 |  | $ | 71,428
|Weighted average common shares outstanding                                         |  |                                 | 62,298 |                                 |   | 53,281 |  |      | 60,245 |  |   | 53,236
|Earnings per common share-basic                                                    |  | $                               | 0.37   |                                 | $ | 0.42   |  | $    | 1.52   |  | $ | 1.34  
|Diluted                                                                            |  |                                 |        |                                 |   |        |  |      |        |  |   |       
|Net income                                                                         |  | $                               | 23,019 |                                 | $ | 22,116 |  | $    | 91,519 |  | $ | 71,428
|Weighted average common shares outstanding                                         |  |                                 | 62,298 |                                 |   | 53,281 |  |      | 60,245 |  |   | 53,236
|Dilutive effect of restricted stock on which forfeiture provisions have not lapsed |  |                                 | 19     |                                 |   |       |  |      | 3      |  |   |      
|                                                                                   |  |                                 |        |                                 |   |        |  |      |        |  |   |       
|Weighted average common shares and common stock equivalents                        |  |                                 | 62,317 |                                 |   | 53,281 |  |      | 60,248 |  |   | 53,236
|Earnings per common share-diluted                                                  |  | $                               | 0.37   |                                 | $ | 0.42   |  | $    | 1.52   |  | $ | 1.34  



28



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except per share amounts)



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

Note 7Financial Highlights

Following is a schedule of financial highlights for the nine months
ended September 30, 2007 and 2006:



|                                                                                                          |  |      |         |    |      |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | ---- | ------- | -- | ---- | - | ------- | -
|                                                                                                          |  | 2007 |         |    | 2006 |  
|Per share data:                                                                                           |  |      |         |    |      |   |         |  
|Net asset value at beginning of period (a)                                                                |  | $    | 12.83   |    |      | $ | 12.48   |  
|                                                                                                          |  |     
|Net operating income before investment gains and losses (b)                                               |  |      | 1.21    |    |      |   | 1.12    |  
|Net realized gains (losses) on investments (b)                                                            |  |      | 0.27    |    |      |   | (0.08   | )
|Net change in unrealized appreciation (depreciation) on investments (b)                                   |  |      | 0.09    |    |      |   | 0.37    |  
|Income tax provision (b)                                                                                  |  |      | (0.05   | )  |      |   | (0.07   | )
|                                                                                                          |  |      |         |    |      |   |         |  
|Net income                                                                                                |  |      | 1.52    |    |      |   | 1.34    |  
|                                                                                                          |  |     
|Distributions declared                                                                                    |  |      | (1.32   | )  |      |   | (1.26   | )
|Effect of distributions recorded as compensation expense (b)                                              |  |      |        |    |      |   | 0.02    |  
|                                                                                                          |  |      |         |    |      |   |         |  
|Net decrease in stockholders equity resulting from distributions                                         |  |      | (1.32   | )  |      |   | (1.24   | )
|Net increase in stockholders equity from reduction in stockholder loans                                  |  |      |        |    |      |   | 0.05    |  
|Issuance of shares                                                                                        |  |      | 0.24    |    |      |   |        |  
|Dilutive effect of issuance of restricted stock and restricted stock subject to forfeiture provisions (c) |  |      | (0.17   | )  |      |   |        |  
|Net increase in stockholders equity from restricted stock amortization (b)                               |  |      | 0.12    |    |      |   | 0.04    |  
|                                                                                                          |  |      |         |    |      |   |         |  
|Net increase in stockholders equity relating to share issuances                                          |  |      | 0.19    |    |      |   | 0.09    |  
|                                                                                                          |  |      |         |    |      |   |         |  
|Net asset value at end of period (a)                                                                      |  | $    | 13.22   |    |      | $ | 12.67   |  
|                                                                                                          |  |      |         |    |      |   |         |  
|Per share market value at end of period                                                                   |  | $    | 14.39   |    |      | $ | 16.33   |  
|Total return (d)                                                                                          |  |      | (22.69  | )% |      |   | 20.56   | %
|Shares outstanding at end of period                                                                       |  |      | 65,541  |    |      |   | 53,382  |  
|                                                                                                          |  |     
|Ratio/Supplemental data:                                                                                  |  |      |         |    |      |   |         |  
|Net assets at end of period                                                                               |  | $    | 866,309 |    |      | $ | 676,604 |  
|Ratio of operating expenses to average net assets (annualized)                                            |  |      | 11.03   | %  |      |   | 10.89   | %
|Ratio of net operating income to average net assets (annualized)                                          |  |      | 12.43   | %  |      |   | 12.03   | %



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

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

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

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

Note 8Recent Accounting Pronouncements

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



29



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##### Table of Contents

In February 2007, the FASB issued SFAS No. 159 (SFAS No. 159), The Fair Value Option
for Financial Assets and Financial Liabilities. Among other requirements, SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for the first fiscal year
that begins after November 15, 2007. The Company is currently evaluating the impact of SFAS No. 157 and SFAS No. 159 on its financial position and results of operations.

Note 9Subsequent Events

On October 3, 2007, the Company issued $25,000 of long-term unsecured
notes in a private placement. The notes have a five-year term and a fixed interest rate of 6.71% per annum paid semi-annually. The interest rate is subject to possible adjustment in the future. The purchasers of the new notes are also holders of the
Companys notes issued in the $50,000 private placement which was completed in 2005. The proceeds from the offering will be used for working capital and other general corporate purposes, including originating investments primarily in private
middle market companies. The proceeds may also be used temporarily to reduce borrowings under the Companys revolving credit facilities.

On October 23, 2007, the Company entered into the first amendment to its Commercial Loan Trust 2006-2 warehouse credit facility with Merrill Lynch Capital Corp. Pursuant to this amendment, the maturity date for the facility was
extended from November 30, 2007 through February 29, 2008. In addition, the advance rate was reduced from 80% to 75% of the value of the commercial loans purchased by the trust. The Company had previously intended to access the CLO Market
during the fall of 2007 in order to obtain debt capital, a portion of which would have been used to repay amounts outstanding under our warehouse credit facility with Merrill Lynch Capital Corp. This amendment extends that credit facility in order
to delay this transaction pending more favorable market conditions. In the event that we do not see improvement in the market, we will likely seek an additional extension or refinance this facility. The Company believes that it has sufficient cash,
additional borrowing capacity from other existing credit sources and other sources of liquidity to repay the amounts owed on this warehouse credit facility. Further, while there can be no assurance, in the event that the Company is unable to access
the CLO Market for an extended period of time, the Company believes that it will have continued access to other forms of debt capital, although these other forms of debt capital may be at higher interest rates than our historical term
securitizations.

On October 24, 2007, the Company announced that its consolidated wholly owned subsidiary, Solutions Capital I, L.P.,
has received a license from the United States Small Business Administration (SBA) to operate as a Small Business Investment Company (SBIC). The license allows Solutions Capital I to borrow up to $100,000 in funds which
can be used to provide debt and equity capital to qualifying small businesses. Additionally, the Company has applied for exemptive relief from the SEC, similar to relief that has been granted to other business development companies, to permit the
Company to exclude debt issued by the SBA to Solutions Capital I from its consolidated asset coverage ratio, which will enable the Company to fund more investments with debt capital. There can be no assurances that the Company will receive exemptive
relief from the SEC. The Company intends to seek up to $127,000 in leverage from the SBA, which is subject to SBA approval. The SBIC debt, once drawn, has an interim rate of LIBOR plus 30 basis points. The rate becomes fixed at the time of SBA
pooling, which is within six months of funding, and is set to the 10 year treasury rate at that time plus a spread and an annual SBA charge, which taken together currently approximate 175 basis points.



30



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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, 2007, including the consolidated schedule of investments, the related consolidated statements of operations for the three- and nine-month periods ended September 30, 2007 and
2006, and the consolidated statements of changes in net assets, cash flows, and financial highlights for the nine-month periods ended September 30, 2007 and 2006. 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, 2006, 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 26, 2007 we expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2006, including the consolidated schedule of investments, is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.

LOGO

McLean, Virginia

October 31, 2007



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##### Table of Contents

Selected Financial Data

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



|                                                                                                                                |  |                                 |           |                                |   |           |  |      |         |  |   |        
|------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | --------- | ------------------------------ | - | --------- |  | ---- | ------- |  | - | -------
|                                                                                                                                |  | Three Months EndedSeptember 30, |           | Nine Months EndedSeptember 30,
|(dollars in thousands except per share and other period-end data)                                                               |  | 2007                            |           | 2006                           |   | 2007      |  | 2006
|Income statement data:                                                                                                          |  |                                 |           |                                |   |           |  |      |         |  |   |        
|Revenue                                                                                                                         |  | $                               | 47,082    |                                | $ | 40,864    |  | $    | 137,412 |  | $ | 113,771
|Net operating income before investment gains and losses and income tax provision (benefit)                                      |  |                                 | 24,248    |                                |   | 20,064    |  |      | 72,788  |  |   | 59,713 
|Distributable net operating income (DNOI)(a)                                                                                  |  |                                 | 26,368    |                                |   | 21,224    |  |      | 79,914  |  |   | 62,228 
|Net income                                                                                                                      |  |                                 | 23,019    |                                |   | 22,116    |  |      | 91,519  |  |   | 71,428 
|                                                                                                                                |  |                                 |           |                               
|Per common share data:                                                                                                          |  |                                 |           |                                |   |           |  |      |         |  |   |        
|Net operating income before investment gains and losses and income tax provision (benefit) per common share - basic and
diluted |  | $                               | 0.39      |                                | $ | 0.38      |  | $    | 1.21    |  | $ | 1.12   
|DNOI per common sharebasic and diluted(a)                                                                                      |  |                                 | 0.42      |                                |   | 0.40      |  |      | 1.33    |  |   | 1.17   
|Earnings per common sharebasic and diluted                                                                                     |  |                                 | 0.37      |                                |   | 0.42      |  |      | 1.52    |  |   | 1.34   
|Cash dividends declared per common share                                                                                        |  |                                 | 0.44      |                                |   | 0.42      |  |      | 1.32    |  |   | 1.26   
|                                                                                                                                |  |                                 |           |                               
|Selected period-end balances:                                                                                                   |  |                                 |           |                                |   |           |  |      |         |  |   |        
|Total investment portfolio                                                                                                      |  | $                               | 1,525,325 |                                | $ | 1,207,186 |  |      |         |  |   |        
|Total assets                                                                                                                    |  |                                 | 1,579,386 |                                |   | 1,276,156 |  |      |         |  |   |        
|Borrowings                                                                                                                      |  |                                 | 659,780   |                                |   | 554,679   |  |      |         |  |   |        
|Total stockholders equity                                                                                                      |  |                                 | 866,309   |                                |   | 676,604   |  |      |         |  |   |        
|Net asset value per common share(b)                                                                                             |  |                                 | 13.22     |                                |   | 12.67     |  |      |         |  |   |        
|                                                                                                                                |  |                                 |           |                               
|Other period-end data:                                                                                                          |  |                                 |           |                                |   |           |  |      |         |  |   |        
|Average size of investment                                                                                                      |  |                                 | 17,736    |                                |   | 13,413    |  |      |         |  |   |        
|Number of portfolio companies                                                                                                   |  |                                 | 86        |                                |   | 90        |  |      |         |  |   |        
|Number of employees                                                                                                             |  |                                 | 94        |                                |   | 85        |  |      |         |  |   |        
|                                                                                                                                |  |                                 |           |                               
|Reconciliation of DNOI to net operating income before investment gains and losses and income tax provision (benefit):           |  |                                 |           |                                |   |           |  |      |         |  |   |        
|Net operating income before investment gains and losses and income tax provision (benefit)                                      |  | $                               | 24,248    |                                | $ | 20,064    |  | $    | 72,788  |  | $ | 59,713 
|Amortization of employee restricted stock awards                                                                                |  |                                 | 2,120     |                                |   | 1,160     |  |      | 7,126   |  |   | 2,515  
|                                                                                                                                |  |                                 |           |                                |   |           |  |      |         |  |   |        
|DNOI                                                                                                                            |  | $                               | 26,368    |                                | $ | 21,224    |  | $    | 79,914  |  | $ | 62,228 
|                                                                                                                                |  |                                 |           |                                |   |           |  |      |         |  |   |        
|Weighted average common shares outstanding                                                                                      |  |                                 | 62,298    |                                |   | 53,281    |  |      | 60,245  |  |   | 53,236 
|Weighted average common shares outstanding and dilutive common stock equivalents                                                |  |                                 | 62,317    |                                |   | 53,281    |  |      | 60,248  |  |   | 53,236 
|Earnings per common sharebasic and diluted                                                                                     |  |                                 | 0.37      |                                |   | 0.42      |  |      | 1.52    |  |   | 1.34   
|Net operating income before investment gains and losses and income tax provision (benefit) per common sharebasic and
diluted   |  |                                 | 0.39      |                                |   | 0.38      |  |      | 1.21    |  |   | 1.12   
|DNOI per sharebasic and diluted                                                                                                |  |                                 | 0.42      |                                |   | 0.40      |  |      | 1.33    |  |   | 1.17   



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

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



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

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

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



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



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



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



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



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



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

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

Overview

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

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



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##### Table of Contents

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

Portfolio Composition and Investment Activity

The total value of our investment portfolio, exclusive of unearned income,
was $1,525.3 million and $1,257.6 million at September 30, 2007 and December 31, 2006, respectively. Our gross originations and advances totaled $510.2 million and $467.8 million during the nine months ended September 30, 2007 and 2006,
respectively. During the nine months ended September 30, 2007, we originated investments of $354.2 million in 26 portfolio companies (some of which were new customers and some of which were existing customers) and made advances of $156.0 million to
existing portfolio companies. The originations of $354.2 million were composed of $182.2 million of senior debt, $74.3 million of secured subordinated debt, $23.1 million of unsecured subordinated debt and $74.6 million of equity. During the nine
months ended September 30, 2007, the total value of newly originated investments, additional investments in existing portfolio companies, accrual of payment-in-kind interest and dividends, and net unrealized appreciation on investments, net of sales
and repayments of securities, resulted in a $267.7 million increase in the total portfolio value of our investments, exclusive of unearned income.

The following table shows our portfolio of investments by security type at September 30, 2007 and December 31, 2006:



|                                 |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|-------------------------------- |  | ------------------------ | ------- | ---------------------------- | ----------------- | - | ------------------------ | - | ---------------------------- |  | ----- | -
|                                 |  | September 30, 2007       |         |                              | December 31, 2006 |  
|(dollars in millions)            |  | Investments atFair Value |         | Percentage ofTotal Portfolio |                   |   | Investments atFair Value |   | Percentage ofTotal Portfolio | 
|Senior secured debt              |  | $                        | 497.5   |                              | 32.6              | % |                          | $ | 389.7                        |  | 31.0  | %
|Subordinated debt                |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|Secured                          |  |                          | 521.5   |                              | 34.2              |   |                          |   | 495.0                        |  | 39.3  |  
|Unsecured                        |  |                          | 37.4    |                              | 2.5               |   |                          |   | 24.7                         |  | 2.0   |  
|                                 |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|Total debt investments           |  |                          | 1,056.4 |                              | 69.3              |   |                          |   | 909.4                        |  | 72.3  |  
|                                 |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|Preferred equity                 |  |                          | 401.3   |                              | 26.3              |   |                          |   | 285.1                        |  | 22.7  |  
|Common/common equivalents equity |  |                          | 67.6    |                              | 4.4               |   |                          |   | 63.1                         |  | 5.0   |  
|                                 |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|Total equity investments         |  |                          | 468.9   |                              | 30.7              |   |                          |   | 348.2                        |  | 27.7  |  
|                                 |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|Total                            |  | $                        | 1,525.3 |                              | 100.0             | % |                          | $ | 1,257.6                      |  | 100.0 | %
|                                 |  |                          |         |                              |                   |   |                          |   |                              |  |       |  

Our senior debt investments have increased from 31.0% of our total portfolio at December 31, 2006
to 32.6% of our total portfolio at September 30, 2007.



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Total portfolio investment activity (exclusive of unearned income) for the nine months ended September
30, 2007 and 2006 was as follows:



|                                                    |  |      |         |   |      |   |         |  
|--------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|(dollars in millions)                               |  | 2007 |         |   | 2006 |  
|Investment portfolio at beginning of period         |  | $    | 1,257.6 |   |      | $ | 1,097.6 |  
|Originations and advances                           |  |      | 510.2   |   |      |   | 467.8   |  
|Gross payments/reductions/sales of securities       |  |      | (263.5  | ) |      |   | (373.3  | )
|Net unrealized gains                                |  |      | 15.9    |   |      |   | 14.2    |  
|Net realized gains (losses)                         |  |      | 15.4    |   |      |   | (4.4    | )
|Reversals of unrealized (appreciation) depreciation |  |      | (10.3   | ) |      |   | 5.3     |  
|                                                    |  |      |         |   |      |   |         |  
|Investment portfolio at end of period               |  | $    | 1,525.3 |   |      | $ | 1,207.2 |  
|                                                    |  |      |         |   |      |   |         |  

The following table shows our gross originations and advances during the nine months ended
September 30, 2007 and 2006 by security type:



|                                 |  |      |       |  |       |   |  |   |       |  |       |  
|-------------------------------- |  | ---- | ----- |  | ----- | - |  | - | ----- |  | ----- | -
|(dollars in millions)            |  | 2007 |       |  | 2006  |  
|Senior secured debt              |  | $    | 236.9 |  | 46.5  | % |  | $ | 139.2 |  | 29.7  | %
|Subordinated debt                |  |      | 158.8 |  | 31.1  |   |  |   | 183.7 |  | 39.3  |  
|Preferred equity                 |  |      | 108.2 |  | 21.2  |   |  |   | 136.9 |  | 29.3  |  
|Common/common equivalents equity |  |      | 6.3   |  | 1.2   |   |  |   | 8.0   |  | 1.7   |  
|                                 |  |      |       |  |       |   |  |   |       |  |       |  
|Total                            |  | $    | 510.2 |  | 100.0 | % |  | $ | 467.8 |  | 100.0 | %
|                                 |  |      |       |  |       |   |  |   |       |  |       |  

The following table shows our gross payments, reductions, and sales of securities during the nine
months ended September 30, 2007 and 2006 by security type:



|                      |  |      |       |  |       |   |  |   |       |  |       |  
|--------------------- |  | ---- | ----- |  | ----- | - |  | - | ----- |  | ----- | -
|(dollars in millions) |  | 2007 |       |  | 2006  |  
|Senior secured debt   |  | $    | 127.9 |  | 48.6  | % |  | $ | 258.4 |  | 69.2  | %
|Subordinated debt     |  |      | 98.9  |  | 37.5  |   |  |   | 108.9 |  | 29.2  |  
|Equity                |  |      | 36.7  |  | 13.9  |   |  |   | 6.0   |  | 1.6   |  
|                      |  |      |       |  |       |   |  |   |       |  |       |  
|Total                 |  | $    | 263.5 |  | 100.0 | % |  | $ | 373.3 |  | 100.0 | %
|                      |  |      |       |  |       |   |  |   |       |  |       |  

During the nine months ended September 30, 2007 and 2006, our gross payments, reductions and sales
of securities by transaction type included:



|                                               |  |      |       |      |   |      
|---------------------------------------------- |  | ---- | ----- | ---- | - | -----
|(dollars in millions)                          |  | 2007 |       | 2006
|Scheduled principal amortization               |  | $    | 37.1  |      | $ | 75.8 
|Senior loan sales                              |  |      | 4.6   |      |   | 114.1
|Principal repayments                           |  |      | 173.8 |      |   | 167.3
|Payment of paid-in-kind interest and dividends |  |      | 16.2  |      |   | 11.3 
|Sale of equity investments                     |  |      | 31.8  |      |   | 4.8  
|                                               |  |      |       |      |   |      
|Total                                          |  | $    | 263.5 |      | $ | 373.3
|                                               |  |      |       |      |   |      



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##### Table of Contents

The following table shows our portfolio of investments by industry at fair value, as of September 30,
2007 and December 31, 2006 (excluding unearned income):



|                                                                |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|--------------------------------------------------------------- |  | ------------------------ | ------- | ---------------------------- | ----------------- | - | ------------------------ | - | ---------------------------- |  | ----- | -
|                                                                |  | September 30, 2007       |         |                              | December 31, 2006 |  
|(dollars in millions)                                           |  | Investments atFair Value |         | Percentage ofTotal Portfolio |                   |   | Investments atFair Value |   | Percentage ofTotal Portfolio | 
|Telecommunications  CLEC (competitive local exchange carriers) |  | $                        | 282.6   |                              | 18.5              | % |                          | $ | 274.1                        |  | 21.8  | %
|Other Communications                                            |  |                          | 46.1    |                              | 3.0               |   |                          |   | 84.0                         |  | 6.7   |  
|Healthcare                                                      |  |                          | 130.0   |                              | 8.5               |   |                          |   | 112.1                        |  | 8.9   |  
|Broadcasting                                                    |  |                          | 96.9    |                              | 6.4               |   |                          |   | 39.9                         |  | 3.2   |  
|Cable                                                           |  |                          | 82.9    |                              | 5.4               |   |                          |   | 38.7                         |  | 3.1   |  
|Plastic Products                                                |  |                          | 81.2    |                              | 5.3               |   |                          |   | 60.0                         |  | 4.8   |  
|Business Services                                               |  |                          | 75.5    |                              | 5.0               |   |                          |   | 51.2                         |  | 4.1   |  
|Logistics                                                       |  |                          | 61.7    |                              | 4.1               |   |                          |   |                             |  |      |  
|Publishing                                                      |  |                          | 59.9    |                              | 3.9               |   |                          |   | 68.0                         |  | 5.4   |  
|Food Services                                                   |  |                          | 56.4    |                              | 3.7               |   |                          |   | 21.2                         |  | 1.7   |  
|Laboratory Instruments                                          |  |                          | 55.1    |                              | 3.6               |   |                          |   | 58.4                         |  | 4.6   |  
|Home Furnishings                                                |  |                          | 51.4    |                              | 3.4               |   |                          |   | 52.5                         |  | 4.2   |  
|Sporting Goods                                                  |  |                          | 46.1    |                              | 3.0               |   |                          |   | 26.9                         |  | 2.1   |  
|Consumer Products                                               |  |                          | 46.1    |                              | 3.0               |   |                          |   | 19.4                         |  | 1.5   |  
|Entertainment                                                   |  |                          | 45.4    |                              | 3.0               |   |                          |   | 41.5                         |  | 3.3   |  
|Technology                                                      |  |                          | 45.2    |                              | 3.0               |   |                          |   | 36.2                         |  | 2.9   |  
|Information Services                                            |  |                          | 44.3    |                              | 2.9               |   |                          |   | 47.4                         |  | 3.8   |  
|Electronics                                                     |  |                          | 40.2    |                              | 2.6               |   |                          |   | 24.8                         |  | 2.0   |  
|Newspaper                                                       |  |                          | 35.7    |                              | 2.3               |   |                          |   | 90.6                         |  | 7.2   |  
|Auto Parts                                                      |  |                          | 34.8    |                              | 2.3               |   |                          |   | 17.2                         |  | 1.4   |  
|Education                                                       |  |                          | 31.1    |                              | 2.1               |   |                          |   | 31.0                         |  | 2.5   |  
|Other Media                                                     |  |                          | 29.3    |                              | 1.9               |   |                          |   | 24.1                         |  | 1.9   |  
|Leisure Activities                                              |  |                          | 14.0    |                              | 0.9               |   |                          |   | 14.3                         |  | 1.1   |  
|Other (a)                                                       |  |                          | 33.4    |                              | 2.2               |   |                          |   | 24.1                         |  | 1.8   |  
|                                                                |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|                                                                |  | $                        | 1,525.3 |                              | 100.0             | % |                          | $ | 1,257.6                      |  | 100.0 | %
|                                                                |  |                          |         |                              |                   |   |                          |   |                              |  |       |  



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

At September 30, 2007, our ten largest portfolio companies represented approximately 41.2% of the total fair value of our investments. These ten customers accounted for approximately 35.3% of our total revenue during the nine months ended
September 30, 2007. At September 30, 2007, approximately 21.5% of our portfolio at fair value was invested in companies in the communications industry, of which 18.5% were in competitive local exchange carriers, or CLECs. Two of our largest
portfolio companies, which we control, Broadview Networks Holdings, Inc. (Broadview) and Cleartel Communications, Inc. (Cleartel) are CLECs. Our remaining investments in the communications industry include telecommunications
tower companies, rural local exchange carriers, Internet service providers, wireless companies and security alarm companies. See Results of Operations for additional information regarding our investments in Broadview and Cleartel.



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Asset Quality

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



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

The following table shows the distribution of our investments on the 1 to 5 investment rating
scale at fair value as of September 30, 2007 and December 31, 2006:



|                      |  |  |  |                          |         |     |                              |       |   |                          |   |         |                              |  |       |  
|--------------------- |  |  |  | ------------------------ | ------- | --- | ---------------------------- | ----- | - | ------------------------ | - | ------- | ---------------------------- |  | ----- | -
|(dollars in millions) |  |  |  |                          |         |     |                              |       |  
|                      |  |  |  | September 30, 2007       |         |     | December 31, 2006            |      
|Investment Rating     |  |  |  | Investments atFair Value |         |     | Percentage ofTotal Portfolio |       |   | Investments atFair Value |   |         | Percentage ofTotal Portfolio | 
|1                     |  |  |  | $                        | 992.2   | (a) |                              | 65.1  | % |                          | $ | 785.3   | (a)                          |  | 62.4  | %
|2                     |  |  |  |                          | 267.3   |     |                              | 17.5  |   |                          |   | 285.5   |                              |  | 22.7  |  
|3                     |  |  |  |                          | 176.4   |     |                              | 11.6  |   |                          |   | 158.2   |                              |  | 12.6  |  
|4                     |  |  |  |                          | 26.2    |     |                              | 1.7   |   |                          |   | 23.6    |                              |  | 1.9   |  
|5                     |  |  |  |                          | 63.2    |     |                              | 4.1   |   |                          |   | 5.0     |                              |  | 0.4   |  
|                      |  |  |  |                          |         |     |                              |       |   |                          |   |         |                              |  |       |  
|                      |  |  |  | $                        | 1,525.3 |     |                              | 100.0 | % |                          | $ | 1,257.6 |                              |  | 100.0 | %
|                      |  |  |  |                          |         |     |                              |       |   |                          |   |         |                              |  |       |  



|(a) | At September 30, 2007 and December 31, 2006, approximately $551.1 million and $447.4 million, respectively, of our investments with an investment rating of 1 were
loans to companies in which we also hold equity securities or for which we have already realized a gain on our equity investment.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The increase in the amount of investments with an investment rating of 5 is primarily due to our investment in Cleartel. See Results of Operations for additional information regarding our investment in
Cleartel.



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When one of our loans becomes more than 90 days past due, or if we otherwise do not expect the customer
to be able to service its debt and other obligations, we will, as a general matter, place the loan on non-accrual status and will generally cease recognizing interest income on that loan until all principal and interest has been brought current
through payment or due to a restructuring such that the interest income is deemed to be collectible. However, we may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection. The following table
summarizes loans on non-accrual status and loans greater than 90 days past due, at fair value, at September 30, 2007 and December 31, 2006:



|                                                             |  |                    |       |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|------------------------------------------------------------ |  | ------------------ | ----- | ------------------ | ----------------- | - | ------------------- | --- | - | --------- | - | ------------------ |  | --- | ------------------- |  | --- | -
|                                                             |  | September 30, 2007 |       |                    | December 31, 2006 |  
|(dollars in millions)                                        |  | FairValue          |       | % ofLoan Portfolio |                   |   | % ofTotal Portfolio |     |   | FairValue |   | % ofLoan Portfolio |  |     | % ofTotal Portfolio | 
|Loans greater than 90 days past due                          |  |                    |       |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|On non-accrual status                                        |  | $                  | 6.3   |                    | 0.6               | % |                     | 0.4 | % |           | $ | 20.1               |  | 2.2 | %                   |  | 1.6 | %
|Not on non-accrual status                                    |  |                    | 1.8   |                    | 0.2               |   |                     | 0.1 |   |           |   | 1.8                |  | 0.2 |                     |  | 0.1 |  
|                                                             |  |                    |       |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|Total loans greater than 90 days past due                    |  | $                  | 8.1   |                    | 0.8               | % |                     | 0.5 | % |           | $ | 21.9               |  | 2.4 | %                   |  | 1.7 | %
|                                                             |  |                    |       |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|Loans on non-accrual status                                  |  |                    |       |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|0 to 90 days past due                                        |  | $                  | 100.5 |                    | 9.5               | % |                     | 6.6 | % |           | $ | 15.3               |  | 1.7 | %                   |  | 1.2 | %
|Greater than 90 days past due                                |  |                    | 6.3   |                    | 0.6               |   |                     | 0.4 |   |           |   | 20.1               |  | 2.2 |                     |  | 1.6 |  
|                                                             |  |                    |       |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|Total loans on non-accrual status                            |  | $                  | 106.8 |                    | 10.1              | % |                     | 7.0 | % |           | $ | 35.4               |  | 3.9 | %                   |  | 2.8 | %
|                                                             |  |                    |       |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  
|Loans on non-accrual status or greater than 90 days past due |  | $                  | 108.6 |                    | 10.3              | % |                     | 7.1 | % |           | $ | 37.2               |  | 4.1 | %                   |  | 2.9 | %
|                                                             |  |                    |       |                    |                   |   |                     |     |   |           |   |                    |  |     |                     |  |     |  

The increase in loans on non-accrual status from $35.4 million at December 31, 2006 to $106.8
million at September 30, 2007 is primarily due to our investment in Cleartel Communications, Inc. (Cleartel), a competitive local exchange carrier (CLEC) serving primarily residential customers, which we placed on
non-accrual status during the first quarter of 2007. At September 30, 2007, Cleartel represented 5.7% of our total loan portfolio and 56.5% of our loans on non-accrual status. During the first nine months of 2007, we invested an additional $15.5
million of subordinated debt in Cleartel. As of September 30, 2007, we held Cleartel subordinated debt with a fair value of $60.4 million and Cleartel preferred stock with a fair value of zero. These fair values reflect a write-down of approximately
$24.6 million which was recorded during the third quarter of 2007 and a write-down of approximately $40.1 million which was recorded in the fourth quarter of 2006.

Cleartel acquired Supra Telecom (Supra), a Florida-based CLEC during the fourth quarter of 2006. Cleartel has not met our expectations and projections of realizing synergies from this acquisition and has
had problems related to the application of its customer disconnect procedures, credit policies and billing processes. As a result, Cleartel incurred an estimated EBITDA loss of ($0.5) million during the first quarter of 2007 which was not
anticipated. During the second quarter of 2007, Cleartel earned an estimated EBITDA of $0.3 million. Cleartel has since improved its EBITDA to $0.5 million during the third quarter of 2007 through improvement in gross margins from 31.5% in the first
quarter of 2007 to 35.3% in the second quarter of 2007 to 36.4% during the third quarter of 2007. Cleartels current business plan will focus on delivering more advanced IP services and reducing some of its less profitable initiatives. We
believe we are repositioning Cleartel to be an effective competitor in the highly competitive telecommunications market. Cleartels investments in people and technology should enable it to deliver more advanced IP services to better serve its
customers and to rebuild value in our investment. During the third quarter of 2007, we invested an additional $3.1 million in Cleartel and for the nine months ended September 30, 2007, we have invested $15.5 million into Cleartel. We may elect to
make additional investments in Cleartel in future periods to support its business initiatives.

Since our Cleartel investment is a control
investment and because Cleartel is not currently generating sufficient earnings to service its capital structure, all of our Cleartel debt investments were placed on non-accrual status during the first quarter of 2007 and remained on non-accrual
status during the second and third quarters of 2007. This investment will remain on non-accrual status until the underlying financial results and cash flows of Cleartel improve. During the third quarter of 2007, in connection with the completion of
a re-evaluation of the multi-year business plan, it became evident that revenue levels in future periods will run at lower levels than



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previously anticipated and it will take longer than expected to achieve significant profitability. This is due in part to the fact that Cleartel will reduce
some of its less profitable initiatives and in part to the impact of the customer attrition that has occurred. Because we view revenue as a key component of value, we have reduced the value of our total investment in Cleartel. We believe that
Cleartels business initiatives will lead to improved results for Cleartel in 2008 and beyond. However, these initiatives take time to implement and we cannot predict with certainty when any of our Cleartel investments will return to accrual
status. At a minimum, we do not expect our Cleartel debt investment to return to accrual status prior to the middle of 2008. Further, it is likely that we will reconstitute the capital structure by converting some of the debt to equity in the near
future. At September 30, 2007, Cleartel represented approximately 4.0% of the fair value of our investments compared to 5.8% of the fair value of our investments at December 31, 2006. Our ability to recognize income from our investment in Cleartel
in future periods and the fair value of our investment in Cleartel will be dependent on the financial and operational performance of Cleartel.

Results of Operations

Comparison of the Three Months Ended September 30, 2007 and 2006

The following table shows the components of our net income for the three months ended September 30, 2007 and 2006:



|                                                                                 |  |      |      |      |   |        |  |   |                  |   |  |     |  
|-------------------------------------------------------------------------------- |  | ---- | ---- | ---- | - | ------ |  | - | ---------------- | - |  | --- | -
|(dollars in millions)                                                            |  | 2007 |      | 2006 |   | Change |  |   | PercentageChange |  
|Revenue                                                                          |  |      |      |      |   |        |  |   |                  |   |  |     |  
|Interest and dividend income                                                     |  | $    | 43.8 |      | $ | 33.3   |  | $ | 10.5             |   |  | 32  | %
|Loan fees                                                                        |  |      | 1.6  |      |   | 1.1    |  |   | 0.5              |   |  | 45  |  
|                                                                                 |  |      |      |      |   |        |  |   |                  |   |  |     |  
|Total interest and dividend income                                               |  |      | 45.4 |      |   | 34.4   |  |   | 11.0             |   |  | 32  |  
|Advisory fees and other income                                                   |  |      | 1.7  |      |   | 6.5    |  |   | (4.8             | ) |  | (74 | )
|                                                                                 |  |      |      |      |   |        |  |   |                  |   |  |     |  
|Total revenue                                                                    |  |      | 47.1 |      |   | 40.9   |  |   | 6.2              |   |  | 15  |  
|                                                                                 |  |      |      |     
|Operating expenses                                                               |  |      |      |      |   |        |  |   |                  |   |  |     |  
|Interest expense                                                                 |  |      | 11.9 |      |   | 9.8    |  |   | 2.1              |   |  | 21  |  
|Employee compensation:                                                           |  |      |      |      |   |        |  |   |                  |   |  |     |  
|Salaries and benefits                                                            |  |      | 6.2  |      |   | 6.7    |  |   | (0.5             | ) |  | (7  | )
|Amortization of employee restricted stock                                        |  |      | 2.1  |      |   | 1.2    |  |   | 0.9              |   |  | 75  |  
|                                                                                 |  |      |      |      |   |        |  |   |                  |   |  |     |  
|Total employee compensation                                                      |  |      | 8.3  |      |   | 7.9    |  |   | 0.4              |   |  | 5   |  
|General and administrative expense                                               |  |      | 2.7  |      |   | 3.1    |  |   | (0.4             | ) |  | (13 | )
|                                                                                 |  |      |      |      |   |        |  |   |                  |   |  |     |  
|Total operating expenses                                                         |  |      | 22.9 |      |   | 20.8   |  |   | 2.1              |   |  | 10  |  
|                                                                                 |  |      |      |      |   |        |  |   |                  |   |  |     |  
|                                                                                 |  |      |      |     
|Net operating income before investment gains and losses and income tax provision |  |      | 24.2 |      |   | 20.1   |  |   | 4.1              |   |  | 20  |  
|                                                                                 |  |      |      |     
|Net investment gains before income tax provision                                 |  |      | 2.2  |      |   | 2.0    |  |   | 0.2              |   |  | 10  |  
|                                                                                 |  |      |      |     
|Income tax provision                                                             |  |      | 3.4  |      |   |       |  |   | 3.4              |   |  | N/A |  
|                                                                                 |  |      |      |      |   |        |  |   |                  |   |  |     |  
|Net income                                                                       |  | $    | 23.0 |      | $ | 22.1   |  | $ | 0.9              |   |  | 4   | %
|                                                                                 |  |      |      |      |   |        |  |   |                  |   |  |     |  

Total Revenue

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



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Total interest and dividend income, which includes loan fees, increased $11.0 million for the three
months ended September 30, 2007 compared to the three months ended September 30, 2006. Interest income, exclusive of loan fees, increased approximately $4.0 million during the three months ended September 30, 2007 compared to the three months ended
September 30, 2006, due to an increase in our average loan portfolio, which had an impact of approximately $5.5 million and an increase in spread to LIBOR on yielding loans, which had an impact of approximately $1.6 million. This increase was
partially offset by the impact of non-accrual loans of approximately $(3.0) million and the impact of a decrease in previously unaccrued income of approximately $(0.1) million. We include in interest income certain amounts that we have not received
in cash, such as contractual paid-in-kind (PIK) interest. PIK interest represents contractually deferred interest that is added to the loan balance and which may be prepaid either by contract or the portfolio companys choice, but is generally
paid at the end of the loan term. The following table shows the PIK related activity for the three months ended September 30, 2007 and 2006:



|                                        |  |      |      |   |      |   |      |  
|--------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|(dollars in millions)                   |  | 2007 |      |   | 2006 |  
|Beginning PIK loan balance              |  | $    | 11.8 |   |      | $ | 19.1 |  
|PIK interest earned during the period   |  |      | 4.4  |   |      |   | 2.8  |  
|Principal payments of cash on PIK loans |  |      | (1.4 | ) |      |   | (1.2 | )
|PIK loans converted to other securities |  |      |     |   |      |   | (9.7 | )
|Interest receivable converted to PIK    |  |      | 0.9  |   |      |   | 3.9  |  
|                                        |  |      |      |   |      |   |      |  
|Ending PIK loan balance                 |  | $    | 15.7 |   |      | $ | 14.9 |  
|                                        |  |      |      |   |      |   |      |  

Dividend income increased approximately $6.5 million for the three months ended September 30, 2007
compared to the three months ended September 30, 2006. Certain of our equity investments have stated accruing dividend rates, for which we accrue dividends as they are earned to the extent we believe they will ultimately be paid. The increase in
accrued preferred dividends for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006 was primarily due to the recognition of approximately $1.5 million of previously unaccrued dividends on one of our
portfolio companies, JUPR Holdings, Inc., during the third quarter of 2007, and due to an increase of approximately $2.8 million in accrued preferred dividends from our investment in Broadview. The remainder of the increase in dividend income is
primarily due to growth in our equity portfolio. We recognized dividend income equal to the contractual accruing dividend on our preferred equity investment in Broadview of approximately $7.5 million and $4.7 million for the three months ended
September 30, 2007 and 2006, respectively. Our dividend activity for the three months ended September 30, 2007 and 2006 was as follows:



|                                         |  |      |      |   |      |   |      |  
|---------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|(dollars in millions)                    |  | 2007 |      |   | 2006 |  
|Beginning accrued dividend balance       |  | $    | 52.4 |   |      | $ | 19.4 |  
|Dividend income earned during the period |  |      | 12.6 |   |      |   | 6.1  |  
|Payment of dividends                     |  |      | (0.1 | ) |      |   | (0.5 | )
|                                         |  |      |      |   |      |   |      |  
|Ending accrued dividend balance          |  | $    | 64.9 |   |      | $ | 25.0 |  
|                                         |  |      |      |   |      |   |      |  

Loan fees include origination fees on loans that are deferred and amortized into interest income
over the life of the loan. When repayments or restructurings with other than minor modifications occur, we accelerate the recognition of previously unamortized loan origination fees into loan fee income. These accelerations have the effect of
increasing current period income and may reduce future amortizable income. Because these repayments and restructurings may vary from period to period, the amount of loan origination fees that are recognized as interest income may also vary from
period to period. Loan fees increased approximately $0.6 million for the three months ended September 30, 2007 compared to the three months ended September 30, 2006.



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The following table shows our loan fee activity during the three months ended September 30, 2007 and
2006:



|                                  |  |      |      |   |      |   |      |  
|--------------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|(dollars in millions)             |  | 2007 |      |   | 2006 |  
|Beginning unearned income balance |  | $    | 10.7 |   |      | $ | 7.7  |  
|Additional deferred fees          |  |      | 1.3  |   |      |   | 1.5  |  
|Unearned income recognized        |  |      | (1.6 | ) |      |   | (1.1 | )
|                                  |  |      |      |   |      |   |      |  
|Ending unearned income balance    |  | $    | 10.4 |   |      | $ | 8.1  |  
|                                  |  |      |      |   |      |   |      |  

The total yield on our average debt portfolio at fair value for the three months ended September
30, 2007 and 2006 was 12.2% and 12.7%, respectively. The average LIBOR for the three months ended September 30, 2007 was 5.4%, which is the same as the three months ended September 30, 2006. The decrease in total yield is primarily attributable to
the increase in non-accrual loans. For the three months ended September 30, 2007, the impact of non-accrual loans on total yield was (1.7%), as compared to (0.4%) for the three months ended September 30, 2006. This impact was partially offset by an
increase in the spread to average LIBOR on our average yielding loan portfolio of 8.2% for the three months ended September 30, 2007, as compared to 7.5% for the three months ended September 30, 2006.

Advisory fees and other income primarily include fees related to advisory and management services, equity structuring fees, syndication fees, prepayment
fees, bank interest and other income. Advisory fees and other income are generally related to specific transactions or services and therefore may vary from period to period depending on the level and types of services provided. The decrease in
advisory fees and other income of $(4.8) million for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006 was primarily due to decreases in advisory and management fees of approximately $(3.9)
million primarily due to lower origination activity and a decrease in prepayment fees of approximately $(1.0), million partially offset by an increase in bank interest of approximately $0.1 million.

Broadview, a CLEC serving primarily business customers, is our largest portfolio investment, in which we held preferred stock with an aggregate fair
value of $181.8 million at September 30, 2007. For the three months ended September 30, 2007, Broadview accounted for approximately $7.5 million, or 16.0%, of our total revenue compared to approximately $6.8 million, or 16.8%, of our total revenue
for the three months ended September 30, 2006. During the three months ended September 30, 2006, our revenue from our Broadview investment was comprised of interest and dividend income. During the third quarter of 2006, we converted all our debt
investments in Broadview to preferred stock, therefore during the three months ended September 30, 2007, our revenue from our Broadview investment was all in the form of dividend income. Our investment in Broadviews preferred stock is
convertible into common stock and represents an ownership interest of approximately 46% on an as-if converted basis. As of September 30, 2007, our preferred stock investment in Broadview entitles us to a preferred claim of approximately $259.1
million, prior to claims by Broadview common shareholders. This claim amount represents the amount to which we would be entitled in a liquidation scenario where the value of Broadview is sufficient to satisfy the claims of all preferred equity
holders. In other words, $259.1 million is the amount, as of September 30, 2007, that we would be entitled to receive for our preferred stock claim prior to any distributions to the holders of Broadview common stock. We are also entitled to
accumulating dividends on our preferred stock investment, which accumulate and compound quarterly at an annual rate of 12% on $259.1 million but are not payable in cash on a current basis. Based on our current investments in Broadview, our future
earnings will all be in the form of accumulating dividend income. Further, because accumulating dividends are typically not considered part of taxable income until they are received in cash, it is possible that our GAAP earnings may exceed our
taxable earnings by a significant amount until such time as this investment is liquidated. Our ability to recognize income from our investment in Broadview in future periods and the fair value of our investment in Broadview will be dependent on the
financial and operational performance and value of Broadview.

During the first quarter of 2007, we placed our investment in Cleartel,
which was our second largest portfolio company at the time, on non-accrual status. We did not recognize any revenue from this investment during the quarter ended September 30, 2007, compared to $1.3 million, or 3.2%, of our total revenue for
the



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three months ended September 30, 2006. As of September 30, 2007, we held Cleartel subordinated debt with a fair value of $60.4 million and Cleartel preferred
stock with a fair value of zero. Our ability to recognize income from our investment in Cleartel in future periods and the fair value of our investment in Cleartel will be dependent on the financial and operational performance and value of Cleartel.
See Asset Quality for additional discussion regarding our investment in Cleartel.

Total Operating Expenses

Operating expenses include interest, employee compensation and general and administrative expenses. The increase in interest expense of approximately $2.1
million during the three months ended September 30, 2007 as compared to the three months ended September 30, 2006, is primarily attributable to higher average borrowings which caused interest expense to increase by approximately $3.4 million,
partially offset by a decrease of approximately $1.2 million in amortization of deferred debt issuance costs.

Employee compensation
includes base salaries and benefits, variable annual incentive compensation, and amortization of employee restricted stock awards. Total salaries and benefits was approximately $6.2 million and $6.7 million during the three months ended September
30, 2007 and September 30, 2006, respectively. The approximately $(0.5) million decrease in salaries and benefits expense was primarily due to approximately $1.5 million of severance costs related to our former CEO included in the three months ended
September 30, 2006 results, partially offset by an increase of approximately $1.0 million in salaries and benefits due to increased staffing and variable annual incentive compensation. Amortization of employee restricted stock awards is
non-cash compensation related to restricted stock awards granted in 2001, 2006, and 2007. During the quarter ended September 30, 2007, we recognized compensation expense related to restricted stock awards of approximately $2.1 million, compared to
approximately $1.2 million for the quarter ended September 30, 2006. We granted approximately 20,500 shares of restricted stock during the third quarter of 2007 pursuant to our 2006 Employee Restricted Stock Plan. The forfeiture provisions will
lapse quarterly with respect to these 20,500 restricted shares through September 30, 2011.

General and administrative expenses
include legal and accounting fees, insurance premiums, rent and various other expenses. General and administrative expenses decreased approximately $(0.4) million during the three months ended September 30, 2007 compared to the three months ended
September 30, 2006, due to professional fees of approximately $1.0 million incurred in the third quarter of 2006 in conjunction with the independent review of certain tax withholding reimbursements and loan repayments by our current and former
executive officers, as previously disclosed, partially offset by costs resulting from the growth of our business.

Net Operating Income Before
Investment Gains and Losses and Income Tax Provision (Benefit)

Net operating income before investment gains and losses and income tax
provision (benefit) for the three months ended September 30, 2007 totaled $24.2 million, an increase of approximately $4.2 million compared with $20.1 million for the three months ended September 30, 2006. This increase is due to the items
discussed above.

Distributable Net Operating Income (DNOI)

DNOI is net operating income before investment gains and losses and income tax provision (benefit), as determined in accordance with GAAP, excluding
amortization of employee restricted stock awards. We view DNOI and the related per share measures as useful and appropriate supplements to net operating income, net income, earnings per share and cash flows from operating activities. DNOI serves as
an additional measure of our operating performance exclusive of employee restricted stock amortization, which represents an expense of MCG but does not require settlement in cash. DNOI should not be considered as an alternative to net operating
income, net income, earnings per share or cash flows from operating activities (each computed in accordance with



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GAAP). Instead, DNOI should be reviewed in connection with net operating income, net income, earnings per share and cash flows from operating activities in
our consolidated financial statements, to help analyze how our business is performing.

DNOI for the three months ended September 30, 2007
was $26.4 million, or $0.42 per share, compared to $21.2 million, or $0.40 per share, for the three months ended September 30, 2006. The following table shows a reconciliation of our reported net operating income before investment gains
and losses and income tax provision (benefit) to DNOI for the quarter ended September 30, 2007 and 2006:



|                                                                                                                              |  |      |        |      |   |       
|----------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------
|(in thousands, except per share data)                                                                                         |  |      |        |     
|                                                                                                                              |  | 2007 |        | 2006
|Net operating income before investment gains and losses and income tax provision (benefit)                                    |  | $    | 24,248 |      | $ | 20,064
|Amortization of employee restricted stock awards                                                                              |  |      | 2,120  |      |   | 1,160 
|                                                                                                                              |  |      |        |      |   |       
|DNOI                                                                                                                          |  | $    | 26,368 |      | $ | 21,224
|                                                                                                                              |  |      |        |      |   |       
|Weighted average common shares outstanding                                                                                    |  |      | 62,298 |      |   | 53,281
|Weighted average common shares outstanding and dilutive common stock equivalents                                              |  |      | 62,317 |      |   | 53,281
|Earnings per common sharebasic and diluted                                                                                   |  | $    | 0.37   |      | $ | 0.42  
|Net operating income before investment gains and losses and income tax provision (benefit) per common sharebasic and
diluted |  | $    | 0.39   |      | $ | 0.38  
|DNOI per sharebasic and diluted                                                                                              |  | $    | 0.42   |      | $ | 0.40  

Net Investment Gains and Losses Before Income Tax Provision (Benefit)

Net investment gains before income tax provision (benefit) totaled approximately $2.2 million for the three months ended September 30, 2007, compared to
$2.0 million for the three months ended September 30, 2006. The net investment gains of $2.2 million for the three months ended September 30, 2007 were inclusive of $24.6 million of unrealized depreciation on Cleartel. See Results of
Operations for more information about our investment in Cleartel. These amounts represent the total of net realized gains and losses, net unrealized appreciation and depreciation and reversals of unrealized appreciation and depreciation.
Reversals of unrealized appreciation and depreciation occur when a gain or loss becomes realized.

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:



|                                         |  |                      |  |               |  |                                       |       |                         |   |         |                                     |  |   |                  |   |  |   |         |  
|---------------------------------------- |  | -------------------- |  | ------------- |  | ------------------------------------- | ----- | ----------------------- | - | ------- | ----------------------------------- |  | - | ---------------- | - |  | - | ------- | -
|                                         |  |                      |  |               |  | Three Months Ended September 30, 2007 |      
|(dollars in thousands) Portfolio Company |  | Industry             |  | Type          |  | Realized Gain/ (Loss)                 |       | Unrealized Gain/ (Loss) |   |         | Reversal of Unrealized (Gain)/ Loss |  |   | 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   |  
|Coastal Sunbelt, LLC                     |  | Food Services        |  | Control       |  |                                       |      |                         |   | 5,218   |                                     |  |   |                 |   |  |   | 5,218   |  
|JetBroadband Holdings, LLC               |  | Cable                |  | Control       |  |                                       |      |                         |   | 3,346   |                                     |  |   |                 |   |  |   | 3,346   |  
|D&B Towers, LLC                          |  | Communications       |  | Non-affiliate |  |                                       |      |                         |   | 1,641   |                                     |  |   |                 |   |  |   | 1,641   |  
|JUPR Holdings, Inc.                      |  | Information Services |  | Control       |  |                                       |      |                         |   | 1,573   |                                     |  |   |                 |   |  |   | 1,573   |  
|Miles Media Group, LLC                   |  | Publishing           |  | Non-affiliate |  |                                       | 2,530 |                         |   |        |                                     |  |   | (2,461           | ) |  |   | 69      |  
|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                                    |  |                      |  |               |  |                                       | 710   |                         |   | (1,470  | )                                   |  |   | (10              | ) |  |   | (770    | )
|                                         |  |                      |  |               |  |                                       |       |                         |   |         |                                     |  |   |                  |   |  |   |         |  
|Total                                    |  |                      |  |               |  | $                                     | 3,240 |                         | $ | 1,436   |                                     |  | $ | (2,471           | ) |  | $ | 2,205   |  
|                                         |  |                      |  |               |  |                                       |       |                         |   |         |                                     |  |   |                  |   |  |   |         |  



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



|                                         |  |                       |  |               |  |                                       |        |   |                        |   |        |                                   |  |   |                 |   |  |   |        |  
|---------------------------------------- |  | --------------------- |  | ------------- |  | ------------------------------------- | ------ | - | ---------------------- | - | ------ | --------------------------------- |  | - | --------------- | - |  | - | ------ | -
|                                         |  |                       |  |               |  | Three Months Ended September 30, 2006 |       
|(dollars in thousands) Portfolio Company |  | Industry              |  | Type          |  | RealizedGain/ (Loss)                  |        |   | UnrealizedGain/ (Loss) |   |        | Reversal ofUnrealized(Gain)/ Loss |  |   | NetGain/ (Loss) |  
|dick clark productions, inc.             |  | Broadcasting          |  | Non-affiliate |  | $                                     |       |   |                        | $ | 3,541  |                                   |  | $ |                |   |  | $ | 3,541  |  
|SXC Health Solutions, Inc.               |  | Healthcare            |  | Non-affiliate |  |                                       |       |   |                        |   | 1,343  |                                   |  |   |                |   |  |   | 1,343  |  
|Quantum Medical Holdings, LLC            |  | LaboratoryInstruments |  | Non-affiliate |  |                                       |       |   |                        |   | 420    |                                   |  |   |                |   |  |   | 420    |  
|Crystal Media Network, LLC               |  | Broadcasting          |  | Control       |  |                                       | (2,245 | ) |                        |   |       |                                   |  |   | 2,561           |   |  |   | 316    |  
|Fawcette Technical Publications Holding  |  | Publishing            |  | Control       |  |                                       |       |   |                        |   | (462   | )                                 |  |   |                |   |  |   | (462   | )
|Jupitermedia Corporation                 |  | Information Services  |  | Non-affiliate |  |                                       |       |   |                        |   | (644   | )                                 |  |   |                |   |  |   | (644   | )
|Midwest Tower Partners, LLC              |  | Communications        |  | Control       |  |                                       |       |   |                        |   | (865   | )                                 |  |   |                |   |  |   | (865   | )
|National Product Services, Inc.          |  | Business Services     |  | Control       |  |                                       |       |   |                        |   | (1,143 | )                                 |  |   |                |   |  |   | (1,143 | )
|Other                                    |  |                       |  |               |  |                                       | 2      |   |                        |   | (453   | )                                 |  |   | (26             | ) |  |   | (477   | )
|                                         |  |                       |  |               |  |                                       |        |   |                        |   |        |                                   |  |   |                 |   |  |   |        |  
|Total                                    |  |                       |  |               |  | $                                     | (2,243 | ) |                        | $ | 1,737  |                                   |  | $ | 2,535           |   |  | $ | 2,029  |  
|                                         |  |                       |  |               |  |                                       |        |   |                        |   |        |                                   |  |   |                 |   |  |   |        |  

Income Tax Provision

During the three months ended September 30, 2007, we recorded an income tax provision of approximately $3.4 million primarily related to unrealized gains on our investments and the performance of certain of our
investments that are held in taxable subsidiaries.

Net Income

Net income totaled approximately $23.0 million for the three months ended September 30, 2007, compared to $22.1 million for the three months ended September 30, 2006. The increase in net income is due to the items
discussed above.



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Comparison of the Nine Months Ended September 30, 2007 and 2006

The following table shows the components of our net income for the nine months ended September 30, 2007 and 2006:



|                                                                                           |  |      |       |      |   |        |  |   |                  |   |  |     |  
|------------------------------------------------------------------------------------------ |  | ---- | ----- | ---- | - | ------ |  | - | ---------------- | - |  | --- | -
|(dollars in millions)                                                                      |  | 2007 |       | 2006 |   | Change |  |   | PercentageChange |  
|Revenue                                                                                    |  |      |       |      |   |        |  |   |                  |   |  |     |  
|Interest and dividend income                                                               |  | $    | 125.7 |      | $ | 95.6   |  | $ | 30.1             |   |  | 31  | %
|Loan fees                                                                                  |  |      | 4.0   |      |   | 4.6    |  |   | (0.6             | ) |  | (13 | )
|                                                                                           |  |      |       |      |   |        |  |   |                  |   |  |     |  
|Total interest and dividend income                                                         |  |      | 129.7 |      |   | 100.2  |  |   | 29.5             |   |  | 29  |  
|Advisory fees and other income                                                             |  |      | 7.7   |      |   | 13.5   |  |   | (5.8             | ) |  | (43 | )
|                                                                                           |  |      |       |      |   |        |  |   |                  |   |  |     |  
|Total revenue                                                                              |  |      | 137.4 |      |   | 113.7  |  |   | 23.7             |   |  | 21  |  
|                                                                                           |  |      |       |     
|Operating expenses                                                                         |  |      |       |      |   |        |  |   |                  |   |  |     |  
|Interest expense                                                                           |  |      | 31.5  |      |   | 27.4   |  |   | 4.1              |   |  | 15  |  
|Employee compensation:                                                                     |  |      |       |      |   |        |  |   |                  |   |  |     |  
|Salaries and benefits                                                                      |  |      | 18.1  |      |   | 17.2   |  |   | 0.9              |   |  | 5   |  
|Amortization of employee restricted stock                                                  |  |      | 7.1   |      |   | 2.5    |  |   | 4.6              |   |  | 184 |  
|                                                                                           |  |      |       |      |   |        |  |   |                  |   |  |     |  
|Total employee compensation                                                                |  |      | 25.2  |      |   | 19.7   |  |   | 5.5              |   |  | 28  |  
|General and administrative expense                                                         |  |      | 7.9   |      |   | 6.9    |  |   | 1.0              |   |  | 14  |  
|                                                                                           |  |      |       |      |   |        |  |   |                  |   |  |     |  
|Total operating expenses                                                                   |  |      | 64.6  |      |   | 54.0   |  |   | 10.6             |   |  | 20  |  
|                                                                                           |  |      |       |      |   |        |  |   |                  |   |  |     |  
|                                                                                           |  |      |       |     
|Net operating income before investment gains and losses and income tax provision (benefit) |  |      | 72.8  |      |   | 59.7   |  |   | 13.1             |   |  | 22  |  
|                                                                                           |  |      |       |     
|Net investment gains before income tax provision                                           |  |      | 21.6  |      |   | 15.3   |  |   | 6.3              |   |  | 41  |  
|                                                                                           |  |      |       |     
|Income tax provision                                                                       |  |      | 2.9   |      |   | 3.6    |  |   | (0.7             | ) |  | (19 | )
|                                                                                           |  |      |       |      |   |        |  |   |                  |   |  |     |  
|Net income                                                                                 |  | $    | 91.5  |      | $ | 71.4   |  | $ | 20.1             |   |  | 28  | %
|                                                                                           |  |      |       |      |   |        |  |   |                  |   |  |     |  

Total Revenue

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

Total interest and dividend income,
which includes loan fees, increased $29.5 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006. Interest income, exclusive of loan fees, increased approximately $9.4 million during the nine months
ended September 30, 2007 compared to the nine months ended September 30, 2006. This increase was due to the increase in our average loan portfolio, which had an impact of approximately $10.3 million, the increase in LIBOR, which had an impact of
approximately $1.7 million, an increase in the impact of previously unaccrued interest of $1.7 million and an increase in spread to LIBOR on yielding loans, which had an impact of approximately $6.3 million. These increases were partially offset by
the impact of non-accrual loans of approximately $(8.6) million and the impact of fee accelerations on unearned fees on paid/restructured loans of $(2.0) million. We include in interest income certain amounts that we have not received in cash, such
as contractual paid-in-kind (PIK) interest. PIK interest represents contractually deferred interest that is added to the loan balance and which may be prepaid either by contract or the portfolio companys choice, but is generally paid at the
end of the loan term. During the nine



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months ended September 30, 2007 and 2006, we recognized approximately $2.9 million and $1.7 million, respectively, of previously unaccrued PIK interest that
was paid in cash. The following table shows the PIK related activity for the nine months ended September 30, 2007 and 2006:



|                                        |  |      |       |   |      |   |      |  
|--------------------------------------- |  | ---- | ----- | - | ---- | - | ---- | -
|(dollars in millions)                   |  | 2007 |       |   | 2006 |  
|Beginning PIK loan balance              |  | $    | 11.1  |   |      | $ | 13.5 |  
|PIK interest earned during the period   |  |      | 13.8  |   |      |   | 12.1 |  
|Principal payments of cash on PIK loans |  |      | (10.6 | ) |      |   | (7.4 | )
|PIK loans converted to other securities |  |      | (0.7  | ) |      |   | (9.9 | )
|PIK loans purchased                     |  |      | 0.4   |   |      |   |     |  
|Interest receivable converted to PIK    |  |      | 1.7   |   |      |   | 6.6  |  
|                                        |  |      |       |   |      |   |      |  
|Ending PIK loan balance                 |  | $    | 15.7  |   |      | $ | 14.9 |  
|                                        |  |      |       |   |      |   |      |  

Dividend income increased approximately $20.7 million for the nine months ended September 30, 2007
compared to the nine months ended September 30, 2006. Certain of our equity investments have stated accruing dividend rates, for which we accrue dividends as they are earned to the extent we believe they will ultimately be paid. The increase in
accrued preferred dividends for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006 was primarily due to approximately $1.5 million of previously unaccrued dividends on one of our portfolio companies,
JUPR Holdings, Inc., approximately $3.4 million of previously unaccrued dividends we received when we sold our investment in Superior Publishing Corporation and an increase of approximately $11.3 million in accrued preferred dividends from our
investment in Broadview. The remainder of the increase in dividend income is primarily due to growth in our equity portfolio. We recognized dividend income equal to the contractual accruing dividend on our preferred equity investment in Broadview of
approximately $22.0 million and $10.7 million for the nine months ended September 30, 2007 and 2006, respectively. Our dividend activity for the nine months ended September 30, 2007 and 2006 was as follows:



|                                         |  |      |      |   |      |   |      |  
|---------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|(dollars in millions)                    |  | 2007 |      |   | 2006 |  
|Beginning accrued dividend balance       |  | $    | 33.6 |   |      | $ | 12.4 |  
|Dividend income earned during the period |  |      | 35.6 |   |      |   | 14.9 |  
|Payment of dividends                     |  |      | (4.3 | ) |      |   | (2.3 | )
|                                         |  |      |      |   |      |   |      |  
|Ending accrued dividend balance          |  | $    | 64.9 |   |      | $ | 25.0 |  
|                                         |  |      |      |   |      |   |      |  

Loan fees include origination fees on loans that are deferred and amortized into interest income
over the life of the loan. When repayments or restructurings with other than minor modifications occur, we accelerate the recognition of previously unamortized loan origination fees into loan fee income. These accelerations have the effect of
increasing current period income and may reduce future amortizable income. Because these repayments and restructurings may vary from period to period, the amount of loan origination fees that are recognized as interest income may also vary from
period to period. Loan fees decreased approximately $(0.6) million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006.

The following table shows our loan fee activity during the nine months ended September 30, 2007 and 2006:



|                                  |  |      |      |   |      |   |      |  
|--------------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|(dollars in millions)             |  | 2007 |      |   | 2006 |  
|Beginning unearned income balance |  | $    | 9.5  |   |      | $ | 9.1  |  
|Additional deferred fees          |  |      | 4.6  |   |      |   | 3.6  |  
|Unearned income recognized        |  |      | (3.7 | ) |      |   | (4.6 | )
|                                  |  |      |      |   |      |   |      |  
|Ending unearned income balance    |  | $    | 10.4 |   |      | $ | 8.1  |  
|                                  |  |      |      |   |      |   |      |  

The total yield on our average debt portfolio at fair value for the nine months ended September
30, 2007 and 2006 was 12.6% and 12.8%, respectively. The average LIBOR for the nine months ended September 30, 2007



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was 5.4%, an increase of 0.3% from 5.1% for the nine months ended September 30, 2006. The decrease in total yield is primarily attributable to the increase
in non-accrual loans. For the nine months ended September 30, 2007, the impact of non-accrual loans on total yield was (1.7%) as compared to (0.4%) for the nine months ended September 30, 2006. This impact was partially offset by an increase in the
spread to average LIBOR on our average yielding loan portfolio of 8.3% for the nine months ended September 30, 2007, as compared to 7.4% for the nine months ended September 30, 2006.

Advisory fees and other income primarily include fees related to advisory and management services, equity structuring fees, syndication fees, prepayment
fees, bank interest and other income. Advisory fees and other income are generally related to specific transactions or services and therefore may vary from period to period depending on the level and types of services provided. The decrease in
advisory fees and other income of $(5.8) million for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006 was primarily due to decreases in prepayment fees of $(2.8) million, advisory and management fees
of $(1.7) million and bank interest and other fees of approximately $(1.3) million.

Broadview, a CLEC serving primarily business
customers, is our largest portfolio investment, in which we hold preferred stock with an aggregate fair value of $181.8 million at September 30, 2007. For the nine months ended September 30, 2007, Broadview accounted for approximately
$22.0 million, or 16.0%, of our total revenue compared to approximately $15.5 million, or 13.6%, of our total revenue for the nine months ended September 30, 2006. During the nine months ended September 30, 2006, our revenue from our Broadview
investment was comprised of interest and dividend income. During the third quarter of 2006, we converted all our debt investments in Broadview to preferred stock, therefore during the three months ended September 30, 2007, our revenue from our
Broadview investment was all in the form of dividend income. Our investment in Broadviews preferred stock is convertible into common stock and represents an ownership interest of approximately 46% on an as-if converted basis. As of September
30, 2007, our preferred stock investment in Broadview entitles us to a preferred claim of approximately $259.1 million, prior to claims by Broadview common shareholders. This claim amount represents the amount to which we would be entitled in a
liquidation scenario where the value of Broadview is sufficient to satisfy the claims of all preferred equity holders. In other words, $259.1 million is the amount, as of September 30, 2007, that we would be entitled to receive for our preferred
stock claim prior to any distributions to the holders of Broadview common stock. We are also entitled to accumulating dividends on our preferred stock investment, which accumulate and compound quarterly at an annual rate of 12% on $259.1 million but
are not payable in cash on a current basis. Based on our current investments in Broadview our future earnings will all be in the form of accumulating dividend income. Further, because accumulating dividends are typically not considered part of
taxable income until they are received in cash, it is possible that our GAAP earnings may exceed our taxable earnings by a significant amount until such time as this investment is liquidated. Our ability to recognize income from our investment in
Broadview in future periods and the fair value of our investment in Broadview will be dependent on the financial and operational performance and value of Broadview.

During the first quarter of 2007, we placed our investment in Cleartel, our second largest portfolio company at the time, on non-accrual status. We did not recognize any revenue from this investment during the nine
months ended September 30, 2007, compared to $3.5 million, or 3.0%, of our total revenue for the nine months ended September 30, 2006. As of September 30, 2007, we held Cleartel subordinated debt with a fair value of $60.4 million and
Cleartel preferred stock with a fair value of zero. Our ability to recognize income from our investment in Cleartel in future periods and the fair value of our investment in Cleartel will be dependent on the financial and operational performance and
value of Cleartel. See Asset Quality for additional discussion regarding our investment in Cleartel.

Total Operating Expenses

Operating expenses include interest, employee compensation and general and administrative expenses. The increase in interest expense of
approximately $4.1 million during the nine months ended September 30, 2007 as



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compared to the nine months ended September 30, 2006, is attributable to higher average borrowings which caused interest expense to increase by approximately
$5.8 million and an increase in LIBOR which caused interest expense to increase by approximately $1.0 million, partially offset by a decrease of approximately $2.7 million in amortization of deferred debt issuance costs.

Employee compensation includes base salaries and benefits, variable annual incentive compensation, and amortization of employee restricted stock awards.
Total salaries and benefits was approximately $18.1 million and $17.2 million during the nine months ended September 30, 2007 and September 30, 2006, respectively. The increase of $0.9 million in salaries and benefits was primarily due to
increased staffing and variable annual incentive compensation, which was partially offset by approximately $1.5 million of severance costs related to our former CEO in 2006 and a decrease in dividends on restricted shares with performance based
forfeiture restrictions and shares securing employee loans. Amortization of employee restricted stock awards is non-cash compensation related to restricted stock awards granted in 2001, 2006, and 2007. During the nine months ended September 30,
2007, we recognized compensation expense related to restricted stock awards of approximately $7.1 million, compared to approximately $2.5 million for the nine months ended September 30, 2006. We granted approximately 936,000 shares of restricted
stock during the nine months of 2007 pursuant to our 2006 Employee Restricted Stock Plan. The forfeiture provisions will lapse quarterly with respect to 836,000 of these restricted shares through September 30, 2011 and with respect to 100,000 of
these shares annually through February 28, 2008.

General and administrative expenses include legal and accounting fees, insurance
premiums, rent and various other expenses. General and administrative expenses increased approximately $1.0 million during the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006, due to costs resulting from the
growth of our business partially offset by professional fees of approximately $1.0 million incurred in the first nine months of 2006 in conjunction with the independent review of certain tax withholding reimbursements and loan repayments by our
current and former executive officers, as previously disclosed.

Net Operating Income Before Investment Gains and Losses and Income Tax Provision
(Benefit)

Net operating income before investment gains and losses and income tax provision (benefit) for the nine months ended
September 30, 2007 totaled $72.8 million, an increase of approximately $13.1 million compared with $59.7 million for the nine months ended September 30, 2006. This increase is due to the items discussed above.

Distributable Net Operating Income (DNOI)

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



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DNOI for the nine months ended September 30, 2007 was $79.9 million, or $1.33 per share, compared to
$62.2 million, or $1.17 per share, for the nine months ended September 30, 2006. The following table shows a reconciliation of our reported net operating income before investment gains and losses and income tax provision (benefit) to DNOI for
the nine months ended September 30, 2007 and 2006:



|                                                                                                                              |  |      |        |      |   |       
|----------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------
|(in thousands, except per share data)                                                                                         |  |      |        |     
|                                                                                                                              |  | 2007 |        | 2006
|Net operating income before investment gains and losses and income tax provision (benefit)                                    |  | $    | 72,788 |      | $ | 59,713
|Amortization of employee restricted stock awards                                                                              |  |      | 7,126  |      |   | 2,515 
|                                                                                                                              |  |      |        |      |   |       
|DNOI                                                                                                                          |  | $    | 79,914 |      | $ | 62,228
|                                                                                                                              |  |      |        |      |   |       
|Weighted average common shares outstanding                                                                                    |  |      | 60,245 |      |   | 53,236
|Weighted average common shares outstanding and dilutive common stock equivalents                                              |  |      | 60,248 |      |   | 53,236
|Earnings per common sharebasic and diluted                                                                                   |  | $    | 1.52   |      | $ | 1.34  
|Net operating income before investment gains and losses and income tax provision (benefit) per common sharebasic and
diluted |  | $    | 1.21   |      | $ | 1.12  
|DNOI per sharebasic and diluted                                                                                              |  | $    | 1.33   |      | $ | 1.17  

Net Investment Gains and Losses Before Income Tax Provision (Benefit)

Net investment gains before income tax provision (benefit) totaled approximately $21.6 million for the nine months ended September 30, 2007, compared
to $15.3 million for the nine months ended September 30, 2006. These amounts represent the total of net realized gains and losses, net unrealized appreciation and depreciation and reversals of unrealized appreciation and depreciation. Reversals of
unrealized appreciation and depreciation occur when a gain or loss becomes realized.

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:



|                                           |  |                      |  |               |  |                                      |        |   |                         |   |         |                                     |  |   |                  |   |  |   |         |  
|------------------------------------------ |  | -------------------- |  | ------------- |  | ------------------------------------ | ------ | - | ----------------------- | - | ------- | ----------------------------------- |  | - | ---------------- | - |  | - | ------- | -
|                                           |  |                      |  |               |  | Nine Months Ended September 30, 2007 |       
|(dollars in thousands) Portfolio Company   |  | Industry             |  | Type          |  | Realized Gain/ (Loss)                |        |   | Unrealized Gain/ (Loss) |   |         | Reversal of Unrealized (Gain)/ Loss |  |   | Net Gain/ (Loss) |  
|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 Schools 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   |  
|Miles Media Group, LLC                     |  | Publishing           |  | Non-affiliate |  |                                      | 2,530  |   |                         |   | 781     |                                     |  |   | (2,461           | ) |  |   | 850     |  
|Platinum Wireless, Inc.                    |  | Communications       |  | Control       |  |                                      | (1,149 | ) |                         |   |        |                                     |  |   | 1,149            |   |  |   |        |  
|Midwest Tower Partners, LLC                |  | Communications       |  | Control       |  |                                      | 3,642  |   |                         |   | (572    | )                                   |  |   | (3,642           | ) |  |   | (572    | )
|Cornerstone Healthcare Group Holding, Inc. |  | Healthcare           |  | Non-affiliate |  |                                      |       |   |                         |   | (1,216  | )                                   |  |   |                 |   |  |   | (1,216  | )
|RadioPharmacy Investors, LLC               |  | Healthcare           |  | Control       |  |                                      |       |   |                         |   | (2,437  | )                                   |  |   |                 |   |  |   | (2,437  | )
|Intran Media, LLC                          |  | Other Media          |  | Control       |  |                                      |       |   |                         |   | (2,550  | )                                   |  |   |                 |   |  |   | (2,550  | )
|TNR Entertainment Corp.                    |  | Entertainment        |  | Control       |  |                                      |       |   |                         |   | (3,000  | )                                   |  |   |                 |   |  |   | (3,000  | )
|Cleartel Communications, Inc.              |  | Communications       |  | Control       |  |                                      |       |   |                         |   | (24,647 | )                                   |  |   |                 |   |  |   | (24,647 | )
|Other                                      |  |                      |  |               |  |                                      | 278    |   |                         |   | 292     |                                     |  |   | (123             | ) |  |   | 447     |  
|                                           |  |                      |  |               |  |                                      |        |   |                         |   |         |                                     |  |   |                  |   |  |   |         |  
|Total                                      |  |                      |  |               |  | $                                    | 16,072 |   |                         | $ | 15,834  |                                     |  | $ | (10,308          | ) |  | $ | 21,598  |  
|                                           |  |                      |  |               |  |                                      |        |   |                         |   |         |                                     |  |   |                  |   |  |   |         |  



49



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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, 2006:



|                                                |  |                      |  |               |  |                                      |        |   |                       |   |        |                                  |  |   |                |   |  |   |        |  
|----------------------------------------------- |  | -------------------- |  | ------------- |  | ------------------------------------ | ------ | - | --------------------- | - | ------ | -------------------------------- |  | - | -------------- | - |  | - | ------ | -
|                                                |  |                      |  |               |  | Nine Months Ended September 30, 2006 |       
|(dollars in thousands) Portfolio Company        |  | Industry             |  | Type          |  | RealizedGain/(Loss)                  |        |   | UnrealizedGain/(Loss) |   |        | Reversal ofUnrealized(Gain)/Loss |  |   | NetGain/(Loss) |  
|Midwest Tower Partners, LLC                     |  | Communications       |  | Control       |  | $                                    |       |   |                       | $ | 6,548  |                                  |  | $ |               |   |  | $ | 6,548  |  
|dick clark productions, inc.                    |  | Broadcasting         |  | Non-affiliate |  |                                      |       |   |                       |   | 4,016  |                                  |  |   |               |   |  |   | 4,016  |  
|Metropolitan Telecommunications Holding Company |  | Communications       |  | Non-affiliate |  |                                      | 583    |   |                       |   | 1,557  |                                  |  |   |               |   |  |   | 2,140  |  
|SXC Health Solutions, Inc.                      |  | Healthcare           |  | Non-affiliate |  |                                      |       |   |                       |   | 1,940  |                                  |  |   |               |   |  |   | 1,940  |  
|Stratford Schools Holdings, Inc.                |  | Education            |  | Affiliate     |  |                                      |       |   |                       |   | 1,746  |                                  |  |   |               |   |  |   | 1,746  |  
|Wiesner Publishing Company, LLC                 |  | Publishing           |  | Non-affiliate |  |                                      |       |   |                       |   | 762    |                                  |  |   |               |   |  |   | 762    |  
|Superior Publishing Corporation                 |  | Newspaper            |  | Control       |  |                                      |       |   |                       |   | 755    |                                  |  |   |               |   |  |   | 755    |  
|Jenzabar, Inc.                                  |  | Technology           |  | Non-affiliate |  |                                      |       |   |                       |   | 655    |                                  |  |   |               |   |  |   | 655    |  
|I-55 Internet Services, Inc.                    |  | Communications       |  | Non-affiliate |  |                                      |       |   |                       |   |       |                                  |  |   | 606            |   |  |   | 606    |  
|Miles Media Holding, Inc.                       |  | Publishing           |  | Non-affiliate |  |                                      |       |   |                       |   | 478    |                                  |  |   |               |   |  |   | 478    |  
|Crystal Media Network, LLC                      |  | Broadcasting         |  | Control       |  |                                      | (2,245 | ) |                       |   | (77    | )                                |  |   | 2,561          |   |  |   | 239    |  
|Telecomm South, LLC                             |  | Communications       |  | Control       |  |                                      | (1,493 | ) |                       |   |       |                                  |  |   | 1,493          |   |  |   |       |  
|Copperstate Technologies, Inc.                  |  | Security Alarm       |  | Control       |  |                                      | (1,483 | ) |                       |   |       |                                  |  |   | 1,053          |   |  |   | (430   | )
|National Product Services, Inc.                 |  | Business Services    |  | Control       |  |                                      |       |   |                       |   | (458   | )                                |  |   |               |   |  |   | (458   | )
|iVerify, US Inc.                                |  | Communications       |  | Affiliate     |  |                                      |       |   |                       |   | (512   | )                                |  |   |               |   |  |   | (512   | )
|West Coast WirelessLines, LLC                   |  | Publishing           |  | Control       |  |                                      |       |   |                       |   | (586   | )                                |  |   |               |   |  |   | (586   | )
|Jupitermedia Corporation                        |  | Information Services |  | Non-affiliate |  |                                      |       |   |                       |   | (798   | )                                |  |   |               |   |  |   | (798   | )
|Fawcette Technical Publications Holding         |  | Publishing           |  | Control       |  |                                      |       |   |                       |   | (2,197 | )                                |  |   |               |   |  |   | (2,197 | )
|Other                                           |  |                      |  |               |  |                                      | 191    |   |                       |   | 371    |                                  |  |   | (182           | ) |  |   | 380    |  
|                                                |  |                      |  |               |  |                                      |        |   |                       |   |        |                                  |  |   |                |   |  |   |        |  
|Total                                           |  |                      |  |               |  | $                                    | (4,447 | ) |                       | $ | 14,200 |                                  |  | $ | 5,531          |   |  | $ | 15,284 |  
|                                                |  |                      |  |               |  |                                      |        |   |                       |   |        |                                  |  |   |                |   |  |   |        |  

Income Tax Provision

During the nine months ended September 30, 2007, we recorded an income tax provision of $2.8 million primarily related to unrealized gains on our investments and the performance of certain of our investments that
are held in taxable subsidiaries.

Net Income

Net income totaled approximately $91.5 million for the nine months ended September 30, 2007, compared to $71.4 million for the nine months ended September 30, 2006. The increase in net income is due to the items discussed above.

Valuation

Our board of
directors is responsible for determining the fair value of our portfolio investments on a quarterly basis. As part of our process for determining the fair value of our portfolio of investments, we retain independent valuation firms to perform
independent valuations on certain of our portfolio companies and review certain of our fair value determinations. The independent valuations and the reviews are considered by our board of directors in its determination of the fair value of our
portfolio companies. We intend to continue to obtain independent valuations or reviews of our fair value determinations and to periodically update those



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valuations and reviews. The following table summarizes the independent valuations and reviews that have been performed from December 31, 2006 through
September 30, 2007:



|                                                                                                                                                                                                                            |  |                 |         |   |                  |   |       |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | - | ---------------- | - | ----- | -
|(dollars in millions)                                                                                                                                                                                                       |  | TotalInvestment |         |   | EquityInvestment |  
|Total portfolio value at September 30, 2007                                                                                                                                                                                 |  | $               | 1,525.3 |   |                  | $ | 468.9 |  
|Number of companies in our portfolio as of September 30, 2007 for which independent valuations or reviews of our fair value determinations
were obtained between December 31, 2006 and September 30, 2007                   |  |                 | 45      |   |                  |   | 25    |  
|Total value of companies in our portfolio as of September 30, 2007 for which independent valuations or reviews of our fair value
determinations were obtained between December 31, 2006 and September 30, 2007              |  | $               | 1,142.4 |   |                  | $ | 397.9 |  
|% of portfolio value as of September 30, 2007 for which independent valuations or reviews of our fair value determinations were obtained
between December 31, 2006 and September 30, 2007                                   |  |                 | 75      | % |                  |   | 85    | %
|% of portfolio value that is greater than one year old as of September 30, 2007 for which independent valuations or reviews of our fair value
determinations were obtained between December 31, 2006 and September 30, 2007 |  |                 | 85      | % |                  |   | 91    | %
|% of loans on non-accrual status as of September 30, 2007 for which independent valuations or reviews of our fair value determinations were
obtained between December 31, 2006 and September 30, 2007                       |  |                 | 74      | % |                  |   | N/A   |  

Financial Condition, Liquidity and Capital Resources

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

At September 30, 2007 and December 31, 2006, we had $12.0 million and $21.7 million, respectively, in cash and cash equivalents. In addition, at September 30, 2007 and December 31, 2006, we had $20.3 million
and $15.9 million, respectively, in cash, securitization accounts. We also had $4.5 million and $2.6 million of restricted cash as of September 30, 2007 and December 31, 2006, respectively. We primarily invest cash on hand in interest bearing
deposit accounts. Cash, securitization accounts include principal and interest payments received on securitized loans, which in certain cases are held in designated bank accounts until monthly or quarterly disbursements are made from the
securitization trusts. In certain cases, we are required to use a portion of these amounts to pay interest expense, reduce borrowings, or pay other amounts in accordance with the related securitization agreements, while in other cases we are
permitted to use these amounts to acquire new loans into the securitization trusts. Cash in securitization accounts negatively impacts our earnings since the interest we pay on borrowings typically exceeds the rate of return that we are able to earn
on temporary cash investments. Our objective is to maintain sufficient cash on hand to cover current funding requirements and operational needs.

For the nine months ended September 30, 2007, net cash provided by operating activities totaled $52.3 million, a decrease of approximately $(1.0) million from $53.3 million for the nine months ended September 30, 2006. This decrease was due
primarily to higher paid-in-kind interest and dividends, gains on investments and amortization of restricted stock awards which are included in net income, an increase in cash securitization accounts from interest collections and other working
capital changes. During the nine months ended September 30, 2007, net cash used in investing activities was $212.9 million compared to $68.9 million during the nine months ended September 30, 2006. This change is primarily the result of a decrease
in cash received from principal payments on loans of approximately $92.8 million, an increase of approximately $71.6 million of originations, draws and advances on loans, an increase of approximately $7.1 million in equity investments made and an
increase of approximately $0.4 million in fixed asset purchases, partially offset by an increase in the proceeds from the sales of equity investments of approximately $27.9 million. During the nine months ended September 30, 2007, cash provided by
financing activities was approximately $150.8 million compared to $0.7 million during the nine months ended September 30, 2006. This change is mainly due to an increase in proceeds from borrowings of approximately $89.7 million, an increase in
proceeds from issuance of common stock of approximately $95.1 million and a decrease in payment of financing costs of approximately $6.6 million, partially offset by an increase in cash in securitization accounts for paydown of principal on debt of
approximately $26.3 million, an increase in distributions paid of approximately $12.5 million and a decrease in repayment of stockholder loans of approximately $2.6 million.



51



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Liquidity and Capital Resources

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

During the nine months ended September 30, 2007, we raised approximately $94.7
million in net proceeds from the sale of 6,000,000 shares of newly issued common stock. During the nine months ended September 30, 2006 we did not raise any proceeds by selling shares of newly issued common stock.

In order to satisfy the requirements applicable to a regulated investment company, we intend to distribute to our stockholders substantially all of our
income. In addition, as a business development company, we generally will be required to meet a coverage ratio of total assets to total senior securities, which include all of our borrowings and any preferred stock we may issue in the future, of at
least 200%. As of September 30, 2007, this ratio was 227% This requirement limits the amount that we may borrow.

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

Off-Balance Sheet Arrangements

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

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

As of September 30,
2007, we had unused commitments to extend credit to our customers of $87.2 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, which are
also not reflected on our balance sheet. As of September 30, 2007, we had guarantees and standby letters of credit of approximately $10.0 million.

Contractual Obligations

The following table shows our contractual obligations as of September 30, 2007:



|                                                  |  |                        |       |                 |   |           |  |           |     |              |   |      |  |   |      
|------------------------------------------------- |  | ---------------------- | ----- | --------------- | - | --------- |  | --------- | --- | ------------ | - | ---- |  | - | -----
|                                                  |  | Payments Due by Period
|(dollars in millions) Contractual Obligations (a) |  | Total                  |       | Less than1 year |   | 1-3 years |  | 4-5 years |     | After 5years
|Borrowings (b)                                    |  | $                      | 659.8 |                 | $ | 224.3     |  | $         |    |              | $ | 50.0 |  | $ | 385.5
|Future minimum rental obligations                 |  |                        | 11.3  |                 |   | 2.0       |  |           | 4.2 |              |   | 4.3  |  |   | 0.8  
|                                                  |  |                        |       |                 |   |           |  |           |     |              |   |      |  |   |      
|Total contractual obligations                     |  | $                      | 671.1 |                 | $ | 226.3     |  | $         | 4.2 |              | $ | 54.3 |  | $ | 386.3
|                                                  |  |                        |       |                 |   |           |  |           |     |              |   |      |  |   |      



|(a) | This excludes the unused commitments to extend credit to our customers of $87.2 million as well as guarantees and standby letters of credit of approximately $10.0 million as
discussed above.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



52



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Borrowings

The following table shows our borrowings as of September 30, 2007 and December 31, 2006:



|                                       |  |                  |  |                    |       |                    |   |                 |  |                    |       |  |   |      
|-------------------------------------- |  | ---------------- |  | ------------------ | ----- | ------------------ | - | --------------- |  | ------------------ | ----- |  | - | -----
|                                       |  |                  |  | September 30, 2007 |       | December 31, 2006 
|(dollars in millions)                  |  | Maturity Date    |  | Facility Amount    |       | Amount Outstanding |   | Facility Amount |  | Amount Outstanding
|Unsecured Notes                        |  | October 2010     |  | $                  | 50.0  |                    | $ | 50.0            |  | $                  | 50.0  |  | $ | 50.0 
|Commercial Loan Trust 2006-2           |  | November 2007(1) |  |                    | 200.0 |                    |   | 152.1           |  |                    | 200.0 |  |   | 84.0 
|Commercial Loan Funding Trust Facility |  | November 2010(2) |  |                    |      |                    |   |                |  |                    | 250.0 |  |   | 84.0 
|Class A Variable Funding Certificates  |  |                  |  |                    | 218.8 |                    |   | 60.2            |  |                    |      |  |   |     
|Class B Variable Funding Certificates  |  |                  |  |                    | 31.2  |                    |   |                |  |                    |      |  |   |     
|Term Securitization                    |  | April 2018       |  |                    |       |                    |   |                 |  |                    |       |  |   |      
|Series 2006-1 Class A-1 Notes          |  |                  |  |                    | 106.2 |                    |   | 106.2           |  |                    | 106.2 |  |   | 106.2
|Series 2006-1 Class A-2 Notes          |  |                  |  |                    | 50.0  |                    |   | 43.0            |  |                    | 50.0  |  |   | 11.4 
|Series 2006-1 Class A-3 Notes          |  |                  |  |                    | 85.0  |                    |   | 85.0            |  |                    | 85.0  |  |   | 35.0 
|Series 2006-1 Class B Notes            |  |                  |  |                    | 58.8  |                    |   | 58.8            |  |                    | 58.8  |  |   | 58.8 
|Series 2006-1 Class C Notes            |  |                  |  |                    | 45.0  |                    |   | 45.0            |  |                    | 45.0  |  |   | 45.0 
|Series 2006-1 Class D Notes            |  |                  |  |                    | 47.5  |                    |   | 47.5            |  |                    | 47.5  |  |   | 47.5 
|Revolving Unsecured Credit Facility    |  | June 2008        |  |                    | 100.0 |                    |   | 12.0            |  |                    | 100.0 |  |   |     
|                                       |  |                  |  |                    |       |                    |   |                 |  |                    |       |  |   |      
|Total                                  |  |                  |  | $                  | 992.5 |                    | $ | 659.8           |  | $                  | 992.5 |  | $ | 521.9
|                                       |  |                  |  |                    |       |                    |   |                 |  |                    |       |  |   |      

---

|(1) | Amended in October 2007 to extend the maturity date to February 29, 2008. See Recent Developments for further discussion of this facility.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Renewable at lenders discretion each July.
|--- | -------------------------------------------

For the
above borrowings, the fair value of the borrowings approximates cost. The following table shows our weighted average borrowings, the weighted average interest rate on all of our borrowings, including amortization of deferred debt issuance costs and
commitment fees, the average LIBOR, and the average spread to LIBOR for the nine months ended September 30, 2007 and 2006:



|                                                                                |  |      |       |   |      |   |       |  
|------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|(dollars in millions)                                                           |  | 2007 |       |   | 2006 |  
|Weighted average borrowings                                                     |  | $    | 628.2 |   |      | $ | 506.7 |  
|Average LIBOR                                                                   |  |      | 5.4   | % |      |   | 5.1   | %
|Average spread to LIBOR, excluding amortization of deferred debt issuance costs |  |      | 1.0   | % |      |   | 1.0   | %
|Impact of amortization of deferred debt issuance costs                          |  |      | 0.2   | % |      |   | 1.0   | %
|                                                                                |  |      |       |   |      |   |       |  
|Total cost of funds                                                             |  |      | 6.6   | % |      |   | 7.1   | %
|                                                                                |  |      |       |   |      |   |       |  

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

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

Commercial Loan Trust 2006-2. On May 2, 2006 we
established, through MCG Commercial Loan Trust 2006-2, a $200.0 million warehouse credit facility with Merrill Lynch Capital Corp. The warehouse credit facility allows MCG Commercial Loan Trust 2006-2 to acquire up to $250.0 million of commercial
loans with



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

We use this warehouse credit facility to fund the origination of loans that will collateralize a future term securitization. Advances under the facility,
equal to 80% of the value of commercial loans purchased by the trust, bear interest based on LIBOR plus 0.75% and interest is payable monthly. The facility is scheduled to terminate on the earlier of November 30, 2007 or the completion of a
term securitization and may be extended under certain circumstances. As of September 30, 2007 we had $152.1 million outstanding under this facility. See Recent Developments for further discussion of this facility including amendments
made subsequent to September 30, 2007.

MCG Commercial Loan Funding Trust. We have, through MCG Commercial Loan Funding Trust, a
$250.0 million warehouse financing facility funded through Three Pillars Funding LLC, an asset-backed commercial paper conduit administered by SunTrust Capital Markets, Inc. The warehouse financing facility operates like a revolving credit facility
that is primarily secured by the assets of MCG Commercial Loan Funding Trust, including commercial loans sold by us to the trust. The pool of commercial loans in the trust must meet certain requirements, including, but not limited to, term, average
life, investment rating, agency rating and industry diversity requirements. There are also certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs. Such
limitations, requirements, and associated defined terms are as provided for in the documents governing the facility. This facility is funded through two separate Variable Funding Certificates, or VFCs, a $218.8 million Class A VFC and a $31.2
million Class B VFC. Advances under the Class A VFC may be up to 70% of eligible collateral. Advances under the Class B VFC may be up to 10% of eligible collateral. The facility is scheduled to terminate on November 30, 2010, but is subject to
annual renewal and may be extended under certain circumstances. In July 2007, this facility was renewed through July 25, 2008. As of September 30, 2007, we had $60.2 million Class A VFC and no Class B VFC outstanding under this credit facility.

In July 2007, we amended the Commercial Loan Funding Trust Facility. Pursuant to this amendment, the interest rates for Class A advances
and Class B advances were reduced to the commercial paper rate plus 0.75% and 1.50%, respectively, per annum. The Class A advances and Class B advances previously bore interest at the commercial paper rate plus 0.95% and 1.75%, respectively, per
annum.

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

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

The Class A-1, Class B, Class C and Class D Notes are term notes. The Class A-2 Notes are a revolving class of secured notes and have a
revolving period of five years. The Class A-3 Notes are a delayed draw class of secured notes, which were drawn in full during April 2007. All of the notes are secured by the assets of MCG Commercial Loan Trust 2006-1, including commercial
loans totaling $486.8 million as of September 30, 2007,



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which were purchased by the trust from us. Additional commercial loans will be purchased by the trust from us primarily using the proceeds from the
Class A-2 revolving notes. The pool of commercial loans in the trust must meet certain requirements, including, but not limited to, asset mix and concentration, collateral coverage, term, agency rating, minimum coupon, minimum spread and sector
diversity requirements. As of September 30, 2007, we had $385.5 million of these notes outstanding.

Revolving Unsecured Credit
Facility. This facility is a $100.0 million unsecured revolving credit facility established with HVB. The facility allows for additional lenders with HVB acting as the agent. The $100.0 million commitment is maintained by four lenders. HVB,
Chevy Chase Bank, Sovereign Bank and Royal Bank of Canada maintain $50.0 million, $10.0 million, $15.0 million, and $25.0 million commitments, respectively. Advances under this credit facility bear interest at LIBOR plus 2.00%, the prime rate plus
0.50% or the Federal Funds rate plus 2.25%, and there is a commitment fee of 0.25% per annum on undrawn amounts. The credit facility contains customary terms and conditions, including, without limitation, affirmative and negative covenants such
as information reporting, minimum stockholders equity, minimum asset coverage ratio, minimum cash net operating income and a minimum ratio of earnings before interest and taxes to interest expense. The credit facility also contains customary
events of default with customary cure and notice, including, without limitation, nonpayment, misrepresentation in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, change of control, change of management, and
material adverse change. As of September 30, 2007, we had $12.0 million outstanding under this credit facility.

SBIC Leverage.
On December 13, 2004, we formed a wholly owned subsidiary, Solutions Capital I, LP. Solutions Capital I, LP has received a license from the United States Small Business Administration (SBA) to operate as a small business
investment company (SBIC) under the Small Business Investment Act of 1958, as amended. The license allows Solutions Capital I to borrow up to $100 million in funds which can be used to provide debt and equity capital to qualifying small
businesses. Additionally, we have applied for exemptive relief from the SEC similar to relief that has been granted to other business development companies, to permit us to exclude debt issued by the SBA to Solutions Capital I, LP from our
consolidated asset coverage ratio, which will enable us to fund more investments with debt capital. There can be no assurance that we will receive the exemptive relief from the SEC. We intend to seek up to $127 million in leverage from the SBA,
which is subject to SBA approval. The SBIC debt, once drawn, has an interim rate of LIBOR plus 30 basis points. The rate becomes fixed at the time of SBA pooling, which is within six months of funding, and is set to the 10 year treasury rate at the
time plus a spread and an annual SBA charge, which taken together currently approximate 175 basis points. See Recent Developments for further discussion concerning Solutions Capital I, L.P.

Distributions

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

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

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



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



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

Since December 2001, we have declared distributions of $11.07 per share totaling over $483.9
million. For 2007, dividends total $1.76 per share. For 2008, we currently estimate that our dividends will be at least $1.76 per share. This estimate takes into consideration our estimates of distributable net operating income, net income, capital
gains and taxable income for 2008.

Each year a statement on Form 1099-DIV identifying the source of the distribution (i.e., paid from
ordinary income, paid from net capital gains on the sale of securities, and/or a return of paid-in-capital surplus which is a nontaxable distribution) is mailed to our stockholders. To the extent our taxable earnings fall below the total amount of
our distributions for that fiscal year, a portion of those distributions may be deemed a tax return of capital to our stockholders. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather
than our taxable ordinary income or capital gains. Stockholders should read any written disclosure accompanying a dividend payment carefully and should not assume that the source of any distribution is our taxable ordinary income or capital gains.

For the fiscal years ended December 31, 2006, 2005, 2004 and 2003 a portion of the distribution to our stockholders was deemed a return of
capital. For the quarter ended September 30, 2007, we declared a distribution of $0.44 per share which brings total year to date distributions to $1.32 per share. The determination of the tax attributes of our distributions is made annually as of
the end of our fiscal year based upon our taxable income for the full year and distributions paid for the full year, therefore a determination made on a quarterly basis may not be representative of the actual tax attributes of our distributions for
a full year. If we determined the tax attributes of our distributions year-to-date as of September 30, 2007, 84% would be from ordinary income, 16% would be from capital gains and none would be a return of capital for shareholders, however there can
be no certainty to shareholders that this determination is representative of what the tax attributes of our 2007 distributions to shareholders will actually be.

The following table is a reconciliation of GAAP net income to taxable net income for the nine month period ended September 30, 2007 and the year ended December 31, 2006:



|                                                                                              |  |                                      |       |   |                             |   |       |  
|--------------------------------------------------------------------------------------------- |  | ------------------------------------ | ----- | - | --------------------------- | - | ----- | -
|                                                                                              |  | Nine Months Ended September 30, 2007 |       |   | Year EndedDecember 31, 2006 |  
|(dollars in millions)                                                                         |  |                                     
|Net income                                                                                    |  | $                                    | 91.5  |   |                             | $ | 100.9 |  
|Net change in unrealized appreciation on investments not taxable until realized               |  |                                      | (5.5  | ) |                             |   | (34.6 | )
|Differences between GAAP and tax related to deductibility of long-term incentive compensation |  |                                      | 3.2   |   |                             |   | 2.5   |  
|Interest income on nonaccrual loans that is taxable                                           |  |                                      | 12.4  |   |                             |   | 3.6   |  
|Dividend income accrued for GAAP purposes which is not yet taxable                            |  |                                      | (32.2 | ) |                             |   | (22.3 | )
|Distributions from taxable subsidiaries                                                       |  |                                      | 13.6  |   |                             |   | 0.7   |  
|Federal tax expense                                                                           |  |                                      | 2.5   |   |                             |   | 2.7   |  
|Other, net                                                                                    |  |                                      | (5.0  | ) |                             |   | (0.1  | )
|                                                                                              |  |                                      |       |   |                             |   |       |  
|Taxable income before deductions for distributions                                            |  | $                                    | 80.5  |   |                             | $ | 53.4  |  
|                                                                                              |  |                                      |       |   |                             |   |       |  



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Critical Accounting Policies

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

Income Recognition

Interest and Dividend Income

Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected. When a loan becomes 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 investment has sufficient
collateral value and is in the process of collection.

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

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

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

Advisory Fees and Other Income

Advisory fees and other income is related to advisory and management services, equity structuring fees, prepayment fees, research revenues, bank interest,
and other fees. We charge fees for advisory or management services that we provide to our portfolio companies. These fees are charged at market rates as documented in an agreement between MCG and the portfolio company that outlines the services and
the fees to which both parties have agreed. Advisory and management services fees are recognized when earned. Equity structuring fees are recognized as earned, which is generally when the investment transaction closes. Prepayment fees are recognized
upon receipt.

Valuation of Investments

We determine the value of each investment in our portfolio on a quarterly basis. Value, as defined in Section 2(a)(41) of the Investment Company Act of 1940, is (i) the market price for those securities for which a market
quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good



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faith by the board of directors. Since there is typically no readily available market value for the investments in our portfolio, we value substantially all
of our investments at fair value as determined in good faith by the board of directors pursuant to a valuation policy and a consistent valuation process. At September 30, 2007, approximately 97% of our total assets represented investments of which
approximately 97% are valued at fair value and approximately 3% are valued at market value based on readily ascertainable public market quotes at September 30, 2007. Because of the inherent uncertainty of determining the fair value of investments
that do not have a readily available market value, the fair value of our investments determined in good faith by the board of directors may differ significantly from the values that would have been used had a ready market existed for the
investments, and the differences could be material.

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

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

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

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



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We also retain independent valuation firms to perform independent valuations of certain of our portfolio
companies and perform reviews of our fair value determinations. The independent valuations and reviews are considered by our Board of Directors in its determination of the fair value of our portfolio companies. We intend to continue to utilize
independent valuation firms to obtain additional support in the preparation of our internal valuation analyses each quarter.

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

Share-based Compensation

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

Securitization Transactions

Periodically, we transfer pools of loans to bankruptcy remote, special purpose entities for use in securitization transactions. These transfers of loans
are treated as secured borrowing financing arrangements in accordance with FASB SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. These on-balance sheet securitization
transactions comprise a significant source of our overall funding, with the total face amount of the assets assumed by our consolidated bankruptcy remote special purpose entities equaling $827.2 million and $677.4 million at September 30, 2007 and
December 31, 2006, respectively.

Recent Accounting Pronouncements

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

In February 2007, the FASB issued SFAS No. 159 (SFAS No. 159), The Fair Value Option for Financial Assets and
Financial Liabilities. Among other requirements, SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for the first fiscal year that begins after
November 15, 2007. We are currently evaluating the impact of SFAS No. 157 and SFAS No. 159 on our financial position and results of operations.

Recent Developments

On October 3, 2007, we issued $25.0 million of long-term unsecured notes in a private placement. The
notes have a five-year term and a fixed interest rate of 6.71% per annum paid semi-annually. The interest rate is subject to possible adjustment in the future. The purchasers of the new notes are also holders of our notes issued in the $50.0 million
private placement which was completed in 2005. The proceeds from the offering will be used for working capital and other general corporate purposes, including originating investments primarily in private middle market companies. The proceeds may
also be used temporarily to reduce borrowings under our revolving credit facilities.



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On October 23, 2007, we entered into the first amendment to our Commercial Loan Trust 2006-2 warehouse
credit facility with Merrill Lynch Capital Corp. Pursuant to this amendment, the maturity date for the facility was extended from November 30, 2007 through February 29, 2008. In addition, the advance rate was reduced from 80% to 75% of the value of
the commercial loans purchased by the trust. We had previously intended to access the CLO Market during the fall of 2007 in order to obtain debt capital, a portion of which would have been used to repay amounts outstanding under our warehouse credit
facility with Merrill Lynch Capital Corp. This amendment extends that credit facility in order to delay this transaction pending more favorable market conditions. In the event that we do not see improvement in the market, we will likely seek an
additional extension or refinance this facility. We believe that we have sufficient cash, additional borrowing capacity from other existing credit sources and other sources of liquidity to repay the amounts owed on this warehouse credit facility.
Further, while there can be no assurance, in the event that we are unable to access the CLO Market for an extended period of time, we believe that we will have continued access to other forms of debt capital, although these other forms of debt
capital may be at higher interest rates than our historical term securitizations.

On October 24, 2007, we announced that our consolidated
wholly owned subsidiary, Solutions Capital I, L.P., has received a license from the United States Small Business Administration (SBA) to operate as a Small Business Investment Company (SBIC). The license allows Solutions
Capital I to borrow up to $100 million in funds which can be used to provide debt and equity capital to qualifying small businesses. Additionally, we have applied for exemptive relief from the SEC, similar to relief that has been granted to other
business development companies, to permit us to exclude debt issued by the SBA to Solutions Capital I from our consolidated asset coverage ratio, which will enable us to fund more investments with debt capital. There can be no assurances that we
will receive exemptive relief from the SEC. We intend to seek up to $127 million in leverage from the SBA, which is subject to SBA approval. The SBIC debt, once drawn, has an interim rate of LIBOR plus 30 basis points. The rate becomes fixed at the
time of SBA pooling, which is within six months of funding, and is set to the 10 year treasury rate at that time plus a spread and an annual SBA charge, which taken together currently approximate 175 basis points.

On October 31, 2007, we announced that we named A. Hugh Ewing as a new Independent Director. His inclusion on our Board of Directors increases the Board
size to nine members. Hugh Ewing is President, Managing Director and Co-Founder of Ewing Bemiss & Co., an independent investment bank providing investment banking services to middle-market companies across the United States based in Richmond,
Virginia. Prior to founding Ewing Bemiss & Co. in 1992, he was a partner in Galleher & Company where he was active in private placements, leveraged buyouts, and mergers and acquisitions, and as a principal in leveraged buyouts and venture
capital. Prior to that he was vice president, corporate finance, of Wheat, First Securities, Inc., where he headed the merger and acquisition group, and gained experience in private and public financings. Mr. Ewing was also a general partner of
Hillcrest Group, which managed venture capital funds and is a past chairman of the National Association of Small Business Investment Companies.



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

Interest rate sensitivity refers to the change in earnings that may result from changes in the level of interest rates. Our net interest income is affected by changes in various interest rates, including LIBOR, prime rates and commercial
paper rates. As of September 30, 2007, approximately 65% of our loan portfolio, at cost, bears interest at a spread to LIBOR or Prime, and 35% at a fixed rate. As of September 30, 2007, approximately 28% of our loan portfolio, at cost, has LIBOR
floors between 1.50% and 3.00% on the LIBOR base index.

We regularly measure exposure to interest rate risk. We assess interest rate risk
and we manage our interest rate exposure on an ongoing basis by comparing our interest rate sensitive assets to our interest rate sensitive liabilities. Based on this review, we determine whether or not any hedging transactions are necessary to
mitigate exposure to changes in interest rates. At September 30, 2007, we were not a party to any hedging arrangements. Certain of our interest bearing investments contain LIBOR floors between 1.50% and 3.00% on the LIBOR base index to minimize our
exposure to significant decreases in interest rates.



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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, 2007 and December 31, 2006:



|                          |  |                                          |         |                   |   |                                           |  |            |       |  |   |      
|------------------------- |  | ---------------------------------------- | ------- | ----------------- | - | ----------------------------------------- |  | ---------- | ----- |  | - | -----
|                          |  | September 30, 2007                       |         | December 31, 2006
|(dollars in millions)     |  | Interest BearingCash andCommercial Loans |         | Borrowings        |   | Interest Bearing Cash andCommercial Loans |  | Borrowings
|Repurchase Agreement Rate |  | $                                        | 32.2    |                   | $ |                                          |  | $          | 37.5  |  | $ |     
|Money Market Rate         |  |                                          | 4.5     |                   |   |                                          |  |            | 2.6   |  |   |     
|Prime Rate                |  |                                          | 7.8     |                   |   |                                          |  |            | 0.4   |  |   |     
|30-Day LIBOR              |  |                                          | 25.9    |                   |   |                                          |  |            | 14.5  |  |   |     
|60-Day LIBOR              |  |                                          | 4.5     |                   |   |                                          |  |            | 0.8   |  |   |     
|90-Day LIBOR              |  |                                          | 645.6   |                   |   | 549.6                                     |  |            | 522.0 |  |   | 388.0
|180-Day LIBOR             |  |                                          | 22.1    |                   |   |                                          |  |            | 42.6  |  |   |     
|9 month LIBOR             |  |                                          |        |                   |   |                                          |  |            | 1.3   |  |   |     
|Commercial Paper          |  |                                          |        |                   |   | 60.2                                      |  |            |      |  |   | 83.9 
|Federal Funds             |  |                                          |        |                   |   |                                          |  |            |      |  |   |     
|Fixed Rate                |  |                                          | 379.5   |                   |   | 50.0                                      |  |            | 334.8 |  |   | 50.0 
|                          |  |                                          |         |                   |   |                                           |  |            |       |  |   |      
|Total                     |  | $                                        | 1,122.1 |                   | $ | 659.8                                     |  | $          | 956.5 |  | $ | 521.9
|                          |  |                                          |         |                   |   |                                           |  |            |       |  |   |      

Based on our September 30, 2007 balance sheet, the following table shows the impact to net income
of base rate changes in interest rates assuming no changes in our investment and borrowing structure:



|                      |  |                |       |   |                 |   |       |            |  |   |      |  
|--------------------- |  | -------------- | ----- | - | --------------- | - | ----- | ---------- |  | - | ---- | -
|(dollars in millions) |  |                |       |   |                 |   |       |            | 
|Basis Point Change    |  | InterestIncome |       |   | InterestExpense |   |       | Net Income | 
|(300)                 |  | $              | (21.8 | ) |                 | $ | (18.3 | )          |  | $ | (3.5 | )
|(200)                 |  |                | (14.9 | ) |                 |   | (12.2 | )          |  |   | (2.7 | )
|(100)                 |  |                | (7.4  | ) |                 |   | (6.1  | )          |  |   | (1.3 | )
|100                   |  |                | 7.4   |   |                 |   | 6.1   |            |  |   | 1.3  |  
|200                   |  |                | 14.9  |   |                 |   | 12.2  |            |  |   | 2.7  |  
|300                   |  |                | 22.3  |   |                 |   | 18.3  |            |  |   | 4.0  |  



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

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

There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30,
2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION



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

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



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

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

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

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

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

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

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

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

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

From time to time we target specific industries in which to invest on a recurring basis, which could cause a high concentration of our portfolio in a specific industry. At September 30, 2007, approximately 21.5% of
our



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portfolio at fair value was invested in companies in the communications industry. Of the 21.5% in the communications industry, 18.5% represents our
investments in CLECs, and 3.0% represents our investments in other communications companies. If our customers in the communications industry, or any other industry in which our portfolio is or may become concentrated, suffer due to adverse business
conditions or due to economic slowdowns or downturns, we will be more vulnerable to losses in our portfolio and our operating results may be negatively impacted.

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

At September 30, 2007, our largest portfolio investment and one of our control investments was Broadview Networks Holdings, Inc. (Broadview), which totaled $181.8 million at fair value, or 11.9% of the fair value of our
investments, and accounted for approximately $22.0 million, or 16.0% of our revenue during the nine months ended September 30, 2007. We own preferred securities of Broadview, which entitle us to a preferred claim of approximately $259.1 million,
plus dividends, which accumulate at an annual rate of 12%, compounded quarterly, on our preferred claim. We currently recognize these dividends as income on a quarterly basis; however, our ability to record income related to these accumulating
dividends in future periods will be dependent upon the financial and operational performance and value of Broadview. Our financial results could be negatively affected if this portfolio company fails to perform as expected or if we are unable to
recognize these dividends as income on a quarterly basis.

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

Cleartel
Communications, Inc. (Cleartel) is one of our largest portfolio investments and one of our control investments. We placed our investment in Cleartel on non-accrual status during the first quarter of 2007 because, at the time, Cleartel
was not generating sufficient earnings to service its capital structure. Cleartel remained on non-accrual status during the second and third quarters of 2007. We cannot predict with certainty when any of our debt investments will return to accrual
status. At a minimum, we do not expect our Cleartel debt investment to return to accrual status prior to the middle of 2008. Cleartel represents approximately 4.0% of the fair value of our investments at September 30, 2007. As of September 30, 2007,
we held Cleartel subordinated debt with a fair value of $60.4 million and Cleartel preferred stock with a fair value of zero. These fair values are net of a write-down of approximately $24.6 million which was recorded during the third quarter of
2007 and a write-down of approximately $40.1 million in the fourth quarter of 2006. During the third quarter of 2007, in connection with the completion of a re-evaluation of Cleartels multi-year business plan, it became evident that revenue
levels in future periods will run at lower levels than previously anticipated and it will take longer than expected to achieve significant profitability. Because we view revenue as a key component of value, we have reduced the value of our total
investment in Cleartel. Our ability to recognize income from our Cleartel investment in future periods and the fair value of our investment in Cleartel will be dependent upon the performance, including the underlying financial results and cash
flows, of Cleartel and its ability to execute its business plan.

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

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

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



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

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

We have elected to be taxed for federal income tax purposes as a regulated investment company, or RIC, under Subchapter M
of the Internal Revenue Code. If we can meet certain requirements, including source of income, asset diversification and distribution requirements, as well as if we continue to qualify as a business development company, we will qualify to be a RIC
and will not have to pay corporate-level taxes on any income we distribute to our stockholders as dividends, allowing us to substantially reduce or eliminate our corporate-level tax liability. Covenants and provisions in our credit facilities limit
the ability of our subsidiaries and our securitization trusts to make distributions to us, which could affect our ability to make distributions to our stockholders and to maintain our status as a 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 fail to qualify as a RIC, we will have to pay corporate-level taxes on all of our
income whether or not we distribute it, which would substantially reduce the amount of income available for distribution to our stockholders. Even if we qualify as a RIC, we generally will be subject to a corporate-level income tax on the income we
do not distribute. Moreover, if we do not distribute at least 98% of our income, we generally will be subject to a 4% excise tax.

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

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

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

As of September 30, 2007, we had $659.8 million of outstanding borrowings under our debt facilities. As of September 30, 2007, the weighted average annual
interest rate on all of our outstanding borrowings was 6.14%, 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, 2007
total assets of at least 2.56%. Our ability to service our debt depends largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures.

In addition, our subsidiaries have sold some of our loans to trusts that serve as the vehicles for our securitization facilities, and these trusts, which
are bankruptcy remote, hold legal title to these assets. However, we bear losses of principal and interest from defaults on these loans held by the trusts up to the amount of our retained interest in the trusts, which was approximately $241.8
million as of September 30, 2007.



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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. In addition, some of
our debt facilities, including our unsecured notes, contain cross-default provisions, whereby a default under one of our debt facilities could constitute a default under other debt facilities.

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

As a business development company, we generally are required to meet a coverage ratio of total assets to total borrowings and other senior securities,
which include all of our borrowings and any preferred stock we may issue in the future, of at least 200%. If this ratio declines below 200%, we may not be able to incur additional debt and may need to sell a portion of our investments to repay some
debt when it is disadvantageous to do so, and we may not be able to make distributions. At September 30, 2007, this ratio was approximately 227%

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

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

Our Revolving Unsecured Credit Facility is scheduled to expire on June 4, 2008. Our Commercial Loan Funding Trust Facility
$250.0 million warehouse financing facility through Three Pillars Funding, LLC is scheduled to terminate on November 7, 2010, but is subject to annual renewal by the lender and may be extended under certain circumstances. The next renewal date for
this facility is July 25, 2008. In addition, our $200.0 million warehouse credit facility with Merrill Lynch Capital Corp. is scheduled to expire on February 29, 2008.

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

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

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



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Investments in equity securities involve a substantial degree of risk.

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

You may not receive
distributions.

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

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

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

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

Our growth could place significant strain on our management systems and
resources. We must continue to refine and expand our marketing capabilities, our management of the investment process, our access to financing resources and our technology. As we grow, we must continue to hire, train, supervise and manage new
employees. We may not develop sufficient lending and administrative personnel and management and operating systems to manage our expansion effectively. If we are unable to manage our growth, our operations could be adversely affected and our
financial results could be adversely affected.

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

Our investments are usually subject to contractual or legal restrictions on resale or are otherwise
illiquid because there is usually no established trading market for such investments. The illiquidity of most of our investments may make it difficult for us to dispose of them at a favorable price, and, as a result, we may suffer losses. In
addition, if we were forced to immediately liquidate some or all of the investments in our portfolio, the proceeds of such liquidation could be significantly less than the current value of such investments. We may be required to liquidate some or
all of our portfolio to meet our debt service obligations or to maintain our qualification as a business development company and as a RIC 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 adversely affect our income.

Because we sometimes borrow to make investments,
our net income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. A significant increase in market interest rates could harm our ability to attract new customers and originate new
loans and investments, our non-performing assets could increase and the value of our portfolio could decrease because our floating-rate loan customers may be unable to meet higher payment obligations. Due to the nature of the portfolio companies to
which we provide fixed rate financing, fluctuations in market rates have a limited impact on rates charged. As a result, an increase in market interest rates would generally have no effect on the existing fixed rate loans in our portfolio.
Conversely, a significant decrease in interest rates would reduce our net income, all other things being equal. A decrease in interest rates may reduce net income despite the increased demand for our capital that the decrease in interest rates may
produce. Approximately 65% of the loans in our portfolio, based on amounts outstanding at cost as of September 30, 2007, were at variable rates determined on the basis of a benchmark LIBOR or prime rate and approximately 35% 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 asset coverage, as defined in the 1940 Act, equals at least 200% after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of
our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous.

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

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

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



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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 a SBIC and is regulated by the SBA. The
SBA regulations require that a licensed SBIC be periodically examined and audited by the SBA to determine its compliance with the relevant SBA regulations. If Solutions Capital I, LP fails to comply with applicable SBA regulations, the SBA could,
depending on the severity of the violation, limit or prohibit the Solutions Capital I, LPs use of debentures, declare outstanding debentures immediately due and payable, and/or limit the 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.

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

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

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

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

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

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

The Independent Committee has reported these matters to the SEC Staff and has also reported the results of the review to date to the SEC Staff. The
review by the Independent Committee has now been substantially



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

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



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

During the nine months ended September 30, 2007, we issued a total of 36,172 shares of common stock under our dividend reinvestment plan pursuant to an exemption from the registration requirements of the Securities Act of 1933. The
aggregate offering price for the shares of common stock sold under the dividend reinvestment plan was approximately $564,000.



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

Not Applicable



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

Not Applicable



|Item 5. | Other Information
|------- | -----------------

Not Applicable



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

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



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



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.11         |  | Promissory Note issued to Steven F. Tunney, dated as of November 28, 2001 (incorporated by reference to Exhibit 10.36 filed with MCG
Capitals Form 10-K for the year ended December 31, 2001).                                                                                                                                                                                                                                                 
|              | 
|10.12         |  | Form of Promissory Note issued to employees (incorporated by reference to Exhibit i.9 to Pre-effective Amendment No. 3 to MCG
Capitals registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 6, 2001).                                                                                                                                                                         
|              | 
|10.13         |  | Pledge Agreement between the Company and Bryan J. Mitchell, dated as of November 28, 2001 (incorporated by reference to Exhibit 10.39 filed
with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                                                                                                                                                                                 
|              | 
|10.14         |  | Pledge Agreement between the Company and B. Hagen Saville, dated as of November 28, 2001 (incorporated by reference to Exhibit 10.40 filed
with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                                                                                                                                                                                  
|              | 
|10.15         |  | Pledge Agreement between the Company and Steven F. Tunney, dated as of November 28, 2001 (incorporated by reference to Exhibit 10.41 filed
with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                                                                                                                                                                                  
|              | 
|10.16         |  | Form of Pledge Agreement between the Company and employee (incorporated by reference to Exhibit i.10 to Pre-effective Amendment No. 3 to
MCG Capitals registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 6, 2001).                                                                                                                                                          
|              | 
|10.17         |  | Form of Amended and Restated Promissory Note issued to senior management (incorporated by reference to Exhibit I.10 to Pre-effective
Amendment No. 2 to MCG Capitals registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 1, 2001).                                                                                                                                           
|              | 
|10.18         |  | Form of Pledge Agreement between the Company and senior management, dated as of June 24, 1998 (incorporated by reference to Exhibit i.7
filed with MCG Capitals registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on July 5, 2001).                                                                                                                                                    
|              | 
|10.19         |  | Custodial Agreement between the Company and Riggs Bank, N.A. (incorporated by reference to Exhibit 10.45 filed with MCG Capitals Form
10-K for the year ended December 31, 2001).                                                                                                                                                                                                                                                              
|              | 
|10.20         |  | Deed of Lease by and between Twin Towers II Associates Limited Partnership, as landlord, and MCG Capital Corporation, as tenant, dated as
of September 24, 2002 (incorporated by reference to Exhibit 10.50 filed with MCG Capitals Form 10-Q for the quarter ended September 30, 2002).                                                                                                                                                       
|10.21         |  | Amended and Restated Employment Agreement between MCG Capital Corporation and Bryan J. Mitchell dated November 3, 2002 (incorporated by
reference to Exhibit 10.51 filed with MCG Capitals Form 10-Q for the quarter ended September 30, 2002).                                                                                                                                                                                                
|              | 
|10.22         |  | Employment Agreement between the Company and Michael R. McDonnell, dated July 14, 2004 (incorporated by reference to Exhibit 10.65 filed
with MCG Capitals Form 10-Q for the quarter ended June 30, 2004).                                                                                                                                                                                                                                     
|              | 
|10.23         |  | Sale and Servicing Agreement by and among MCG Capital Corporation, MCG Commercial Loan Funding Trust, Three Pillars Funding, LLC, SunTrust
Capital Markets, Inc. and Wells Fargo Bank, National Association, dated as of November 10, 2004 (incorporated by reference to Exhibit f.37 filed with MCG Capitals registration statement on Form N-2 [File No. 333-121358] filed with the
Securities and Exchange Commission on December 17, 2004).
|              | 
|10.24         |  | Credit and Warehouse Agreement, dated as of April 21, 2005, among UBS AG, Stamford Branch, MCG Commercial Loan Trust 2005-1 and MCG Capital
Corporation (incorporated by reference to Exhibit 10.71 filed with MCG Capitals Form 10-Q for the quarter ended March 31, 2005).                                                                                                                                                                   



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.25         |  | Pledge, Security and Custody Agreement by and among MCG Commercial Loan Trust 2005-1, MCG Finance VI, LLC, MCG Capital Corporation, UBS AG,
Stamford Branch, and Wells Fargo Bank, National Association, dated as of April 21, 2005 (incorporated by reference to Exhibit 10.72 filed with MCG Capitals Form 10-Q for the quarter ended March 31, 2005).                                                                                       
|              | 
|10.26         |  | Master Conveyance Assignment, dated as of April 21, 2005, among MCG Capital Corporation, MCG Finance VI, LLC, and MCG Commercial Loan Trust
2005-1 (incorporated by reference to Exhibit 10.73 filed with MCG Capitals Form 10-Q for the quarter ended March 31, 2005).                                                                                                                                                                        
|              | 
|10.27         |  | First Amendment to Sale and Servicing Agreement by and among MCG Commercial Loan Funding Trust, MCG Capital Corporation, Three Pillars
Funding LLC, SunTrust Capital Markets, Inc. and Wells Fargo Bank, National Association, dated as of May 2, 2005 (incorporated by reference to Exhibit 10.74 filed with MCG Capitals Form 10-Q for the quarter ended March 31,
2005).                                                                    
|              | 
|10.28         |  | Credit and Warehouse Agreement, dated as of June 9, 2005, among Merrill Lynch Capital Corp., MCG Commercial Loan Trust 2005-2 and MCG
Capital Corporation (incorporated by reference to Exhibit 99.1 filed with MCG Capitals Current Report on Form 8-K filed on June 9, 2005).                                                                                                                                                                
|              | 
|10.29         |  | Second Amendment to Sale and Servicing Agreement, dated as of July 29, 2005 among MCG Commercial Loan Funding Trust, MCG Capital
Corporation, Three Pillars Funding LLC, SunTrust Capital Markets, Inc., and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.76 filed with MCG Capitals Form 10-Q for the quarter ended June 30,
2005).                                                                        
|              | 
|10.30         |  | Amended and Restated Revolving Credit Agreement dated as of September 20, 2005 among MCG Capital Corporation, Bayerische Hypo-Und
Vereinsbank, AG, New York Branch and Various Lenders (incorporated by reference to Exhibit 99.1 filed with MCG Capitals Current Report on Form 8-K filed on September 21, 2005).                                                                                                                             
|              | 
|10.31         |  | Note Purchase Agreement, dated October 11, 2005 (incorporated by reference to Exhibit 99.1 filed with MCG Capitals Current Report on
Form 8-K filed on October 12, 2005).                                                                                                                                                                                                                                                                      
|              | 
|10.32         |  | Third Amendment to Sale and Servicing Agreement, dated as of December 7, 2005 among MCG Commercial Loan Funding Trust, MCG Capital
Corporation, Three Pillars Funding LLC, SunTrust Capital Markets, Inc., and Wells Fargo Bank, National Association (incorporated by reference Exhibit 99.1 filed with MCG Capitals Current Report on Form 8-K filed on December 13, 2005).                                                                  
|10.33         |  | Fourth Amendment to Sale and Servicing Agreement, dated as of April 17, 2006, among MCG Commercial Loan Funding Trust, MCG Capital
Corporation, Three Pillars Funding LLC, SunTrust Capital Markets, Inc., and Wells Fargo, National Association (incorporated by reference to Exhibit f.23 filed with MCG Capitals registration statement on Form N-2 [File No. 333-133669] filed
with the Securities and Exchange Commission on May 1, 2006).
|              | 
|10.34         |  | Indenture by and between MCG Commercial Loan Trust 2006-1 and Wells Fargo Bank, National Association, dated as of April 18, 2006
(incorporated by reference to Exhibit f.24 filed with MCG Capitals registration statement on Form N-2 [File No. 333-133669] filed with the Securities and Exchange Commission on May 1, 2006).                                                                                                                
|              | 
|10.35         |  | Collateral Management Agreement, dated as of April 18, 2006, by and between MCG Commercial Loan Trust 2006-1 and MCG Capital Corporation
(incorporated by reference to Exhibit f.25 filed with MCG Capitals registration statement on Form N-2 [File No. 333-133669] filed with the Securities and Exchange Commission on May 1, 2006).                                                                                                        



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                      
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                                              
|10.36         |  | Class A-2 Note Purchase Agreement, dated as of April 18, 2006, among MCG Commercial Loan Trust 2006-1 and Wells Fargo Bank, National
Association (incorporated by reference to Exhibit f.26 filed with MCG Capitals registration statement on Form N-2 [File No. 333-133669] filed with the Securities and Exchange Commission on May 1, 2006).                                                                     
|              | 
|10.37         |  | Class A-3 Note Purchase Agreement, dated as of April 18, 2006, by and among MCG Commercial Loan Trust 2006-1, North Sea Funding Europe
Asset Purchasing Company No. 1 B.V. and Wells Fargo Bank, National Association (incorporated by reference to Exhibit f.27 filed with MCG Capitals registration statement on Form N-2 [File No. 333-133669] filed with the Securities and Exchange
Commission on May 1, 2006).
|              | 
|10.38         |  | Class A-3 Note Purchase Agreement, dated as of April 18, 2006 by and among MCG Commercial Loan Trust 2006-1, Barclays Bank PLC and Wells
Fargo Bank, National Association (incorporated by reference to Exhibit f.28 filed with MCG Capitals registration statement on Form N-2 [File No. 333-133669] filed with the Securities and Exchange Commission on May 1,
2006).                                            
|              | 
|10.39         |  | Credit and Warehouse Agreement, dated as of May 2, 2006, among Merrill Lynch Capital Corp., MCG Commercial Loan Trust 2006-2 and MCG
Capital Corporation (incorporated by reference to exhibit 10.60 filed with MCG Capitals Form 10-Q for the quarter ended March 31, 2006).                                                                                                                                       
|              | 
|10.40         |  | Custody Agreement, dated as of May 2, 2006, among MCG Capital Corporation, MCG Finance VIII, LLC, MCG Commercial Loan Trust 2006-2, Wells
Fargo Bank, National Association and Merrill Lynch Capital Corp. (incorporated by reference to exhibit 10.61 filed with MCG Capitals Form 10-Q for the quarter ended March 31, 2006).                                                                                     
|              | 
|10.41         |  | MCG Capital Corporation 2006 Non-Employee Director Restricted Stock Plan (incorporated by reference to exhibit 10.62 filed with MCG
Capitals Form 10-Q for the quarter ended June 30, 2006).                                                                                                                                                                                                                        
|              | 
|10.42         |  | MCG Capital Corporation 2006 Employee Restricted Stock Plan (incorporated by reference to exhibit 10.63 filed with MCG Capitals Form
10-Q for the quarter ended June 30, 2006).                                                                                                                                                                                                                                     
|              | 
|10.43         |  | Second Amended and Restated Revolving Credit Agreement dated as of June 19, 2006 among MCG Capital Corporation, Bayerische Hypo-Und
Vereinsbank, AG, New York Branch and Various Lenders (incorporated by reference to Exhibit 99.1 filed with MCG Capitals Current Report on Form 8-K filed on June 22, 2006).                                                                                                     
|              | 
|10.44         |  | Amendment No. 1 to the Second Amended and Restated Revolving Credit Agreement, dated as of August 7, 2006, by and among MCG Capital
Corporation, Bayerische Hypo-Und Vereinsbank AG, New York Branch and various lenders. (incorporated by reference to exhibit 10.64 filed with MCG Capitals Form 10-Q for the quarter ended June 30, 2006).                                                                       
|10.45         |  | Severance Agreement and Release by and between Bryan J. Mitchell and MCG Capital Corporation, dated as of August 24, 2006 (incorporated by
reference to exhibit 10.1 filed with MCG Capitals Current Report on Form 8-K filed on August 28, 2006).                                                                                                                                                                  
|              | 
|10.46         |  | Employment Agreement by and between MCG Capital Corporation and Steven F. Tunney, dated as of September 18, 2006 (incorporated by reference
to exhibit 10.1 filed with MCG Capitals Current Report on Form 8-K filed on September 19, 2006).                                                                                                                                                                        
|              | 
|10.47         |  | Employment Agreement by and between MCG Capital Corporation and B. Hagen Saville, dated as of September 18, 2006 (incorporated by
reference to exhibit 10.2 filed with MCG Capitals Current Report on Form 8-K filed on September 19, 2006).                                                                                                                                                                        
|              | 
|10.48         |  | Employment Agreement by and between MCG Capital Corporation and Robert J. Merrick, dated as of September 18, 2006 (incorporated by
reference to exhibit 10.3 filed with MCG Capitals Current Report on Form 8-K filed on September 19, 2006).                                                                                                                                                                       



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|              |  |                                                                                                                                                                                                                                                                                                                                                                             
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                                                                     
|10.49         |  | Amended and Restated Employment Agreement by and between MCG Capital Corporation and Michael R. McDonnell, dated as of September 18,
2006 (incorporated by reference to exhibit 10.4 filed with MCG Capitals Current Report on Form 8-K filed on September 19, 2006).                                                                                                      
|              | 
|10.50         |  | MCG Capital Corporation Supplemental Non-Qualified Retirement Plan Amended and Restated as of January 1, 2005 (incorporated by reference to
exhibit 10.70 filed with MCG Capitals Form 10-Q for the quarter ended September 30, 2006).                                                                                                                                     
|              | 
|10.51         |  | Third Amended and Restated Revolving Credit Agreement dated as of November 29, 2006 among MCG Capital Corporation, Bayerische Hypo Und
Vereinsbank, AG, New York Branch and Various Lenders (incorporated by reference to Exhibit 99.1 filed with MCG Capitals Current Report on Form 8-K filed on November 30, 2006).                                                     
|              | 
|10.52         |  | Fifth Amendment to Sale and Servicing Agreement, dated as of February 1, 2007, among MCG Commercial Loan Funding Trust, MCG Capital
Corporation, Three Pillars Funding LLC, SunTrust Capital Markets, Inc., and Wells Fargo, National Association (incorporated by reference to Exhibit 99.1 filed with MCG Capitals Current Report on Form 8-K filed on February 1,
2007).
|              | 
|10.53         |  | First Amendment to Deed of Lease by and between Twin Towers II Property Associates, LLC, as landlord and MCG Capital Corporation, as
tenant, dated as of November 30, 2006 (incorporated by reference to Exhibit 10.73 filed with MCG Capitals Form 10-K for the year ended December 31, 2006).                                                                            
|              | 
|10.54         |  | Employment Agreement by and between MCG Capital Corporation and Samuel G. Rubenstein, dated as of March 1, 2007 (incorporated by
reference to Exhibit 10.74 filed with MCG Capitals Form 10-K for the year ended December 31, 2006).                                                                                                                                       
|              | 
|10.55         |  | Form of Restricted Stock Agreement for Non-Employee Directors Pursuant to 2006 Non-Employee Director Restricted Stock Plan (incorporated by
reference to Exhibit 10.75 filed with MCG Capitals Form 10-K for the year ended December 31, 2006).                                                                                                                            
|              | 
|10.56         |  | Form of Restricted Stock Agreement for Employees Pursuant to 2006 Employee Restricted Stock Plan (incorporated by reference to Exhibit
10.76 filed with MCG Capitals Form 10-K for the year ended December 31, 2006).                                                                                                                                                      
|              | 
|10.57         |  | Sixth Amendment to Sale and Servicing Agreement, dated as of April 3, 2007, among MCG Commercial Loan Funding Trust, MCG Capital
Corporation, Three Pillars Funding LLC, SunTrust Capital Markets, Inc., and Wells Fargo, National Association (incorporated by reference to Exhibit 99.1 filed with MCG Capitals Current Report on Form 8-K filed on April 4,
2007).      
|              | 
|10.58         |  | Fourth Amended and Restated Revolving Credit Agreement dated as of June 6, 2007 among MCG Capital Corporation, Bayerische Hypo Und
Vereinsbank, AG, New York Branch and Various Lenders (incorporated by reference to Exhibit 99.1 filed with MCG Capitals Current Report on Form 8-K filed on June 11, 2007).                                                             
|              | 
|10.59         |  | Seventh Amendment to Sale and Servicing Agreement, dated as of July 12, 2007, among MCG Commercial Loan Funding Trust, MCG Capital
Corporation, Three Pillars Funding LLC, SunTrust Capital Markets, Inc., and Wells Fargo, National Association (incorporated by reference to Exhibit 99.1 filed with MCG Capitals Current Report on Form 8-K filed on July 18,
2007).    
|              | 
|10.60         |  | Note Purchase Agreement, dated October 3, 2007 (incorporated by reference to Exhibit 99.1 filed with MCG Capitals Current Report Form
8-K filed on October 9, 2007).                                                                                                                                                                                                       
|              | 
|10.61         |  | Agreement and Amendment Number 1 to Warehousing Agreement, dated October 23, 2007, by and among MCG Commercial Loan Trust 2006-2, MCG
Capital Corporation and Merrill Lynch Capital Corp. (incorporated by reference to Exhibit 99.1 filed with MCG Capitals Current Report on Form 8-K filed on October 29, 2007).                                                        



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|              |  |                                                                                                                                             
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                     
|11            |  | Statement regarding computation of per share earnings is included in Note 6 to the Companys Notes to the Consolidated Financial
Statements.
|              | 
|15++          |  | Letter regarding Unaudited Interim Financial Information.                                                                                   
|              | 
|31.1++        |  | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.                              
|              | 
|31.2++        |  | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.                              
|              | 
|31.3++        |  | Certification of Chief Accounting Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.                             
|              | 
|32.1++        |  | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350).                      
|              | 
|32.2++        |  | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350).                      
|              | 
|32.3++        |  | Certification of Chief Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U. S. C.
1350).                     

---

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



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 1, 2007.



MCG CAPITAL CORPORATIONBy:

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

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

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




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