10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO                     

COMMISSION FILE NUMBER: 0-33377

MCG CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	54-1889518
(State of Incorporation)	(I.R.S. Employer Identification Number)
1100 Wilson Boulevard Suite 3000 Arlington, VA	22209
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: 703-247-7500

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange On Which Registered
Common Stock, par value $0.01 per share	The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes ¨    No  x.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.  Yes ¨    No  x.

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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 aggregate market value of common stock held by non-affiliates of the Registrant as of June 30, 2006 was approximately $826,695,155 based on the closing price on the NASDAQ Global Select Market. For purposes of this computation, shares held by certain stockholders and by directors and executive officers of the Registrant have been excluded. Such exclusion of shares held by such persons is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the Registrant. There were 58,700,108 shares of the Registrant’s common stock outstanding as of February 26, 2007.

Documents Incorporated by Reference

Portions of the Registrant’s definitive Proxy Statement relating to the 2007 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission, are incorporated by reference in Part III of this Annual Report on Form 10-K as indicated herein.

MCG CAPITAL CORPORATION

2006 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

		PAGE
	PART I
Item 1.	Business	1
Item 1A.	Risk Factors	19
Item 1B.	Unresolved Staff Comments	25
Item 2.	Properties	25
Item 3.	Legal Proceedings	25
Item 4.	Submission of Matters to a Vote of Security Holders	25
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	26
Item 6.	Selected Financial Data	29
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	57
Item 8.	Financial Statements and Supplementary Data	58
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	101
Item 9A.	Controls and Procedures	101
Item 9B.	Other Information	101
	PART III
Item 10.	Directors, Executive Officers, and Corporate Governance	102
Item 11.	Executive Compensation	102
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	102
Item 13.	Certain Relationships and Related Transactions, and Director Independence	102
Item 14.	Principal Accountant Fees and Services	102
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	103
Signatures		113

PART I

In this Annual Report on Form 10-K, or Annual Report, the “Company”, “MCG”, “we”, “us” and “our” refer to MCG Capital Corporation and its wholly owned subsidiaries (including its affiliated securitization trusts) unless the context otherwise requires.

Item 1.    Business

GENERAL

We are a solutions-focused commercial finance company providing capital and advisory services to middle market companies throughout the United States. We make debt and equity investments primarily in companies with annual revenue of $20 million to $200 million and earnings before interest, taxes, depreciation and amortization (“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 identify and source new customers through multiple channels, including private equity sponsors, investment bankers, brokers, fund-less sponsors, institutional syndication partners, other club lenders and owner operators. We originate most of our investments directly with our customers, although from time to time we do participate in loan syndications or other deals. We have controlling equity positions in certain of our portfolio companies. We base our investment decisions on extensive analyses of potential customers’ business operations and asset valuations. We utilize specialized risk management methods, pricing tools, due diligence methodologies and data management processes that are designed to help us assess risk, establish appropriate pricing, and maximize our return on investment.

Our primary business objectives are to increase our earnings and net asset value by investing in debt and equity securities of middle market companies. Our investment objective is to achieve current income and capital gains. We earn current income, in the form of interest, dividends, and fees, from our investments in debt and equity securities and achieve capital gains through appreciation in the value of our equity investments. To meet our investment objectives, we selectively invest in companies which present opportunities for favorable risk-adjusted returns. In addition, we maintain a flexible approach to funding that permits adjustments to transaction terms, including pricing terms, to accommodate the shifting corporate development needs of our customers.

We have built our portfolio with disciplined asset acquisition through our underwriting and investment approval processes and active portfolio management. We believe that our core competencies include risk assessment and risk management, and we have developed expertise which is reflected in our underwriting and compliance processes. We generally make investments of up to $75 million utilizing three core products: our “one-stop” solution, institutional subordinated debt, and control investing. Our debt investments include senior and subordinated securities, substantially all of which include a security interest. Our loans typically mature in four to eight years, and require monthly or quarterly interest payments at fixed rates or variable rates based on the prime rate or LIBOR, plus a margin. We price our debt securities based upon our credit analysis and risk assessment. Our equity investments are often made in companies in which we have also made debt investments. Our equity investments include preferred stock, common stock, and warrants and, in many cases, will include the right to board representation. We may invest across the capital structure of our portfolio companies using a combination of debt and equity investments to meet our customers’ needs and optimize our returns.

CORPORATE HISTORY AND OFFICES

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

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least 70% of our total assets in private or thinly traded public U.S.-based companies and meeting a coverage ratio of total net assets to total senior securities, which include all of our borrowings (including accrued interest payable) and any preferred stock we may issue in the future, of at least 200%. See “Regulation as a Business Development Company”. In addition, we have elected to be treated for federal income tax purposes as a regulated investment company, or “RIC,” under the Internal Revenue Code. In order to continue to qualify as a RIC for federal income tax purposes, we must meet certain requirements, including certain minimum distribution requirements. See “Certain U.S. Federal Income Tax Considerations.”

Our business began in 1990 as a division of Signet Bank known as the media communications group. Signet Banking Corporation, the parent of Signet Bank, was acquired by First Union Corporation (now Wachovia Corporation) on November 27, 1997. We were formed in 1998 by certain members of our management and affiliates of Goldman, Sachs & Co. to purchase a loan portfolio and certain other assets from First Union National Bank (now Wachovia Bank, National Association) in a management buyout. MCG was organized as a Delaware corporation on March 18, 1998 at which time we changed our name from MCG, Inc. to MCG Credit Corporation. On June 14, 2001, we changed our name from MCG Credit Corporation to MCG Capital Corporation.

Our executive offices are located at 1100 Wilson Boulevard, Suite 3000, Arlington, Virginia 22209 and our telephone number is (703) 247-7500. We also have an office in Richmond, Virginia. Our Internet site address is www.mcgcapital.com. Information contained on our web site is not incorporated by reference into this Annual Report and you should not consider information contained on our web site to be part of this Annual Report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and our current reports on Form 8-K, as well as any amendments to those reports, are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the Securities and Exchange Commission (“SEC”).

MARKET OPPORTUNITY

We believe that the middle market is a significant, growing segment of the U.S. economy that has increasing demand for, and less access to, high-quality differentiated corporate financial services, and that this trend is likely to continue given the on-going consolidation in the financial services industry. We also believe that the middle market offers attractive rates of return and that middle market companies have distinct capital and servicing requirements. Our ability to structure transactions to meet these capital and servicing requirements for middle market companies across a diverse industry base enhances our market opportunity.

In order to continue to service our middle market customers, we enhance our knowledge of the middle market through continuous engagement with existing and prospective customers and by conducting ongoing market research. We use this information to enhance the quality of our investment analysis. We write and distribute Transactions, a periodic newsletter which focuses on merger and acquisition activity, to portfolio companies, prospective customers, investors, and others to facilitate a dialogue and to provide our perspective on a variety of topics. We believe that our extensive knowledge and research capabilities differentiate us in the marketplace because we are able to demonstrate our expertise and knowledge of the middle market and share it with our customers.

STRATEGY

We seek to achieve favorable risk-adjusted rates of return in the form of current income and capital appreciation, while maintaining credit and investment quality in our asset portfolio. We believe our financial performance is a product of our knowledge and insight, effectiveness in targeting potential customers, exceptional customer service, risk-based pricing techniques, and effective risk management. We apply well established credit processes to the assessment of risk, and we structure and price our investments accordingly. We have developed proprietary analytics, data and knowledge to support our business activities.

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Our investment process is designed to achieve the following strategic objectives:

• generate favorable risk-adjusted rates of return by delivering capital and strategic insight to increase our customers’ enterprise value;

• maintain sound credit and investment discipline and pricing practices, regardless of market conditions, to avoid adverse investment selection;

• manage risk by utilizing an integrated team approach to business development, underwriting, and investment servicing.

INVESTMENTS

Our debt investments include senior and subordinated securities, substantially all of which include a security interest. Our loans typically mature in four to eight years, and require monthly or quarterly interest payments at fixed rates or variable rates based on the prime rate or LIBOR, plus a margin. We price our debt securities based upon our credit analysis and risk assessment. Our equity investments are often made in companies in which we have also made debt investments. Our equity investments include preferred stock, common stock, and warrants and, in many cases, will include the right to board representation. We may invest across the capital structure of our portfolio companies using a combination of debt and equity investments to meet our customers’ needs and optimize our returns. In order to execute our strategy we utilize three core products: our “one-stop” solution, institutional sub debt, and control investing.

“One-stop” Solution.    Our “one-stop” solution, which refers to our ability to invest throughout the capital structure of a company, enables our customers to satisfy multiple financing needs from a single capital provider. In a typical “one-stop” transaction, we provide a combination of senior and subordinated debt to our customer and, in certain cases, also acquire an equity interest in the customer. The overall transaction size and product mix are based upon our customer’s needs. In some cases our “one-stop” solution results in a product mix that meets our customer’s needs but which we believe is not the most efficient use of our capital. In these cases, we may sell portions of some of the securities in order to achieve a more optimal mix. Typically, when we sell portions of one of our investments, we continue to service the investment and thus these sales are seamless to our customers. “One-stop” transactions generally provide current interest income on our loans and the opportunity to achieve capital gains on our equity investment, as well as fee income generated through syndication of portions of the investment.

Institutional Subordinated Debt.    We provide institutional subordinated debt in the form of junior, yielding capital, as a sole or club investor. These loans are payable in full at maturity and generally provide attractive yields. Our institutional sub debt customers are generally larger businesses supported by institutional equity capital that reduces the risk profile of these investments.

Control Investments.    Control investments are those for which we take a majority ownership position and, in most cases, control the board of directors of a portfolio company. Control investments are long-term investments in which we expect to achieve the majority of our returns through capital appreciation. Our control investments typically include investments across the entire capital structure of the portfolio company. We believe control investments generally provide a reliable income stream and an opportunity to generate capital gains on our investment.

Other Investments and Services.    In addition to our core products we also make other investments, such as senior loans and investments in broadly syndicated assets. These other investments help balance our portfolio. In addition to capital, we also offer managerial assistance to our portfolio companies. This assistance typically involves strategic advice, evaluation of business plans, financial modeling assistance and industry research and insights. We believe that providing assistance to our portfolio companies enables us to maximize our value proposition for our customers which, in turn, helps us maximize our investment returns.

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OPERATIONS

We engage our markets with expertise and superior responsiveness, which enables us to originate and manage a diverse portfolio of investments that produce current income and capital gains in order to create consistent, high quality and sustainable dividends for our stockholders. To achieve our goal of being a leading provider of solutions-focused financial services to middle market companies, we have established a credit and business culture that strives to identify and attract new customers and provide excellent customer service, while protecting our capital and generating favorable risk-adjusted returns through current income on our loans and equity investments and capital gains on our equity investments.

Business Development

MCG and its predecessors have been active investors in the middle market since 1990 and have invested over $5.1 billion in approximately 480 transactions. We believe that our experience in middle market investing is a meaningful competitive advantage that we use to develop our business. We identify and source new customers through multiple channels, including private equity sponsors, investment bankers, brokers, fund-less sponsors, institutional syndication partners, other club lenders and owner operators. We also market to prospective customers identified through various data services, customized internet searches, and relationships with investment bankers, accountants, lawyers and other professionals. From time to time we also purchase investments through syndicated or other deals. Members of our professional staff engage in other marketing initiatives on a national scale, including attending and presenting at industry forums, conferences and meetings and participating in industry associations. Of our investments in new customers during 2006, approximately 62% were in deals sponsored by private equity investors, 24% were in syndicated or other deals, and 14% were direct investments in owner operators.

Once we identify a prospective customer, we review its financial reports, corporate activities, and other relevant information which we gather from third-party databases, industry reports, trade and consumer magazines, newspapers and newsletters. We focus on a company’s fundamental performance against industry conditions and operational benchmarks. We work with our current and prospective customers to understand their business, costs and benefits of their corporate development initiatives, opportunities, competition, and acceptable risks and returns. This understanding allows us to support our customers’ corporate development decisions, even in some cases where short-term financial ratios or other metrics may temporarily decline. We believe this approach differentiates us from most other lenders and investors and enables us to make investments and achieve returns based on the value we help create rather than solely on the basis of our cost of capital. This approach has been successful in attracting new customers and in gaining additional business from current customers as they execute their long term growth strategies.

Underwriting and Risk Management

Our underwriting philosophy places primary emphasis on credit and risk analysis. Our underwriting function is initiated during the business development process. Our underwriting team consists of investment professionals who perform due diligence and financial analyses, deal teams who are responsible for originating and managing the transaction, a member of our credit committee and a member of our legal team. Our underwriting processes, which have been developed over more than 15 years, include standard due diligence on a prospective customer’s financial performance as well as customized analyses of a prospective customer’s operations, systems, accounting policies, human resources and legal and regulatory environment. Our underwriting team works to gain an understanding of the relationships among the customer’s business plan, operations and financial performance. We frequently engage external experts to supplement and assist in the underwriting process.

In addition to gaining an in-depth understanding of our customers and prospective customers, our research and due diligence provide expert perspectives on industry wide operational, strategic, and valuation issues and support our business development and risk management processes by identifying attractive industries, emerging

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trends, and competitive threats. We continually update our investment perspectives and develop investment hypotheses for new industries. The knowledge and insight we obtain through our research are valuable to our customers who may draw on our industry expertise to refine their strategic plans, identify acquisition opportunities, and set appropriate financial and operational goals.

As part of our evaluation of a proposed investment, the underwriting team prepares an investment memorandum for presentation to the credit committee and, in some instances, the investment committee. The investment memorandum generally consists of:

• a business description;

• historical financial analysis, projections and scenario modeling;

• a risk evaluation specific to the prospective portfolio company’s business, considering the anticipated use of proceeds of our investment, and industry;

• an enterprise valuation to assess the underlying value of the customer, both as an ongoing operation and its value relative to comparable public and private companies; and

• a description of the capital structure and the investment risk and return characteristics.

Risk Analysis.    We review the prospective portfolio company’s history, organization and product lines, and we analyze the prospective portfolio company’s industry, competition and market share, obsolescence and substitution risk, markets served, legal and regulatory environment and technology. In particular, we analyze the following risks:

• Industry Risks.    We analyze the specific vulnerability to industry risk, such as maturity, cyclicality, and seasonality.

• Competitive Risks.    We analyze the strengths and weaknesses of the prospective portfolio company relative to its competitors in terms of its pricing, product quality, customer loyalty, substitution and switching costs, brand positioning and capitalization. We also assess the defensibility of a prospect’s market position and its opportunity for increasing market share.

• Regulatory Risks.    We follow regulatory developments in the industries in which we invest and assess the risks that are presented by existing and proposed regulations.

• Customer Concentration and Market Risks.    We evaluate the stability of the prospective portfolio company’s customer base by analyzing the number and size of its customers and their attrition rates, the potential impact of above average customer attrition and low renewals, and the risk due to loss of its significant customers.

• Technology Risks.    We follow technological advancements in the industries in which we invest and analyze the positive or negative impacts these advancements may have on the prospective portfolio company.

We also assess other attributes of a potential transaction. We evaluate management’s track record, their business plan, their judgments about their products and other characteristics that may significantly affect the risk of a transaction. Quantitative attributes that we evaluate include industry-specific comparisons such as cash flow margins, product and cash flow diversification, revenue growth rates, cost structure and other operating benchmarks that are derived from historical financial statements. Qualitative attributes we evaluate may include management skill and depth, industry risk, substitution risk, cyclicality, geographic diversification, facilities infrastructure, administration requirements and product quality and ranking.

Enterprise Valuation.    To assess the risk of a potential investment and to quantify the underlying value of the enterprise in which we are investing, we employ a series of valuation techniques. We primarily derive enterprise valuations through analyses of comparative public and private market transactions using our database

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of transactions. We also generally prepare discounted cash flow models based on our projections of the future free cash flows of the business and industry derived capital costs. Finally, we look to comparable public companies to benchmark the value of the enterprise using public market data. We generally base enterprise value on current and projected market conditions. Using these methods provides us with multiple views of the value of the enterprise and allows us to calculate certain metrics that we use in both risk assessment and product pricing, such as loan-to-value ratios for our debt investments.

Investment Structure.    We evaluate our customers’ needs and utilize our product mix to structure investments that meet their capital requirements and business plans and protect our capital while generating favorable risk-adjusted returns through current income on our loans and equity investments and capital gains on our equity investments. We structure our investments to mitigate risk by requiring appropriate financial and collateral coverage thresholds. When structuring our investments, we evaluate key components, including payment priority, collateral or asset value, and financial support from guarantors and other credit enhancements. Since our investments typically include loans and our loans are typically cash flow loans, rather than asset backed loans, liquidation value of assets is a factor in our credit decisions. In the majority of our loans, we receive a security interest in our customers’ tangible and intangible assets, which entitles us to a preferred position on payments in the event of liquidation, and a pledge of the equity by the equity owners. In addition, our loan covenants generally include affirmative covenants that require the customer to provide periodic financial information, notification of material events and compliance with laws, as well as restrictive covenants that prevent customers from taking a range of significant actions, such as incurring additional indebtedness or making acquisitions without our consent. We also generally include covenants requiring the customer to maintain or achieve specified financial ratios, such as cash flow leverage, interest charge coverage and total charge coverage, and, in certain cases, operating covenants requiring them to maintain certain operational benchmarks.

Investment Approval Process

All of our investments are approved by our credit committee, whose members include Steven F. Tunney, our President and Chief Executive Officer; Robert J. Merrick, our Chief Investment Officer; B. Hagen Saville, our Executive Vice President of Business Development; William B. Ford, a Senior Vice President and Managing Director; and Robert L. Marcotte, a Senior Vice President and Managing Director. In addition, certain investments based on asset type and investment size must also be approved by the investment committee of our board of directors, whose members include Messrs. Tunney, Saville and Merrick and independent directors Kenneth J. O’Keefe, Kim D. Kelly, and Edward S. Civera.

Investment Servicing

After an investment is approved and funded, the deal sponsor and underwriting team, along with the investment administration group and the compliance and valuation group, monitor covenant compliance and financial performance on an ongoing basis. Our deal teams maintain primary responsibility for the performance of their investments throughout the life of the investment.

Investment Administration Group.    This group maintains our investment transaction records and is responsible for:

• funding the investments in accordance with credit committee and, if applicable, investment committee approval;

• recording the investments into our accounting system;

• billing and collecting;

• reporting and collecting on past due accounts; and

• maintaining the collateral that is in our possession.

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Compliance and Valuation Group.    This group monitors investment compliance and ensures that all investments adhere to our internal policies and procedures. This group is responsible for:

• reviewing the investment agreement to ensure that the final documents reflect the terms approved by the credit committee and, if applicable, the investment committee and advising of any deviations;

• ensuring that the portfolio company compliance package is prepared in accordance with the loan covenant requirements;

• entering the portfolio company’s financial statements into our tracking system and entering the loan covenants into our covenant tracking system;

• ensuring the mathematical accuracy of applicable covenant requirements;

• reviewing the portfolio company’s financial statements to ensure that the portfolio company performs in accordance with our expectations and to identify any changes in risk;

• reporting all covenant violations, loan amendments and covenant waivers to the credit committee; and

• preparing quarterly portfolio valuations for review by the valuation committee of our Board of Directors.

Investment Monitoring and Restructuring Procedures.    We continually monitor the status and financial performance for each individual customer in order to evaluate overall portfolio quality. We closely monitor compliance with all covenants and take appropriate action on all exceptions. We do not believe that all contract exceptions, such as breaches of contractual covenants or late delivery of financial statements, are necessarily an indication of deterioration in the credit quality or the need to pursue remedies or an active workout of a portfolio investment.

When our attempts to collect past due principal and interest on a loan are unsuccessful, we will perform an analysis to determine the appropriate course of action. In some cases, we may consider restructuring the investment to better reflect the current financial performance of the customer. Such a restructuring may, among other items, involve deferring payments of principal and interest, adjusting interest rates or warrant positions, imposing additional fees, amending financial or operating covenants or converting debt to equity. In connection with a restructuring, we generally receive appropriate compensation from the customer for any increased risk. During the process of monitoring a loan in default, we will generally send a notice of non-compliance outlining the specific defaults that have occurred and preserving our remedies, and initiate a review of the collateral, if any. When a restructuring is not the most appropriate course of action, we generally pursue remedies available to us that minimize any potential losses, including initiating foreclosure and/or liquidation proceedings.

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

Investment Funding

We fund our investments using cash that we receive in exchange for a combination of debt and equity instruments that we issue from time to time. Our debt obligations include both secured and unsecured obligations. As a business development company we are 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%. Our equity is publicly traded on the NASDAQ Global Select Market under the symbol “MCGC”.

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Portfolio Valuation

We determine the value of each investment in our portfolio on a quarterly basis, and record changes in value as unrealized appreciation or depreciation in our statement of operations. Value, as defined in Section 2(a)(41) of 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the board of directors. Since there is typically no readily ascertainable 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 December 31, 2006 and December 31, 2005, approximately 95% and 88%, respectively, of our total assets represented investments of which approximately 97% and 94%, respectively, are valued at fair value and approximately 3% and 6%, are valued at market value based on readily ascertainable public market quotes, respectively. 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. See further discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies.”

Portfolio Overview

As of December 31, 2006, our investment portfolio consisted of approximately 72% of debt investments and 28% of equity investments. Approximately 97% of our debt investments as of that date had security interests.

Our debt instruments provide for a contractual interest rate generally ranging from 10% to 16%, a portion of which may be payment-in-kind (“PIK”) which we typically do not collect until maturity. At December 31, 2006, approximately 64% of the debt investments in our portfolio, based on amounts outstanding at fair value, were at variable rates determined on the basis of LIBOR or prime rate, and approximately 36% were at fixed rates. In addition, approximately 31% of our debt investment portfolio has floors of between 1.50% and 3.00% on the LIBOR base index. Our loans have stated maturities at origination that generally range from four to eight years. Our customers typically pay an origination fee based on a percentage of the commitment amount and also often pay a fee on any undrawn commitments.

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The following table shows statistics of our portfolio as of December 31, 2006 and 2005, and activity for the years then ended:

(dollars in millions)	2006			2005
Portfolio by type at fair value:
Senior secured debt	$	389.7		$	543.0
Subordinated debt
Secured		495.0			329.5
Unsecured		24.7			61.6
Total debt investments		909.4			934.1
Preferred equity		285.1			126.7
Common equity or common equity equivalents		63.1			36.8
Total equity investments		348.2			163.5
Total portfolio	$	1,257.6		$	1,097.6
Portfolio by type at fair value as a percentage of total portfolio:
Senior secured debt		31.0	%		49.5	%
Subordinated debt
Secured		39.3	%		30.0	%
Unsecured		2.0	%		5.6	%
Total debt investments		72.3	%		85.1	%
Preferred equity		22.7	%		11.5	%
Common equity or common equity equivalents		5.0	%		3.4	%
Total equity investments		27.7	%		14.9	%
Total portfolio		100.0	%		100.0	%
Average investment balance per customer	$	15.2		$	12.1
Yield on average loan portfolio at fair value		12.9	%		11.9	%
Average LIBOR		5.2	%		3.6	%
Impact of fee accelerations of unearned fees on paid loans		0.3	%		0.7	%
Spread to average LIBOR on average loan portfolio at fair value		7.4	%		7.6	%
Total yield on average loan portfolio at fair value		12.9	%		11.9	%
Loans on non-accrual status as a percentage of total debt investments		3.9	%		1.4	%
Loans on non-accrual status as a percentage of total investments		2.8	%		1.2	%
Loans greater than 90 days past due as a percentage of total debt investments		2.4	%		1.8	%
Loans greater than 90 days past due as a percentage of total investments		1.7	%		1.5	%
Loans on non-accrual status or greater than 90 days past due as a percentage of total debt investments		4.1	%		2.8	%
Loans on non-accrual status or greater than 90 days past due as a percentage of total investments		3.0	%		2.4	%
% of loans with fixed interest rates		36.2	%		29.2	%
% of loans with floating interest rates		63.8	%		70.8	%
Portfolio company data:
Number of portfolio companies		83			91
Average annual revenue of portfolio companies	$	103.3		$	154.4
Average annual revenue of portfolio companies (excluding broadly syndicated portfolio companies)	$	51.6		$	45.9
Average annual EBITDA of portfolio companies	$	11.6		$	19.6
Average annual EBITDA of portfolio companies (excluding broadly syndicated portfolio companies)	$	7.1		$	8.5
Average loan to value (excluding broadly syndicated portfolio companies)		51.0	%		49.0	%

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The following table shows our portfolio of investments by industry at fair value, as of December 31, 2006 and 2005:

	December 31, 2006				December 31, 2005
(dollars in millions)	Investments at Fair Value		Percentage of Total Portfolio		Investments at Fair Value (a)		Percentage of Total Portfolio (a)
Telecommunications—CLECs (competitive local exchange carriers)	$	274.1	21.8	%	$	213.4	19.4	%
Other Communications		84.0	6.7			68.8	6.3
Healthcare		106.5	8.5			91.1	8.4
Newspaper		90.6	7.2			112.8	10.3
Publishing		68.0	5.4			72.3	6.6
Laboratory Instruments		58.4	4.6			52.1	4.7
Plastic Products		57.1	4.5			—	—
Home Furnishings		52.5	4.2			18.9	1.7
Business Services		51.2	4.1			22.2	2.1
Information Services		47.4	3.8			75.4	6.9
Broadcasting		39.9	3.2			31.9	2.9
Cable		38.7	3.1			33.3	3.0
Technology		36.2	2.9			66.1	6.0
Education		31.0	2.5			19.5	1.8
DVD Rental		28.6	2.3			—	—
Sporting Goods		26.9	2.1			—	—
Electronics		24.8	2.0			34.1	3.1
Other Media		24.1	1.9			33.9	3.1
Food Services		21.2	1.7			—	—
Retail		19.4	1.5			20.5	1.9
Auto Parts		17.2	1.4			17.0	1.5
Drugs		15.6	1.2			28.7	2.6
Leisure Activities		14.3	1.1			13.4	1.2
Photographic Studio		12.9	1.0			—	—
Cosmetics		6.3	0.5			11.3	1.0
Car Rental		—	—			13.5	1.2
Other (b)		10.7	0.8			47.4	4.3
	$	1,257.6	100.0	%	$	1,097.6	100.0	%

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

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

Our ten largest portfolio companies represented approximately 41.3% of the total fair value of our investments at December 31, 2006 and accounted for approximately 37.5% of our operating income during the year ended December 31, 2006. At December 31, 2006, approximately 28.5% of our portfolio at fair value was invested in companies in the communications industry. The communications industry is a regulated industry. Of the 28.5% in the communications industry, 21.8% represents our investments in CLECs, and 6.7% represents our investments in other communications companies, including telecommunications tower companies, internet service providers, wireless companies and security alarm companies. Our two largest portfolio companies, Broadview Networks Holdings, Inc. (“Broadview”) and Cleartel Communications, Inc. (“Cleartel”) are CLECs. Broadview, our largest portfolio company and one of our control investments, represented approximately 12.7% of the fair value of our investments at December 31, 2006 and approximately 14.5% of our operating income during the year ended December 31, 2006. Cleartel, our second largest portfolio company and one of our control

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investments, represented approximately 5.8% of the fair value of our investments at December 31, 2006 and approximately 4.8% of our operating income during the year ended December 31, 2006. See additional discussion of Broadview and Cleartel in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Portfolio Composition and Investment Activity.”

Investment Rating System

We use an investment rating system to characterize and monitor our expected level of return on each investment in our portfolio. We use the following 1 to 5 investment rating scale:

Investment Rating	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

We monitor and, when appropriate, recommend changes to investment ratings. The valuation committee of our board of directors reviews management’s recommendations and affirms or changes the investment ratings quarterly. In most cases, where we hold multiple securities in a portfolio company, the investment rating is the same for each security in that portfolio company.

The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of December 31, 2006 and 2005:

(dollars in millions)	December 31, 2006					December 31, 2005
Investment     Rating	Investments at Fair Value			Percentage of Total Portfolio		Investments at Fair Value			Percentage of Total Portfolio
1		785.3	(a)	62.4	%		459.0	(a)	41.8	%
2		285.5		22.7			429.9		39.2
3		158.2		12.6			128.0		11.7
4		23.6		1.9			77.4		7.0
5		5.0		0.4			3.3		0.3
	$	1,257.6		100.0	%	$	1,097.6		100.0	%

(a) At December 31, 2006 and 2005, approximately $447.4 million and $348.4 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.

COMPETITION

In general, we compete for investments with a large number of financial services companies, including commercial finance companies, commercial banks, private mezzanine and equity funds, investment banks and other investment funds such as hedge funds. These include lending subsidiaries of investment banks, other business development companies, and finance subsidiaries of large industrial corporations.

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We do not seek to compete primarily based on the interest rates we offer, and we believe that some of our competitors make loans with interest rates that are comparable to or lower than the rates we offer. We generally compete by using our insight and knowledge of our customers’ business needs, derived from our research, analysis, and interaction of our professional staff with our customers, to offer the appropriate product mix coupled with a range of corporate finance services and information that enhances our customers’ business prospects.

OUR SUBSIDIARIES

We conduct some of our activities through wholly owned financing subsidiaries. These subsidiaries are bankruptcy remote, special purpose entities to which we transfer certain loans. Each financing subsidiary in turn transfers the loans to a Delaware statutory trust. As of December 31, 2006, we had established MCG Finance I, LLC, MCG Finance V, LLC, MCG Finance VII, LLC and MCG Finance VIII, LLC as financing subsidiaries. The transfers of the loans to the Delaware statutory trusts are structured as on-balance sheet securitizations for accounting purposes.

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

We also use wholly owned subsidiaries, all of which are structured as Delaware corporations, to hold the assets of one or more of our portfolio companies. As of December 31, 2006, we had established Crystal Media Network, Inc., IH NPS Holdings, LLC, IH NYL, Inc., IH Sunshine, Inc., and MCG IH Holdings, Inc. to hold assets of certain of our portfolio companies. Some of these subsidiaries have wholly owned subsidiaries, all of which are Delaware corporations, that hold the assets of certain of our portfolio companies.

INVESTMENT POLICIES

Our investment policies provide that we will not:

• act as an underwriter of securities of other issuers, except to the extent that we may be deemed an “underwriter” of securities (i) purchased by us that must be registered under the Securities Act of 1933 before they may be offered or sold to the public, or (ii) in connection with offerings of securities by our portfolio companies;

• purchase or sell real estate or interests in real estate or real estate investment trusts, except that we may purchase and sell real estate or interests in real estate in connection with the orderly liquidation of or pursuit of remedies with respect to investments and we may own the securities of companies or participate in a partnership or partnerships that are in the business of buying, selling or developing real estate or we may own real estate for our own uses;

• sell securities short in an uncovered position;

• write or buy uncovered put or call options, except to the extent of options, warrants or conversion privileges in connection with our loans or other investments, and rights to require the issuers of such investments or their affiliates to repurchase them under certain circumstances;

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• engage in the purchase or sale of commodities or commodity contracts, including futures contracts, except for purposes of hedging in the ordinary course of business or where necessary in working out distressed loan or investment situations; or

• acquire more than 3% of the voting stock of, or invest more than 5% of our total assets in any securities issued by, any other investment company, except if we acquire them as part of a merger, consolidation or acquisition of assets or if they result from a sale of a portfolio company, or otherwise as permitted under the 1940 Act.

All of the above policies and the investment and lending guidelines set by our board of directors or any committees, including our investment objective to achieve current income and capital gains, are not “fundamental” as defined under the 1940 Act. Therefore, our board may change them without notice to or approval by our stockholders, but any change may require the consent of our lenders.

Other than the restrictions pertaining to the issuance of senior securities under the Investment Company Act of 1940, the percentage restrictions on investments generally apply at the time a transaction is effected. A subsequent change in a percentage resulting from market fluctuations or any cause other than an action by us will not require us to dispose of portfolio securities or to take other action to satisfy the percentage restriction.

We intend to conduct our business so as to retain our status as a business development company. In order to retain our status as a business development company, we may not acquire any assets, other than non-investment assets necessary and appropriate to our operations as a business development company, if after giving effect to such acquisition the value of our “qualifying assets” is less than 70% of the value of our total assets.

EMPLOYEES

As of December 31, 2006, we employed 85 employees, including investment and portfolio management professionals, underwriting, compliance, accounting, finance and human resources professionals, in-house legal counsel, and administrative staff. We believe that our relations with our employees are good.

INVESTMENT ADVISER

We have no investment adviser and are internally managed by our executive officers under the supervision of the board of directors. Our investment decisions are made by our officers, directors and senior investment professionals who serve on our credit and investment committees, as discussed under “—Operations—Investment Approval Process” above. None of our executive officers or other employees has the authority to individually approve any investment.

CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS

We elected to be treated as a “regulated investment company” or “RIC” under Subchapter M of the Internal Revenue Code with the filing of our federal corporate income tax return for 2002, which election was effective as of January 1, 2002. As a RIC, we generally do not have to pay corporate taxes on any income we distribute to our stockholders as dividends, which allows us to reduce or eliminate our corporate-level tax liability.

Taxation as a Regulated Investment Company

If we:

• qualify as a RIC, and

• distribute each year to stockholders at least 90% of our “investment company taxable income” (which is defined in the Internal Revenue Code generally as ordinary income plus realized net short-term capital

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gains in excess of realized net long-term capital losses), and 90% of any ordinary pre-RIC built-in gains we recognize between January 1, 2002 and December 31, 2011, less our taxes due on those gains (collectively, the “90% Distribution Requirement”),

we will be entitled to deduct, and therefore will not be subject to U.S. federal income tax on, the portion of our income we distribute or are deemed to distribute to stockholders (other than any built-in gain recognized between January 1, 2002 and December 31, 2011). We will be subject to U.S. federal income tax at the regular corporate rate on any income not distributed (or deemed distributed) to our stockholders. We will be subject to a 4% nondeductible U.S. federal excise tax to the extent we do not distribute (actually or on a deemed basis) in a timely manner 98% of our ordinary income for each calendar year, 98% of our capital gain net income for each calendar year, and any income realized but not distributed in prior calendar years.

In order to qualify as a RIC for federal income tax purposes, we must, among other things:

• continue to qualify as a business development company under the 1940 Act at all times during each taxable year;

• derive in each taxable year at least 90% of our gross income from (1) dividends, interest, payments with respect to certain securities, loans, gains from the sale of stock or other securities, or other income derived with respect to our business of investing in such stock or securities and (2) net income derived from an interest in a “qualified publicly traded partnership” (known as the “90% Income Test”); and

• diversify our holdings so that at the end of each quarter of the taxable year:

• at least 50% of the value of our assets consists of cash, cash items, U.S. government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer, and

• no more than 25% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other RICs, of (i) one issuer, (ii) two or more issuers that are controlled, as determined under applicable Internal Revenue Code rules, by us and are engaged in the same or similar or related trades or businesses or (iii) one or more “qualified publicly traded partnerships” (known as the “Diversification Tests”).

We may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount, we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. We also may have to include in income other amounts that we have not yet received in cash, such as payment-in-kind interest and deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. Because any original issue discount or other amounts accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a cash distribution to our stockholders in the amount of that non-cash income in order to satisfy the 90% Distribution Requirement, even though we will not have received any cash representing such income.

If we fail to satisfy the 90% Distribution Requirement or fail to qualify as a RIC in any taxable year, we will be subject to tax in that year on all of our taxable income, regardless of whether we make any distributions to our stockholders. In that case, all of our income will be subject to corporate-level tax, reducing the amount available to be distributed to our stockholders, and all of our distributions to our stockholders will be characterized as ordinary dividends (to the extent of our current and accumulated earnings and profits). Such dividends generally would be subject to tax to non-corporate U.S. Stockholders at a maximum rate of 15 percent.

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Treatment of Pre-Conversion Built-in Gain

Through December 31, 2001, we were subject to tax as an ordinary corporation under Subchapter C of the Internal Revenue Code. As of January 1, 2002, we held substantial assets (including intangible assets not reflected on the balance sheet, such as goodwill) with built-in gain (i.e., with a fair market value in excess of tax basis). Under a special tax rule that applies to corporations that convert from taxation under Subchapter C of the Internal Revenue Code to taxation as a RIC, we are required to pay corporate level tax on the amount of any net built-in gains we recognize within ten years after the effective date of our election to be treated as a RIC. Any such corporate level tax will be payable at the time those gains are recognized (which, generally, will be the years in which we sell or dispose of the built-in gain assets in a taxable transaction). Based on the assets that we hold as of December 31, 2006 that we currently anticipate selling within the ten-year period beginning January 1, 2002 and ending December 31, 2011, we expect we may have to pay a built-in gain tax of up to $0.4 million at current corporate tax rates. The amount of this tax will vary depending on the assets that are actually sold by us in this ten-year period and applicable tax rates. Under Treasury Regulations, recognized built-in gains (or losses) will generally retain their character as capital gain or ordinary income (or capital or ordinary losses). Recognized built-in gains that are ordinary in character will be included in our investment company taxable income, and we must distribute to our stockholders at least 90% of any such built-in gains recognized within the ten-year period, net of the corporate taxes paid by us on the built-in gains. Any such amount distributed will be taxable to stockholders as ordinary income. Recognized built-in gains within the ten-year period, net of taxes, that are capital gains will be distributed or deemed distributed to our stockholders. Any such amount distributed or deemed distributed will be taxable to stockholders as a capital gain.

REGULATION AS A BUSINESS DEVELOPMENT COMPANY

A business development company is regulated by the 1940 Act. A business development company must be organized in the United States for the purpose of investing in or lending to primarily private companies and making managerial assistance available to them. A business development company may use capital provided by public shareholders and from other sources to invest in long-term, private investments in businesses. A business development company provides stockholders the ability to retain the liquidity of a publicly traded stock, while sharing in the possible benefits, if any, of investing in primarily privately owned companies.

As a business development company, we may not acquire any asset other than “qualifying assets” unless, at the time we make the acquisition, the value of our qualifying assets represents at least 70% of the value of our total assets. The principal categories of qualifying assets relevant to our business are:

• Securities of an eligible portfolio company that are purchased in transactions not involving any public offering. An eligible portfolio company is defined under the 1940 Act to include any issuer that:

• is organized and has its principal place of business in the U.S.;

• is not an investment company or a company operating pursuant to certain exemptions under the 1940 Act, other than a small business investment company wholly owned by a business development company; and

• does not have any class of publicly traded securities with respect to which a broker may extend margin credit;

• does not have a class of securities listed on a national securities exchange;

• Securities received in exchange for or distributed with respect to securities described in the bullet above or pursuant to the exercise of options, warrants, or rights relating to those securities; and

• Cash, cash items, government securities, or high quality debt securities (as defined in the 1940 Act), maturing in one year or less from the time of investment.

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To include certain securities described above as qualifying assets for the purpose of the 70% test, a business development company must offer to make available to the issuer of those securities significant managerial assistance such as providing guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company. We offer to provide managerial assistance to each portfolio company.

As a business development company, we are required to meet a coverage ratio of the value 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%. We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our directors who are not interested persons and, in some cases, prior approval by the SEC.

Our board of directors has appointed a chief compliance officer pursuant to the requirements of the 1940 Act. We are subject to periodic examination by the SEC for compliance with the 1940 Act.

As with other companies regulated by the 1940 Act, a business development company must adhere to certain substantive regulatory requirements. A majority of our directors must be persons who are not interested persons, as that term is defined in the 1940 Act. Additionally, we are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect the business development company. Furthermore, as a business development company, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.

As a business development company under the 1940 Act, we are entitled to provide and have previously provided loans to our employees in connection with the purchase of shares of our common stock. However, as a result of certain provisions of the Sarbanes-Oxley Act of 2002, we are prohibited from making new loans to, or materially modifying existing loans with, our executive officers for that purpose.

On April 4, 2006 we received an exemptive order of the SEC to permit us to issue restricted shares of our common stock as part of the compensation packages for certain of our employees and directors. We believe that the particular characteristics of our business, the dependence we have on key personnel to conduct our business effectively and the highly competitive environment in which we operate require the use of equity-based compensation for our personnel in the form of restricted stock. The issuance of restricted shares of our common stock requires the approval of our stockholders. Our stockholders approved our 2006 Employee Restricted Stock Plan and our 2006 Non-employee Restricted Stock Plan in June 2006.

As required by the 1940 Act, we maintain a code of ethics that establishes procedures for personal investments and restricts certain transactions by our personnel. Our code of ethics generally does not permit investments by our employees in securities that may be purchased or held by us. You may read and copy the code of ethics at the Securities and Exchange Commission’s Public Reference Room in Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. In addition, the code of ethics is available on the EDGAR Database on the Securities and Exchange Commission’s Internet site at http://www.sec.gov. You may obtain copies of the code of ethics, after paying a duplicating fee, by electronic request at the following Email address: publicinfo@sec.gov, or by writing the Securities and Exchange Commission’s Public Reference Room, 100 F Street NE, Washington, D.C. 20549.

We may not change the nature of our business so as to cease to be, or withdraw our election as, a business development company unless authorized by vote of a majority of the outstanding voting securities, as required by the 1940 Act. A majority of the outstanding voting securities of a company is defined under the 1940 Act as the lesser of: (i) 67% or more of such company’s shares present at a meeting if more than 50% of the outstanding shares of such company are present or represented by proxy, or (ii) more than 50% of the outstanding shares of such company. We do not anticipate any substantial change in the nature of our business.

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In addition, as a publicly held company we are subject to compliance with the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002, as well as the rules and regulations promulgated thereunder, imposed a wide variety of regulatory requirements on publicly held companies and their insiders, which affect us. For example:

• Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “1934 Act”), our chief executive officer and chief financial officer must certify the accuracy of the financial statements contained in our periodic reports;

• Pursuant to Item 307 of Regulation S-K, our periodic reports must disclose our conclusions about the effectiveness of our disclosure controls and procedures;

• Pursuant to Rule 13a-15 of the 1934 Act, our management must prepare a report regarding its assessment of our internal control over financial reporting, which must be audited by our independent registered public accounting firm; and

• Pursuant to Item 308 of Regulation S-K, our periodic reports must disclose whether there were significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

The Sarbanes-Oxley Act requires us to review our current policies and procedures to determine whether we comply with the Sarbanes-Oxley Act and the regulations promulgated thereunder. We will continue to monitor our compliance with all regulations that are adopted under the Sarbanes-Oxley Act and will take actions necessary to ensure that we are in compliance therewith.

During 2006, a special committee of the independent members of our board of directors (the “Independent Committee”) was formed after the timeliness of reimbursements of certain tax withholding payments was brought to the attention of the Audit Committee by our executive officers. The Independent Committee conducted a review of the timeliness of certain loan payments and tax withholding reimbursements involving six of our current and former executive officers and has reported these matters to the staff of the Securities and Exchange Commission (the “SEC Staff”). On September 21, 2006, we reported that the review by the Independent Committee had been substantially completed, although the SEC Staff has requested that we furnish additional information. The Independent Committee believes it has fully cooperated with the SEC Staff and it will continue to do so. The SEC Staff may also require additional information in the future, the nature and scope of which cannot be determined at this time. As part of its review, the Independent Committee considered whether there were any violations of the Company’s code of business conduct and ethics and the federal securities laws, including but not limited to, Section 402 of the Sarbanes-Oxley Act of 2002 (Section 13(k) of the Securities Exchange Act of 1934). Based upon its review, the Independent Committee concluded that certain violations of our code of business conduct and ethics did occur and reached no conclusion regarding Section 402 of the Sarbanes-Oxley Act of 2002. We continue to believe that there will be no impact on previously reported earnings as a result of these matters. We have instituted procedures to ensure concurrent payment to the Company of all future obligations of executive officers resulting from tax withholding paid by the Company on behalf of its executive officers, and we have taken certain other actions as previously disclosed.

In addition, we have adopted certain policies and procedures intended to comply with the NASDAQ Global Select Market’s corporate governance rules. We will continue to monitor our compliance with all future listing standards that are approved by the SEC and will take actions necessary to ensure that we are in compliance therewith.

QUARTERLY DETERMINATION OF NET ASSET VALUE

We determine the net asset value per share of our common stock quarterly. The net asset value per share is equal to the value of our total assets minus liabilities and any preferred stock outstanding divided by the total number of shares of common stock outstanding. At the time of this filing, we do not have any preferred stock outstanding.

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DETERMINATIONS OF NET ASSET VALUE IN CONNECTION WITH OFFERINGS

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, at a price below the current net asset value of the common stock, or sell warrants, options or rights to acquire such 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 the Company and our stockholders, and our stockholders approve our policy and practice of making such sales. 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).

In connection with each offering of shares of our common stock, our board of directors or a committee thereof is required to make the determination that we are not selling shares of our common stock at a price below the then current net asset value of our common stock at the time at which the sale is made. Our board of directors considers the following factors, among others, in making such determination:

• the net asset value of our common stock disclosed in the most recent periodic report we filed with the SEC;

• our management’s assessment of whether any material change in the net asset value of our common stock has occurred (including through the realization of gains on the sale of our portfolio securities) from the period beginning on the date of the most recently disclosed net asset value of our common stock to the period ending two days prior to the date of the sale of our common stock; and

• the magnitude of the difference between the net asset value of our common stock disclosed in the most recent periodic report we filed with the SEC and our management’s assessment of any material change in the net asset value of our common stock since the date of the most recently disclosed net asset value of our common stock, and the offering price of the shares of our common stock in the proposed offering.

Importantly, this determination does not require that we calculate the net asset value of our common stock in connection with each offering of shares of our common stock, but instead it involves the determination by our board of directors or a committee thereof that we are not selling shares of our common stock at a price below the then current net asset value of our common stock at the time at which the sale is made.

To the extent that there is even a remote possibility that we may issue shares of our common stock at a price below the then current net asset value of our common stock at the time at which the sale is made, then the board of directors will elect either to postpone the offering until such time that there is no longer the possibility of the occurrence of such event or to undertake to determine the net asset value of our common stock within two days prior to any such sale to ensure that such sale will not be below our then current net asset value. Moreover, to the extent that there is even a remote possibility that we may trigger the undertaking (which we provided to the SEC in our registration statements) to suspend the offering of shares of our common stock if the net asset value of our common stock fluctuates by certain amounts in certain circumstances until the prospectus is amended, then the board of directors will elect to comply with such undertaking or to undertake to determine the net asset value of our common stock to ensure that such undertaking has not been triggered.

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

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

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

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

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

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

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

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

From time to time we target specific industries in which to invest on a recurring basis, which could cause a high concentration of our portfolio in a specific industry. At December 31, 2006, approximately 28.5% of our portfolio at fair value was invested in companies in the communications industry. Of the 28.5% in the

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communications industry, 21.8% represents our investments in CLECs, and 6.7% 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 December 31, 2006, our largest portfolio investment was Broadview Networks Holdings, Inc. (“Broadview”), which totaled $159.8 million at fair value, or 12.7% of the fair value of our investments, and accounted for approximately $22.3 million, or 14.5% of our operating income during 2006. We own preferred securities of Broadview, which entitle us to a preferred claim of approximately $237.7 million, plus dividends, which accumulate at an annual rate of 12%, compounded quarterly, on our preferred claim. We currently recognize these dividends as income on a quarterly basis; however, our ability to record income related to these accumulating dividends will be dependent upon the performance and value of Broadview. Our financial results could be negatively affected if this portfolio company fails to perform as expected or if we are unable to recognize these dividends as income on a quarterly basis.

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

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

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

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

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

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

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we qualify as a regulated investment company, we generally will be subject to a corporate-level income tax on the income we do not distribute. Moreover, if we do not distribute at least 98% of our income, we generally will be subject to a 4% excise tax. See “Regulation as a Business Development Company” and “Certain U.S. Federal Income Tax Considerations—Taxation as a Regulated Investment Company.”

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

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

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

As of December 31, 2006, we had $521.9 million of outstanding borrowings under our debt facilities. As of December 31, 2006, the weighted average annual interest rate on all of our outstanding borrowings was 6.22%, 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 December 31, 2006 total assets of at least 2.46%. 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 $213.5 million as of December 31, 2006.

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

Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. Leverage is generally considered a speculative investment technique. If the value of our consolidated assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more than it otherwise would have had we not utilized leverage. Conversely, if the value of our consolidated assets decreases, leveraging would cause net asset value attributable to our common stock to decline more than it otherwise would have had we not utilized

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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 December 31, 2006, this ratio was approximately 239%.

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

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

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

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

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

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

Investments in equity securities involve a substantial degree of risk.

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

You may not receive distributions.

We intend to make distributions on a quarterly basis to our stockholders. We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these

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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. See “Regulation as a Business Development Company.” 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. See “Certain U.S. Federal Income Tax Considerations—Taxation 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 contractual payment-in-kind interest, which represents contractual interest added to the loan balance and due at the end of the loan term. The increases in loan balances as a result of contracted payment-in-kind arrangements are included in income in advance of receiving cash payment, and are separately identified on our consolidated statements of cash flows. Since we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our investment company taxable income to maintain regulated investment company tax treatment. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” and “Certain U.S. Federal Income Tax Considerations—Taxation as a Regulated Investment Company.”

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

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

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

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

Our business depends on our key personnel.

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

Fluctuations in interest rates could adversely affect our income.

Because we sometimes borrow to make investments, our net income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. A significant increase in market interest rates could harm our ability to attract new customers and originate new loans and investments,

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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 63% of the loans in our portfolio, based on amounts outstanding at cost as of December 31, 2006, were at variable rates determined on the basis of a benchmark LIBOR or prime rate and approximately 37% were at fixed rates. From January 1, 2004 to December 31, 2006, the three-month LIBOR has increased from 1.15% to 5.36%.

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

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

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

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

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

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

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

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

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

As previously reported, the independent members of our Board of Directors (the “Independent Committee”) have reviewed the timeliness of certain loan payments and tax withholding reimbursements involving six of our current and former executive officers and have reported these matters to the staff of the Securities and Exchange Commission (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 staff of the Securities and Exchange Commission (the “SEC Staff”) and has also reported the results of the review to date to the SEC Staff. The review by the Independent Committee has now been substantially completed, although the SEC Staff has requested that we furnish additional information. Based upon the facts known to the Independent Committee as of the present date, the Independent Committee has concluded that certain violations of our code of business conduct and ethics did occur and reached no conclusion regarding Section 402 of 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 1B.    Unresolved SEC Staff Comments

None.

Item 2.    Properties

Neither we nor any of our subsidiaries own any real estate or other physical properties materially important to our operation or any of our subsidiaries. Currently, we lease approximately 30,000 square feet of office space in Arlington, Virginia for our corporate headquarters. In addition, we have amended our lease of office space for our headquarters in Arlington, Virginia to provide for an additional 11,500 square feet which we anticipate to commence in late 2007. We also lease office space in Richmond, Virginia.

Item 3.    Legal Proceedings

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

Item 4.    Submissions of Matters to a Vote of Security Holders

None.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

PRICE RANGE OF COMMON STOCK

Our common stock is traded on the NASDAQ Global Select Market under the symbol “MCGC.” The following table sets forth the range of high and low closing prices of our common stock as reported on the NASDAQ Global Select Market for each of the quarterly periods during 2006 and 2005.

	Price Range
Quarter Ended	High		Low
March 31, 2005	$	17.57	$	15.05
June 30, 2005		17.20		15.08
September 30, 2005		18.42		16.85
December 31, 2005		16.85		14.07
March 31, 2006		16.19		14.06
June 30, 2006		15.98		13.85
September 30, 2006		17.02		15.28
December 31, 2006		20.80		16.00

As of February 26, 2007, we had approximately 137 shareholders of record. Such number of shareholders of record does not reflect shareholders who beneficially own common stock in nominee or street name.

SALES OF UNREGISTERED SECURITIES

During the year ended December 31, 2006, we issued a total of 14,588 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 $218 thousand.

ISSUER PURCHASES OF EQUITY SECURITIES

We did not repurchase any shares of our common stock during the three months ended December 31, 2006.

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DISTRIBUTION POLICY

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

Through December 31, 2006, we have made distributions in excess of our earnings of approximately $90.4 million, which excludes our net unrealized appreciation on our investments of $14.9 million. 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 requirements applicable to us as a business development company under the 1940 Act. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of favorable regulated investment company tax treatment. We cannot assure shareholders that they will receive any distributions or distributions at a particular level.

The following table summarizes our distributions declared since January 1, 2005:

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

Since December 2001, we have declared distributions totaling $9.75 per share. For 2007, we currently estimate that our dividends will be at least $1.76 per share. This estimate takes into consideration our estimates of distributable net operating income (which is equal to net operating income excluding long-term incentive compensation), net income, capital gains, and taxable income for 2007.

Each year a statement on Form 1099-DIV identifying the source of the distribution (i.e., paid from ordinary income, paid from net capital gains on the sale of securities, and/or a return of paid-in-capital surplus which is a nontaxable distribution) is mailed to our stockholders. To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a tax return of capital to our stockholders.

The table below shows the detail of our distributions for the years ended December 31, 2006 and 2005:

	2006				2005
Ordinary income (a)	$	1.01	60.1	%	$	1.31	78.0	%
Capital gains (a)		—	—			0.15	9.0	%
Return of capital (b)		0.67	39.9	%		0.22	13.0	%
Total reported on tax Form 1099-DIV	$	1.68	100.0	%	$	1.68	100.0	%

(a) Ordinary income is reported on Form 1099-DIV as either qualified or non-qualified and capital gains are reported on Form 1099-DIV in various sub-categories which have differing tax treatments to shareholders. Those subcategories have not been shown here.

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(b) Return of capital refers to those amounts reported as nontaxable distributions on Form 1099-DIV.

On a tax basis, distributions to stockholders in 2006 were approximately $53.0 million ordinary income and $35.2 million of return of capital, and in 2005 were approximately $61.6 million of ordinary income, $7.1 million of capital gain, and $10.2 million of return of capital.

The following table is a reconciliation of GAAP net income to taxable net income for the years ended December 31, 2006 and 2005:

(dollars in thousands)	2006			2005
Net income	$	100,949		$	68,193
Net loss of subsidiary not consolidated for tax purposes		—			1,744
Net change in unrealized (appreciation) depreciation on investments not taxable until realized		(34,604	)		1,343
Timing difference related to deductability of long-term incentive compensation		2,468			3,262
Interest income on nonaccrual loans that is taxable		3,612			2,437
Dividend income accrued for GAAP purposes which is not yet taxable		(21,612	)		(6,516	)
Federal tax expense		2,661			(595	)
Other, net		(93	)		(2,594	)
Taxable income before deductions for distributions	$	53,381		$	67,274

STOCK PERFORMANCE GRAPH

This graph compares the return on our common stock with that of the Russell 2000 Index and the NASDAQ Financial 100 Index, for the period December 31, 2001 through December 31, 2006. The graph assumes that, on December 31, 2001, a person invested $100 in each of our common stock, the Russell 2000 Index, and the NASDAQ Financial 100 Index. The graph measures total shareholder return, which takes into account both changes in stock price and dividends. It assumes that dividends paid are reinvested in like securities.

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Item 6.    Selected Financial Data

The following selected financial data, excluding the “Other data (at period end)”, is derived from our audited 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 and notes thereto.

	Year Ended December 31,
(dollars in thousands except per share and other data)	2006		2005		2004		2003		2002
Income Statement Data:
Operating income	$	154,393	$	119,545	$	93,117	$	80,690	$	76,933
Net operating income before investment gains and losses		83,644		60,515		45,090		47,595		44,751
Net income		100,949		68,193		47,647		41,975		3,215
Per Common Share Data:
Earnings per common share—basic (a)		1.86		1.42		1.16		1.28		0.11
Earnings per common share—diluted (a)		1.86		1.42		1.15		1.28		0.11
Net operating income before investment gains and losses per common share basic and diluted		1.54		1.26		1.09		1.45		1.57
Net asset value per common share (b)		12.83		12.48		12.22		11.98		11.56
Cash dividends declared per common share		1.68		1.68		1.68		1.65		1.76
Selected Period-End Balances:
Total investment portfolio		1,257,612		1,097,560		880,400		698,942		688,870
Total assets		1,319,268		1,244,487		1,053,511		790,915		744,993
Borrowings		521,883		541,119		467,400		304,131		363,838
Other data (at period-end):
Number of portfolio companies		83		91		97		81		79
Number of employees (c)		85		128		112		53		56

(a) See Note 10 to our Consolidated Financial Statements under Item 8.

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

(c) The number of employees at December 31, 2005 and December 31, 2004 include 51 and 47 employees, respectively, of our former subsidiary Kagan Research, LLC.

Item 7.    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 Other Data, and our Consolidated Financial Statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K.

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

• economic downturns or recessions may impair our customers’ ability to repay our loans and increase our non-performing assets;

• economic downturns or recessions may disproportionately impact the industries in which we invest, and such conditions may cause us to suffer losses in our portfolio and experience diminished demand for capital in these industries;

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• 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K. We undertake no obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Overview

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

We are an internally managed, non-diversified, closed-end investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940 or the “1940 Act”. As a business development company, we are required to meet various regulatory tests which include investing at least 70% of our total assets in private or thinly traded public U.S.-based companies and meeting a coverage ratio 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, we must meet certain requirements, including certain minimum distribution requirements. Pursuant to this election, we generally will not have to pay corporate-level taxes on any income we distribute to our stockholders as dividends, allowing us to substantially reduce or eliminate our corporate-level tax liability. From time to time our wholly owned subsidiaries may execute transactions that trigger corporate level tax liabilities. In such cases, we recognize a tax provision in the period that the taxable event becomes probable.

Portfolio Composition and Investment Activity

The total value of our investment portfolio, exclusive of unearned income, was $1,257.6 million and $1,097.6 million at December 31, 2006 and December 31, 2005, respectively. During the year ended December 31, 2006, we originated investments in 35 portfolio companies (some of which were new customers and some of which were existing customers) and made advances to existing customers pursuant to contractual terms. Our gross originations and advances totaled $595.8 million and $578.3 million during the years ended

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December 31, 2006 and 2005, respectively. During the year ended December 31, 2006, 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 $160.0 million increase in the total portfolio value of our investments, exclusive of unearned income.

Total portfolio investment activity (exclusive of unearned income) for the years ended December 31, 2006 and 2005 was as follows:

(dollars in millions)	2006			2005
Beginning investment portfolio	$	1,097.6		$	880.4
Originations and advances		595.8			578.3
Gross payments/reductions/sales of securities/other		(455.6	)		(368.8	)
Net unrealized gains		23.6			5.1
Net realized (losses) gains		(14.6	)		9.0
Reversals of unrealized depreciation (appreciation)		10.8			(6.4	)
Ending investment portfolio	$	1,257.6		$	1,097.6

During 2006, we continued to diversify our investment portfolio on an industry basis. We also reduced our investments in secured senior debt while we increased our investments in subordinated debt and equity. During the year ended December 31, 2006, our increase in equity investments was primarily driven by the increase in our investments in control companies. At December 31, 2006, our control investments totaled approximately $526.1 million, compared to approximately $305.6 million at December 31, 2005. Another component of the increase in equity investments during the year ended December 31, 2006 was the conversion of our subordinated unsecured debt in Broadview to preferred shares in Broadview.

The following table shows our portfolio of investments by security type at December 31, 2006 and 2005:

	December 31, 2006				December 31, 2005
(dollars in millions)	Investments at Fair Value		Percentage of Total Portfolio		Investments at Fair Value		Percentage of Total Portfolio
Secured senior debt	$	389.7	31.0	%	$	543.0	49.5	%
Subordinated debt
Secured		495.0	39.3			329.5	30.0
Unsecured		24.7	2.0			61.6	5.6
Total debt investments		909.4	72.3			934.1	85.1
Preferred equity		285.1	22.7			126.7	11.5
Common/common equivalents equity		63.1	5.0			36.8	3.4
Total equity investments		348.2	27.7			163.5	14.9
Total portfolio	$	1,257.6	100.0	%	$	1,097.6	100.0	%

The following table shows our gross originations and advances during 2006 and 2005 by security type:

(dollars in millions)	2006		2005
Secured senior debt	$	176.0	$	245.1
Subordinated debt		256.7		249.0
Preferred equity		154.2		66.2
Common/common equivalents equity		8.9		18.0
Total	$	595.8	$	578.3

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The following table shows our gross payments, reductions, and sales of securities during 2006 and 2005 by security type:

(dollars in millions)	2006		2005
Secured senior debt	$	307.5	$	281.1
Subordinated debt		135.6		39.2
Equity		12.5		48.5
Total	$	455.6	$	368.8

During the year ended December 31, 2006, gross originations and advances and gross repayments and sales of equity securities by security type included $51.1 million of Broadview unsecured debt which was converted to preferred equity during the third quarter 2006.

During the years ended December 31, 2006 and 2005, our gross payments, reductions and sales of securities by transaction type included:

(dollars in millions)	2006		2005
Scheduled principal amortization	$	35.9	$	77.0
Secured senior loan sales		102.7		25.6
Principal repayments		286.5		210.3
Payment of accrued paid-in-kind interest and dividends		19.9		7.4
Sales of equity investments		10.6		48.5
Total	$	455.6	$	368.8

The majority of our senior loan sales during the year ended December 31, 2006 were due to our efforts to reduce the percentage of the portfolio that is comprised of secured senior debt.

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

	December 31, 2006				December 31, 2005
	Investments at Fair Value		Percentage of Total Portfolio		Investments at Fair Value (a)		Percentage of Total Portfolio (a)
(dollars in millions)
Telecommunications—CLECs (competitive local exchange carriers)	$	274.1	21.8	%	$	213.4	19.4	%
Other Communications		84.0	6.7			68.8	6.3
Healthcare		106.5	8.5			91.1	8.4
Newspaper		90.6	7.2			112.8	10.3
Publishing		68.0	5.4			72.3	6.6
Laboratory Instruments		58.4	4.6			52.1	4.7
Plastic Products		57.1	4.5			—	—
Home Furnishings		52.5	4.2			18.9	1.7
Business Services		51.2	4.1			22.2	2.1
Information Services		47.4	3.8			75.4	6.9
Broadcasting		39.9	3.2			31.9	2.9
Cable		38.7	3.1			33.3	3.0
Technology		36.2	2.9			66.1	6.0
Education		31.0	2.5			19.5	1.8
DVD Rental		28.6	2.3			—	—
Sporting Goods		26.9	2.1			—	—
Electronics		24.8	2.0			34.1	3.1
Other Media		24.1	1.9			33.9	3.1
Food Services		21.2	1.7			—	—
Retail		19.4	1.5			20.5	1.9
Auto Parts		17.2	1.4			17.0	1.5
Drugs		15.6	1.2			28.7	2.6
Leisure Activities		14.3	1.1			13.4	1.2
Photographic Studio		12.9	1.0			—	—
Cosmetics		6.3	0.5			11.3	1.0
Car Rental		—	—			13.5	1.2
Other (b)		10.7	0.8			47.4	4.3
	$	1,257.6	100.0	%	$	1,097.6	100.0	%

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

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

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At December 31, 2006, our ten largest portfolio companies represented approximately 41.3% of the total fair value of our investments. These ten customers accounted for approximately 37.5% of our operating income during the year ended December 31, 2006. At December 31, 2006, approximately 28.5% of our portfolio at fair value was invested in companies in the communications industry, of which 21.8% were in CLECs. Our two largest portfolio companies, Broadview Networks Holdings, Inc. (“Broadview”) and Cleartel Communications, Inc. (“Cleartel”) are CLECs. Our remaining investments in the communications industry include telecommunications tower companies, Internet service providers, wireless companies and security alarm companies.

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:

Investment Rating	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 December 31, 2006 and December 31, 2005:

(dollars in millions)	December 31, 2006					December 31, 2005
Investment Rating	Investments at Fair Value			Percentage of Total Portfolio		Investments at Fair Value			Percentage of Total Portfolio
1		785.3	(a)	62.4	%		459.0	(a)	41.8	%
2		285.5		22.7			429.9		39.2
3		158.2		12.6			128.0		11.7
4		23.6		1.9			77.4		7.0
5		5.0		0.4			3.3		0.3
	$	1,257.6		100.0	%	$	1,097.6		100.0	%

(a) At December 31, 2006 and 2005, approximately $447.4 million and $348.4 million, respectively, of our investments with an investment rating of “1” were loans to companies in which we also hold equity securities or for which we have already realized a gain on our equity investment.

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When one of our loans becomes 90 days or more past due, or if we otherwise do not expect the customer to be able to service its debt and other obligations, we will, as a general matter, place the loan on non-accrual status and will generally cease recognizing interest income on that loan until all past due principal and interest has been paid or otherwise restructured such that the interest income is determined to be collectible. We may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection. The following table summarizes loans on non-accrual status and loans greater than 90 days past due, at fair value, at December 31, 2006 and December 31, 2005:

	December 31, 2006						December 31, 2005
(dollars in millions)	Fair Value		% of Loan Portfolio		% of Total Portfolio		Fair Value		% of Loan Portfolio		% of Total Portfolio
Loans greater than 90 days past due
On non-accrual status	$	20.1	2.21	%	1.60	%	$	3.2	0.34	%	0.29	%
Not on non-accrual status		1.8	0.20	%	0.14	%		13.6	1.45	%	1.23	%
Total loans greater than 90 days past due	$	21.9	2.41	%	1.74	%	$	16.8	1.79	%	1.52	%
Loans on non-accrual status
0 to 90 days past due	$	15.3	1.68	%	1.21	%	$	9.5	1.02	%	0.87	%
Greater than 90 days past due		20.1	2.21	%	1.60	%		3.2	0.34	%	0.29	%
Total loans on non-accrual status	$	35.4	3.89	%	2.81	%	$	12.7	1.36	%	1.16	%
Loans on non-accrual status or greater than 90 days past due	$	37.2	4.09	%	2.95	%	$	26.3	2.81	%	2.39	%

The increase in loans on non-accrual status from $12.7 million at December 31, 2005 to $35.4 million at December 31, 2006 is primarily due to one portfolio company that we placed on non-accrual status during the year ended December 31, 2006.

Results of Operations

Comparison of the Years Ended December 31, 2006 and 2005

The following table shows the components of our net income for the years ended December 31, 2006 and 2005:

(dollars in millions)	2006		2005		Change			Percentage Change
Operating income
Interest and dividend income	$	132.9	$	96.7	$	36.2		37	%
Loan fees		6.0		9.6		(3.6	)	(38	)%
Total interest and dividend income		138.9		106.3		32.6		31	%
Advisory fees and other income		15.5		13.2		2.3		17	%
Total operating income		154.4		119.5		34.9		29	%
Operating expenses
Interest expense		36.3		23.1		13.2		57	%
Employee compensation:
Salaries and benefits		20.3		19.3		1.0		5	%
Long-term incentive compensation		4.5		6.5		(2.0	)	(31	)%
Total employee compensation		24.8		25.8		(1.0	)	(4	)%
General and administrative expense		9.7		10.1		(0.4	)	(4	)%
Total operating expenses		70.8		59.0		11.8		20	%
Net operating income before investment gains and provision for income taxes on investment gains		83.6		60.5		23.1		38	%
Net investment gains before taxes		20.0		7.7		12.3		160	%
Provision for income taxes on investment gains		2.7		—		2.7		100	%
Net income	$	100.9	$	68.2	$	32.7		48	%

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Total Operating Income

Total operating income 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 $32.6 million for the year ended December 31, 2006 compared to the year ended December 31, 2005. Interest income, exclusive of loan fees increased approximately $24.8 million during the year ended December 31, 2006 compared to the year ended December 31, 2005, due to the increase in LIBOR, which had an impact of approximately $13.9 million, the growth in the size of our loan portfolio, which had an impact of approximately $11.0 million, and an decrease in the spread to LIBOR in our loan portfolio, which had an impact 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. For the year ended December 31, 2006, PIK interest income totaled $14.7 million, compared to $12.7 million for the year ended December 31, 2005. At December 31, 2006 our total PIK loan balance represented $11.1 million, or 0.9% of our portfolio of investments, compared to $13.5 million, or 1.2%, of our portfolio of investments as of December 31, 2005. The following table shows the PIK related activity for the years ended December 31, 2006 and 2005:

(dollars in millions)	2006			2005
Beginning PIK loan balance	$	13.5		$	17.3
PIK interest earned during the period		14.7			12.7
Principal payments of cash on PIK loans		(13.8	)		(10.4	)
PIK loans converted to other securities		(9.9	)		(5.7	)
Interest receivable converted to PIK		7.2			—
Realized loss		(0.6	)		(0.4	)
Ending PIK loan balance	$	11.1		$	13.5

Dividend income increased approximately $11.4 million for the year ended December 31, 2006 compared to the year ended December 31, 2005, due to an increase in dividends declared by our portfolio companies and an increase in accruing preferred dividends. Certain of our equity investments have stated accruing dividend rates, for which we accrue dividends as they are earned to the extent we believe they will ultimately be paid. The accrued dividend balance at December 31, 2006 was approximately $33.6 million, or 2.7% of our portfolio of investments, compared to $12.4 million, or 1.1%, of our portfolio of investments at December 31, 2005. Our dividend activity for the years ended December 31, 2006 and 2005 was as follows:

(dollars in millions)	2006			2005
Beginning accrued dividend balance	$	12.4		$	5.4
Dividend income earned during the period		23.9			12.4
Payment of previously accrued dividends		(2.7	)		—
Accrued dividends converted to other securities		—			(5.4	)
Ending accrued dividend balance	$	33.6		$	12.4

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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 for the years ended December 31, 2006 and 2005, were approximately $6.0 million and $9.6 million, respectively.

The following table shows our loan fee activity during the years ended December 31, 2006 and 2005:

(dollars in millions)	2006			2005
Beginning unearned income balance	$	9.1		$	12.5
Additional deferred fees		6.4			6.2
Unearned income recognized		(6.0	)		(9.6	)
Ending unearned income balance	$	9.5		$	9.1

The total yield on our debt portfolio at fair value for the years ended December 31, 2006 and 2005 was 12.9% and 11.9%, respectively. The average LIBOR for the year ended December 31, 2006 was 5.2%, an increase of 1.6% from 3.6% for the year ended December 31, 2005. The average spread to LIBOR for the years ended December 31, 2006 was 7.7%, a decrease of approximately 0.6% from 8.3% for the year ended December 31, 2005, primarily due to an increase in the level of fixed rate loans as well as a decrease in amortizing fee income and fee accelerations.

Advisory fees and other income primarily include fees related to advisory and management services, equity structuring fees, syndication fees, prepayment fees, bank interest and other income. Advisory fees and other income are generally related to specific transactions or services and therefore may vary from period to period depending on the level and types of services provided. The increase in fees and other income of $2.3 million for the year ended December 31, 2006 as compared to the year ended December 31, 2005 was primarily due to increases in equity structuring fees of $3.5 million, advisory and management fees of $0.8 million, prepayment fees of $3.0 million, and bank interest and other fees of approximately $0.2 million, partially offset by a decrease in research fees of ($5.3) million due to the deconsolidation of Kagan Research, LLC effective January 1, 2006.

For the year ended December 31, 2006, our largest portfolio company, Broadview, accounted for approximately $22.3 million, or 14.5%, of our total operating income compared to approximately $17.5 million, or 14.6%, of our total operating income for the year ended December 31, 2005. During the year ended December 31, 2006, our operating income 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 equity. As of December 31, 2006, our preferred equity investments in Broadview entitle us to a preferred claim of approximately $237.7 million, prior to claims by Broadview common shareholders. We are also entitled to accumulating dividends on our preferred stock investment, which accumulate and compound quarterly at an annual rate of 12% on $237.7 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.

For the year ended December 31, 2006, our second largest portfolio company, Cleartel, accounted for $7.5 million, or 4.8% of our total operating income, compared to $3.7 million, or 3.1%, of our total operating income for the year ended December 31, 2005. During the year ended December 31, 2006, our operating income from our Cleartel investment was comprised of interest and fee income. A portion of the interest income for the year ended December 31, 2006 was in the form of payment-in-kind interest; however, the debt was restructured during the year and is currently current pay interest.

Our ability to recognize income from our investments in Broadview and Cleartel on an ongoing basis will be dependent upon the performance and value of each company.

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Total Operating Expenses

Operating expenses include interest, employee compensation and general and administrative expenses. The increase in interest expense of approximately $13.2 million during the year ended December 31, 2006 as compared to the year ended December 31, 2005, is primarily attributable to an increase of $8.1 million due to increases in LIBOR, an increase of $1.7 million due to increases in the spread to LIBOR, and an increase of $3.4 million due to higher average borrowings. Of the $1.7 million increase due to increases in the spread to LIBOR, $0.5 million is attributable to the amortization of deferred debt issuance costs. The increase in deferred debt issuance cost amortization is primarily attributable to the expenses associated with the redemption of our Series 2004-1 Notes during the third quarter of 2006.

Employee compensation includes base salaries and benefits, variable annual incentive compensation, and long-term incentive compensation. The increase in salaries and benefits expense of $1.0 million during the year ended December 31, 2006 as compared to the year ended December 31, 2005 is primarily due to an increase of approximately $3.7 million in salaries and benefits and $1.5 million of severance costs related to our former CEO, partially offset by a decrease of approximately $4.2 million due to the deconsolidation of Kagan Research, LLC. Long-term incentive compensation expense is made up of non-cash amortization of restricted stock awards granted in 2001 and 2006 and dividends on shares securing employee loans. Long-term incentive compensation decreased $2.0 million for the year ended December 31, 2006 as compared to the year ended December 31, 2005 due to a decrease in the lapsing of forfeiture provisions on shares of restricted stock and fewer dividends on shares securing employee loans during the year ended December 31, 2006 compared to the year ended December 31, 2005, partially offset by a charge of $0.7 million related to the accelerated vesting of certain restricted shares held by our former CEO.

General and administrative expenses include legal and accounting fees, insurance premiums, rent and various other expenses. General and administrative expenses decreased approximately $0.4 million during the year ended December 31, 2006 compared to the year ended December 31, 2005, due to a decrease of approximately $2.8 million due to the deconsolidation of Kagan Research LLC, partially offset by professional fees of approximately $1.4 million incurred in conjunction with the independent review of certain tax withholding reimbursements and loan repayments by our current and former executive officers, as previously disclosed, an increase in directors fees of approximately $0.3 million and an increase in recruiting and other general and administrative costs of approximately $0.7 million.

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

Net operating income before investment gains and losses and provision for income taxes on investment gains for the year ended December 31, 2006 totaled $83.6 million, an increase of approximately $23.1 million compared with $60.5 million for the year ended December 31, 2005. This increase is due to the items discussed above. During the year ended December 31, 2005, our wholly owned subsidiary, Kagan Research, LLC, accounted for losses of approximately ($1.7) million. Effective January 1, 2006, Kagan Research, LLC no longer qualified as a consolidated subsidiary of the Company.

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Net Investment Gains and Losses Before Income Taxes on Investment Gains

Net investment gains before income taxes on investment gains totaled approximately $20.0 million for the year ended December 31, 2006, compared to $7.7 million for the year ended December 31, 2005. 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 year ended December 31, 2006:

			Year Ended December 31, 2006
(dollars in thousands) Portfolio Company	Industry	Type	Realized Gain/ (Loss)			Unrealized Gain/ (Loss)			Reversal of Unrealized (Gain)/ Loss			Net Gain/ (Loss)
Broadview Network Holdings, Inc.	Communications	Control	$	—		$	38,064		$	—		$	38,064
Jenzabar, Inc.	Technology	Non-affiliate		—			9,550			—			9,550
Metropolitan Telecommunications Holding Company	Communications	Non-affiliate		583			4,423			—			5,006
dick clark productions, inc.	Broadcasting	Non-affiliate		—			4,363			—			4,363
Midwest Tower Partners, LLC	Communications	Control		—			3,882			—			3,882
Stratford Schools Holdings, Inc.	Education	Non-affiliate		—			3,771			—			3,771
RadioPharmacy Investors, LLC	Healthcare	Control		—			3,135			—			3,135
SXC Health Solutions, Inc.	Healthcare	Non-affiliate		4,054			1,940			(3,334	)		2,660
Wiesner Publishing Company, LLC	Publishing	Non-affiliate		—			1,615			—			1,615
Miles Media Holding, Inc.	Publishing	Non-affiliate		—			1,282			—			1,282
Working Mother Media, Inc.	Publishing	Control		—			828			—			828
Superior Publishing Corporation	Newspaper	Control		—			700			—			700
I-55 Internet Services, Inc.	Communications	Non-affiliate		—			—			606			606
Crystal Media Network, LLC	Broadcasting	Control		(2,245	)		(39	)		2,561			277
Telecomm South, LLC	Communications	Control		(1,493	)					1,493			—
Copperstate Technologies, Inc.	Security Alarm	Control		(1,483	)		—			1,053			(430	)
iVerify, US Inc.	Communications	Affiliate		—			(578	)		—			(578	)
West Coast WirelessLines	Publishing	Control		(781	)		(586	)		586			(781	)
Home Interiors & Gifts, Inc.	Home Furnishings	Non-affiliate		—			(807	)		—			(807	)
Platinum Wireless, Inc.	Communications	Control		—			(839	)		—			(839	)
Jupitermedia Corporation	Information Services	Non-affiliate		—			(908	)		—			(908	)
GoldenSource Holdings, Inc.	Technology	Non-affiliate		(3,363	)		—			—			(3,363	)
Fawcette Technical Publications Holding	Publishing	Control		(10,059	)		(2,197	)		8,319			(3,937	)
Total Sleep Holdings, Inc.	Healthcare	Non-affiliate		—			(3,971	)		—			(3,971	)
Cleartel Communications, Inc.	Communications	Control		—			(40,072	)		—			(40,072	)
Other				200			67			(303	)		(36	)
Total			$	(14,587	)	$	23,623		$	10,981		$	20,017

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Our board of directors is responsible for determining the fair value of our portfolio investments on a quarterly basis. In connection with our process for determining fair value as of December 31, 2006, we retained two independent valuation firms to perform independent valuations of certain of our portfolio companies. Independent valuations were obtained for eleven portfolio companies including all companies in which we hold equity positions with fair value greater than $10.0 million as of December 31, 2006. These valuations were considered by our board of directors in their determination of fair value. The following table summarizes the independent valuations performed:

(dollars in millions)	Total Investment Value			Equity Investment Value
Total portfolio value at December 31, 2006	$	1,257.6		$	348.2
Number of companies for which independent enterprise valuations were obtained		11			10
Total value of companies for which independent enterprise valuations were obtained	$	486.0		$	267.0
% of portfolio value for which independent enterprise valuations were obtained		39	%		77	%
% of loans on non-accrual status for which independent enterprise valuations were obtained		62	%		N/A

Broadview, our largest portfolio company, serves primarily business customers. At December 31, 2006, our investment in Broadview had a fair value of approximately $159.8 million, or 12.7% of the value of our total portfolio, compared to $95.1 million, or 8.7% at December 31, 2005. During the year ended December 31, 2006, there was an unrealized gain on our Broadview investment of approximately $38.1 million. This increase in fair value is primarily due to an increase in valuations in comparable industry transactions during the fourth quarter of 2006 and enhanced value associated with Broadview’s acquisition of ATX Communications, Inc. (“ATX”). On September 29, 2006, Broadview completed the acquisition of ATX, an integrated communications provider serving business customers in the Mid-Atlantic region. Broadview financed the ATX acquisition using a portion of the proceeds from a $210.0 million offering of 11 3/8% Senior Secured Notes due 2012, which were offered through Rule 144A under the Securities Act of 1933, as amended (the “Bond Offering”). The Bond Offering closed on August 23, 2006. At the time of the Bond Offering, we invested an additional $5.5 million into Broadview and converted all of our subordinated debt investments, which at that time had a fair value of approximately $51.1 million, to preferred equity. Broadview was one of the portfolio companies for which an independent valuation was obtained as of December 31, 2006.

Cleartel, our second largest portfolio company, is a Florida-based CLEC that serves primarily residential customers. At December 31, 2006, Cleartel represented approximately 5.8% of the fair value of our investments compared to 7.2% of the fair value of our investments at December 31, 2005. At December 31, 2006, we held subordinated debt with a fair value of $72.0 million and preferred equity with a fair value of $0.6 million, which included unrealized depreciation of approximately $40.1 million. This decrease in fair value is largely due to a decrease in valuations in comparable residential CLEC industry transactions that occurred during the fourth quarter of 2006. During October 2006, Cleartel acquired Supra Telecom, a Florida-based CLEC. In conjunction with this acquisition, we invested an additional $19.8 million in Cleartel in the form of subordinated debt and restructured our existing debt investments in Cleartel by extending the maturity dates and modifying the interest rates. Cleartel was one of the portfolio companies for which an independent valuation was obtained as of December 31, 2006.

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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 year ended December 31, 2005:

			Year Ended December 31, 2005
(dollars in thousands) Portfolio Company	Industry	Type	Realized Gain/ (Loss)			Unrealized Gain/ (Loss)			Reversal of Unrealized (Gain)/ Loss			Net Gain/ (Loss)
Jenzabar, Inc.	Technology	Non-affiliate	$	—		$	6,506		$	—		$	6,506
Sunshine Media Delaware, LLC	Publishing	Affiliate		—			4,001			—			4,001
Jupitermedia Corporation	Information Services	Non-affiliate		2,321			—			(425	)		1,896
Metropolitan Telecommunications Holding Company	Communications	Non-affiliate		2,038			534			(989	)		1,583
Wiesner Publishing Company, LLC	Publishing	Non-affiliate		—			1,514			—			1,514
SXC Health Solutions, Inc.	Healthcare	Non-affiliate		—			1,342			—			1,342
Midwest Tower Partners, LLC	Communications	Control		—			1,131			—			1,131
On Target Media, LLC	Publishing	Affiliate		—			1,103			—			1,103
Telecomm South, LLC	Communications	Control		—			619			—			619
Boucher Communications, Inc.	Publishing	Non-affiliate		930			—			(409	)		521
ETC Group, LLC	Publishing	Control		—			503			—			503
Talk America Holdings, Inc.	Communications	Non-affiliate		1,354			—			(892	)		462
National Systems Integration, Inc.	Security Alarm	Control		(5,177	)		—			5,319			142
Interactive Business Solutions, Inc.	Security Alarm	Control		(1,750	)		—			1,826			76
Witter Publishing Co. Inc.	Publishing	Non-affiliate		(721	)		(127	)		874			26
All Island Media, Inc	Newspaper	Affiliate		390			—			(390	)		—
UMAC, Inc.	Publishing	Control		(10,062	)		—			10,062			—
nii communications, inc.	Communications	Non-affiliate		900			—			(901	)		(1	)
Corporate Legal Times	Publishing	Control		(367	)		—			339			(28	)
IDS Telcom LLC	Communications	Non-affiliate		—			(692	)		583			(109	)
Bridgecom Holdings, Inc. after acquisition	Communications	Control		—			—			(497	)		(497	)
Cleartel	Communications	Control		—			(733	)		—			(733	)
Copperstate Technologies, Inc.	Security Alarm	Control		—			(876	)					(876	)
Superior Publishing Corporation	Newspaper	Control		—			(924	)		—			(924	)
CCG Consulting, LLC	Business Services	Non-affiliate		(1,258	)		(1,269	)		1,269			(1,258	)
Working Mother Media, Inc.	Publishing	Control		—			(1,604	)		—			(1,604	)
Creatas, L.L.C.	Information Services	Control		20,431			—			(22,138	)		(1,707	)
Fawcette Technical Publications Holding	Publishing	Control		—			(3,553	)		—			(3,553	)
Crystal Media Network, LLC	Broadcasting	Control		—			(3,704	)		—			(3,704	)
Other				(8	)		1,330			(75	)		1,247
Total			$	9,021		$	5,101		$	(6,444	)	$	7,678

Provision for Income Taxes on Investment Gains

During the year ended December 31, 2006, we recorded a $2.7 million provision for income taxes. This tax provision is primarily related to unrealized gains on one of our investments.

Net Income

Net income totaled approximately $100.9 million for the year ended December 31, 2006, compared to $68.2 million for the year ended December 31, 2005. The increase in net income is due to the items discussed above.

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Comparison of the Years Ended December 31, 2005 and 2004

The following table shows the components of our net operating income for the years ended December 31, 2005, and 2004:

(dollars in millions)	2005		2004		Change			Percentage Change
Operating income
Interest and dividend income	$	96.7	$	69.1	$	27.6		40	%
Loan fees		9.6		8.8		0.8		9	%
Total interest and dividend income		106.3		77.9		28.4		36	%
Advisory fees and other income		13.2		15.2		(2.0	)	(13	%)
Total operating income		119.5		93.1		26.4		28	%
Operating expenses
Interest expense		23.1		10.5		12.6		120	%
Employee compensation:
Salaries and benefits		19.3		15.7		3.6		23	%
Long-term incentive compensation		6.5		11.7		(5.2	)	(44	%)
Total employee compensation		25.8		27.4		(1.6	)	(6	%)
General and administrative expense		10.1		10.1		—		0	%
Total operating expenses		59.0		48.0		11.0		23	%
Net operating income before investment gains and provision for income taxes on investment gains		60.5	$	45.1		15.4		34	%
Net investment gains before taxes		7.7		2.5		5.2		208	%
Provision for income taxes on investment gains		—		—		—		0	%
Net income	$	68.2	$	47.6	$	20.6		43	%

Total Operating Income

Total operating income includes interest and dividend income, loan fees and fees and other income. The level of interest income, which includes interest paid in cash and in kind, 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 yielding equity investments. Dividend income will vary from period to period depending upon the level of yield on our equity investments and the amount of yielding equities outstanding, as well as the value of the underlying securities.

The increase in interest and dividend income for the year ended December 31, 2005, as compared to the year ended December 31, 2004, is due to growth in average loans, which had an impact of $14.5 million, an increase in LIBOR, which had an impact of $13.2 million and an increase in dividend income, which had an impact of $7.2 million, primarily attributable to our preferred stock of Broadview Networks Holdings, Inc. These increases were partially offset by a decrease in the spread to LIBOR in our loan portfolio, which had an impact of ($7.2) million. The majority of the decrease in the spread to LIBOR is related to holding fixed rate loans and loans with LIBOR floors in a rising interest rate environment, as well as fluctuations due to payoff and origination activity. The total yield on our total investment portfolio, at cost, for the years ended December 31, 2005 and 2004 was 11.1% and 10.0%, respectively.

During the year ended December 31, 2005, our investments in Bridgecom Holdings, Inc. and Broadview accounted for approximately $17.5 million, or 14.6%, of our total operating income. Our operating income

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related to Bridgecom and Broadview related to interest and dividends on our loan and equity investments in these entities. Our preferred stock investment in Broadview, which had a fair value of $52.1 million as of December 31, 2005, entitles us to a preferred claim of approximately $90 million plus accrued dividends, which accumulate at an annual rate of 12% on our preferred claim. We currently expect that our Broadview investment will continue to comprise a significant component of our operating income. In future periods, our ability to record income related to the accumulating dividends on our preferred securities will be dependent upon the performance and value of Broadview.

Loan fees for the years ended December 31, 2005 and 2004, included fees relating to the following:

(dollars in millions)	2005		2004
Amortizing and other fee income	$	3.7	$	5.6
Fee accelerations		5.9		3.1
Total loan fees	$	9.6	$	8.7

Loan fees include origination fees on loans that are capitalized and amortized into interest income over the life of the loan. When repayments or restructurings with other than minor modifications occur, we will accelerate the recognition into loan fee income of previously unamortized loan origination fees. These accelerations have the effect of increasing current period income and reducing future amortizable income. Because these repayments and restructurings may vary from period to period, the amount of loan origination fees that are recognized as interest income may also vary from period to period. The decrease in amortizing fee income for the year ended December 31, 2005 as compared to the year ended December 31, 2004 is related primarily to the volume of fee accelerations in 2005 and a decrease in our average origination fees on new loans.

Fees and other income primarily include fees related to advisory and management services, prepayment fees, research revenues, bank interest and other income. 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 fees and other income of $2.0 million for the year ended December 31, 2005 as compared to the year ended December 31, 2004 was primarily due to $4.5 million of management fees earned in 2004 from one of our control investments, Bridgecom Holdings, Inc., prior to its merger with Broadview, versus none earned during 2005, and a decrease in other income of $0.7 million. These decreases were partially offset by increases in advisory fees of $0.4 million, prepayment fees of $0.2 million, research revenues from our wholly owned subsidiary Kagan Research, LLC of $0.9 million, and bank interest income of $1.7 million. The increase in bank interest income is due to higher cash balances, primarily in our cash, securitization accounts, due to higher principal and interest payments on loans held as collateral for our securitization facilities. Cash from principal and interest payments that occur in our securitization facilities are accumulated in trust accounts until monthly or quarterly disbursements are made from trust accounts. These balances are reflected as Cash, securitization accounts on the balance sheet. The portion of payments that represent principal payments are primarily used to repay debt.

Total Operating Expenses

Operating expenses include interest, employee compensation and general and administrative expenses. The increase in interest expense during the year ended December 31, 2005 as compared to the year ended December 31, 2004, is primarily attributable to an increase of $7.8 million due to increases in LIBOR, an increase of $1.7 million due to the spread to LIBOR, and an increase of $3.1 million due to higher average borrowings.

Employee compensation includes base salaries and benefits, variable annual incentive compensation, and long-term incentive compensation. The increase in salaries and benefits expense during the year ended December 31, 2005 as compared to the year ended December 31, 2004 is primarily due to increased staffing,

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which is part of an ongoing effort to expand our infrastructure in order to support our plans for future growth. Long-term incentive compensation expense is made up of non-cash amortization of restricted stock awards granted in 2001 and dividends on performance based restricted shares and shares securing employee loans. Long-term incentive compensation totaled $6.5 million for the year ended December 31, 2005 compared to $11.7 million for the year ended December 31, 2004. During the first quarter of 2004, our compensation committee waived the performance-based forfeiture restrictions and modified the time-based forfeiture provisions that were applicable to restricted stock of certain of our executive officers which resulted in an expense of $4.0 million. During the third quarter of 2005, the performance-based forfeiture restrictions and time-based forfeiture provisions that were applicable to restricted stock of certain non-executive officers lapsed which resulted in a $0.6 million increase in long-term incentive compensation expense and a $0.4 million increase in salaries and benefits expense.

General and administrative expenses include legal and accounting fees, insurance premiums, rent and various other expenses. General and administrative expenses were approximately $10.1 million for the years ended December 31, 2005 and 2004.

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

Net operating income before investment gains and losses and provision for income taxes on investment gains for the year ended December 31, 2005 totaled $60.5 million, an increase of 34.2% compared with $45.1 million for the year ended December 31, 2004. Our wholly owned subsidiary, Kagan Research, LLC, accounted for losses of $(1.9) million and $(0.7) during the years ended December 31, 2005 and 2004, respectively. The changes in net operating income are the result of the items described above.

Net Investment Gains and Losses before Income Taxes on Investment Gains

Net investment gains before income taxes on investment gains totaled approximately $7.7 million for the year ended December 31, 2005, compared to $2.6 million for the year ended December 31, 2004. These amounts represent the total of net realized gains and losses, net unrealized appreciation and depreciation and reversals of unrealized appreciation and depreciation. Reversals of unrealized appreciation and depreciation occur when a gain or loss becomes realized.

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The following table summarizes our gains and (losses) on investments and the change in our unrealized appreciation and depreciation on investments for the year ended December 31, 2005:

			Year Ended December 31, 2005
(dollars in thousands) Portfolio Company	Industry	Type	Realized Gain/ (Loss)			Unrealized Gain/ (Loss)			Reversal of Unrealized (Gain)/Loss			Net Gain/ (Loss)
Jenzabar, Inc.	Technology	Non-affiliate	$	—		$	6,506		$	—		$	6,506
Sunshine Media Delaware, LLC	Publishing	Affiliate		—			4,001			—			4,001
Jupitermedia Corporation	Information Services	Non-affiliate		2,321			—			(425	)		1,896
Metropolitan Telecommunications Holding Company	Communications	Non-affiliate		2,038			534			(989	)		1,583
Wiesner Publishing Company, LLC	Publishing	Non-affiliate		—			1,514			—			1,514
SXC Health Solutions, Inc.	Healthcare	Non-affiliate		—			1,342			—			1,342
Midwest Tower Partners, LLC	Communications	Control		—			1,131			—			1,131
On Target Media, LLC	Publishing	Affiliate		—			1,103			—			1,103
Telecomm South, LLC	Communications	Control		—			619			—			619
Boucher Communications, Inc.	Publishing	Non-affiliate		930			—			(409	)		521
ETC Group, LLC	Publishing	Control		—			503			—			503
Talk America Holdings, Inc.	Communications	Non-affiliate		1,354			—			(892	)		462
National Systems Integration, Inc.	Security Alarm	Control		(5,177	)		—			5,319			142
Interactive Business Solutions, Inc.	Security Alarm	Control		(1,750	)		—			1,826			76
Witter Publishing Co. Inc.	Publishing	Non-affiliate		(721	)		(127	)		874			26
All Island Media, Inc	Newspaper	Affiliate		390			—			(390	)		—
UMAC, Inc.	Publishing	Control		(10,062	)		—			10,062			—
nii communications, inc.	Communications	Non-affiliate		900			—			(901	)		(1	)
Corporate Legal Times	Publishing	Control		(367	)		—			339			(28	)
IDS Telcom LLC	Communications	Non-affiliate		—			(692	)		583			(109	)
Bridgecom Holdings, Inc. after acquisition	Communications	Control		—			—			(497	)		(497	)
Cleartel	Communications	Control		—			(733	)		—			(733	)
Copperstate Technologies, Inc.	Security Alarm	Control		—			(876	)					(876	)
Superior Publishing Corporation	Newspaper	Control		—			(924	)		—			(924	)
CCG Consulting, LLC	Business Services	Non-affiliate		(1,258	)		(1,269	)		1,269			(1,258	)
Working Mother Media, Inc.	Publishing	Control		—			(1,604	)		—			(1,604	)
Creatas, L.L.C.	Information Services	Control		20,431			—			(22,138	)		(1,707	)
Fawcette Technical Publications Holding	Publishing	Control		—			(3,553	)		—			(3,553	)
Crystal Media Network, LLC	Broadcasting	Control		—			(3,704	)		—			(3,704	)
Other				(8	)		1,330			(75	)		1,247
Total			$	9,021		$	5,101		$	(6,444	)	$	7,678

The net realized gains for the year ended December 31, 2005 were primarily attributable to a $20.4 million realized gain on the sale of our Creatas equity investment, partially offset by a $10.1 million realized loss on the sale of our investment in UMAC, Inc. The reversal of unrealized appreciation on the Creatas investment totaled ($22.1) million, and the reversal of unrealized depreciation on the UMAC investment totaled $10.1 million.

During 2005, our investment with the largest unrealized depreciation was Crystal Media Network, LLC. Certain events occurred at Crystal Media during 2005 that caused us to record unrealized losses on our equity investment of approximately $3.7 million. These unrealized losses, along with unrealized losses recorded on this investment prior to 2005, have reduced our estimated fair value of our equity investment in Crystal Media to approximately $1.1 million, which is approximately $5.0 million less than our cost basis in this investment. We currently expect to convert this unrealized loss to a realized loss in a future period.

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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 year ended December 31, 2004:

			Year Ended December 31, 2004
(dollars in thousands) Portfolio Company	Industry	Type	Realized Gain/ (Loss)			Unrealized Gain/ (Loss)			Reversal of Unrealized (Gain)/Loss			Net Gain/ (Loss)
Creatas, L.L.C.	Information Services	Control	$	—		$	20,459		$	—		$	20,459
21st Century Newspapers, Inc.	Newspaper	Non-affiliate		2,478			—			(215	)		2,263
R.R. Bowker LLC	Information Services	Non-affiliate		2,268			242			(794	)		1,716
Corporate Legal Times	Publishing	Control		—			1,637			—			1,637
Images.com, Inc.	Information Services	Non-affiliate		—			1,466			—			1,466
Metropolitan Telecommunications Holding Company	Communications	Non-affiliate		—			1,239			—			1,239
Superior Publishing Corporation	Newspaper	Control		—			1,104			—			1,104
nii communications, inc.	Communications	Non-affiliate		—			925			—			925
Jenezabar, Inc.	Technology	Non-affiliate		—			703			—			703
NOW Communications, Inc.	Communications	Non-affiliate		—			—			658			658
Bridgecom Holdings, Inc.	Communications	Control		2,158			497			(2,242	)		413
Netplexus Corporation	Technology	Affiliate		(2,531	)		—			2,413			(118	)
AMI Telecommunications Corporation	Communications	Control		(6,989	)		—			6,858			(131	)
Witter Publishing Co. Inc.	Publishing	Non-affiliate		—			(602	)		—			(602	)
Fawcette Technical Publications Holding	Publishing	Control		—			(718	)		—			(718	)
ETC Group, LLC	Publishing	Control		—			(750	)		—			(750	)
Interactive Business Solutions, Inc.	Security Alarm	Control		—			(919	)		—			(919	)
Telecomm South, LLC	Communications	Control		—			(1,019	)		—			(1,019	)
Talk America Holdings, Inc.	Communications	Non-affiliate		—			(1,302	)		—			(1,302	)
Copperstate Technologies, Inc.	Security Alarm	Control		—			(1,681	)		—			(1,681	)
Sunshine Media Delaware, LLC	Publishing	Affiliate		—			(3,678	)		—			(3,678	)
Working Mother Media, Inc.	Publishing	Control		—			(4,012	)		—			(4,012	)
National Systems Integration, Inc.	Security Alarm	Control		—			(4,743	)		—			(4,743	)
Cleartel Communications, Inc.	Communications	Control		(669	)		(4,332	)		—			(5,001	)
FTI Technologies Holdings, Inc.	Technology	Non-affiliate		(5,125	)		(5,125	)		5,125			(5,125	)
Other				160			(121	)		(266	)		(227	)
Total			$	(8,250	)	$	(730	)	$	11,537		$	2,557

Net Income

Net income totaled $68.2 million for the year ended December 31, 2005, compared to $47.6 for the year ended December 31, 2004. The increase in net income is due to the items discussed above.

Financial Condition, Liquidity and Capital Resources

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

At December 31, 2006 and December 31, 2005, we had $21.7 million and $45.6 million, respectively, in cash and cash equivalents. In addition, at December 31, 2006 and December 31, 2005, we had $15.9 million and $82.1 million, respectively, in cash, securitization accounts. We also had $2.6 million and $2.0 million of restricted cash as of December 31, 2006 and December 31, 2005, 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.

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For the year ended December 31, 2006, net cash provided by operating activities totaled $69.9 million, an increase of approximately $19.3 million from $50.6 million for the year ended December 31, 2005. This increase was due primarily to an increase in net income, partially offset by an increase in the portion of net income attributable to net gains on investments and an increase in paid-in-kind interest and dividends. Cash used in investing activities decreased approximately $81.5 million to $115.9 million for the year ended December 31, 2006 from $197.5 million for the year ended December 31, 2005. This change is primarily the result of an increase in principal payments on loans and a decrease in originations, draws and advances on loans, partially offset by an increase in purchases of equity investments and a decrease in proceeds from sales of equity investments. Cash provided by financing activities decreased approximately $87.7 million to $22.1 million for the year ended December 31, 2006, from $109.7 million for the year ended December 31, 2005. This change is mainly due to fewer proceeds raised through the issuance of common stock and the net proceeds from borrowings during 2006 compared to 2005 and to higher dividends paid during 2006 compared to 2005.

Liquidity and Capital Resources

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

During the year ended December 31, 2006 we raised $72.5 million of gross proceeds by selling 4,600,000 shares of newly issued common stock. During the year ended December 31, 2005 we raised $123.1 million of gross proceeds by selling 8,029,500 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 December 31, 2006, this ratio was 239%. This requirement limits the amount that we may borrow.

To fund growth in our investment portfolio in the future, we anticipate needing to raise additional capital from various sources, including the equity markets and various debt markets. We intend to maintain a current shelf registration statement pursuant to which we may issue common stock from time to time.

Off-Balance Sheet Arrangements

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

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.

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As of December 31, 2006, we had unused commitments to extend credit to our customers of $71.6 million, which are not reflected on our balance sheet. From time to time, we provide guarantees or standby letters of credit on behalf of our portfolio companies. As of December 31, 2006, we had guarantees and standby letters of credit of approximately $9.5 million.

Contractual Obligations

The following table shows our contractual obligations as of December 31, 2006:

	Payments Due by Period
(dollars in millions) Contractual Obligations (a)	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
Borrowings (b)	$	521.9	$	168.0	$	—	$	50.0	$	303.9
Future minimum rental obligations		11.7		1.6		3.9		4.1		2.1
Total contractual obligations	$	533.6	$	169.6	$	3.9	$	54.1	$	306.0

(a) This excludes the unused commitments to extend credit to our customers of $71.6 million as discussed above.

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

Borrowings

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

	December 31, 2006				December 31, 2005
	Facility amount		Amount outstanding		Facility amount		Amount outstanding
(dollars in millions)
Unsecured Notes	$	50.0	$	50.0	$	50.0	$	50.0
Commercial Loan Trust 2005-2		—		—		250.0		159.2
Commercial Loan Trust 2006-2		200.0		84.0
Commercial Loan Funding Trust Facility		250.0		84.0		250.0		160.0
Term Securitizations
Series 2004-1 Class A-1 Asset Backed Bonds		—		—		81.1		81.1
Series 2004-1 Class A-2 Asset Backed Bonds		—		—		31.5		31.5
Series 2004-1 Class B Asset Backed Bonds		—		—		43.5		43.5
Series 2004-1 Class C Asset Backed Bonds		—		—		15.8		15.8
Series 2006-1 Class A-1 Notes		106.2		106.2		—		—
Series 2006-1 Class A-2 Notes		50.0		11.4		—		—
Series 2006-1 Class A-3 Notes		85.0		35.0		—		—
Series 2006-1 Class B Notes		58.8		58.8		—		—
Series 2006-1 Class C Notes		45.0		45.0		—		—
Series 2006-1 Class D Notes		47.5		47.5		—		—
Revolving Unsecured Credit Facility		100.0		—		50.0		—
Total	$	992.5	$	521.9	$	771.9	$	541.1

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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 year ended December 31, 2006 and 2005:

	2006			2005
Weighted average borrowings	$	507.5		$	439.0
Weighted average interest rate on borrowings		7.1	%		5.3	%
Average LIBOR		5.2	%		3.6	%
Average spread to LIBOR		1.9	%		1.7	%

The increase of approximately 1.8% in the weighted average interest rate for the year ended December 31, 2006 compared to the year ended December 31, 2005 was primarily attributable to an increase in average LIBOR of 1.6%, as well as an increase in the average spread to LIBOR of 0.2%.

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

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

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

We use this warehouse credit facility to fund the origination of loans that will collateralize a future term securitization. Advances under the facility, equal to 80% of the value of commercial loans purchased by the trust, bear interest based on LIBOR plus 0.75% and interest is payable monthly. The facility is scheduled to terminate on the earlier of November 30, 2007 or the completion of a term securitization and may be extended under certain circumstances. As of December 31, 2006 we had $84.0 million outstanding under this facility.

MCG Commercial Loan Funding Trust.    On November 10, 2004, we established, through MCG Commercial Loan Funding Trust, a $150.0 million warehouse financing facility funded through Three Pillars Funding LLC, an asset-backed commercial paper 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

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charge-offs. Such limitations, requirements, and associated defined terms are as provided for in the documents governing the facility. Through July 29, 2005, advances under the facility bore interest based on a commercial paper rate plus 1.15%.

On July 29, 2005, we amended the MCG Commercial Loan Funding Trust facility. Pursuant to this amendment, the total facility amount was increased from $150.0 million to $250.0 million, the interest rate was changed from commercial paper rate plus 1.15% to commercial paper rate plus 0.95%, the concentration criteria were modified to allow, among other things, for an increase in the allowable percentage of certain secured subordinated loans in the collateral pool from 25% to 35%, and other minor modifications were made. On April 17, 2006 we again amended this facility to allow, among other things, for an increase in the allowable percentage of certain secured subordinated loans in the collateral pool from 35% to 50% and the inclusion of additional industry segments. The facility is scheduled to terminate on November 7, 2007, but is subject to annual renewal and may be extended under certain circumstances. During July 2006, the facility was renewed until July 27, 2007. As of December 31, 2006, we had $84.0 million outstanding under this credit facility. See “Recent Developments” for further discussion.

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

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

The Class A-1, Class B, Class C and Class D Notes are term notes. The Class A-2 Notes are a revolving class of secured notes and have a revolving period of five years. The Class A-3 Notes are a delayed draw class of secured notes and are required to be drawn by April 2007. All of the notes are secured by the assets of MCG Commercial Loan Trust 2006-1, including commercial loans totaling $408.6 million as of December 31, 2006, which were purchased by the trust from us. Additional commercial loans will be purchased by the trust from us primarily using the proceeds from the Class A-3 delayed draw notes and the Class A-2 revolving notes. The pool of commercial loans in the trust must meet certain requirements, including, but not limited to, asset mix and concentration, collateral coverage, term, agency rating, minimum coupon, minimum spread and sector diversity requirements. As of December 31, 2006, we had $303.9 million of these notes outstanding.

Revolving Unsecured Credit Facility.    This facility was established on September 20, 2005 as a result of an amendment to our Senior Secured Credit facility with Bayerische Hypo-Und Vereinsbank, AG, New York Branch (“HVB”). Pursuant to that amendment the facility was no longer secured by our assets and was committed up to $50.0 million. On June 19, 2006, we made a second amendment to this facility. Pursuant to this amendment, the aggregate revolving commitment under this credit facility was increased from $50.0 million to $60.0 million, the maturity date was extended from September 19, 2006 to June 18, 2007, and an additional lender was added to the facility. Other minor modifications were also made to the facility. HVB maintained its $50.0 million commitment, and the additional $10.0 million was committed by Chevy Chase Bank. On August 7, 2006, we again amended this facility. Pursuant to this amendment, the aggregate revolving commitment under this facility was increased from $60.0 million to $75.0 million and an additional lender was added to the facility. HVB and Chevy Chase Bank maintained their $50.0 million and $10.0 million commitments, respectively, and the additional $15.0 million was committed by Sovereign Bank. On November 29, 2006, we again amended this

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facility. Pursuant to this amendment, the aggregate revolving commitment under this facility was increased from $75.0 million to $100.0 million and an additional lender was added to the facility. HVB, Chevy Chase Bank, and Sovereign Bank maintained their $50.0 million, $10.0 million, and $15 million commitments, respectively, and the additional $25.0 million was committed by Royal Bank of Canada.

This credit facility is unsecured and is committed up to $100.0 million on a revolving basis. In addition, this Revolving Unsecured Credit Facility allows for additional lenders with HVB acting as the agent. Advances under this credit facility bear interest at LIBOR plus 2.00% or the prime rate plus 0.50%, and there is a commitment fee of 0.25% per annum on undrawn amounts. The credit facility contains customary terms and conditions, including, without limitation, affirmative and negative covenants such as information reporting, minimum stockholders’ equity, minimum asset coverage ratio, and minimum cash net investment income. The credit facility also contains customary events of default with customary cure and notice, including, without limitation, nonpayment, misrepresentation in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, change of control, change of management, and material adverse change. As of December 31, 2006, the Company had no amounts outstanding under this credit facility.

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

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

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

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

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Distributions

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

As a business development company that has elected to be treated as a RIC, we generally are required to (1) 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) 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.

The following table summarizes our distributions declared since January 1, 2005:

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

Since December 2001, we have declared distributions totaling $9.75 per share. For 2007, we currently estimate that our dividends will be at least $1.76 per share. This estimate takes into consideration our estimates of distributable net operating income (which is equal to net operating income excluding long-term incentive compensation), net income, capital gains and taxable income for 2007.

Each year a statement on Form 1099-DIV identifying the source of the distribution (i.e., paid from ordinary income, paid from net capital gains on the sale of securities, and/or a return of paid-in-capital surplus which is a nontaxable distribution) is mailed to our stockholders. To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a tax return of capital to our stockholders.

The table below shows the detail of our distributions for the years ended December 31, 2006 and 2005:

	2006				2005
Ordinary income (a)	$	1.01	60.1	%	$	1.31	78.0	%
Capital gains (a)		—	—			0.15	9.0	%
Return of capital (b)		0.67	39.9	%		0.22	13.0	%
Total reported on tax Form 1099-DIV	$	1.68	100.0	%	$	1.68	100.0	%

(a) Ordinary income is reported on Form 1099-DIV as either qualified or non-qualified and capital gains are reported on Form 1099-DIV in various sub-categories which have differing tax treatments to shareholders. Those subcategories have not been shown here.

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(b) Return of capital refers to those amounts reported as nontaxable distributions on Form 1099-DIV.

On a tax basis, distributions to stockholders in 2006 were $53,020 of ordinary income and $35,204 of return of capital, and in 2005 were $61,582 of ordinary income, $7,136 of capital gain, and $10,221 of return of capital.

The following table is a reconciliation of GAAP net income to taxable net income for the years ended December 31, 2006 and 2005:

(dollars in thousands)	2006			2005
Net income	$	100,949		$	68,193
Net loss of subsidiary not consolidated for tax purposes		—			1,744
Net change in unrealized (appreciation) depreciation on investments not taxable until realized		(34,604	)		1,343
Timing difference related to deductibility of long-term incentive compensation		2,468			3,262
Interest income on nonaccrual loans that is taxable		3,612			2,437
Dividend income accrued for GAAP purposes which is not yet taxable		(21,612	)		(6,516	)
Federal tax expense		2,661			(595	)
Other, net		(93	)		(2,594	)
Taxable income before deductions for distributions	$	53,381		$	67,274

Critical Accounting Policies

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

Income Recognition

Interest and Dividend Income

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

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

Contractual paid-in-kind (PIK) interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. We will generally cease accruing PIK 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

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models are then applied to our ownership share considering any discounts for transfer restrictions or other terms which impact the value. Changes in these values are recorded through our statement of operations. Any resulting discount on the loan from recordation of warrant and other equity instruments are accreted into income over the term of the loan.

Other Fee Income

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

Valuation of Investments

We determine the value of each investment in our portfolio on a quarterly basis. Value, as defined in Section 2(a)(41) of the Investment Company Act of 1940, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the board of directors. Since there is typically no readily available market value for the investments in our portfolio, we value substantially all of our investments at fair value as determined in good faith by the board of directors pursuant to a valuation policy and a consistent valuation process. At December 31, 2006, approximately 95% 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 December 31, 2006. Because of the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments determined in good faith by the board of directors may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.

There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment. Unlike banks, we are not permitted to provide a general reserve for anticipated loan losses. Instead, we 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

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enterprise value of a portfolio company, we analyze its historical and projected financial results. We generally prepare discounted cash flow models based on our projections of the future free cash flows of the business and industry derived capital costs. We review external events, including private mergers and acquisitions, and include these events in our enterprise valuation process. We also use industry valuation benchmarks and review public market comparables. In certain cases, we retain independent valuation firms to perform valuations that we consider as part of our determination of portfolio company value. When an external event such as a purchase transaction, public offering, or subsequent debt or equity sale occurs, the pricing indicated by the external event may be used to corroborate our estimate of enterprise value.

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

During the fourth quarter of 2006, in connection with our process for determining fair value as of December 31, 2006, we retained two independent valuation firms to perform independent valuations of certain of our portfolio companies. These valuations were considered by our Board of Directors in their determination of fair value. We intend to continue to utilize independent valuation firms to obtain additional support in the preparation of our internal valuation analyses each quarter.

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

Share-based Compensation

Prior to January 1, 2006, we accounted for share based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Effective January 1, 2006, we adopted the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123R”) using the modified prospective method. The adoption of SFAS No. 123R did not impact our net operating income before investment gains and losses, net income, cash flows from operations, cash flows from financing activities, or basic and diluted earnings per share during that period. See Note 9 to the Consolidated Financial Statements for further discussion of our share-based compensation.

Securitization Transactions

Periodically, we transfer pools of loans to bankruptcy remote, special purpose entities for use in securitization transactions. These transfers of loans are treated as secured borrowing financing arrangements in accordance with FASB SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. These on-balance sheet securitization transactions comprise a significant source of our overall funding, with the total face amount of the assets assumed by our consolidated bankruptcy remote special purpose entities equaling $677.4 million at December 31, 2006 and $596.9 million at December 31, 2005.

Recent Accounting Pronouncements

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”, which clarifies the accounting for uncertainty in

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income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 will be effective as of the last day of the first reporting period beginning after December 15, 2006, which is March 31, 2007.

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

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

Recent Developments

On January 9, 2007, the performance criteria for 200,000 restricted shares to certain executives were determined by the board of directors and those executives, therefore those awards are considered granted for GAAP purposes on that date. The total compensation cost of those awards is approximately $3.9 million, based on the closing price of MCG’s common stock on that date, and will be recognized as compensation expense over the requisite service periods which run through February 2010.

In January 2007, one of our majority owned control companies, Midwest Tower Partners, LLC (“MTP”), sold substantially all of its assets and repaid its outstanding debt with those proceeds. MTP is currently in the process of making distributions to its equity holders. As of December 31, 2006, we had debt and equity investments in MTP with a fair value of $34.9 million which includes unrealized appreciation of $5.0 million. In connection with this transaction, we expect to realize the December 31, 2006 unrealized pre-tax gain of approximately $5.0 million which will have no significant impact on first quarter 2007 earnings.

On February 1, 2007, we entered into the fifth amendment to our MCG Commercial Loan Funding Trust facility, funded by Three Pillars Funding LLC (“Three Pillars”), an asset-backed commercial paper conduit administered by SunTrust Capital Markets, Inc. Pursuant to this amendment, the $250.0 million facility provided by Three Pillars has been divided and will be funded through two separate Variable Funding Certificates (“VFCs”), a $218.8 million Class A VFC and a $31.2 million Class B VFC. The Class A VFC will maintain the same advance rate, of up to 70% of eligible collateral, and the same interest rate, the commercial paper rate plus 0.95%, as was in effect immediately prior to this amendment. The Class B VFC has an advance rate of 10% of eligible collateral and bears interest at the commercial paper rate plus 1.75%. This amendment effectively increases our overall borrowing advance rate by 10% from a maximum of 70% of eligible collateral to a maximum of 80% of eligible collateral, which will allow us to borrow up to $250.0 million under the facility using less collateral than previously required. Other minor modifications were also made to this facility.

In February 2007, Broadview Networks Holdings, Inc., our largest portfolio company, signed a definitive agreement to acquire InfoHighway Communications Corp., a New York-based integrated provider of hosted and managed communications solutions serving more than 12,000 business customers in the Mid-Atlantic and

56

Northeast regions of the U.S. We do not expect to be required to provide additional funding to Broadview to facilitate this transaction. The transaction is expected to close in the second quarter of 2007 and is subject to regulatory approvals and other closing conditions.

During the first quarter of 2007, our board of directors approved the issuance of 777,600 shares of restricted stock to our employees pursuant to the MCG Capital Corporation 2006 Employee Restricted Stock Plan, which will generally be expensed over four years.

Item 7A.    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 December 31, 2006, approximately 63% of our loan portfolio, at cost, bears interest at a spread to LIBOR, and 36% at a fixed rate. As of December 31, 2006, approximately 31% 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 December 31, 2006, we were not a party to any hedging arrangements. Certain of our interest bearing investments contain LIBOR floors between 1.50% and 3.00% on the LIBOR base index to minimize our exposure to significant decreases in interest rates.

The following table shows a comparison of the interest rate base for our interest bearing cash, outstanding commercial loans and our outstanding borrowings at December 31, 2006 and December 31, 2005:

	December 31, 2006				December 31, 2005
(dollars in millions)	Interest Bearing Cash and Commercial Loans		Borrowings		Interest Bearing Cash and Commercial Loans		Borrowings
Repurchase Agreement Rate	$	37.5	$	—	$	120.7	$	—
Money Market Rate		2.6		—		2.0		—
Prime Rate		0.4		—		36.1		—
30-Day LIBOR		14.5		—		36.0		—
60-Day LIBOR		0.8		—		—		—
90-Day LIBOR		522.0		388.0		562.6		331.1
180-Day LIBOR		42.6		—		30.9		—
9 month LIBOR		1.3		—		—		—
Commercial Paper		—		83.9		—		160.0
Fixed Rate		334.8		50.0		273.5		50.0
Total	$	956.5	$	521.9	$	1,061.8	$	541.1

Based on our December 31, 2006 balance sheet, the following table shows the impact to net income of base rate changes in interest rates assuming no changes in our investment and borrowing structure:

(dollars in millions) Basis Point Change	Interest Income			Interest Expense			Net Income
(300)	$	(18.3	)	$	(14.2	)	$	(4.1	)
(200)		(12.4	)		(9.4	)		(3.0	)
(100)		(6.2	)		(4.7	)		(1.5	)
100		6.2			4.7			1.5
200		12.4			9.4			3.0
300		18.7			14.2			4.5

57

Item 8.    Financial Statements and Supplementary Data

Index to Financial Statements

Management’s Report on Internal Control Over Financial Reporting	59
Reports of Independent Registered Public Accounting Firm	60
Consolidated Balance Sheets as of December 31, 2006 and 2005	62
Consolidated Statements of Operations for the years ended December 31, 2006, 2005, and 2004	63
Consolidated Statements of Changes in Net Assets for the years ended December 31, 2006, 2005, and 2004	64
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005, and 2004	65
Consolidated Schedule of Investments as of December 31, 2006	66
Consolidated Schedule of Investments as of December 31, 2005	71
Notes to Consolidated Financial Statements	79

58

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of MCG Capital Corporation (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the SEC, internal control over financial reporting is a process designed under the supervision of the Company’s principal executive, principal financial and principal accounting officers, and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.

The Company’s internal control over financial reporting is supported by written policies and procedures, that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management of the Company conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO Framework”). Based on this assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2006.

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, has been audited by Ernst & Young LLP, the registered public accounting firm that audited the Company’s financial statements, as stated in their report, a copy of which is included in this Annual Report on Form 10-K.

59

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

MCG Capital Corporation

We have audited management’s assessment, included in the accompanying “Management’s Report on Internal Control over Financial Reporting”, that MCG Capital Corporation maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). MCG Capital Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that MCG Capital Corporation maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, MCG Capital Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of MCG Capital Corporation, including the consolidated schedules of investments, as of December 31, 2006 and 2005 and the related consolidated statements of operations, changes in net assets, and cash flows for each of the three years in the period ended December 31, 2006 and the financial highlights for each of the five years ended December 31, 2006 of MCG Capital Corporation and our report dated February 26, 2007 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

McLean, Virginia

February 26, 2007

60

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

MCG Capital Corporation

We have audited the accompanying consolidated balance sheets of MCG Capital Corporation, including the consolidated schedules of investments, as of December 31, 2006 and 2005 and the related consolidated statements of operations, changes in net assets, and cash flows for each of the three years in the period ended December 31, 2006 and the financial highlights for each of the five years ended December 31, 2006. Our audit also included the financial statement schedule listed in the Index at Item 15. These financial statements, financial highlights and the schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements, financial highlights and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included verification by examination of securities held and confirmation of securities held by the custodians. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the consolidated financial position of MCG Capital Corporation at December 31, 2006 and 2005, and the consolidated results of its operations, its cash flows and the changes in its net assets for each of the three years in the period ended December 31, 2006 and the financial highlights for each of the five years ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of MCG Capital Corporation’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2007 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

McLean, Virginia

February 26, 2007

61

MCG Capital Corporation

Consolidated Balance Sheets

(in thousands, except per share data)

	December 31,
	2006			2005
Assets
Cash and cash equivalents	$	21,691		$	45,626
Cash, securitization accounts		15,931			82,107
Cash, restricted		2,587			1,977
Investments at fair value
Non-affiliate investments (cost of $629,849 and $733,717, respectively)		659,441			745,757
Affiliate investments (cost of $71,589 and $46,168, respectively)		72,031			46,156
Control investments (cost of $541,267 and $337,372, respectively)		526,140			305,647
Total investments (cost of $1,242,705 and $1,117,257, respectively)		1,257,612			1,097,560
Unearned income on commercial loans		(9,539	)		(9,062	)
Total investments net of unearned income		1,248,073			1,088,498
Interest receivable		10,451			10,602
Other assets		20,535			15,677
Total assets	$	1,319,268		$	1,244,487
Liabilities
Borrowings (maturing within one year of $167,983 and $362,435, respectively)	$	521,883		$	541,119
Interest payable		5,198			5,904
Dividends payable		24,652			20,967
Other liabilities		14,398			10,410
Total liabilities		566,131			578,400
Stockholders’ equity
Preferred stock, par value $.01, authorized 1 share, none issued and outstanding		—			—
Common stock, par value $.01, authorized 200,000 shares on December 31, 2006 and 2005, 58,694 issued and outstanding on December 31, 2006 and 53,372 issued and outstanding on December 31, 2005		587			534
Paid-in capital		828,795			758,433
Distributions in excess of earnings:
Paid-in capital		(78,072	)		(39,219	)
Other		(12,365	)		(26,784	)
Net unrealized appreciation (depreciation) on investments		14,907			(19,697	)
Stockholder loans		(715	)		(3,624	)
Unearned compensation—restricted stock		—			(3,556	)
Total stockholders’ equity		753,137			666,087
Total liabilities and stockholders’ equity	$	1,319,268		$	1,244,487
Net asset value per common share at period end	$	12.83		$	12.48

See notes to consolidated financial statements

62

MCG Capital Corporation

Consolidated Statements of Operations

(in thousands, except per share data)

	Year Ended December 31,
	2006			2005			2004
Operating income
Interest and dividend income
Non-affiliate investments (less than 5% owned)	$	85,569		$	69,760		$	51,898
Affiliate investments (5% to 25% owned)		6,015			5,745			3,999
Control investments (more than 25% owned)		47,261			30,761			21,954
Total interest and dividend income		138,845			106,266			77,851
Advisory fees and other income
Non-affiliate investments (less than 5% owned)		7,537			12,317			9,306
Affiliate investments (5% to 25% owned)		1,621			—			495
Control investments (more than 25% owned)		6,390			962			5,465
Total advisory fees and other income		15,548			13,279			15,266
Total operating income		154,393			119,545			93,117
Operating expenses
Interest expense		36,240			23,100			10,509
Employee compensation:
Salaries and benefits		20,274			19,331			15,693
Long-term incentive compensation		4,514			6,523			11,683
Total employee compensation		24,788			25,854			27,376
General and administrative expense		9,721			10,076			10,142
Total operating expenses		70,749			59,030			48,027
Net operating income before investment gains and losses and provision for income taxes on investment gains		83,644			60,515			45,090
Net realized gains (losses) on investments
Non-affiliate investments (less than 5% owned)		1,619			5,741			1,939
Affiliate investments (5% to 25% owned)		9			205			(2,531	)
Control investments (more than 25% owned)		(16,215	)		3,075			(7,658	)
Total net realized gains (losses) on investments		(14,587	)		9,021			(8,250	)
Net unrealized appreciation (depreciation) on investments
Non-affiliate investments (less than 5% owned)		17,549			7,279			378
Affiliate investments (5% to 25% owned)		455			5,289			(1,186	)
Control investments (more than 25% owned)		16,600			(13,911	)		11,615
Total net unrealized appreciation (depreciation) on investments		34,604			(1,343	)		10,807
Net investment gains before income taxes on investment gains		20,017			7,678			2,557
Provision for income taxes on investment gains		2,712			—			—
Net income	$	100,949		$	68,193		$	47,647
Earnings per common share—basic	$	1.86		$	1.42		$	1.16
Earnings per common share—diluted	$	1.86		$	1.42		$	1.15
Cash dividends declared per common share	$	1.68		$	1.68		$	1.68
Weighted average common shares outstanding		54,227			48,109			41,244
Weighted average common shares outstanding and dilutive common stock equivalents		54,264			48,131			41,298

See notes to consolidated financial statements

63

MCG Capital Corporation

Consolidated Statements of Changes in Net Assets

(in thousands, except per share amounts)

	Year Ended December 31,
	2006			2005			2004
Operations:
Net operating income	$	83,644		$	60,515		$	45,090
Net realized (loss) gain on investments		(14,587	)		9,021			(8,250	)
Net unrealized appreciation (depreciation) of investments		34,604			(1,343	)		10,807
Provision for income taxes on investment gains		(2,712	)		—			—
Net increase in net assets resulting from operations		100,949			68,193			47,647
Shareholder distributions:
Distributions from net investment income		(51,926	)		(59,519	)		(46,191	)
Distributions from capital gains		—			(9,021	)		—
Return of capital distributions		(38,853	)		(10,221	)		(21,187	)
Net decrease in net assets resulting from shareholder distributions		(90,779	)		(78,761	)		(67,378	)
Capital share transactions:
Issuance of common stock		70,211			117,015			100,034
Issuance of common stock under dividend reinvestment plan		218			127			97
Repayment of stockholder loans		2,909			879			462
Amortization of restricted stock awards		3,542			4,421			9,401
Net increase in net assets resulting from capital share transactions		76,880			122,442			109,994
Total increase in net assets		87,050			111,874			90,263
Net assets at beginning of period		666,087			554,213			463,950
Net assets at end of period	$	753,137		$	666,087		$	554,213
Net asset value per common share	$	12.83		$	12.48		$	12.22
Common shares outstanding at end of period		58,694			53,372			45,342

See notes to consolidated financial statements.

64

MCG Capital Corporation

Consolidated Statements of Cash Flows

(in thousands)

	Year Ended December 31,
	2006			2005			2004
Operating activities
Net income	$	100,949		$	68,193		$	47,647
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		316			756			1,021
Amortization of restricted stock awards		3,542			4,421			9,401
Amortization of deferred debt issuance costs		4,122			3,646			1,558
Net realized losses (gains) on investments		14,587			(9,021	)		8,250
Net unrealized (appreciation) depreciation on investments		(34,604	)		1,343			(10,807	)
Decrease (increase) in cash—securitization accounts from interest collections		2,650			(943	)		(1,348	)
Increase in interest receivable		(6,993	)		(5,674	)		(773	)
Increase in accrued payment-in-kind interest and dividends		(22,128	)		(13,936	)		(3,239	)
Decrease in unearned income		(70	)		(3,730	)		(6,207	)
Decrease in other assets		1,722			2			424
(Decrease) increase in interest payable		(706	)		2,979			1,740
Increase in other liabilities		6,546			2,584			5,264
Net cash provided by operating activities		69,933			50,620			52,931
Investing activities
Originations, draws and advances on loans		(410,874	)		(465,232	)		(339,102	)
Principal payments on loans		373,923			274,743			168,340
Purchase of equity investments		(80,984	)		(31,664	)		(16,026	)
Proceeds from sales of equity investments		2,683			24,956			13,861
Purchase of premises, equipment and software		(677	)		(258	)		(665	)
Other acquisitions		—			—			(2,208	)
Net cash used in investing activities		(115,929	)		(197,455	)		(175,800	)
Financing activities
Net proceeds from borrowings		15,355			82,866			120,314
Decrease (increase) in cash—securitization accounts for paydown of principal on debt		28,933			(10,839	)		(1,736	)
Payment of financing costs		(7,342	)		(1,378	)		(6,758	)
Dividends paid		(88,223	)		(78,941	)		(66,884	)
Issuance of common stock, net of costs		70,429			117,142			100,131
Repayment of stockholder loans		2,909			879			462
Net cash provided by financing activities		22,061			109,729			145,529
(Decrease) increase in cash and cash equivalents		(23,935	)		(37,106	)		22,660
Cash and cash equivalents at beginning of period		45,626			82,732			60,072
Cash and cash equivalents at end of period	$	21,691		$	45,626		$	82,732
Supplemental disclosures
Interest paid	$	32,824		$	16,475		$	7,210
Income taxes paid (received)		298			—			(98	)

See notes to consolidated financial statements

65

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2006

(in thousands, except share data)

Portfolio Company	Industry	Investment (8)	Principal		Cost		Fair Value
Control investments: Majority-owned (5):
Broadview Networks Holdings,	Communications-CLEC	Series A Preferred Stock (87,254 shares)			$	64,318	$	74,165
Inc.(2)(13)		Series A-1 Preferred Stock (100,702 shares)				57,380		85,597
		Common Stock (4,698,987 shares)				—		—
Chesapeake Tower Holdings,	Communications-Other	Senior Debt (11.4%, Due 5/10)	$	400		400		400
LLC		Preferred LLC Interest (3,139 units)				3,139		3,139
		Common LLC Interest (4,000 units)				—		—
Cleartel Communications,	Communications-CLEC	Subordinated Debt (14.7%, Due 12/10-12/11)		71,962		71,962		71,962
Inc.(2)		Preferred Stock (57,859 shares)				50,613		612
		Common Stock (9 shares)				540		—
		Guaranty ($7,125)
Helicon Cable Holdings,	Cable	Senior Debt (10.4%, Due 12/12)(12)		12,250		12,250		12,250
LLC(2)		Subordinated Debt (14.3%, Due 6/13)(12)		7,187		7,187		7,187
		Preferred LLC Interest (82,500 units)				9,180		9,180
		Standby Letter of Credit ($300)
IntranMedia, LLC	Other Media	Senior Debt (9.9%, Due 12/11)(12)		12,000		12,000		12,000
		Preferred Units (86,000 units)				8,661		8,661
Jet Plastica Investors, LLC(2)	Plastic Products	Subordinated Debt (14.0%, Due 3/13)(12)		26,159		26,159		26,159
		Preferred LLC Interest (301,595 units)				30,893		30,893
JupiterKagan, Inc.(2)(11)	Information Services	Senior Debt (12.1%, Due 3/10)(12)		5,349		5,349		5,349
		Series A Preferred Stock (100,000 shares)				10,000		10,000
		Common Stock (770,000 shares)				—		—
		Standby Letter of Credit ($225)
		Guaranty ($1,353)
Midwest Tower Partners,	Communications-Other	Senior Debt (16.4%, 8/07)		9,781		9,781		9,781
LLC(2)		Subordinated Debt (14.3%, Due 2/08)(12)		17,485		17,485		17,485
		Preferred LLC Interest (17,563 units)				2,438		2,438
		Common LLC Interest (79,117 Units)				201		5,213
RadioPharmacy Investors,	Healthcare	Senior Debt ( 9.9%, Due 12/10) (12)		7,000		7,000		7,000
LLC(2)		Subordinated Debt (15.0%, Due 12/11)(12)		9,258		9,258		9,258
		Preferred LLC Interest (70,000 units)				7,522		10,657
Superior Industries Investors,	Sporting Goods	Subordinated Debt (14.0%, Due 3/13-3/15)(12)		14,083		14,083		14,083
LLC (2)		Preferred LLC Interest (125,400 units)				12,837		12,837
Superior Publishing	Newspaper	Subordinated Debt (20.0%, Due 10/10)(12)		20,731		19,022		19,022
Corporation(2)		Preferred Stock (7,999 shares)				7,999		9,244
		Common Stock (100 shares)				365		—
Working Mother Media, Inc.(6)	Publishing	Senior Debt (8.8%, Due 12/08)		17,869		11,546		11,546
		Class A Preferred Stock (12,497 shares)				12,497		5,019
		Class B Preferred Stock (1 share)				1		—
		Class C Preferred Stock (1 share)				1		—
		Common Stock (510 shares)				1		—
		Guaranty ($476)
Total Control investments: Majority-owned (represents 39.1% of total investments at fair value)						502,068		491,137

See notes to consolidated financial statements

66

MCG Capital Corporation

Consolidated Schedule of Investments—(Continued)

December 31, 2006

(in thousands, except share data)

Portfolio Company	Industry	Investment (8)	Principal		Cost		Fair Value
Control Investments: Non-majority owned (4):
Crystal Media Network,	Broadcasting	LLC Interest			$	3,060	$	547
LLC(1)(6)
National Product Services,	Business Services	Senior Debt (13.2%, Due 6/09)	$	12,316		5,710		12,365
Inc.(2)		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				272		—
		(expire 12/31/13)
PremierGarage Holdings,	Home Furnishings	Senior Debt (10.1%, Due 6/10-12/10)		10,700		10,700		10,700
LLC(2)		Preferred LLC Units (445 Units)				4,592		4,592
		Common LLC Units (356 Units)
Total Control Investments: Non-majority-owned (represents 2.8% of total investments at fair value)						39,199		35,003
Total Control Investments: (represents 41.9% of total investments at fair value)						541,267		526,140
Affiliate Investments (3):
Cherry Hill Holdings, Inc.(2)	Photographic Studio	Senior Debt (12.9%, Due 8/11)(12)		12,122		12,122		12,122
		Series A Preferred Stock (750 Shares)				775		775
iVerify. US Inc. (6)	Communications-Other	Preferred Stock (54 shares)				578		—
		Common Stock (20 shares)				550		—
NYL Brands Holdings,	Clothing & Accessories	Subordinated Debt (13.0%, Due 2/11)(12)		10,000		10,000		10,000
Inc.(2)		Class A Common Stock (1,500 shares)				1,500		1,500
		Warrants to purchase Common Stock				331		526
		(expire 2/3/16)
On Target Media, LLC	Other Media	Class A LLC Interest				1,836		1,836
		Class B LLC Interest				—		1,613
Sunshine Media Delaware,	Publishing	Senior Debt (14.7%, Due 12/08)		13,632		12,281		12,281
LLC(2)		Class A LLC Interest				564		329
		Warrants to purchase Class B LLC interest				—		—
		(expire 1/31/11)
TNR Entertainment Corp	DVD Rental	Senior Debt (10.4%, Due 7/10)(12)		12,500		12,500		12,500
LLC(2)		Subordinated Debt (17.5%, Due 1/11) (12)		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)(10)	Communications-Other	Common Stock (868,947 shares)				2,485		2,482
		Warrants to purchase common stock				—		—
		(expire 3/3/11)
Total Affiliate Investments (represents 5.7% of total investments at fair value)						71,589		72,031

See notes to consolidated financial statements

67

MCG Capital Corporation

Consolidated Schedule of Investments—(Continued)

December 31, 2006

(in thousands, except share data)

Portfolio Company	Industry	Investment (8)	Principal		Cost		Fair Value
Non-Affiliate Investments (less than 5% owned):
Advanced Sleep Concepts, Inc. (2)	Home Furnishings	Senior Debt (13.8%, Due 10/11 ) (12) Subordinated Debt 16.0%, Due 4/12) (12) Common Stock (419 shares) Warrants to Purchase Common Stock (expire 10/12/16)	$	7,000 4,540	$	7,000 4,540 524 348	$	7,000 4,540 524 348
Allen's TV Cable Service, Inc.	Cable	Senior Debt (12.1%, Due 12/12) (12)		7,998		7,998		7,998
		Subordinated Debt (12.1%, Due 12/12) (12)		2,096		2,096		2,096
		Warrants to purchase Common Stock (expire 12/31/15)				—		—
Amerifit Nutrition, Inc. (2)	Drugs	Senior Debt (12.0%, Due 3/10) (12)		5,569		5,569		5,569
B & H Education, Inc. (2)	Education	Senior Debt (10.4%, Due 3/10) (12)		4,000		4,000		4,000
		Preferred Stock ( 5,384 shares)				1,188		1,540
Badoud Enterprises, Inc. (2)	Newspaper	Senior Debt (10.4%, Due 9/11) (12)		4,799		4,799		4,799
BLI Holdings, Inc. (2)	Drugs	Subordinated Debt (13.1%, Due 3/10) (12)		10,000		10,000		10,000
Builders First Source, Inc.	Building & Development	Senior Debt (7.9%, Due 8/11) (12)		886		886		873
Cambridge Information Group, Inc. (2)	Information Services	Subordinated Debt (12.9%, Due 11/11) (12)		8,500		8,500		8,500
CEI Holdings, Inc.	Cosmetics	Subordinated Debt (13.1%, Due 12/11) (12)		4,755		4,755		4,755
Communications & Power Industries, Inc.	Aerospace & Defense	Senior Debt (7.6%, Due 7/10) (12)		741		741		744
Communicom Broadcasting, LLC (2)	Broadcasting	Senior Debt (12.4%, Due 2/11) (12)		8,068		8,068		8,068
Community Media Group, Inc. (2)	Newspaper	Senior Debt (9.9%, Due 9/10) (12)		19,730		19,730		19,730
Cornerstone Healthcare Group Holding, Inc.	Healthcare	Subordinated Debt (14.0%, Due 7/12) (12)		7,206		7,206		7,206
Country Road Communications LLC (2)	Communications-Other	Subordinated Debt (13.3%,Due 7/13) (12)		13,000		13,000		13,000
Creative Loafing, Inc. (2)	Newspaper	Senior Debt (12.0%, Due 6/10) (12)		18,275		18,275		18,275
Crescent Publishing Company LLC (2)	Newspaper	Senior Debt (15.1%, Due 6/09-6/10) (12)		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) (12)		6,250		6,250		6,250
		Subordinated Debt (13.4%, Due 12/12) (12)		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) (12) Preferred LLC Interest ( 16,371 units) Class A LLC Interest (10,914 units)		16,000		16,000 589 408		16,000 589 609
D&B Towers, LLC	Communications-Other	Senior Debt (15.4%, Due 6/08) (12)		5,412		5,412		5,062
dick clark productions, inc. (6)	Broadcasting	Common Stock (235,714 shares)				210		510
		Warrants to purchase Common Stock (expire 7/25/11)				858		5,049
The e-Media Club, LLC (6)	Investment Fund	LLC Interest				88		34
EAS Group, Inc.	Technology	Subordinated Debt (16.0%, Due 4/11) (12)		11,529		11,529		11,529
Empower IT Holdings, Inc. (2)	Information Services	Senior Debt (11.9%, Due 5/12) (12)		7,959		7,959		7,959
		Subordinated Debt (14.5%, Due 6/12) (12)		5,116		5,116		5,116
Equibrand Holding Corporation (2)	Leisure Activities	Senior Debt (12.4%, Due 9/10) (12) Subordinated Debt (15.8%, Due 3/11) (12)		4,640 9,674		4,640 9,674		4,640 9,674
Flexsol Packaging Corp.	Chemicals/Plastics	Subordinated Debt (13.5%, Due 12/12) (12)		3,000		3,000		2,955
GoldenSource Holdings Inc. (6)	Technology	Warrants to purchase Common Stock (expire 10/31/08)				—		—
Home Interiors & Gifts, Inc.	Home Furnishings	Senior Debt (10.4%, Due 3/11)		4,492		4,492		3,308

See notes to consolidated financial statements

68

MCG Capital Corporation

Consolidated Schedule of Investments—(Continued)

December 31, 2006

(in thousands, except share data)

Portfolio Company	Industry	Investment (8)	Principal		Cost		Fair Value
Jenzabar, Inc. (2)	Technology	Preferred Stock (5,000 shares)			$	6,381	$	6,381
		Subordinated Preferred Stock (109,800 shares)				1,098		1,098
		Warrants to purchase Common Stock (expire 4/30/16)				422		17,180
The Joseph F. Biddle Publishing Company (2)	Newspaper	Senior Debt (8.9%, Due 12/11) (12)	$	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) (12)		3,000		3,000		3,000
Marietta Intermediate Holding Corporation	Cosmetics	Subordinated Debt (14.8%, Due 12/11) (12)		2,000		2,000		1,517
MCI Holdings, LLC (2)	Healthcare	Subordinated Debt (12.7%, Due 3/12-4/13) (12)		29,791		29,791		29,791
		Class A LLC Interest (4,712,042 units)				3,000		3,388
Metropolitan Telecommunications Holding Company (2)	Communications-CLEC	Senior Debt (12.5%, Due 6/010-9/10) (12) Subordinated Debt (16.4%, Due 12/10) (12) Warrants to purchase Common Stock (expire 9/30/13)		20,725 10,929		20,725 10,929 1,843		20,725 10,929 8,320
MicroCal Holdings, LLC (2)	Laboratory Instruments	Senior Debt (9.9%, Due 3/10-9/10) (12)		12,800		12,800		12,800
		Subordinated Debt (14.5%, Due 3/11) (12)		9,115		9,115		9,115
MicroDental Laboratories (2)	Healthcare	Senior Debt (10.7%, Due 5/11-11/11) (12)		13,186		13,186		13,186
		Subordinated Debt (15.0%, Due 5/12) (12)		6,999		6,999		6,999
Miles Media Holding, LLC (2)	Publishing	Senior Debt (11.9%, Due 6/12) (12)		9,150		9,150		9,150
		Subordinated Debt (16.4%, Due 12/12) (12)		4,000		4,000		4,000
		Warrants to purchase Units in LLC (expire 6/30/09)				439		2,119
National Display Holdings, LLC (2)	Electronics	Senior Debt (11.4%, Due 12/11) (12)		10,000		10,000		10,000
		Subordinated Debt (15.0%, Due 12/12) (12)		13,682		13,682		13,682
		Class A LLC Interest (1,000,000 units)				1,000		1,152
New Century Companies, Inc. (6)	Industrial Equipment	Warrants to purchase Common Stock (expire 6/30/10)				—		—
PartMiner, Inc. (2)	Information Services	Senior Debt (14.9%, Due 6/09) (12)		3,341		3,341		3,341
Philadelphia Newspapers, LLC	Newspapers	Subordinated Debt (16.0%, Due 6/14) (12)		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) (12)		17,500		17,500		17,500
		Subordinated Debt (15.0%, Due 12/11) (12)		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) (12)		20,923		20,923		20,923
		Series A Preferred Stock (7,813 Shares)				281		281
Sagamore Hill Broadcasting, LLC (2)	Broadcasting	Senior Debt (11.4%, Due 11/09) (12)		14,000		14,000		14,000

See notes to consolidated financial statements

69

MCG Capital Corporation

Consolidated Schedule of Investments—(Continued)

December 31, 2006

(in thousands, except share data)

Portfolio Company	Industry	Investment (8)	Principal		Cost			Fair Value
Stratford School Holdings, Inc. (2)	Education	Senior Debt (9.9%, Due 7/11- 9/11) (12) Subordinated Debt (14.0%, Due 12/11) (12) Preferred Stock (10,000 shares) Warrants to purchase Common Stock (expire 5/31/15)	$	14,500 6,924	$	14,500 6,924 60 68		$	14,500 6,924 2,997 1,026
Summit Business Media Intermediate Holding Company, LLC	Information Services	Subordinated Debt (12.4%, Due 11/13)		6,000		6,000			6,000
Switch & Data Holdings, Inc.	Business Services	Subordinated Debt (12.6%, Due 4/11) (12)		12,000		12,000			12,000
Team Express, Inc. (2)	Retail	Subordinated Debt (15.0%, Due 6/11) (12)		7,327		7,327			7,327
Teleguam Holdings, LLC (2)	Communications-Other	Subordinated Debt (12.4%, Due 10/12) (12)		20,000		20,000			20,000
Total Sleep Holdings, Inc. (2)	Healthcare	Subordinated Debt (16.0%, Due 9/11) (12)		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) (12) Convertible Preferred Subordinated Notes (12.4%, Due 6/15-10/16 )		11,054 1,317		11,000 1,244			11,000 677
Wicks Business Information,	Publishing	Unsecured Note (10.3%, Due 2/08)		237		237			237
LLC
Wiesner Publishing Company, LLC	Publishing	Warrants to purchase membership interest in LLC (expire 6/30/12)				406			3,339
Wire Rope Corporation of America, Inc.	Industrial Equipment	Senior Debt (13.1%, Due 6/11) (12)		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)	Business Services	Senior Debt (9.3%, Due 7/11) (12)		17,255		17,255			17,255
		Subordinated Debt (14.0%, Due 7/12) (12)		6,075		6,075			6,075
		Series A Preferred Stock (161,870 shares)				500			500
Total Non-Affiliate Investments (represents 52.4% of total investments at fair value)						629,849			659,441
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 (1)	Broadcasting	Call options written			$	—		$	—
Total Call Options Written					$	—		$	—

See notes to consolidated financial statements

70

MCG Capital Corporation

Consolidated Schedule of Investments—(Continued)

December 31, 2005

(in thousands, except share data)

Portfolio Company	Industry	Investment (8)	Principal		Cost		Fair Value
Control Investments: Majority-owned (5):
Broadview Networks Holdings, Inc. (2) (7)	Communications	Subordinated Debt (12.0%, Due 12/09)	$	42,993	$	42,993	$	42,993
		Series A Preferred Stock (89,154 shares)				52,137		52,137
		Common Stock (2,228,937 shares)				—		—
Cleartel Communications,	Communications	Senior Debt (8.3%, Due 6/09)		28,850		28,850		28,850
Inc. (2)		Subordinated Debt (14.4%, Due 6/09)		9,356		9,356		9,356
		Preferred Stock (57,859 shares)				50,613		40,684
		Common Stock (9 shares)				540		—
		Guaranty ($8,092)
Copperstate Technologies,	Security Alarm	Senior Debt (11.0%, Due 9/07)		1,272		1,272		1,272
Inc.		Class A Common Stock (20,000 shares)				2,000		946
		Class B Common Stock (10 shares)				—		—
		Warrants to purchase Class B Common Stock (expire 12/20/12)				—		—
		Standby Letter of Credit ($1,000)
Crystal Media Network,	Broadcasting	Senior Debt (11.4%, Due 5/06)		1,099		947		947
LLC (6)		LLC Interest				6,132		1,097
Helicon Cable Holdings, LLC (2)	Cable	Senior Debt (9.2%, Due 12/12) Subordinated Debt (14.3%, Due 6/13) Preferred LLC Interest (82,500 units) Standby Letter of Credit ($300)		10,072 5,750		10,072 5,750 8,316		10,072 5,750 8,316
Midwest Tower Partners,	Communications	Subordinated Debt (14.1%, Due 2/07) (12)		16,813		16,813		16,813
LLC (2)		Preferred LLC Interest				2,121		2,121
		Common LLC Interest				201		1,332
Superior Publishing	Newspaper	Senior Debt (9.0%, Due 12/06) (12)		20,759		20,759		20,759
Corporation (2)		Subordinated Debt (20.0%, Due 12/06) (12)		22,692		20,141		20,141
		Preferred Stock (7,999 shares)				7,999		8,545
		Common Stock (100 shares)				365		—
Telecomm South, LLC	Communications	Senior Debt (13.4%, Due 12/05)		7,996		2,582		1,100
		LLC Interest				10		—
West Coast Wireless Lines LLC	Conferences	LLC Interest				851		851
Working Mother Media,	Publishing	Senior Debt (7.5%, Due 6/06)		10,452		8,576		8,576
Inc. (6)		Class A Preferred Stock (12,497 shares)				12,497		4,192
		Class B Preferred Stock (1 share)				1		—
		Class C Preferred Stock (1 share)				1		—
		Common Stock (510 shares)				1		—
		Guaranty ($834)
Total Control Investments: Majority-owned (represents 26.1% of total investments at fair value)						311,896		286,850

See notes to consolidated financial statements

71

MCG Capital Corporation

Consolidated Schedule of Investments—(Continued)

December 31, 2005

(in thousands, except share data)

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

See notes to consolidated financial statements

72

MCG Capital Corporation

Consolidated Schedule of Investments—(Continued)

December 31, 2005

(in thousands, except share data)

Portfolio Company	Industry	Investment (8)	Principal		Cost		Fair Value
Non-Affiliate Investments (less than 5% owned):
Allen's TV Cable Service, Inc.	Cable	Senior Debt (13.1%, Due 12/12) (12)	$	7,130	$	7,130	$	7,130
		Subordinated Debt (12.6%, Due 12/12) (12)		2,007		2,007		2,007
		Warrants to purchase Common Stock (expire 12/31/15)				—		—
Amerifit Nutrition, Inc. (2)	Drugs	Senior Debt (13.9%, Due 3/10) (12)		6,623		6,623		6,623
Archway Broadcasting Group, LLC	Broadcasting	Senior Debt (11.0%, Due 12/08) (12)		4,900		4,900		4,900
Auto Europe, LLC	Equipment Leasing	Subordinated Debt (11.3%, Due 10/12) (12)		13,500		13,500		13,500
B & H Education, Inc. (2)	Education	Senior Debt (10.5%, Due 3/10) (12)		4,000		4,000		4,000
		Preferred Stock ( 5,384 shares)				1,060		1,078
Badoud Enterprises, Inc. (2)	Newspaper	Senior Debt (9.7%, Due 9/11)		5,449		5,449		5,449
BLI Holdings, Inc. (2)	Drugs	Subordinated Debt (12.2%, Due 3/10) (12)		10,000		10,000		10,000
Builders First Source, Inc.	Building & Development	Senior Debt (6.2%, Due 8/11) (12)		889		889		894
Cambridge Information Group, Inc. (2)	Information Services	Senior Debt (8.7%, Due 6/07-6/11) (12)		26,825		26,825		26,825
CEI Holdings, Inc.	Cosmetics	Subordinated Debt (11.1%, Due 12/11) (12)		2,377		2,377		2,270
Communications & Power Industries, Inc.	Aerospace & Defense	Senior Debt (6.6%, Due 7/10) (12)		1,778		1,778		1,797
Community Media Group, Inc. (2)	Newspaper	Senior Debt (8.9%, Due 9/10) (12)		22,365		22,365		22,365
Cornerstone Healthcare Group Holding, Inc.	Healthcare	Subordinated Debt (14.0%, Due 7/12) (12)		7,060		7,060		7,060
Country Road Communications LLC (2)	Communications	Subordinated Debt (11.6%, Due 7/13) (12)		13,000		13,000		13,000
Creative Loafing, Inc. (2)	Newspaper	Senior Debt (11.1%, Due 6/10) (12)		19,400		19,400		19,400
Crescent Publishing Company LLC (2)	Newspaper	Senior Debt (14.3%, Due 6/09-6/10) (12)		8,942		8,942		8,942
Cruz Bay Publishing, Inc. (2)	Publishing	Senior Debt (12.1%, Due 12/06) (12)		6,172		6,172		6,172
		Subordinated Debt (20.5%, Due 12/06) (12)		11,417		11,417		11,417
Dayton Parts Holdings, LLC(2)	Vehicle Parts & Supplies	Subordinated Debt (12.5%, Due 6/11)		16,000		16,000		16,000
		Preferred LLC Interest ( 16,371 units)				602		602
		Class A LLC Interest (10,914 units)				401		401

See notes to consolidated financial statements

73

MCG Capital Corporation

Consolidated Schedule of Investments—(Continued)

December 31, 2005

(in thousands, except share data)

Portfolio Company	Industry	Investment (8)	Principal		Cost		Fair Value
D&B Towers, LLC	Communications	Senior Debt (14.2%, Due 6/08) (12)	$	5,022	$	5,022	$	5,022
dick clark productions, inc.(6)	Broadcasting	Common Stock (235,714 shares)				210		111
		Warrants to purchase Common Stock (expire 7/25/11)				858		1,085
The e-Media Club, LLC (6)	Investment Fund	LLC Interest				89		37
EAS Group, Inc.	Communications Equipment	Subordinated Debt (16.0%, Due 4/11) (12)		10,227		10,227		10,227
Empower IT Holdings, Inc. (2)	Information Services	Senior Debt (11.0%, Due 5/12)		10,000		10,000		10,000
		Subordinated Debt (14.5%, Due 6/12)		5,067		5,067		5,067
Equibrand Holding Corporation(2)	Leisure Activities	Senior Debt (11.5%, Due 3/10-9/10) (12)		4,640		4,640		4,640
		Subordinated Debt (16.0%, Due 3/11) (12)		8,763		8,763		8,763
Flexsol Packaging Corp.	Chemicals/Plastics	Subordinated Debt (10.7%, Due 12/12) (12)		5,000		5,000		5,000
GoldenSource Holdings Inc.(2)	Technology	Senior Debt (9.0%, Due 9/08)		17,000		17,000		17,000
		Warrants to purchase Common Stock (expire 10/31/08)				—		—
The Hillman Group, Inc.	Home Furnishings	Senior Debt (7.7%, Due 3/11) (12)		5,910		5,910		6,010
Home Interiors & Gifts, Inc.	Home Furnishings	Senior Debt (9.4%, Due 3/11) (12)		4,668		4,668		4,290
I-55 Internet Services, Inc. (6)	Communications	Senior Debt (17.5%, Due 12/06)		1,778		1,778		1,539
		Warrants to purchase Common Stock (expire 4/30/10)				366		—
Images.com, Inc.	Information Services	Senior Debt (12.5%, Due 12/07) (12)		2,664		2,664		2,664
Information Today, Inc. (2)	Information Services	Senior Debt (11.0%, Due 9/08) (12)		6,915		6,915		6,915
Instant Web, Inc.	Direct Mail Advertiser	Senior Debt (7.8%, Due 2/11) (12)		4,962		4,962		5,037
Jenzabar, Inc. (2)	Technology	Senior Debt (12.5%, Due 4/09) (12)		12,000		12,000		12,000
		Subordinated Debt (18.0%, Due 4/09-4/12) (12)		7,467		7,467		7,467
		Senior Preferred Stock (5,000 shares)				5,831		5,831
		Subordinated Preferred Stock (109,800 shares)				1,098		1,098
		Warrants to purchase Common Stock (expire 4/30/16)				422		7,630
The Joseph F. Biddle Publishing Company (2)	Newspaper	Senior Debt (7.4%, Due 12/11) (12)		7,225		7,225		7,225

See notes to consolidated financial statements

74

MCG Capital Corporation

Consolidated Schedule of Investments—(Continued)

December 31, 2005

(in thousands, except share data)

Portfolio Company	Industry	Investment (8)	Principal		Cost		Fair Value
Jupitermedia Corporation	Information Services	Common Stock (148,373 shares)			$	2,115	$	2,084
Managed Health Care Associates, Inc.	Drugs	Senior Debt (10.3%, Due 6/09-6/10) (12)	$	4,380		4,380		4,380
MD Beauty, Inc	Cosmetics	Subordinated Debt (11.3%, Due 2/13) (12)		9,000		9,000		9,079
MCI Holdings, LLC (2)	Management Consulting Service	Subordinated Debt (12.5%, Due 3/12)		17,102		17,102		17,102
		Class A LLC Interest (4,712,042 units)				3,000		3,000
Metropolitan Telecommunications Holding Company (2) (9)	Communications	Senior Debt (11.6%, Due 6/10-9/10) (12)		22,000		22,000		22,000
		Subordinated Debt (15.5%, Due 12/10) (12)		10,929		10,929		10,929
		Warrants to purchase Common Stock (expire 9/30/13)				1,843		3,897
Michael May	Security Alarm	Senior Debt (12.0%, Due 2/08)		450		450		450
MicroCal Holdings, LLC (2)	Laboratory Instruments	Senior Debt (9.0%, Due 3/10-9/10) (12)		13,900		13,900		13,900
		Subordinated Debt (14.5%, Due 3/11) (12)		9,115		9,115		9,115
MicroDental Laboratories (2)	Healthcare	Senior Debt (9.8%, Due 5/11-11/11) (12)		11,767		11,767		11,767
		Subordinated Debt (15.0%, Due 5/12) (12)		6,113		6,113		6,113
Miles Media Holding, Inc. (2)	Publishing	Senior Debt (10.9%, Due 6/12) (12)		8,287		8,287		8,287
		Subordinated Debt (15.4%, Due 12/12) (12)		4,000		4,000		4,000
		Warrants to purchase Common Stock (expire 6/3/15)				439		837
Monotype Imaging Holdings Corp. (2)	Technology	Senior Debt (8.8%, Due 11/09) (12)		4,850		4,850		4,850
MultiPlan, Inc.	Insurance	Senior Debt (7.0%, Due 3/09) (12)		3,194		3,194		3,234
Nalco Company	Ecological Services	Senior Debt (6.3%, Due 11/10) (12)		4,162		4,162		4,217
National Display Holdings, LLC(2)	Electronics	Senior Debt (9.7%, Due 12/10-12/11)		20,087		20,087		20,087
		Subordinated Debt (15.0%, Due 12/12)		13,000		13,000		13,000
		Class A LLC Interest (1,000,000 units)				1,000		1,000
National Product Services, Inc.	Business Services	Subordinated Debt (14.0%, Due 6/07) (12)		10,225		10,225		10,225
New Century Companies, Inc. (6)	Industrial Equipment	Warrants to purchase Common Stock (expire 6/30/10)				—		—

See notes to consolidated financial statements

75

MCG Capital Corporation

Consolidated Schedule of Investments—(Continued)

December 31, 2005

(in thousands, except share data)

Portfolio Company	Industry	Investment (8)	Principal		Cost		Fair Value
OMP, Inc.	Drugs	Senior Debt (8.3%, Due 1/10-1/11) (12)	$	7,714	$	7,714	$	7,714
PartMiner, Inc. (2)	Information Services	Senior Debt (15.0%, Due 6/09) (12)		5,240		5,240		5,240
Powercom Corporation (2)	Communications	Senior Debt (12.0%, Due 12/06) (12)		1,861		1,861		1,861
		Warrants to purchase Class A Common Stock (expire 6/30/14)				286		341
Quantum Medical Holdings, LLC (2)	Laboratory Instruments	Senior Debt (9.3%, Due 12/10-5/11)		17,535		17,535		17,535
		Subordinated Debt (15.0%, Due 12/11)		10,502		10,502		10,502
		Preferred LLC Interest (1,000,000 units)				1,001		1,001
R.R. Bowker, LLC (2)	Information Services	Senior Debt (11.4%, Due 12/08-12/09) (12)		16,650		16,650		16,650
Republic National Cabinet Corporation	Home Furnishings	Senior Debt (9.2%, Due 6/09) (12)		3,578		3,578		3,578
		Subordinated Debt (13.1%, Due 6/09) (12)		5,000		5,000		5,000
Sagamore Hill Broadcasting, LLC (2)	Broadcasting	Senior Debt (11.9%, Due 11/09) (12)		12,400		12,400		12,400
SCI Holdings, Inc	Communication Services	Subordinated Debt (11.5%, Due 11/12) (12)		7,500		7,500		7,500
Sheridan Healthcare, Inc.	Healthcare	Senior Debt (7.5%, Due 11/10) (12)		2,850		2,850		2,895
Sterigenics International, Inc.	Healthcare	Senior Debt (7.5%, Due 6/11) (12)		4,925		4,925		4,993
Stratford School Holdings, Inc.(2)	Education	Senior Debt (9.5%, Due 6/11) (12)		6,500		6,500		6,500
		Subordinated Debt (14.0%, Due 12/11) (12)		6,651		6,651		6,651
		Preferred Stock (10,000 shares)				1,059		1,059
		Warrants to purchase Common Stock (expire 5/31/15)				67		192
Survey Sampling International, LLC	Research	Senior Debt (7.3%, Due 5/11) (12)		3,911		3,911		3,943
Switch & Data Holdings, Inc.	Business Services	Subordinated Debt (11.6%, Due 4/11) (12)		12,000		12,000		12,000
SXC Health Solutions, Inc. (2)	Technology	Senior Debt (9.0%, Due 12/10) (12)		13,260		13,260		13,260
		Common Stock (1,111,100 shares)				1,235		2,630
Talk America Holdings, Inc. (6)	Communications	Warrants to purchase Common Stock (expire 8/17/06—3/31/07)				25		330

See notes to consolidated financial statements

76

MCG Capital Corporation

Consolidated Schedule of Investments—(Continued)

December 31, 2005

(in thousands, except share data)

Portfolio Company	Industry	Investment (8)	Principal		Cost			Fair Value
Team Express, Inc.	Specialty Retail	Senior Debt (10.7%, Due 12/09-12/10) (12)	$	13,364	$	13,364		$	13,364
		Subordinated Debt (15.0%, Due 6/11) (12)		7,108		7,108			7,108
Teleguam Holdings, LLC	Communications	Subordinated Debt (11.4%, Due 10/12) (12)		20,000		20,000			20,000
Tippmann Sports, LLC	Leisure Goods	Senior Debt (10.3%, Due 6/09) (12)		6,550		6,550			6,550
Total Sleep Holdings, Inc. (2)	Healthcare	Subordinated Debt (14.0%, Due 9/11) (12)		22,220		22,220			22,220
U. S. I. Holdings Corporation	Insurance	Senior Debt (6.7%, Due 8/08) (12)		2,970		2,970			2,982
VS&A-PBI Holding LLC (6)	Publishing	LLC Interest				500			—
VOX Communications Group Holdings, LLC (2)	Broadcasting	Senior Debt (10.8%, Due 12/07-6/10) (12)		10,350		10,350			10,350
		Convertible Preferred Subordinated Notes (12.0%, Due 6/15 )		1,062		1,062			1,062
Wicks Business Information, LLC	Publishing	Unsecured Notes (9.3%, Due 2/08)		215		215			215
Wiesner Publishing Company, LLC (2)	Publishing	Warrants to purchase membership interest in LLC (expire 6/30/12)				406			1,723
Wire Rope Corporation of America, Inc.	Industrial Equipment	Senior Debt (11.9%, Due 6/11) (12)		6,000		6,000			6,180
WirelessLines II, Inc.	Communications	Senior Debt (8.0%, Due 4/07)		185		185			185
Total Non-Affiliate Investments (represents 68.0% of total investments at fair value)				—		733,717			745,757
Total Investments						1,117,257			1,097,560
Unearned Income						(9,062	)		(9,062	)
Total Investments Net of Unearned Income					$	1,108,195		$	1,088,498
Call options written (included in Other Liabilities in the Consolidated Balance Sheets)
Metropolitan Telecommunications Holding Company (9)	Communications	Call options written			$	575		$	575
Total Call Options Written					$	575		$	575

See notes to consolidated financial statements

77

MCG Capital Corporation

Consolidated Schedule of Investments—(Continued)

December 31, 2006 and 2005

(in thousands, except share data)

(1) In August 2006, MCG sold 50.1% of its equity in Crystal Media Network, LLC (“Crystal Media”). As part of the same transaction, Crystal Media’s outstanding debt was paid off. At December 31, 2006, MCG had a written call option outstanding on up to a 10% interest in Crystal Media. The option expires January 31, 2008.

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

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

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

(5) Majority owned investments are generally defined under the Investment Company Act of 1940 as companies in which MCG owns more than 50% of the voting securities of the company.

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

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

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

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

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

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

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

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

See notes to consolidated financial statements

78

MCG Capital Corporation

Notes to Consolidated Financial Statements

(in thousands, except per share data)

Note 1—Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies

Description of Business and Basis of Presentation

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

The accompanying financial statements reflect the consolidated accounts of MCG, including Solutions Capital I, LP, Solutions Capital GP, LLC, and MCG’s special purpose financing subsidiaries, MCG Finance I, LLC, MCG Finance II, LLC, MCG Finance III, LLC, MCG Finance IV, LLC, MCG Finance V, LLC, MCG Finance VI, LLC, MCG Finance VII, LLC, and MCG Finance VIII, LLC, with all significant intercompany balances eliminated. In accordance with Article 6 of Regulation S-X under the Securities Act of 1933 and Securities Exchange Act of 1934, the Company does not consolidate portfolio company investments, including those in which it has a controlling interest. Prior to January 1, 2006, Kagan Research, LLC was one of the Company’s consolidated subsidiaries. During the first quarter of 2006, Kagan Research, LLC and Jupiter Research, LLC merged to create JupiterKagan, Inc., which is reflected on the Company’s schedule of investments.

Use of estimates

The accompanying financial statements are prepared in conformity with accounting principles generally accepted in the United States. This requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Summary of Significant Accounting Policies

Income Recognition

Interest and dividend income

Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected. When a loan becomes 90 days or more past due, or if MCG otherwise does not expect the customer to be able to service its debt and other obligations, MCG will, as a general matter, place the loan on non-accrual status and cease recognizing interest income on that loan until all principal has been paid. However, MCG 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. MCG will generally cease accruing PIK if there is insufficient value to support the accrual or it does 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

79

MCG Capital Corporation

Notes to Consolidated Financial Statements—(Continued)

(in thousands, except per share data)

additional origination fees. The borrowers granting these interests are typically non-publicly traded companies. MCG records the financial instruments received at fair value as determined by MCG’s 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 MCG’s ownership share considering any discounts for transfer restrictions or other terms which impact the value. Changes in these values are recorded through MCG’s statement of operations. Any resulting discount on the loan from recordation of warrant and other equity instruments are accreted into income over the term of the loan.

Other 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. 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.

Securitization Transactions

Periodically, MCG transfers 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”.

Cash and Cash Equivalents

Cash and cash equivalents as presented in the balance sheet and the statement of cash flows includes bank checking accounts, highly liquid investments with original maturities of 90 days or less, and interest bearing deposits collateralized by marketable debt securities.

Cash, Securitization Accounts

Cash, securitization accounts includes amounts held in designated bank accounts representing principal and interest payments received on securitized loans or other reserved amounts associated with the Company’s securitization facilities. The Company is required to use these amounts to pay interest expense, reduce borrowings, or pay other amounts in accordance with the related securitization agreements.

Cash, Restricted

Cash, restricted includes cash that was received in exchange for the sale of an asset that is currently held in escrow.

Investments

The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in companies in which MCG owns more than 25% of the voting securities or maintains greater than 50% of the board representation. Under the 1940 Act, “Affiliate Investments” are defined as those non-control investments in companies in which MCG owns between 5% and 25% of the voting securities. Under the 1940 Act, “Non-affiliate Investments” are defined as investments that are neither Control Investments nor Affiliate Investments.

80

MCG Capital Corporation

Notes to Consolidated Financial Statements—(Continued)

(in thousands, except per share data)

All investments are carried at fair value with any adjustments recorded in the statement of operations as investment gains (losses)—unrealized. The Company determines the value of each investment in its portfolio on a quarterly basis. Value, as defined in Section 2(a)(41) of the Investment Company Act of 1940, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the board of directors. Since there is typically no readily available market value for the investments in the Company’s portfolio, the Company values substantially all of its 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 December 31, 2006, approximately 95% of the Company’s 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 December 31, 2006. Because of the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s 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, the Company is not permitted to provide a general reserve for anticipated loan losses. Instead, the Company must 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 its statement of operations.

As a business development company, the Company invests 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. The Company generally includes 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, the Company’s 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. The Company’s investments are generally subject to some restrictions on resale and generally have no established trading market. Because of the type of investments that the Company makes and the nature of its business, the Company’s valuation process requires an analysis of various factors. The Company’s fair value methodology includes the examination of, among other things, the underlying investment performance, financial condition and market changing events that impact valuation.

The Company bases the fair value of its investments on the enterprise value of the portfolio companies in which it invests. 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 a single estimate of enterprise value is derived. In determining the enterprise value of a portfolio company, the Company analyzes the portfolio company’s historical and projected financial results. The Company generally prepares discounted cash flow models based on its projections of the future free cash flows of the business and industry derived capital costs. The Company reviews external events, including private mergers and acquisitions, and includes these events in the enterprise valuation process. The Company also uses industry valuation benchmarks and reviews public market

81

MCG Capital Corporation

Notes to Consolidated Financial Statements—(Continued)

(in thousands, except per share data)

comparables. In certain cases, the Company retains independent valuation firms to perform valuations that it considers as part of its determination of portfolio company value. When an external event such as a purchase transaction, public offering, or subsequent debt or equity sale occurs, the pricing indicated by the external event may be used to corroborate the Company’s estimate of enterprise value.

For loans and debt securities, if there is adequate enterprise value to support the repayment of the Company’s debt then the fair value of its 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 the Company’s 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.

During the fourth quarter of 2006, in connection with its process for determining fair value as of December 31, 2006, the Company retained two independent valuation firms to perform independent valuations of certain of its portfolio companies. These valuations were considered by the board of directors in their determination of fair value. The Company intends to continue to utilize independent valuation consultants 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.

Debt Issuance Costs

Debt issuance costs represent fees and other direct incremental costs incurred in connection with the Company’s borrowings. These costs are amortized into the consolidated statement of operations as interest expense ratably over the contractual term of the borrowing using the effective interest method.

Share-based Compensation

The Company recognizes share based compensation in accordance with FASB Statement No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123R”), which it adopted effective January 1, 2006 using the modified prospective method. Effective January 1, 2006, unearned compensation amounts previously recorded as a separate component of equity on the Company’s balance sheet are included in paid-in capital. In accordance with FAS 123R, the Company recognizes compensation cost related to share based awards for which forfeiture provisions are expected to lapse over the requisite service period.

Prior to January 1, 2006, the Company accounted for share based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” The adoption of SFAS No. 123R did not impact the Company’s net operating income before investment gains and losses, net income, cash flows from operations, cash flows from financing activities, or basic and diluted earnings per share. See Note 9 for further discussion of the Company’s share based compensation.

Income Taxes

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

82

MCG Capital Corporation

Notes to Consolidated Financial Statements—(Continued)

(in thousands, except per share data)

shareholders. The Company has distributed and intends to distribute sufficient dividends to eliminate taxable income. The Company may also be subject to federal excise tax if it does not distribute at least 98% of its investment company taxable income in any calendar year and 98% of its capital gain net income in any calendar year.

The Company has certain wholly owned taxable subsidiaries (the “Taxable Subsidiaries”), each of which holds one or more of the Company’s portfolio investments that are listed on the Consolidated Schedule of Investments. The Taxable Subsidiaries are consolidated with the Company for GAAP purposes, such that the Company’s consolidated financial statements reflect its investments in the portfolio companies owned by the Taxable Subsidiaries. The purpose of the Taxable Subsidiaries is to permit the Company to hold portfolio companies that are organized as limited liability companies (“LLCs”) (or other forms of pass–through entities) and still satisfy the RIC tax requirement that at least 90% of the Company’s gross revenue for income tax purposes must consist of investment income. Absent the Taxable Subsidiaries, a proportionate amount of any gross income of an LLC (or other pass–through entity) portfolio investment would flow through directly to the Company. To the extent that such income did not consist of investment income, it could jeopardize the ability of the Company to qualify as a RIC and therefore cause the Company to incur significant amounts of federal income taxes. Where the LLCs (or other pass-through entities) are owned by the Taxable Subsidiaries, however, their income is taxed to the Taxable Subsidiaries and does not flow through to the Company, thereby helping the Company preserve its RIC status and resultant tax advantages. The Taxable Subsidiaries are not consolidated with the Company 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.

Earnings Per Share

Basic earnings per share is computed by dividing net income applicable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share is computed by dividing such net income by the sum of the weighted average number of shares outstanding for the period and the dilutive impact of restricted stock for which forfeiture provisions have not lapsed.

Goodwill

The Company records goodwill in accordance with FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). As of December 31, 2006 and December 31, 2005, the balance of goodwill was $3,851 and $6,224, respectively, and is included in other assets on the Consolidated Balance Sheets. In accordance with SFAS No. 142, the Company has tested its intangible assets with indefinite lives for impairment and determined that there were no impairments as of those dates.

Reclassifications

Certain prior period information has been reclassified to conform to current year presentation.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R), which replaced SFAS No. 123 and superseded APB Opinion No. 25. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial

83

MCG Capital Corporation

Notes to Consolidated Financial Statements—(Continued)

(in thousands, except per share data)

statements based on their fair values. SFAS No. 123R is effective beginning with the first interim period of the fiscal year beginning after June 15, 2005. MCG adopted SFAS No. 123R effective January 1, 2006. See Note 9, “Share Based Compensation”.

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 will be effective as of the last day of the first reporting period beginning after December 15, 2006, which is March 31, 2007.

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

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

Note 2—Investments

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

	December 31, 2006				December 31, 2005
	Investments at Cost		Percentage of Total Portfolio		Investments at Cost		Percentage of Total Portfolio
Secured senior debt	$	384,490	30.9	%	$	544,449	48.7	%
Subordinated debt
Secured		506,681	40.8			333,080	29.8
Unsecured		25,233	2.0			61,557	5.5
Total debt investments		916,404	73.7			939,086	84.0
Preferred equity		296,942	23.9			146,905	13.1
Common/Common equivalents equity		29,359	2.4			31,266	2.9
Total equity investments		326,301	26.3			178,171	16.0
Total	$	1,242,705	100.0	%	$	1,117,257	100.0	%

84

MCG Capital Corporation

Notes to Consolidated Financial Statements—(Continued)

(in thousands, except per share data)

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

	December 31, 2006				December 31, 2005
	Investments at Fair Value		Percentage of Total Portfolio		Investments at Fair Value		Percentage of Total Portfolio
Secured senior debt	$	389,721	31.0	%	$	542,981	49.5	%
Subordinated debt
Secured		494,992	39.3			329,498	30.0
Unsecured		24,666	2.0			61,557	5.6
Total debt investments		909,379	72.3			934,036	85.1
Preferred equity		285,150	22.7			126,664	11.5
Common/Common equivalents equity		63,083	5.0			36,860	3.4
Total equity investments		348,233	27.7			163,524	14.9
Total	$	1,257,612	100.0	%	$	1,097,560	100.0	%

The Company’s debt instruments generally provide for a contractual variable interest rate generally ranging from approximately 10% to 16%, a portion of which may be deferred. At December 31, 2006, approximately 64% 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 36% were at fixed rates. In addition, at December 31, 2006, approximately 31% of the loan portfolio has floors of between 1.50% and 3.0% on the LIBOR base index. The Company’s loans generally have stated maturities at origination that range from four to eight years. Customers typically pay an origination fee based on a percentage of the commitment amount. They also often pay a fee based on any undrawn commitments.

When one of the Company’s loans becomes 90 days or more past due, or if the Company otherwise does not expect the customer to be able to service its debt and other obligations, the Company will, as a general matter, place the loan on non-accrual status and will generally cease recognizing interest income on that loan until all past due principal and interest has been paid or otherwise restructured such that the interest income is determined to be collectible. The Company may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection. The following table summarizes our loans greater than 90 days past due and loans on non-accrual status, at fair value, at December 31, 2006 and December 31, 2005:

	December 31, 2006						December 31, 2005
	Fair Value		% of Loan Portfolio		% of Total Portfolio		Fair Value		% of Loan Portfolio		% of Total Portfolio
Loans greater than 90 days past due
On non-accrual status	$	20,129	2.21	%	1.60	%	$	3,218	0.34	%	0.29	%
Not on non-accrual status		1,798	0.20	%	0.14	%		13,553	1.45	%	1.23	%
Total loans greater than 90 days past due	$	21,927	2.41	%	1.74	%	$	16,771	1.79	%	1.52	%
Loans on non-accrual status
0 to 90 days past due	$	15,259	1.68	%	1.21	%	$	9,522	1.02	%	0.87	%
Greater than 90 days past due		20,129	2.21	%	1.60	%		3,218	0.34	%	0.29	%
Total loans on non-accrual status	$	35,388	3.89	%	2.81	%	$	12,740	1.36	%	1.16	%
Loans on non-accrual status or greater than 90 days past due	$	37,186	4.09	%	2.95	%	$	26,293	2.81	%	2.39	%

85

MCG Capital Corporation

Notes to Consolidated Financial Statements—(Continued)

(in thousands, except per share data)

Set forth below are tables showing the composition of MCG’s portfolio by industry (excluding unearned income) at cost and fair value as of December 31, 2006 and 2005:

	December 31, 2006				December 31, 2005
	Investments at Cost		Percentage of Total Portfolio		Investments at Cost(a)		Percentage of Total Portfolio(a)
Telecommunications—CLECs (competitive local exchange carriers)	$	280,394	22.6	%	$	221,433	19.8	%
Other Communications		81,605	6.6			71,725	6.4
Healthcare		106,967	8.6			89,532	8.0
Newspaper		89,760	7.2			112,645	10.1
Publishing		71,623	5.8			86,307	7.7
Laboratory Instruments		57,868	4.6			52,053	4.7
Plastic Products		57,052	4.6			—	—
Home Furnishings		53,696	4.3			19,156	1.7
Business Services		51,765	4.2			22,225	2.0
Information Services		48,379	3.9			75,476	6.8
Cable		38,711	3.1			33,275	3.0
Broadcasting		38,440	3.1			36,859	3.3
DVD Rental		28,567	2.3			—	—
Sporting Goods		26,920	2.2			—	—
Education		26,740	2.1			19,337	1.7
Electronics		24,682	2.0			34,087	3.0
Other Media		22,497	1.8			32,774	2.9
Food Services		21,204	1.7			—	—
Technology		19,430	1.6			58,895	5.3
Retail		19,158	1.5			20,472	1.8
Auto Parts		16,997	1.4			17,003	1.5
Drugs		15,569	1.2			28,717	2.6
Leisure Activities		14,314	1.2			13,403	1.2
Photographic Studio		12,897	1.0			—	—
Cosmetics		6,755	0.5			11,377	1.0
Car Rental		—	—			13,500	1.2
Other(b)		10,715	0.9			47,006	4.3
	$	1,242,705	100.0	%	$	1,117,257	100.0	%

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

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

86

MCG Capital Corporation

Notes to Consolidated Financial Statements—(Continued)

(in thousands, except per share data)

	December 31, 2006				December 31, 2005
	Investments at Fair Value		Percentage of Total Portfolio		Investments at Fair Value(a)		Percentage of Total Portfolio(a)
Telecommunications—CLECs (competitive local exchange carriers)	$	274,108	21.8	%	$	213,379	19.4	%
Other Communications		83,988	6.7			68,846	6.3
Healthcare		106,519	8.5			91,040	8.4
Newspaper		90,640	7.2			112,826	10.3
Publishing		68,020	5.4			72,280	6.6
Laboratory Instruments		58,402	4.6			52,052	4.7
Plastic Products		57,052	4.5			—	—
Home Furnishings		52,512	4.2			18,878	1.7
Business Services		51,230	4.1			22,225	2.1
Information Services		47,440	3.8			75,444	6.9
Broadcasting		39,851	3.2			31,953	2.9
Cable		38,711	3.1			33,275	3.0
Technology		36,188	2.9			66,103	6.0
Education		30,987	2.5			19,479	1.8
DVD Rental		28,567	2.3			—	—
Sporting Goods		26,920	2.1			—	—
Electronics		24,834	2.0			34,087	3.1
Other Media		24,110	1.9			33,876	3.1
Food Services		21,204	1.7			—	—
Retail		19,353	1.5			20,472	1.9
Auto Parts		17,198	1.4			17,003	1.5
Drugs		15,569	1.2			28,717	2.6
Leisure Activities		14,314	1.1			13,403	1.2
Photographic Studio		12,897	1.0			—	—
Cosmetics		6,272	0.5			11,349	1.0
Car Rental		—	—			13,500	1.2
Other(b)		10,726	0.8			47,373	4.3
	$	1,257,612	100.0	%	$	1,097,560	100.0	%

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

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

87

MCG Capital Corporation

Notes to Consolidated Financial Statements—(Continued)

(in thousands, except per share data)

Note 3—Borrowings

The following is a summary of the borrowings for the years ended December 31, 2006, and 2005:

	December 31, 2006				December 31, 2005
	Facility amount		Amount outstanding		Facility amount		Amount outstanding
Unsecured Notes	$	50,000	$	50,000	$	50,000	$	50,000
Commercial Loan Trust 2005-2		—		—		250,000		159,181
Commercial Loan Trust 2006-2		200,000		84,040		—		—
Commercial Loan Funding Trust Facility		250,000		83,943		250,000		160,000
Term Securitizations
Series 2004-1 Class A-1 Asset Backed Bonds		—		—		81,138		81,138
Series 2004-1 Class A-2 Asset Backed Bonds		—		—		31,500		31,500
Series 2004-1 Class B Asset Backed Bonds		—		—		43,500		43,500
Series 2004-1 Class C Asset Backed Bonds		—		—		15,800		15,800
Series 2006-1 Class A-1 Notes		106,250		106,250		—		—
Series 2006-1 Class A-2 Notes		50,000		11,400		—		—
Series 2006-1 Class A-3 Notes		85,000		35,000		—		—
Series 2006-1 Class B Notes		58,750		58,750		—		—
Series 2006-1 Class C Notes		45,000		45,000		—		—
Series 2006-1 Class D Notes		47,500		47,500		—		—
Revolving Unsecured Credit Facility		100,000		—		50,000		—
Total	$	992,500	$	521,883	$	771,938	$	541,119

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

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

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

88

MCG Capital Corporation

Notes to Consolidated Financial Statements—(Continued)

(in thousands, except per share data)

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 December 31, 2006 the Company had $84,040 outstanding under this facility.

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

On July 29, 2005, the Company amended the MCG Commercial Loan Funding Trust facility. Pursuant to this amendment, the total facility amount was increased from $150,000 to $250,000, the interest rate was changed from commercial paper rate plus 1.15% to commercial paper rate plus 0.95%, the concentration criteria were modified to allow, among other things, for an increase in the allowable percentage of certain secured subordinated loans in the collateral pool from 25% to 35%, and other minor modifications were made. On April 17, 2006 the Company again amended this facility to allow, among other things, for an increase in the allowable percentage of certain secured subordinated loans in the collateral pool from 35% to 50% and the inclusion of additional industry segments. The facility is scheduled to terminate on November 7, 2007, but is subject to annual renewal and may be extended under certain circumstances. During July 2006, the facility was renewed until July 27, 2007. As of December 31, 2006, the Company had $83,943 outstanding under this credit facility. See “Note 13 – Subsequent Events” for further discussion.

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

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

The Class A-1, Class B, Class C and Class D Notes are term notes. The Class A-2 Notes are a revolving class of secured notes and have a revolving period of five years. The Class A-3 Notes are a delayed draw class of secured notes and are required to be drawn by April 2007. All of the notes are secured by the assets of MCG Commercial Loan Trust 2006-1, including commercial loans totaling $408,562 as of December 31, 2006, which

89

MCG Capital Corporation

Notes to Consolidated Financial Statements—(Continued)

(in thousands, except per share data)

were purchased by the trust from the Company. Additional commercial loans will be purchased by the trust from the Company primarily using the proceeds from the Class A-3 delayed draw notes and the Class A-2 revolving notes. The pool of commercial loans in the trust must meet certain requirements, including, but not limited to, asset mix and concentration, collateral coverage, term, agency rating, minimum coupon, minimum spread and sector diversity requirements. As of December 31, 2006, a total of $303,900 of these notes were outstanding.

Revolving Unsecured Credit Facility.    This facility was established on September 20, 2005 as a result of an amendment to the Company’s Senior Secured Credit facility with Bayerische Hypo-Und Vereinsbank, AG, New York Branch (“HVB”). Pursuant to that amendment the facility was no longer secured by the Company’s assets and was committed up to $50,000. On June 19, 2006, the Company made a second amendment to this facility. Pursuant to this amendment, the aggregate revolving commitment amount under this credit facility was increased from $50,000 to $60,000, the maturity date was extended from September 19, 2006 to June 18, 2007, and an additional lender was added to this facility. Other minor modifications were also made to this facility. HVB maintained its $50,000 commitment, and the additional $10,000 was committed by Chevy Chase Bank. On August 7, 2006, the Company again amended this facility. Pursuant to this amendment, the aggregate revolving commitment amount under this credit facility was increased from $60,000 to $75,000, and an additional lender was added to this facility. HVB and Chevy Chase Bank maintained their $50,000 and $10,000 commitments, respectively, and the additional $15,000 was committed by Sovereign Bank. On November 29, 2006, the Company again amended this facility. Pursuant to this amendment, the aggregate revolving commitment amount under this credit facility was increased from $75,000 to $100,000, and an additional lender was added to this facility. HVB, Chevy Chase Bank, and Sovereign Bank maintained their $50,000, $10,000, and $15,000 commitments, respectively, and the additional $25,000 was committed by Royal Bank of Canada.

This credit facility is unsecured and is committed up to $100,000 on a revolving basis. In addition, this Revolving Unsecured Credit Facility allows for additional lenders with HVB acting as the agent. Advances under this credit facility bear interest at LIBOR plus 2.00% or the prime rate plus 0.50%, and there is a commitment fee of 0.25% per annum on undrawn amounts. The credit facility contains customary terms and conditions, including, without limitation, affirmative and negative covenants such as information reporting, minimum stockholders’ equity, minimum asset coverage ratio, and minimum cash net investment income. The credit facility also contains customary events of default with customary cure and notice, including, without limitation, nonpayment, misrepresentation in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, change of control, change of management, and material adverse change. As of December 31, 2006, the Company had no amounts outstanding under this credit facility.

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

Term Securitization 2004-1.    On September 30, 2004, the Company established MCG Commercial Loan Trust 2004-1 (the “2004-1 Trust”), which issued three classes of series 2004-1 Notes. The facility was structured

90

MCG Capital Corporation

Notes to Consolidated Financial Statements—(Continued)

(in thousands, except per share data)

to hold up to $397,700 of loans. The facility was secured by all of the 2004-1 Trust’s commercial loans and cash in securitization accounts, which totaled approximately $228,047 as of December 31, 2005. On July 20, 2006, the Company repaid the 2004-1 Notes using approximately $61,868 of cash from the Commercial Loan Trust 2004-1 and its Commercial Loan Trust 2006-1 securitization and $15,000 of new borrowings from its Commercial Loan Trust 2006-1 securitization. This facility was scheduled to terminate July 20, 2016 or sooner upon the full repayment of the Class A-1, Class A-2, Class B and Class C Notes.

The 2004-1 Trust issued $250,500 of Class A-1 Notes rated Aaa/AAA, $31,500 of Class A-2 Notes rated Aa1/AAA, $43,500 of Class B Notes rated A2/A and $15,800 of Class C Notes rated Baa2/BBB as rated by Moody’s and Fitch, respectively. On June 1, 2005, the Company sold the Class C securities, which had previously been retained by the Company. The Series 2004-1 Class A-1 Notes, Class A-2 Notes, Class B Notes and Class C Notes bore interest of LIBOR plus 0.43%, 0.65%, 1.30%, and 2.50%, respectively.

Borrowing repayments based on the contractual principal collections of the loans which comprise the collateral would be:

2007	$	167,983
2008		—
2009		—
2010		50,000
2011 and thereafter		303,900
Total	$	521,883

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

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

	December 31, 2006		December 31, 2005
90-day LIBOR	$	387,940	$	331,119
Commercial paper rate		83,943		160,000
Fixed Rate		50,000		50,000
	$	521,883	$	541,119

Note 4—Capital Stock

MCG has one class of common stock and one class of preferred stock authorized. The Company’s board of directors is authorized to provide for the issuance of shares of preferred stock in one or more series, to establish the number of shares to be included in each such series, and to fix the designations, voting powers, preferences, and rights of the shares of each such series, and any qualifications, limitations or restrictions thereof subject to the 1940 Act.

In 2006, MCG raised $68,642 of net proceeds by selling 4,600 shares of newly issued common stock. In 2005, MCG raised $117,015 of net proceeds by selling 8,030 shares of newly issued common stock.

91

MCG Capital Corporation

Notes to Consolidated Financial Statements—(Continued)

(in thousands, except per share data)

The following table summarizes MCG’s distributions declared since January 1, 2005:

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

A return of capital for federal income tax purposes, which MCG calls a tax return of capital, of $0.67 per share, $0.22 per share and $0.53 per share occurred with respect to the fiscal years ended December 31, 2006, 2005 and 2004, respectively. Each year a statement on Form 1099-DIV identifying the source of the dividend (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 MCG’s stockholders. To the extent MCG’s taxable earnings fall below the total amount of MCG’s distributions for that fiscal year, a portion of those distributions may be deemed a tax return of capital to MCG’s stockholders. See “Note 6 – Income Taxes” for further discussion.

Note 5—Employee Benefit Plans

MCG sponsors a contributory savings plan (“The Plan”). The Plan allows all full-time and part-time employees who work at least one thousand hours per year to participate beginning on the first day of the calendar quarter following an employee’s date of hire. MCG matches a portion of the contribution made by employees, which is based upon a percent of defined compensation, to the savings plan. Expenses related to the Plan were $236, $265, and $692 for the years ended December 31, 2006, 2005, and 2004, respectively.

MCG has created a deferred compensation plan for certain executives that allows them to defer a portion of their salary and bonuses to an unfunded deferred compensation plan managed by MCG. Contributions to the plan earn interest at a rate of 2.00% over MCG’s internal cost of funds rate, as defined by the plan. Expenses related to the Plan were $46, $56, and $35 for the years ended December 31, 2006, 2005, and 2004, respectively.

Note 6—Income Taxes

Through December 31, 2001 the Company was taxed under Subchapter C of the Internal Revenue Code. Effective January 1, 2002 the Company elected to be treated as a regulated investment company under Subchapter M of the Internal Revenue Code. The Company’s taxable income therefore generally will not be subject to Federal taxation to the extent such taxable income is distributed to stockholders and the Company annually meets certain qualification and minimum distribution requirements. During the year ended December 31, 2006, the Company recorded a tax provision of approximately $2,712. This tax provision is primarily related to unrealized gains on the Company’s investments.

Deferred income taxes subsequent to conversion to a business development company reflect taxes on built-in gains on equity investments, which amounted to $377, $377, and $989 at December 31, 2006, 2005, and 2004, respectively.

92

MCG Capital Corporation

Notes to Consolidated Financial Statements—(Continued)

(in thousands, except per share data)

The tax cost basis of the Company’s investments as of December 31, 2006, 2005, and 2004 approximates the book cost basis. In addition, the components of stockholders’ equity on a tax basis are not materially different from components of stockholders’ equity on a book basis for the years ended December 31, 2006, 2005, and 2004.

For income tax purposes, distributions paid to shareholders are reported as ordinary income, return of capital, capital gains, or a combination thereof. Distributions paid per common share for the years ended December 31, 2006, 2005, and 2004 were taxable as follows:

	2006					2005					2004
Dividends declared during the year	$	1.68				$	1.68				$	1.68
Dividends declared in 2003 but treated as taxable in 2004 as required by the Internal Revenue Code		—					—					0.42
Dividends declared in 2004 but treated as taxable in 2005 as required by the Internal Revenue Code		—					0.42					(0.42	)
Dividends declared in 2005 but treated as taxable in 2006 as required by the Internal Revenue Code		0.42					(0.42	)				—
Dividends declared in 2006 but treated as taxable in 2007 as required by the Internal Revenue Code		(0.42	)				—					—
Dividends paid for tax purposes	$	1.68				$	1.68				$	1.68
Ordinary income (a)		1.01		60.1	%		1.31		78.0	%		1.09		64.6	%
Capital gains (a)		—		—			0.15		9.0			0.06		3.7
Return of capital (b)		0.67		39.9			0.22		13.0			0.53		31.7
Total reported on tax Form 1099-DIV	$	1.68		100.0	%	$	1.68		100.0	%	$	1.68		100.0	%

(a) For 2006, 2005 and 2004, ordinary income is reported on Form 1099-DIV as either qualified or non-qualified and capital gains are reported on Form 1099-DIV in various sub-categories which have differing tax treatments to shareholders. Those subcategories have not been shown here.

(b) Return of capital refers to those amounts reported as nontaxable distributions on Form 1099-DIV.

On a tax basis, distributions to stockholders in 2006 were $53,020 of ordinary income and $35,204 of return of capital, and in 2005 were $61,582 of ordinary income, $7,136 of capital gain, and $10,221 of return of capital.

The following table is a reconciliation of GAAP net income to taxable net income for the years ended December 31, 2006 and 2005:

(dollars in thousands)	2006			2005
Net income	$	100,949		$	68,193
Net loss of subsidiary not consolidated for tax purposes		—			1,744
Net change in unrealized (appreciation) depreciation on investments not taxable until realized		(34,604	)		1,343
Timing difference related to deductibility of long- term incentive compensation		2,468			3,262
Interest income on nonaccrual loans that is taxable		3,612			2,437
Dividend income accrued for GAAP purposes which is not yet taxable		(21,612	)		(6,516	)
Federal tax expense		2,661			(595	)
Other, net		(93	)		(2,594	)
Taxable income before deductions for distributions	$	53,381		$	67,274

93

MCG Capital Corporation

Notes to Consolidated Financial Statements—(Continued)

(in thousands, except per share data)

Note 7—Commitments and Contingencies

MCG is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of 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. MCG attempts to limit its credit risk by conducting extensive due diligence and obtaining collateral where appropriate.

Commitments to extend credit include the unused portions of commitments that obligate the Company to extend credit in the form of loans, participations in loans or similar transactions. Commitments to extend credit would also include loan proceeds the Company is 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.

The balance of unused commitments to extend credit was $71,581 and $37,330 at December 31, 2006 and 2005, respectively. The estimated fair value of these commitments reflects the amount MCG would have to pay a counterparty to assume these obligations and was $358 and $187 at December 31, 2006 and 2005, respectively. These amounts were estimated as the amount of fees currently charged to enter into similar agreements, taking into account the present creditworthiness of the counterparties.

From time to time, the Company provides guarantees or standby letters of credit on behalf of its portfolio companies. As of December 31, 2006 and 2005, the Company had guarantees and standby letters of credit of approximately $9,480 and $10,226, respectively.

Certain premises are leased under agreements which expire at various dates through 2013. Total rent expense amounted to $1,541, $1,758, and $1,725 during the years ended December 31, 2006, 2005, and 2004, respectively.

Future minimum rental commitments as of December 31, 2006 for all non-cancelable operating leases with initial or remaining terms of one year or more were as follows:

2007	$	1,607
2008		1,939
2009		2,004
2010		2,070
2011 and thereafter		4,070
Total	$	11,690

The Company is also a party to certain legal proceedings incidental to the normal course of its business including the enforcement of its rights under contracts with its portfolio companies. While the outcome of these legal proceedings cannot at this time be predicted with certainty, the Company does not expect that these proceedings will have a material effect upon the Company’s financial condition or results of operations.

Note 8—Concentrations of Credit Risk

At December 31, 2006, the Company’s ten largest customers represented approximately 41.3% of the total fair value of the Company’s investments and accounted for approximately 37.5% of the Company’s operating

94

MCG Capital Corporation

Notes to Consolidated Financial Statements—(Continued)

(in thousands, except per share data)

income during the year ended December 31, 2006. At December 31, 2006, approximately 28.5% of the Company’s portfolio at fair value was invested in companies in the communications industry, of which 21.8% were in competitive local exchange carriers, or CLECs. The Company’s two largest customers, Broadview Networks Holdings, Inc. (“Broadview”) and Cleartel Communications, Inc. (“Cleartel”) are CLEC’s. The Company’s remaining investments in the communications industry include telecommunications tower companies, rural local exchange carriers, Internet service providers, wireless companies and security alarm companies.

At December 31, 2006, the Company holds preferred stock in Broadview which had an aggregate fair value of $159,762. The preferred stock is convertible into common stock and represents a 58% ownership of the preferred stock and a 52% ownership interest on an as-if converted basis. As of December 31, 2006, the Company’s preferred stock investment entitles it to aggregate claims of approximately $237,685, prior to any claims by Broadview common shareholders. The Company is also entitled to accumulating dividends on its preferred stock investment, which accumulate and compound quarterly at an annual rate of 12% on $237,685. On September 29, 2006, Broadview completed the acquisition of ATX, an integrated communications provider serving business customers in the Mid-Atlantic region. Broadview financed the ATX acquisition using a portion of the proceeds from a $210.0 million offering of 11 3/8% Senior Secured Notes due 2012, which were offered through Rule 144A under the Securities Act of 1933, as amended (the “Bond Offering”). Any amounts outstanding on the Bond Offering and Broadview’s $25,000 revolving credit facility from a third party, which Broadview also obtained during the third quarter of 2006, are payable prior to any payments of preferred claims. At December 31, 2006, the Company did not hold any debt investments in Broadview.

At December 31, 2006, the Company’s Broadview investment represented approximately 12.7% of the fair value of its total investments compared to 8.7% of the fair value of its total investments at December 31, 2005. Additionally, the Company’s investment in Broadview accounted for $22,345, or 14.5%, of its total operating income for the year ended December 31, 2006, compared to $17,460, or 14.6%, of its total operating income for the year ended December 31, 2005.

At December 31, 2006, the Company’s Cleartel investment represented approximately 5.8% of the fair value of its total investments compared to 7.2% of the fair value of its total investments at December 31, 2005. Additionally, the Company’s investment in Cleartel accounted for $7,473, or 4.8%, of its total operating income for the year ended December 31, 2006, compared to $3,681, or 3.1%, of its total operating income for the year ended December 31, 2005.

Note 9—Share Based Compensation

Prior to January 1, 2006, the Company accounted for share based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Effective January 1, 2006, the Company adopted the FASB Statement No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123R”) using the modified prospective method. The adoption of SFAS No. 123R did not impact the Company’s net operating income before investment gains and losses, net income, cash flows from operations, cash flows from financing activities, or basic and diluted earnings per share. Effective January 1, 2006, unearned compensation amounts previously recorded as a separate component of equity on the Company’s balance sheet are included in paid-in capital.

In accordance with FAS 123R, the Company recognizes compensation cost related to share based awards for which forfeiture provisions are expected to lapse. The Company uses its historical forfeiture rate as a basis for

95

MCG Capital Corporation

Notes to Consolidated Financial Statements—(Continued)

(in thousands, except per share data)

its estimate of awards for which forfeiture provisions will lapse. The grant date is generally the date on which MCG and the employee reach a mutual understanding of the key terms and conditions of a share based award. The grant date fair value of the restricted share awards is based on the closing price of the Company’s common stock as reported on the NASDAQ Global Select Market on that date. For those awards subject to service conditions, the Company uses the straight line method over the entire service period. During June 2006, the 2006 Employee Restricted Stock Plan (“2006 Plan”) was approved by the Company’s shareholders. The Company may issue up to 3,500 shares under the 2006 Plan. Awards granted under the 2006 Plan may be subject to service, performance, or market conditions as specified in the award agreements.

In 2001, MCG terminated its stock option plan and the option grants made thereunder. In connection with the termination of its stock option plan, MCG issued approximately 1,540 shares of restricted stock, for which forfeiture provisions have not lapsed with respect to approximately 206 as of December 31, 2005. During 2006, the Company granted 483 restricted shares under the 2006 Plan. Of these 483 restricted shares, forfeiture provisions lapsed with respect to 83 immediately upon issuance, and forfeiture provisions will lapse with respect to 300 on a quarterly basis from December 31, 2006 through December 31, 2009, subject to service conditions of continued employment with the Company, while forfeiture provisions will lapse with respect to the other 100 annually on September 1, 2007 and September 1, 2008, subject to service conditions of continued employment with the Company.

During the years ended December 31, 2006 and 2005, the Company recognized compensation expense related to share-based awards in the amount of $4,514 and $6,523, respectively. Included in this amount are dividends of approximately $1,045 and $2,102 that were paid on shares securing non-recourse employee loans. At December 31, 2006, all the restricted share awards for which forfeiture provisions have not lapsed carried non-forfeitable dividend rights to the holder of the restricted shares. Dividends paid on restricted shares for which forfeiture provisions are expected to lapse are charged to retained earnings while dividends paid on restricted shares for which forfeiture provisions are not expected to lapse are charged to compensation expense. During the year ended December 31, 2006, no dividends paid on restricted stock for which forfeiture provisions have not lapsed were charged to compensation expense as forfeiture provisions are expected to lapse with respect to all such shares. At December 31, 2006, total unrecognized compensation cost related to restricted stock granted to employees was approximately $6,589 and is expected to be recognized over a weighted average remaining requisite service period of approximately 2.4 years.

Additionally, pursuant to employment agreements with certain executives dated September 18, 2006, the Company will grant to these executives 200 restricted shares, under the 2006 Plan, that will be subject to both service and performance conditions. Forfeiture provisions will lapse with respect to these 200 restricted shares annually each February 28 from 2007 to 2010. As of December 31, 2006, these 200 shares are not yet considered granted under FAS 123R because the performance conditions had not yet been established. Therefore, the Company has not recorded any compensation expense related to these 200 shares. See “Note 13 – Subsequent Events” for additional discussion regarding the 200 restricted shares with performance conditions and for additional discussion of share based compensation.

Non-Employee Director Share Based Compensation

During June 2006, the 2006 Non-Employee Director Restricted Stock Plan (“2006 Non-Employee Plan”) was approved by the Company’s shareholders. The Company may issue up to 100 shares under the 2006 Non-Employee Plan. During the year ended December 31, 2006, the Company granted 25 restricted shares under the 2006 Non-Employee Plan to certain non-employee directors. Forfeiture provisions will lapse with respect to

96

MCG Capital Corporation

Notes to Consolidated Financial Statements—(Continued)

(in thousands, except per share data)

these restricted shares annually each March 31 from 2007 to 2009. This compensation cost is considered part of the general compensation to these non-employee directors and, therefore, is included as a component of general and administrative expenses on the Company’s Consolidated Statement of Operations for the year ended December 31, 2006. At December 31, 2006, total unrecognized compensation cost related to restricted stock granted to non-employee directors was approximately $400 and is expected to be recognized over a weighted average remaining requisite service period of approximately 2.2 years.

The following table summarizes the Company’s restricted stock award activity during the year ended December 31, 2006:

	Shares		Weighted Average Grant Date Fair Value per Share
Subject to forfeiture provisions at December 31, 2005	206		$	17.01
Granted	508			16.83
Not subject to forfeiture provisions	(256	)		17.56
Forfeited	—			—
Subject to forfeiture provisions at December 31, 2006	458		$	16.50

Note 10—Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per common share for the years ended December 31, 2006, 2005, and 2004:

	Year Ended December 31,
	2006		2005		2004
Basic
Net income	$	100,949	$	68,193	$	47,647
Weighted average common shares outstanding		54,227		48,109		41,244
Earnings per common share-basic	$	1.86	$	1.42	$	1.16
Diluted
Net income	$	100,949	$	68,193	$	47,647
Weighted average common shares outstanding		54,227		48,109		41,244
Dilutive effect of stock options and restricted stock on which forfeiture provisions have not lapsed		37		22		54
Weighted average common shares and common stock equivalents		54,264		48,131		41,298
Earnings per common share-diluted	$	1.86	$	1.42	$	1.15

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.

97

MCG Capital Corporation

Notes to Consolidated Financial Statements—(Continued)

(in thousands, except per share data)

Note 11—Selected Quarterly Data (Unaudited)

The following tables set forth certain quarterly financial information for each of the eight quarters ended with the quarter ended December 31, 2006. This information was derived from our unaudited consolidated financial statements. Results for any quarter are not necessarily indicative of results for the full year or for any future quarter.

	2006
	Qtr 1		Qtr 2		Qtr 3		Qtr 4
Operating income	$	37,637	$	35,270	$	40,864	$	40,622
Net operating income before investment gains and losses		20,764		18,885		20,064		23,931
Net income		26,402		22,910		22,116		29,521
Earnings per common share—basic and diluted	$	0.50	$	0.43	$	0.42	$	0.52
	2005
	Qtr 1		Qtr 2		Qtr 3		Qtr 4
Operating income	$	28,115	$	30,158	$	28,374	$	32,898
Net operating income before investment gains and losses		14,491		16,430		12,887		16,707
Net income		13,058		19,880		16,695		18,560
Earnings per common share—basic and diluted	$	0.29	$	0.42	$	0.34	$	0.37

98

MCG Capital Corporation

Notes to Consolidated Financial Statements—(Continued)

(in thousands, except per share data)

Note 12—Financial Highlights

Following is a schedule of financial highlights for the years ended December 31, 2006, 2005, 2004, 2003 and 2002:

	Year Ended December 31,
	2006			2005			2004			2003			2002
Per Share Data:
Net asset value at beginning of period (a)	$	12.48		$	12.22		$	11.98		$	11.56		$	12.46
Net operating income before investment gains and losses (b)		1.54			1.26			1.10			1.45			1.57
Net realized (losses) gains on investments (b)		(0.27	)		0.19			(0.20	)		(0.60	)		(0.34	)
Net change in unrealized appreciation (depreciation) on investments (b)		0.64			(0.03	)		0.26			0.43			(1.12	)
Provision for income taxes on investment gains		(0.05	)
Net income		1.86			1.42			1.16			1.28			0.11
Distributions from net investment income		(1.01	)		(1.27	)		(1.15	)		(1.40	)		(1.76	)
Distributions from capital gains		—			(0.19	)		—			—			—
Distributions from return of capital		(0.67	)		(0.22	)		(0.53	)		(0.25	)		—
Effect on distributions of stock offerings after record dates (c)		0.12			0.16			0.10			0.23			0.08
Effect of distributions recorded as compensation expense (b)		0.02			0.04			0.06			0.06			0.09
Net decrease in stockholders’ equity resulting from distributions		(1.54	)		(1.48	)		(1.52	)		(1.36	)		(1.59	)
Net increase in shareholders’ equity resulting from reduction in employee loans		0.05			0.02			0.01			0.01			0.03
Issuance of shares		2.45			2.35			3.13			3.06			4.29
Dilutive effect of share issuances, issuance of restricted stock and restricted stock subject to forfeiture provisions (d)		(2.54	)		(2.14	)		(2.77	)		(2.68	)		(3.88	)
Net increase in stockholders’ equity from restricted stock amortization (b)		0.07			0.09			0.23			0.11			0.14
Net increase in stockholders' equity relating to share issuances		0.03			0.32			0.60			0.50			0.58
Net asset value at end of period (a)	$	12.83		$	12.48		$	12.22		$	11.98		$	11.56
Per share market value at end of period	$	20.32		$	14.59		$	17.13		$	19.59		$	10.77
Total return (e)		50.79	%		(5.02	)%		(3.98	)%		97.21	%		(27.13	)
Shares outstanding at end of period		58,694			53,372			45,342			38,732			31,259
Ratio/Supplemental Data:
Net assets at end of period	$	753,137		$	666,087		$	554,213		$	463,950		$	361,250
Ratio of operating expenses to average net assets (annualized)		10.40	%		9.94	%		9.43	%		8.31	%		8.56	%
Ratio of net operating income to average net assets (annualized)		12.30	%		10.19	%		8.85	%		11.95	%		11.91	%

(a) Based on total shares outstanding.

(b) Based on average shares outstanding.

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

99

MCG Capital Corporation

Notes to Consolidated Financial Statements—(Continued)

(in thousands, except per share data)

(d) The Dilutive effect of share issuances, issuance of restricted stock and restricted stock subject to forfeiture provision represents the effects of shares issued during the period and the lapsing of forfeiture provisions on restricted stock on earnings per share.

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

Note 13—Subsequent Events

On January 9, 2007, the performance criteria for 200 restricted shares to certain executives were determined by the board of directors, therefore those awards are considered granted for GAAP purposes on that date. The total compensation cost of those awards is $3,874, based on the closing price of MCG’s common stock on that date, and will be recognized as compensation expense over the requisite service periods which run through February 2010.

In January 2007, one of the Company’s majority owned control companies, Midwest Tower Partners, LLC (“MTP”), sold substantially all of its assets and repaid its outstanding debt with those proceeds. MTP is currently in the process of making distributions to its equity holders. As of December 31, 2006, the Company had debt and equity investments in MTP with a fair value of $34,917 which includes unrealized appreciation of $5,012. In connection with this transaction, the Company expects to realize the December 31, 2006 unrealized pre-tax gain of approximately $5,012 which will have no significant impact on first quarter 2007 earnings.

On February 1, 2007, the Company entered into the fifth amendment to its MCG Commercial Loan Funding Trust facility, funded by Three Pillars Funding LLC ("Three Pillars"), an asset-backed commercial paper conduit administered by SunTrust Capital Markets, Inc. Pursuant to this amendment, the $250.0 million facility provided by Three Pillars has been divided and will be funded through two separate Variable Funding Certificates ("VFCs"), a $218.8 million Class A VFC and a $31.2 million Class B VFC. The Class A VFC will maintain the same advance rate, of up to 70% of eligible collateral, and the same interest rate, the commercial paper rate plus 0.95%, as was in effect immediately prior to this amendment. The Class B VFC has an advance rate of 10% of eligible collateral and bears interest at the commercial paper rate plus 1.75%. This amendment effectively increases the Company’s overall borrowing advance rate by 10% from a maximum of 70% of eligible collateral to a maximum of 80% of eligible collateral, which will allow the Company to borrow up to $250.0 million under the facility using less collateral than previously required. Other minor modifications were also made to this facility.

In February 2007, Broadview Networks Holdings, Inc., the Company’s largest portfolio company, signed a definitive agreement to acquire InfoHighway Communications Corp., a New York-based integrated provider of hosted and managed communications solutions serving more than 12,000 business customers in the Mid-Atlantic and Northeast regions of the U.S. MCG does not expect to be required to provide additional funding to Broadview to facilitate this transaction. The transaction is expected to close in the second quarter of 2007 and is subject to regulatory approvals and other closing conditions.

During the first quarter of 2007, the Company’s board of directors approved the issuance of 778 shares of restricted stock to the Company’s employees pursuant to the MCG Capital Corporation 2006 Employee Restricted Stock Plan, which will generally be expensed over four years.

100

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.    Controls and Procedures

1. Disclosure 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 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.

2. Internal Control Over Financial Reporting

a. Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 and for the assessment of the effectiveness of internal control over financial reporting.

Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006, has been audited by Ernst & Young LLP, the independent registered public accounting firm that audited our financial statements, as stated in their report which is included in this Annual Report on Form 10-K.

Management’s report on internal control over financial reporting and the attestation report of Ernst & Young LLP, an independent registered public accounting firm, thereon are set forth under the headings “Management’s Report on Internal Control over Financial Reporting” and “Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting” in this Annual Report.

b. Attestation Report of the Registered Public Accounting Firm

Our independent registered public accounting firm, Ernst & Young LLP has issued an attestation report concurring with management’s assessment, which is included at the beginning of Part II, Item 8 of this Annual Report on Form 10-K.

c. Changes in Internal Control Over Financial Reporting

There have been no changes in MCG’s internal control over financial reporting that occurred during the quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, MCG’s internal control over financial reporting.

Item 9B.    Other Information

None.

101

PART III

Item 10.    Directors, Executive Officers and Corporate Governance

The information with respect to our directors, executive officers and corporate governance matters is contained under the captions “Proposal I : Election of Directors”, “Information about Executive Officers who are not Directors” and “Certain Relationships and Transactions”, in our definitive Proxy Statement for the 2007 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 and is incorporated in this Annual Report by reference in response to this item.

We have adopted a code of business conduct and ethics that applies to directors, officers and employees. The code of business conduct and ethics is available on our website at http://www.mcgcapital.com. We will report any amendments to or waivers of a required provision of the code of business conduct and ethics on our website or in a Form 8-K.

Item 11.    Executive Compensation

The information with respect to compensation of executives and directors is contained under the caption “Compensation of Executive Officers and Directors” in our definitive Proxy Statement for the 2007 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 and is incorporated in this Annual Report by reference in response to this item.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information with respect to security ownership of certain beneficial owners and management is contained under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Compensation of Executive Officers and Directors” in our definitive Proxy Statement for the 2007 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 and is incorporated in this Annual Report by reference in response to this item.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

The information with respect to certain relationships and related transactions is contained under the caption “Certain Relationships and Transactions” and the caption “Proposal I: Election of Directors” in our definitive Proxy Statement for the 2007 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act and is incorporated in this Annual Report by reference in response to this item.

Item 14.    Principal Accountant Fees and Services

The information with respect to principal accountant fees and services is contained under the captions “Principal Accountant Fees and Services” and “Proposal II: Ratification of Selection of Independent Auditors” in our definitive Proxy Statement for the 2007 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 and is incorporated in this Annual Report by reference to this item.

102

PART IV

Item 15.    Exhibits and Financial Statement Schedules

1.	The following financial statements are filed herewith
	Management’s Report on Internal Control over Financial Reporting	59
	Reports of Independent Registered Public Accounting Firm	60
	Consolidated Balance Sheets as of December 31, 2006 and 2005	62
	Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004	63
	Consolidated Statements of Changes in Net Assets for the years ended December 31, 2006, 2005 and 2004	64
	Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004	65
	Consolidated Schedule of Investments as of December 31, 2006	66
	Consolidated Schedule of Investments as of December 31, 2005	71
	Notes to Consolidated Financial Statements	79
2.	The following financial statement schedules are filed herewith Schedule 12-14 Investments in and Advances to Affiliates.
3.	Exhibits required to be filed by Item 601 of Regulation S-K.

103

Schedule 12-14

MCG Capital Corporation

Schedule of Investments in and Advances to Affiliates

		Year Ended December 31, 2006
Portfolio Company (in thousands)	Investment (1)	Amount of Interest or Dividends Credited to Income (5)		As of December 31, 2005 Fair Value		Gross Additions (2)		Gross Reductions (3)			As of December 31, 2006 Fair Value
Control Investments
Broadview Networks Holdings, Inc.	Debt	$	3,692	$	42,993	$	8,121	$	(51,114	)	$	—
	Series A Preferred Stock		12,180		52,137		32,377					84,514
	Series A-1 Preferred Stock		5,383		—		75,248					75,248
	Common Stock		—		—							—
Chesapeake Tower Holdings, LLC	Debt		31		—		400					400
	Preferred LLC Interest		—		—		3,139					3,139
	Common C LLC Interest		—		—							—
Cleartel Communications, Inc.	Debt		6,723		38,206		33,756					71,962
	Preferred Stock		—		40,684				(40,072	)		612
Crystal Media Network, LLC	Debt (4)		—		947				(947	)		—
	LLC Interest		—		1,097		38		(588	)		547
Helicon Cable Holdings, LLC	Debt		2,021		15,822		3,615					19,437
	Preferred LLC Interest		864		8,316		864					9,180
IntranMedia, LLC	Debt		92		—		12,000					12,000
	Preferred Units		61		—		8,661					8,661
Jet Plastica Investors, LLC	Debt		1,136		—		26,159					26,159
	Preferred LLC Interest		734		—		30,893					30,893
JupiterKagan, Inc.	Debt		416		—		5,349					5,349
	Series A Preferred Stock		—		—		10,000					10,000
	Common Stock		—		—							—
Midwest Tower Partners, LLC	Debt		3,024		16,813		10,487		(34	)		27,266
	Preferred LLC Interest		317		2,121		317					2,438
	Common LLC Interest		—		1,332		7,565		(3,684	)		5,213
National Product Services, Inc.	Debt (4)		602		—		15,834		(434	)		15,400
	Common Stock		—		—							—
Platinum Wireless, Inc.	Debt		10		389				(389	)		—
	Common Stock		—		4,505		201		(942	)		3,764
	Option to purchase		—		98		8		(106	)		—
PremierGarage Holdings, LLC	Debt		471		—		11,000		(300	)		10,700
	Preferred LLC Interest		142		—		4,592					4,592
	Common LLC Interest		—		—							—
RadioPharmacy Investors, LLC	Debt		1,965		—		16,258					16,258
	Preferred LLC Interest		522		—		10,657					10,657
Superior Industries Investors, LLC	Debt		594		—		14,083					14,083
	Preferred LLC Interest		297		—		12,837					12,837
Superior Publishing Corporation	Debt		5,927		40,900		2,392		(24,270	)		19,022
	Preferred Stock		—		8,545		832		(133	)		9,244
	Common Stock		—		—							—
Working Mother Media, Inc.	Debt (4)		—		8,576		2,970					11,546
	Class A Preferred Stock		—		4,192		827					5,019
	Class B Preferred Stock		—		—							—
	Class C Preferred Stock		—		—							—
	Common Stock		—		—							—
Income from Control Investments disposed of during the year			57
Total Control Investments		$	47,261								$	526,140
Affiliate Investments
Cherry Hill Holdings Inc.	Debt	$	548	$	—	$	13,122	$	(1,000	)	$	12,122
	Series A Preferred Stock		25		—		775					775
iVerify, US Inc.	Debt		—		75				(75	)		—
	Preferred Stock		—		—		578		(578	)		—
	Common Stock		—		—							—
NYL Brands Holdings, Inc.	Debt		1,581		—		18,000		(8,000	)		10,000
	Class A Common Stock		—		—		1,501		(1	)		1,500
	Warrants to purchase Common Stock		—		—		526					526
On Target Media, LLC	Debt		285		31,266		14		(31,280	)		—
	Class A LLC Interest		328		2,610		408		(1,182	)		1,836
	Class B LLC Interest		—		—		1,628		(15	)		1,613
Sunshine Media Delaware, LLC	Debt		1,896		12,205		229		(153	)		12,281
	Class A LLC Interest		—		—		329					329
TNR Entertainment Corp LLC	Debt		1,352		—		25,606		(39	)		25,567
	Class D Preferred Stock		—		—		3,000					3,000
	Warrants to purchase Series D Preferred Stock		—		—							—
Xfone, Inc.	Common Stock		—		—		2,803		(321	)		2,482
	Warrants to purchase Common Stock		—		—							—
Income from Affiliate Investments disposed of during the year			—
Total Affiliate Investments		$	6,015								$	72,031

104

This schedule should be read in conjunction with the Company’s Consolidated Financial Statements, including the Consolidated Statement of Investments and Note 2 to the Consolidated Financial Statements.

(1) Common stock, warrants, options, and equity interests are generally non-income producing and restricted. In some cases, preferred stock may also be non-income producing. The principal amount for debt and the number of shares of common stock and preferred stock is shown in the Consolidated Schedule of Investments as of December 31, 2006.

(2) Gross additions include increases in investments resulting from new portfolio company investments, paid-in-kind interest or dividends, the amortization of discounts and fees, and the exchange of one or more existing securities for one or more new securities. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation.

(3) Gross reductions include decreases in investments resulting from principal collections related to investment repayments or sales and the exchange of one or more existing securities for one or more new securities. Gross reductions also include net increases in unrealized depreciation or net decreases in unrealized appreciation.

(4) Debt is on non-accrual status at December 31, 2006, and is therefore considered non-income producing.

(5) Represents the total amount of interest or dividends credited to income for the portion of the year an investment was a control investment (more than 25% owned) or an affiliate investment (5% to 25% owned), respectively.

** Information related to the amount of equity in the net profit and loss for the period for the investments listed has not been included in this schedule. This information is not considered to be meaningful due to the complex capital structures of the portfolio companies, with different classes of equity securities outstanding with different preferences in liquidation. These investments are not consolidated, nor are they accounted for under the equity method of accounting.

105

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):

Exhibit Number	Description of Document
3.1	Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 filed with MCG Capital’s Current Report on Form 8-K filed on May 31, 2005).
3.2	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 filed with MCG Capital’s Current Report on Form 8-K filed on March 28, 2005).
4.1	Specimen Common Stock Certificate (incorporated by reference to Exhibit D.1 to Pre-effective Amendment No. 2 to MCG Capital’s registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 1, 2001).
10.1	Third Amended and Restated Registration Rights Agreement by and among MCG Capital Corporation and certain stockholders (incorporated by reference to Exhibit 10.1 filed with MCG Capital’s Form 10-K for the year ended December 31, 2001).
10.2	Sale and Servicing Agreement by and among MCG Commercial Loan Trust 2001-1, MCG Finance III, LLC, MCG Capital Corporation and Wells Fargo Bank Minnesota, National Association, dated as of December 1, 2001 (incorporated by reference to Exhibit 10.13 filed with MCG Capital’s Form 10-K for the year ended December 31, 2001).
10.3	Note Purchase Agreement among MCG Commercial Loan Trust 2001-1, MCG Capital Corporation, MCG Finance III, LLC and Wachovia Securities, Inc. (formerly First Union Securities, Inc.), dated as of December 19, 2001 (incorporated by reference to Exhibit 10.14 filed with MCG Capital’s Form 10-K for the year ended December 31, 2001).
10.4	Trust Agreement between MCG Finance III, LLC and Wilmington Trust Company, dated as of December 1, 2001 (incorporated by reference to Exhibit 10.15 filed with MCG Capital’s Form 10-K for the year ended December 31, 2001).
10.5	MCG Commercial Loan Trust 2001-1 Trust Certificate, dated as of December 27, 2001 (incorporated by reference to Exhibit 10.16 filed with MCG Capital’s Form 10-K for the year ended December 31, 2001).
10.6	MCG Commercial Loan Trust 2001-1 Class A Note, dated as of December 27, 2001 (incorporated by reference to Exhibit 10.17 filed with MCG Capital’s Form 10-K for the year ended December 31, 2001).
10.7	MCG Commercial Loan Trust 2001-1 Class B Note, dated as of December 27, 2001 (incorporated by reference to Exhibit 10.18 filed with MCG Capital’s Form 10-K for the year ended December 31, 2001).
10.8	MCG Commercial Loan Trust 2001-1 Class C Note issued to MCG Finance III, LLC, dated as of December 27, 2001 (incorporated by reference to Exhibit 10.19 filed with MCG Capital’s Form 10-K for the year ended December 31, 2001).
10.9	Indenture between MCG Commercial Loan Trust 2001-1 and Wells Fargo Bank Minnesota, National Association, dated as of December 1, 2001 (incorporated by reference to Exhibit 10.20 filed with MCG Capital’s Form 10-K for the year ended December 31, 2001).
10.10	Commercial Loan Sale Agreement between MCG Capital Corporation and MCG Finance III, LLC, dated as of December 1, 2001 (incorporated by reference to Exhibit 10.21 filed with MCG Capital’s Form 10-K for the year ended December 31, 2001).
10.11	401(k) Plan (incorporated by reference to Exhibit i.1 filed with MCG Capital’s registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on July 5, 2001).

106

Exhibit Number	Description of Document
10.12	Deferred Compensation Plan (incorporated by reference to Exhibit i.2 filed with MCG Capital’s registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on July 5, 2001).
10.13	Dividend Reinvestment Plan (incorporated by reference to Exhibit e to Pre-effective Amendment No. 2 to MCG Capital’s registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 1, 2001).
10.14	Form of Restricted Stock Agreement for administrative personnel (incorporated by reference to Exhibit i.3 to Pre-effective Amendment No. 3 to MCG Capital’s registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 6, 2001).
10.15	Form of Restricted Stock Agreement for staff professionals (incorporated by reference to Exhibit i.4 to Pre-effective Amendment No. 3 to MCG Capital’s registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 6, 2001).
10.16	Form of Restricted Stock Agreement for senior management (incorporated by reference to Exhibit i.6 to Pre-effective Amendment No. 3 to MCG Capital’s registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 6, 2001).
10.17	Form of Amended and Restated Restricted Stock Agreement for senior management (incorporated by reference to Exhibit i.26 to MCG Capital’s registration statement on Form N-2 [File No. 333-113236] filed with the Securities and Exchange Commission on March 3, 2004).
10.18	Amended and Restated Restricted Stock Agreement between the Company and Bryan J. Mitchell, dated March 1, 2004 (incorporated by reference to Exhibit i.27 to MCG Capital’s registration statement on Form N-2 [File No. 333-113236] filed with the Securities and Exchange Commission on March 3, 2004).
10.19	Restricted Stock Agreement between the Company and Robert J. Merrick, dated November 28, 2001 (incorporated by reference to Exhibit 10.30 filed with MCG Capital’s Form 10-K for the year ended December 31, 2001).
10.20	Amended and Restated Restricted Stock Agreement between the Company and B. Hagen Saville, dated March 1, 2004 (incorporated by reference to Exhibit i.29 to MCG Capital’s registration statement on Form N-2 [File No. 333-113236] filed with the Securities and Exchange Commission on March 3, 2004).
10.21	Amended and Restated Restricted Stock Agreement between the Company and Steven F. Tunney, dated March 1, 2004 (incorporated by reference to Exhibit i.28 to MCG Capital’s registration statement on Form N-2 [File No. 333-113236] filed with the Securities and Exchange Commission on March 3, 2004).
10.22	Form of Restricted Stock Agreement for directors (incorporated by reference to Exhibit 99.i.7 to Pre-effective Amendment No. 3 to MCG Capital’s registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 6, 2001).
10.23	Promissory Note issued to Bryan J. Mitchell, dated as of November 28, 2001 (incorporated by reference to Exhibit 10.34 filed with MCG Capital’s Form 10-K for the year ended December 31, 2001).
10.24	Promissory Note issued to B. Hagen Saville, dated as of November 28, 2001 (incorporated by reference to Exhibit 10.35 filed with MCG Capital’s Form 10-K for the year ended December 31, 2001).
10.25	Promissory Note issued to Steven F. Tunney, dated as of November 28, 2001 (incorporated by reference to Exhibit 10.36 filed with MCG Capital’s Form 10-K for the year ended December 31, 2001).

107

Exhibit Number	Description of Document
10.26	Form of Promissory Note issued to senior management (incorporated by reference to Exhibit i.8 to Pre-effective Amendment No. 3 to MCG Capital’s registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 6, 2001).
10.27	Form of Promissory Note issued to employees (incorporated by reference to Exhibit i.9 to Pre-effective Amendment No. 3 to MCG Capital’s registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 6, 2001).
10.28	Pledge Agreement between the Company and Bryan J. Mitchell, dated as of November 28, 2001 (incorporated by reference to Exhibit 10.39 filed with MCG Capital’s Form 10-K for the year ended December 31, 2001).
10.29	Pledge Agreement between the Company and B. Hagen Saville, dated as of November 28, 2001 (incorporated by reference to Exhibit 10.40 filed with MCG Capital’s Form 10-K for the year ended December 31, 2001).
10.30	Pledge Agreement between the Company and Steven F. Tunney, dated as of November 28, 2001 (incorporated by reference to Exhibit 10.41 filed with MCG Capital’s Form 10-K for the year ended December 31, 2001).
10.31	Form of Pledge Agreement between the Company and employee (incorporated by reference to Exhibit i.10 to Pre-effective Amendment No. 3 to MCG Capital’s registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 6, 2001).
10.32	Form of Amended and Restated Promissory Note issued to senior management (incorporated by reference to Exhibit I.10 to Pre-effective Amendment No. 2 to MCG Capital’s registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 1, 2001).
10.33	Form of Pledge Agreement between the Company and senior management, dated as of June 24, 1998 (incorporated by reference to Exhibit i.7 filed with MCG Capital’s registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on July 5, 2001).
10.34	Custodial Agreement between the Company and Riggs Bank, N.A. (incorporated by reference to Exhibit 10.45 filed with MCG Capital’s Form 10-K for the year ended December 31, 2001).
10.35	Employment Agreement between the Company and Robert J. Merrick, dated November 28, 2001 (incorporated by reference to Exhibit 10.47 filed with MCG Capital’s Form 10-K for the year ended December 31, 2001).
10.36	Employment Agreement between the Company and B. Hagen Saville, dated November 28, 2001 (incorporated by reference to Exhibit 10.48 filed with MCG Capital’s Form 10-K for the year ended December 31, 2001).
10.37	Employment Agreement between the Company and Steven F. Tunney, dated November 28, 2001 (incorporated by reference to Exhibit 10.49 filed with MCG Capital’s Form 10-K for the year ended December 31, 2001).
10.38	Deed of Lease by and between Twin Towers II Associates Limited Partnership, as landlord, and MCG Capital Corporation, as tenant, dated as of September 24, 2002 (incorporated by reference to Exhibit 10.50 filed with MCG Capital’s Form 10-Q for the quarter ended September 30, 2002).
10.39	Amended and Restated Employment Agreement between MCG Capital Corporation and Bryan J. Mitchell dated November 3, 2002 (incorporated by reference to Exhibit 10.51 filed with MCG Capital’s Form 10-Q for the quarter ended September 30, 2002).

108

Exhibit Number	Description of Document
10.40	MCG Capital Corporation Swingline Note issued to Wachovia Bank, National Association (formerly First Union National Bank), dated as of February 12, 2004 (incorporated by reference to Exhibit f.27 to MCG Capital’s registration statement on Form N-2 [File No. 333-113236] filed with the Securities and Exchange Commission on March 3, 2004).
10.41	Employment Agreement between the Company and Michael R. McDonnell, dated July 14, 2004 (incorporated by reference to Exhibit 10.65 filed with MCG Capital’s Form 10-Q for the quarter ended June 30, 2004).
10.42	Sale and Servicing Agreement by and among MCG Commercial Loan Trust 2004-1, MCG Finance IV, LLC, MCG Capital Corporation and Wells Fargo Bank, National Association, dated as of September 30, 2004 (incorporated by reference to Exhibit 10.66 filed with MCG Capital’s Form 10-Q for quarter ended September 30, 2004).
10.43	Indenture between MCG Commercial Loan Trust 2004-1 and Wells Fargo Bank, National Association, dated as of September 30, 2004 (incorporated by reference to Exhibit 10.67 filed with MCG Capital’s Form 10-Q for quarter ended September 30, 2004).
10.44	Sale and Servicing Agreement by and among MCG Capital Corporation, MCG Commercial Loan Funding Trust, Three Pillars Funding, LLC, SunTrust Capital Markets, Inc. and Wells Fargo Bank, National Association, dated as of November 10, 2004 (incorporated by reference to Exhibit f.37 filed with MCG Capital’s registration statement on Form N-2 [File No. 333-121358] filed with the Securities and Exchange Commission on December 17, 2004).
10.45	Credit and Warehouse Agreement, dated as of April 21, 2005, among UBS AG, Stamford Branch, MCG Commercial Loan Trust 2005-1 and MCG Capital Corporation (incorporated by reference to Exhibit 10.71 filed with MCG Capital’s Form 10-Q for the quarter ended March 31, 2005).
10.46	Pledge, Security and Custody Agreement by and among MCG Commercial Loan Trust 2005-1, MCG Finance VI, LLC, MCG Capital Corporation, UBS AG, Stamford Branch, and Wells Fargo Bank, National Association, dated as of April 21, 2005 (incorporated by reference to Exhibit 10.72 filed with MCG Capital’s Form 10-Q for the quarter ended March 31, 2005).
10.47	Master Conveyance Assignment, dated as of April 21, 2005, among MCG Capital Corporation, MCG Finance VI, LLC, and MCG Commercial Loan Trust 2005-1 (incorporated by reference to Exhibit 10.73 filed with MCG Capital’s Form 10-Q for the quarter ended March 31, 2005).
10.48	First Amendment to Sale and Servicing Agreement by and among MCG Commercial Loan Funding Trust, MCG Capital Corporation, Three Pillars Funding LLC, SunTrust Capital Markets, Inc. and Wells Fargo Bank, National Association, dated as of May 2, 2005 (incorporated by reference to Exhibit 10.74 filed with MCG Capital’s Form 10-Q for the quarter ended March 31, 2005).
10.49	Credit and Warehouse Agreement, dated as of June 9, 2005, among Merrill Lynch Capital Corp., MCG Commercial Loan Trust 2005-2 and MCG Capital Corporation (incorporated by reference to Exhibit 99.1 filed with MCG Capital’s Current Report on Form 8-K filed on June 9, 2005).
10.50	Second Amendment to Sale and Servicing Agreement, dated as of July 29, 2005 among MCG Commercial Loan Funding Trust, MCG Capital Corporation, Three Pillars Funding LLC, SunTrust Capital Markets, Inc., and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.76 filed with MCG Capital’s Form 10-Q for the quarter ended June 30, 2005).
10.51	Amended and Restated Revolving Credit Agreement dated as of September 20, 2005 among MCG Capital Corporation, Bayerische Hypo-Und Vereinsbank, AG, New York Branch and Various Lenders (incorporated by reference to Exhibit 99.1 filed with MCG Capital’s Current Report on Form 8-K filed on September 21, 2005).

109

Exhibit Number	Description of Document
10.52	Note Purchase Agreement, dated October 11, 2005 (incorporated by reference to Exhibit 99.1 filed with MCG Capital’s Current Report on Form 8-K filed on October 12, 2005).
10.53	Third Amendment to Sale and Servicing Agreement, dated as of December 7, 2005 among MCG Commercial Loan Funding Trust, MCG Capital Corporation, Three Pillars Funding LLC, SunTrust Capital Markets, Inc., and Wells Fargo Bank, National Association (incorporated by reference Exhibit 99.1 filed with MCG Capital’s Current Report on Form 8-K filed on December 13, 2005).
10.54	Fourth Amendment to Sale and Servicing Agreement, dated as of April 17, 2006, among MCG Commercial Loan Funding Trust, MCG Capital Corporation, Three Pillars Funding LLC, SunTrust Capital Markets, Inc., and Wells Fargo, National Association (incorporated by reference to Exhibit f.23 filed with MCG Capital’s registration statement on Form N-2 [File No. 333-133669] filed with the Securities and Exchange Commission on May 1, 2006).
10.55	Indenture by and between MCG Commercial Loan Trust 2006-1 and Wells Fargo Bank, National Association, dated as of April 18, 2006 (incorporated by reference to Exhibit f.24 filed with MCG Capital’s registration statement on Form N-2 [File No. 333-133669] filed with the Securities and Exchange Commission on May 1, 2006).
10.56	Collateral Management Agreement, dated as of April 18, 2006, by and between MCG Commercial Loan Trust 2006-1 and MCG Capital Corporation (incorporated by reference to Exhibit f.25 filed with MCG Capital’s registration statement on Form N-2 [File No. 333-133669] filed with the Securities and Exchange Commission on May 1, 2006).
10.57	Class A-2 Note Purchase Agreement, dated as of April 18, 2006, among MCG Commercial Loan Trust 2006-1 and Wells Fargo Bank, National Association (incorporated by reference to Exhibit f.26 filed with MCG Capital’s registration statement on Form N-2 [File No. 333-133669] filed with the Securities and Exchange Commission on May 1, 2006).
10.58	Class A-3 Note Purchase Agreement, dated as of April 18, 2006, by and among MCG Commercial Loan Trust 2006-1, North Sea Funding Europe Asset Purchasing Company No. 1 B.V. and Wells Fargo Bank, National Association (incorporated by reference to Exhibit f.27 filed with MCG Capital’s registration statement on Form N-2 [File No. 333-133669] filed with the Securities and Exchange Commission on May 1, 2006).
10.59	Class A-3 Note Purchase Agreement, dated as of April 18, 2006 by and among MCG Commercial Loan Trust 2006-1, Barclays Bank PLC and Wells Fargo Bank, National Association (incorporated by reference to Exhibit f.28 filed with MCG Capital’s registration statement on Form N-2 [File No. 333-133669] filed with the Securities and Exchange Commission on May 1, 2006).
10.60	Credit and Warehouse Agreement, dated as of May 2, 2006, among Merrill Lynch Capital Corp., MCG Commercial Loan Trust 2006-2 and MCG Capital Corporation (incorporated by reference to exhibit 10.60 filed with MCG Capital’s Form 10-Q for the quarter ended March 31, 2006).
10.61	Custody Agreement, dated as of May 2, 2006, among MCG Capital Corporation, MCG Finance VIII, LLC, MCG Commercial Loan Trust 2006-2, Wells Fargo Bank, National Association and Merrill Lynch Capital Corp. (incorporated by reference to exhibit 10.61 filed with MCG Capital’s Form 10-Q for the quarter ended March 31, 2006).
10.62	MCG Capital Corporation 2006 Non-Employee Director Restricted Stock Plan. (incorporated by reference to exhibit 10.62 filed with MCG Capital’s Form 10-Q for the quarter ended June 30, 2006).
10.63	MCG Capital Corporation 2006 Employee Restricted Stock Plan. (incorporated by reference to exhibit 10.63 filed with MCG Capital’s Form 10-Q for the quarter ended June 30, 2006).

110

Exhibit Number	Description of Document
10.64	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).
10.65	Severance Agreement and Release by and between Bryan J. Mitchell and MCG Capital Corporation, dated as of August 24, 2006 (incorporated by reference to exhibit 10.1 filed with MCG Capital’s Current Report on Form 8-K filed on August 28, 2006).
10.66	Employment Agreement by and between MCG Capital Corporation and Steven F. Tunney, dated as of September 18, 2006 (incorporated by reference to exhibit 10.1 filed with MCG Capital’s Current Report on Form 8-K filed on September 19, 2006).
10.67	Employment Agreement by and between MCG Capital Corporation and B. Hagen Saville, dated as of September 18, 2006 (incorporated by reference to exhibit 10.2 filed with MCG Capital’s Current Report on Form 8-K filed on September 19, 2006).
10.68	Employment Agreement by and between MCG Capital Corporation and Robert J. Merrick, dated as of September 18, 2006 (incorporated by reference to exhibit 10.3 filed with MCG Capital’s Current Report on Form 8-K filed on September 19, 2006).
10.69	Amended and Restated Employment Agreement by and between MCG Capital Corporation and Michael R. McDonnell, dated as of September 18, 2006 (incorporated by reference to exhibit 10.4 filed with MCG Capital’s Current Report on Form 8-K filed on September 19, 2006).
10.70	MCG Capital Corporation Supplemental Non-Qualified Retirement Plan Amended and Restated as of January 1, 2005 (incorporated by reference to exhibit 10.70 filed with MCG Capital’s Form 10-Q for the quarter ended September 30, 2006).
10.71	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).
10.72	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).
10.73++	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.
10.74++	Employment Agreement by and between MCG Capital Corporation and Samuel G. Rubenstein, dated as of March 1, 2007.
10.75++	Form of Restricted Stock Agreement for Non-Employee Directors Pursuant to 2006 Non-Employee Director Restricted Stock Plan.
10.76++	Form of Restricted Stock Agreement for Employees Pursuant to 2006 Employee Restricted Stock Plan.
11	Statement regarding computation of per share earnings is included in Note 10 to the Company’s Notes to the Consolidated Financial Statements.
21++	Subsidiaries of the Company and jurisdiction of incorporation/organization.
23++	Consent of Ernst & Young LLP
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.

111

Exhibit Number	Description of Document
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

112

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 February 28, 2007.

MCG CAPITAL CORPORATION
By:	/S/    STEVEN F. TUNNEY
	Steven F. Tunney Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the Registrant in the capacities, and on the dates indicated.

Signature	Title	Date
/s/    STEVEN F. TUNNEY         Steven F. Tunney	Director and Chief Executive Officer (Principal Executive Officer)	February 28, 2007
/s/    MICHAEL R. MCDONNELL         Michael R. McDonnell	Chief Financial Officer (Principal Financial Officer)	February 28, 2007
/s/    JOHN C. WELLONS         John C. Wellons	Chief Accounting Officer (Principal Accounting Officer)	February 28, 2007
/s/    B. HAGEN SAVILLE         B. Hagen Saville	Director and Executive Vice President	February 28, 2007
/s/    ROBERT J. MERRICK         Robert J. Merrick	Director and Chief Investment Officer	February 28, 2007
/s/    KENNETH J. O’KEEFE         Kenneth J. O’Keefe	Chairman of the Board and Director	February 28, 2007
/s/    EDWARD S. CIVERA         Edward S. Civera	Director	February 28, 2007
/s/    JEFFREY M. BUCHER         Jeffrey M. Bucher	Director	February 28, 2007
/s/    WALLACE B. MILLNER         Wallace B. Millner	Director	February 28, 2007
/s/    KIM D. KELLY         Kim D. Kelly	Director	February 28, 2007

EX-10.73

Exhibit 10.73

1100 Wilson Boulevard

Arlington, Virginia 22209

(the “Building”)

FIRST AMENDMENT

Execution Date: November 30, 2006

	LANDLORD:	Twin Towers II Property Associates, LLC, a Delaware limited liability company, successor in interest to Twin Towers II Associates Limited Partnership
	TENANT:	MCG Capital Corporation, a Delaware corporation
	EXISTING
	PREMISES:	A total of 30,008 rentable square feet consisting of: (i) the entirety of the thirty-first (31st) floor of the Building, comprised of 19,787 rentable square feet; and (ii) a portion of the thirtieth (30th) floor of the Building comprised of 10,221 rentable square feet, as shown on the floor plan attached to the Lease as Exhibit A (Sheets 1 and 2)
ORIGINAL	DATE OF LEASE:	September 24, 2002
LEASE
DATA
	LEASE EXPIRATION
	DATE:	February 28, 2013
	PREVIOUS
	LEASE
	AMENDMENTS:	None
	FIRST AMENDMENT
	ADDITIONAL
	PREMISES:	A total of 11,554 rentable square feet consisting of: (i) a portion of the twenty-ninth (29th) floor of the Building comprised of 1,988 rentable square feet; and (ii) a portion of the thirtieth (30th) floor of the Building, comprised of 9,566 rentable square feet, substantially as shown on Exhibit A, First Amendment, Sheets 1 and 2, a copy of which is attached hereto

-1-

WHEREAS, Tenant desires to lease additional premises from Landlord, to wit, the First Amendment Additional Premises;

WHEREAS, Landlord is willing to lease the First Amendment Additional Premises to Tenant upon the terms and conditions hereinafter set forth;

NOW THEREFORE, the above-described lease (the “Lease”) is hereby amended as follows:

1. DEMISE OF THE FIRST AMENDMENT ADDITIONAL PREMISES

Landlord hereby demises and leases to Tenant and Tenant hereby hires and takes from Landlord, the First Amendment Additional Premises. Said demise of the First Amendment Additional Premises shall be for a term commencing as of the First Amendment Additional Premises Lease Commencement Date, as hereinafter defined, and expiring as of February 28, 2013, and shall be upon all of the terms and conditions of the Lease (including, without limitation, Tenant’s renewal options set forth in Section 38 of the Lease), except as follows:

A. The First Amendment Additional Premises Lease Commencement Date is estimated to be May 1, 2007. If Landlord is delayed delivering possession of the First Amendment Additional Premises due to the holdover or unlawful possession of the First Amendment Additional Premises by the current tenant of the First Amendment Additional Premises, Landlord shall use reasonable efforts to obtain possession of the First Amendment Premises, and the First Amendment Additional Premises Lease Commencement Date shall be delayed until the date Landlord delivers possession of the First Amendment Additional Premises to Tenant free from occupancy by the current tenant of the First Amendment Additional Premises.

B. Notwithstanding the foregoing, if the First Amendment Additional Premises Lease Commencement Date shall not have occurred on or before the Outside Date, as hereinafter defined, then Tenant shall have the right, exercisable by a written thirty (30) day termination notice given on or after the Outside Date, to terminate its leasing of the First Amendment Additional Premises. If the First Amendment Additional Premises Lease Commencement Date occurs on or before the thirtieth (30th) day after Landlord receives such termination notice, Tenant’s termination notice shall be deemed to be void and of no force or effect. If the First Amendment Additional Premises Lease Commencement Date does not occur on or before such thirtieth (30th) day, the Lease in respect of the First Amendment Additional Premises only shall terminate and shall be of no further force or effect, but the Lease shall remain in full force and effect with respect to the remainder of the premises. For the purposes hereof, the “Outside Date” shall be defined as October 1, 2007.

C. The rent commencement date in respect of the First Amendment Additional Premises (“First Amendment Additional Premises Rent Commencement Date”) shall be the date which is ninety (90) days after the First Amendment Additional Premises Lease Commencement Date.

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D. Base Rent in respect of the First Amendment Additional Premises shall be as follows:

Time Period	Annual Base Rental Rate Per Square Foot		Annual Base Rent		Monthly Base Rent
First Amendment Additional Premises Lease Commencement Date—First Amendment Additional Premises Rent Commencement Date:	$	-0-	$	-0-	$	-0-
First Amendment Additional Premises Rent Commencement Date—2/29/08:	$	42.17	$	487,232.16	$	40,602.68
3/1/08—2/28/09:	$	43.65	$	504,332.16	$	42,027.68
3/1/09—2/28/10:	$	45.18	$	522,009.72	$	43,500.81
3/1/10—2/28/11:	$	46.76	$	540,265.08	$	45,022.09
3/1/11—2/29/12:	$	48.40	$	559,213.56	$	46,601.13
3/1/12—2/28/13:	$	50.09	$	578,739.84	$	48,228.32

E. In the event that any of the provisions of the Lease are inconsistent with this Amendment or the state of facts contemplated hereby, the provisions of this Amendment shall control. All capitalized terms used herein and not otherwise defined shall have the same meaning as set forth in the Lease.

2. CONDITION OF FIRST AMENDMENT ADDITIONAL PREMISES

Notwithstanding anything to the contrary herein contained, Tenant shall take the First Amendment Additional Premises “as-is”, in the condition in which the First Amendment Additional Premises are in as of the First Amendment Additional Premises Lease Commencement Date, without any obligation on the part of Landlord to prepare or construct the First Amendment Additional Premises for Tenant’s occupancy and without any warranty or representation by Landlord as to the condition of the First Amendment Additional Premises. Notwithstanding the foregoing, Landlord agrees that the building systems serving the First Amendment Additional Premises will be in good working order at the time Landlord delivers the First Amendment Additional Premises to Tenant hereunder.

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3. LANDLORD’S CONTRIBUTION IN RESPECT OF THE FIRST AMENDMENT ADDITIONAL PREMISES

A. Landlord shall, in the manner hereinafter set forth, contribute up to One Hundred Fifty Thousand Two Hundred Two and 00/100 Dollars ($150,202.00) (“Landlord’s Contribution”) towards the cost of leasehold improvements to be installed by Tenant in the First Amendment Additional Premises (“Tenant’s Work”). Tenant’s Work shall be performed in accordance with the Lease including, without limitation, Section 8 thereof.

B. Provided that Tenant is not in default of its obligations under the Lease at the time that Tenant submits any requisition on account of Landlord’s Contribution, Landlord shall reimburse Tenant for the cost of the work shown on each requisition (as hereinafter defined) submitted by Tenant to Landlord within thirty (30) days of submission thereof by Tenant to Landlord. For the purposes hereof, a “requisition” shall mean written documentation from Tenant’s contractor showing in reasonable detail the costs of the improvements then installed by Tenant in the First Amendment Additional Premises. Each requisition shall be accompanied by evidence reasonably satisfactory to Landlord that all work covered by such requisition has been fully paid by Tenant. Tenant shall submit requisition(s) no more often than monthly.

C. Notwithstanding anything to the contrary herein contained:

(i) Landlord shall have no obligation to advance funds on account of Landlord’s Contribution unless and until Landlord has received the requisition in question, together with certifications from Tenant’s architect, certifying that the work shown on the requisition has been performed in accordance with applicable law and in accordance with Tenant’s approved plans.

(ii) Landlord shall have no obligation to pay Landlord’s Contribution in respect of any requisition submitted after the date which is eighteen (18) months after the First Amendment Additional Premises Lease Commencement Date (the “Final Requisition Date”).

(iii) Tenant shall not be entitled to any unused portion of Landlord’s Contribution. Notwithstanding the foregoing, after the Final Requisition Date, provided Tenant has occupied the First Amendment Additional Premises for its business purposes, Tenant shall be entitled to apply up to $35,000.00 of any unused portion of Landlord’s Contribution towards Tenant’s next installment of Base Rent.

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D. Except for Landlord’s Contribution, Tenant shall bear all other costs of Tenant’s Work. Landlord shall have no liability or responsibility for any claim, injury or damage alleged to have been caused by the particular materials, whether building standard or non-building standard, selected by Tenant in connection with Tenant’s Work.

4. SECURITY DEPOSIT

Tenant shall, on the First Amendment Additional Premises Lease Commencement Date, pay to Landlord a security deposit of Forty Thousand Six Hundred Two and 68/100 Dollars ($40,602.68) securing Tenant’s obligations under the Lease. In no event shall said security deposit be deemed to be a prepayment of rent nor shall it be considered a measure of liquidated damages. Tenant agrees that no interest shall accrue on said deposit and that Landlord shall have no obligation to maintain such deposit in a separate account (i.e. Landlord shall have the right to commingle such deposit with other funds of Landlord). In the event that Tenant shall default in any of its obligations under the Lease, Landlord shall have the right, without prior notice to Tenant, to apply said deposit (or any portion thereof) towards the cure of any such default and Tenant shall promptly, upon notice from Landlord, pay to Landlord any amount so applied by Landlord in order to restore the full amount of said deposit. In addition, in the event of a termination based upon the default of Tenant under the Lease, or a rejection of the Lease pursuant to the provisions of the Federal Bankruptcy Code, Landlord shall have the right to apply said security deposit (from time to time, if necessary) to cover the full amount of damages and other amounts due from Tenant to Landlord under the Lease. Any amounts so applied shall, at Landlord’s election, be applied first to any unpaid rent and other charges which were due prior to the filing of the petition for protection under the Federal Bankruptcy Code. The application of all or any part of the deposit to any obligation or default of Tenant under the Lease shall not deprive Landlord of any other rights or remedies Landlord may have nor shall such application by Landlord constitute a waiver by Landlord. Provided that Tenant is not in default of any of its obligations under the Lease at the expiration of the Term of the Lease, Landlord shall refund to Tenant any portion of said security deposit which Landlord is then holding within sixty (60) days after the expiration of the Term of the Lease.

5. PARKING

The parties hereby acknowledge that, pursuant to Section 34 of the Lease, Tenant has the right to purchase sixty-three (63) unreserved Parking Permits in the garage of the Building, five (5) of which unreserved Parking Permits shall be at no charge to Tenant throughout the Term of the Lease. The parties hereby further acknowledge that, with respect to the First Amendment Additional Premises, Tenant has the right to purchase an additional fifteen (15) unreserved Parking Permits (“Additional Parking Permits”) in the garage of the Building. The current monthly rate for such Additional Parking Permits is One Hundred Forty and 00/100 Dollars ($140.00) per month per unreserved permit, subject to change from time to time upon reasonable prior notice (which may be by posting such change in the garage or such other means as the operator of the garage

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deems appropriate). The use of said Additional Parking Permits shall be upon all of the same terms and conditions set forth in said Section 34 of the Lease, except that: (i) Tenant shall not be entitled to use any of the Additional Parking Permits as reserved Parking Permits, (ii) none of the Additional Parking Permits shall be free to Tenant, and (iii) Landlord shall not have the right to allocate any of the Additional Parking Permits to the 1101 Wilson Boulevard parking garage.

6. BROKER

Landlord and Tenant each represents and warrants to the other that, except as hereinafter set forth, neither of them has employed any broker in procuring or carrying on any negotiations relating to this First Amendment. Landlord and Tenant shall indemnify and hold each other harmless from any loss, claim or damage relating to the breach of the foregoing representation and warranty. Landlord recognizes only Monday Properties, as Landlord’s Broker, and only The Staubach Company — Northeast, Inc., as Tenant’s Broker, as brokers with respect to this First Amendment. Landlord agrees to be responsible for the payment of any leasing commissions owed to Landlord’s Broker, and Landlord’s Broker agrees to be responsible for the payment of any leasing commissions owed to Tenant’s Broker, pursuant to a separate agreement between Landlord’s Broker and Tenant’s Broker.

7. NOTICES

For all purposes of the Lease, the notice address for Landlord is as follows:

c/o Beacon Capital Partners, LLC

One Federal Street

Boston, Massachusetts 02110

With a copy to:

Goulston & Storrs, P.C.

400 Atlantic Avenue

Boston, Massachusetts 02110

Attention: 1100 Wilson Boulevard

8. RIGHT OF FIRST OFFER

On the conditions (which conditions Landlord may waive, at its election, by written notice to Tenant at any time) that Tenant is not in default of its covenants and obligations under the Lease and that MCG Capital Corporation, itself, is occupying at least sixty percent (60%) of the Premises then demised to Tenant, both at the time that Landlord is required to give Landlord’s Notice, as hereinafter defined, and as of the Lease Commencement Date in respect of the RFO Premises, Tenant shall have the following right to lease the RFO Premises, as hereinafter defined, when the RFO Premises become available for lease to Tenant, as hereinafter defined, during the term of the Lease.

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A. Definition of RFO Premises

“RFO Premises” shall be defined as any area on the twenty-ninth (29^th) floor of the Building, when such area becomes available for lease to Tenant, as hereinafter defined, during the Term of the Lease. For the purposes of this Paragraph 6, the RFO Premises shall be deemed to be “available for lease to Tenant” when Landlord, in its sole judgment, determines that such area will become available for leasing to Tenant. (i.e. when Landlord determines that (i) the lease of the tenant of the RFO Premises will terminate and such tenant will vacate such RFO Premises, (ii) the rights of all other tenants of the Building who have pre-existing rights to lease such RFO Premises as of the date of this First Amendment have lapsed unexercised or have been waived, and (iii) Landlord intends to offer such area for lease). In no event shall Tenant have any rights under this Paragraph 6 on or after the date twelve (12) months prior to the Lease Expiration Date (i.e. Landlord shall have no obligation to give Landlord’s Notice, as hereinafter defined, to Tenant on or after the date twelve (12) months prior to the Lease Expiration Date).

B. Exercise of Right to Lease RFO Premises

Landlord shall give Tenant written notice (“Landlord’s Notice”) at the time that Landlord determines, as aforesaid, that the RFO Premises will become available for lease to Tenant. Landlord’s Notice shall set forth:

(i) the Lease Commencement Date in respect of the RFO Premises; and

(ii) the Base Rent (“Offered Base Rent”) and other terms applicable to the RFO Premises. Tenant shall have the right, exercisable upon written notice (“Tenant’s Exercise Notice”) given to Landlord on or before the date (“RFO Exercise Date”) ten (10) business days after the receipt of Landlord’s Notice, to lease the RFO Premises. If Tenant fails timely to give Tenant’s Exercise Notice, Tenant shall have no further right to lease such RFO Premises pursuant to this Paragraph 6.

C. Lease Provisions Applying to RFO Premises

The leasing to Tenant of the RFO Premises shall be upon all of the same terms and conditions of the Lease, except to the extent inconsistent with Landlord’s Notice and except as follows:

(1) Lease Commencement Date

The Lease Commencement Date in respect of the RFO Premises shall be the later of: (x) the Estimated Lease Commencement Date in respect of the RFO Premises as set forth in Landlord’s Notice, or (y) the date that Landlord delivers the RFO Premises to Tenant vacant and in broom-clean condition, free of all movable furniture and equipment.

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(2) Base Rent

The Base Rent in respect of the RFO Premises shall be the Offered Base Rent, which shall be based upon the Fair Market Rental Rate as defined in Section 38.E. of the Lease. Said Fair Market Rental Rate shall include a rent-free period to build out the RFO Premises of thirty (30) days.

(3) Condition of RFO Premises

Tenant shall take the RFO Premises “as-is” in its then (i.e. as of the date of premises delivery) state of construction, finish, and decoration, without any obligation on the part of Landlord to construct or prepare the RFO Premises for Tenant’s occupancy and without any obligation on the part of Landlord to provide any Landlord’s Contribution to Tenant on account of Tenant’s demise of the RFO Premises.

D. Execution of Lease Amendments

Notwithstanding the fact that Tenant’s exercise of the above-described option to lease the RFO Premises shall irrevocably act to add the RFO Premises to the Lease without the need for any further documentation, as aforesaid, the parties hereby agree promptly to execute a lease amendment reflecting the addition of the RFO Premises. The execution of such lease amendment shall not be deemed to waive any of the conditions to Tenant’s exercise of the herein option to lease the RFO Premises, unless otherwise specifically provided in such lease amendment.

E. Notwithstanding anything to the contrary herein contained, Tenant’s rights to lease any RFO Premises under this Paragraph 6 shall be subject and subordinate to the rights (whether expansion rights, rights of first refusal and/or rights of first offer) of any tenant of the Building existing on the Execution Date of this First Amendment.

9. INAPPLICABLE AND DELETED LEASE PROVISIONS

A. Sections 1(S) and (T) of the Lease, Sections 3 and 43 of the Lease and Exhibit C to the Lease shall have no applicability in respect of the First Amendment Additional Premises.

B. Whereas the First Amendment Additional Premises constitutes the first right of refusal space pursuant to Section 39.A. of the Lease (entitled “Expansion”) and the right to negotiate to lease space pursuant to Section 39.B. of the Lease (entitled “Right to Offer”), said Section 39 of the Lease is hereby deleted and is of no further force or effect.

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C. Any reference to Westfield Realty, Inc. in the Lease is deleted and Monday Properties is substituted in its place.

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10. ANTI-TERRORISM REPRESENTATIONS

Tenant represents and warrants to Landlord that:

Tenant is not, and shall not during the term of this Lease become, a person or entity with whom Landlord is restricted from doing business under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, H.R. 3162, Public Law 107-56 (commonly known as the “USA Patriot Act”) and Executive Order Number 13224 on Terrorism Financing, effective September 24, 2001 and regulations promulgated pursuant thereto, including, without limitation, persons and entities named on the Office of Foreign Asset Control Specially Designated Nationals and Blocked Persons List (collectively, “Prohibited Persons”); and

Tenant is not currently conducting any business or engaged in any transactions or dealings, or otherwise associated with, any Prohibited Persons in connection with the use or occupancy of the premises; and

Tenant will not in the future during the term of this Lease engage in any transactions or dealings, or be otherwise associated with, any Prohibited Persons in connection with the use or occupancy of the premises.

Landlord represents and warrants to Tenant that Landlord does not employ any Prohibited Persons at the Building.

11. CONDITION OF LANDLORD’S EXECUTION

The parties hereby acknowledge that Landlord is only willing to execute this First Amendment in the event that the current tenant of the First Amendment Additional Premises (the “Current Tenant”) agrees to terminate the term of its lease in respect of the First Amendment Additional Premises. Therefore, Landlord shall have the right, exercisable upon written notice to Tenant, to render this First Amendment void and without further force or effect, unless both of the following events occur:

A. Tenant executes and delivers to Landlord this First Amendment; and

B. The Current Tenant executes and delivers to Landlord an agreement, in form and substance acceptable to Landlord, whereby the Current Tenant agrees to terminate the term of its lease in respect of the First Amendment Additional Premises.

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12. As hereby amended, the Lease is ratified, confirmed, and approved in all respects.

EXECUTED under seal as of the date first above-written.

LANDLORD:

TWIN TOWERS II PROPERTY ASSOCIATES, LLC, a Delaware limited liability company
By:	/s/ Philip J. Brannigan, Jr.
	Philip J. Brannigan, Jr.
	Managing Director
Date Signed: 12/22/06
TENANT:
MCG CAPITAL CORPORATION, a Delaware corporation
By:	/s/ Steven F. Tunney
Name:	Steven F. Tunney
Title:	President and CEO
	Hereunto Duly Authorized
Date Signed: 11/21/06

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EX-10.74

Exhibit 10.74

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT entered into as of the 1^st day of March, 2007 (the “Effective Date”), by and between MCG Capital Corporation (the “Company”), a Delaware corporation, and Samuel G. Rubenstein, an individual (the “Executive”) (hereinafter collectively referred to as the “Parties”).

WHEREAS, the Executive has heretofore been employed by the Company as its General Counsel, Chief Legal Officer and Executive Vice President and the Company desires to continue to retain the services and employment of the Executive as the Company’s General Counsel, Chief Legal Officer and Executive Vice President on the terms and subject to the conditions set forth herein.

NOW, THEREFORE, in consideration of the respective agreements of the Parties contained herein, it is agreed as follows:

1. Term. The term of employment under this Agreement shall be for the period commencing on the date hereof, and shall continue in effect through February 28, 2010 (the “Initial Term”). The Initial Term shall automatically be extended for successive one-year periods (“Extension Terms” and, collectively with the Initial Term, the “Term”) unless either the Company or the Executive gives notice of non-extension to the other no later than sixty (60) days prior to the expiration of the then-applicable Term. Except as otherwise provided herein, this Agreement shall be of no further force or effect following the end of the Term.

2. Employment.

(a) The Executive shall be employed as the General Counsel, Chief Legal Officer and Executive Vice President of the Company. The Executive shall perform the duties, undertake the responsibilities and exercise the authority customarily performed, undertaken and exercised by persons situated in a similar executive capacity. The Executive shall report to the Chief Executive Officer of the Company.

(b) The Executive shall devote his full working time, attention and skill to the performance of such duties, services and responsibilities, and will use his best efforts to promote the interests of the Company. The Executive will not, without prior written approval of the Board of Directors of the Company (the “Board”), engage in any other activities that would interfere with the performance of his duties as an employee of the Company, are in violation of written policies of the Company, are in violation of applicable law, or would create a conflict of interest with respect to the Executive’s obligations as an employee of the Company. The Executive may (1) serve on corporate, civil or charitable boards or committees, (2) deliver lectures and teach at educational institutions, (3) serve as a personal representative or trustee, (4) manage his personal, financial and legal affairs, and (5) invest personally in any business where no conflict of interest exists between such investment and the business of the Company, as long as the foregoing activities do not materially interfere with Executive’s performance of his duties as an employee of the Company.

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3. Compensation.

(a) Base Salary. During the Term, the Company agrees to pay or cause to be paid to the Executive a base salary at the rate of $375,000 per annum (such base salary, as may be adjusted from time to time in accordance with this Section, the “Base Salary”). Such Base Salary shall be payable in accordance with the Company’s customary practices applicable to its executives. Such Base Salary shall be reviewed (and may be adjusted) at least annually by either the Board or the Compensation Committee of the Board (the “Compensation Committee”). Such Base Salary may be reduced only if such reduction is implemented by the Company as part of an overall general salary reduction plan among all of its executive employees and such reduction to the Base Salary on a percentage basis is equal to or less than the percentage reduction otherwise implemented under such plan.

(b) Bonus. During the Term, the Executive will be eligible to receive annual bonuses based upon achieving annual individual and corporate performance goals determined from time to time by either the Board or the Compensation Committee after consultation with the Executive (the “Annual Bonus”). The Executive’s target annual bonus opportunity will equal 100% of Base Salary (the “Target Annual Bonus”), but the Executive will have the opportunity to earn an annual bonus between 0% and 200% of Base Salary. The actual annual bonus for any year will depend on the achievement of performance goals, which will generally be based on individual and corporate goals, as determined from time to time by either the Board or the Compensation Committee.

(c) Restricted Stock.

(i) The Executive shall be granted 150,000 shares of restricted common stock of the Company (the “Restricted Stock”), pursuant to the terms and conditions of the Company’s 2006 Employee Restricted Stock Plan and form of restricted stock agreements approved by either the Board or the Compensation Committee. The Restricted Stock shall become non-forfeitable, subject to accelerated non-forfeitability in accordance with Section 5 and Section 6 if applicable, as follows: 12,500 shares of Restricted Stock shall become non-forfeitable on each March 31, June 30, September 30 and December 31, beginning on March 31, 2007 and ending on December 31, 2009, subject to the Executive’s continued employment with the Company on the applicable forfeiture date (the “Time-Based Schedule”).

(ii) Except as set forth in Section 5 of this Agreement and unless either the Board or the Compensation Committee determines otherwise, any Restricted Stock that have not become non-forfeitable on the applicable forfeiture date as set forth in the Time-Based Schedule shall be immediately forfeited.

(iii) The Executive will be entitled to receive any cash dividends that are paid on the shares of Restricted Stock while such shares are held by the Executive.

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(iv) In addition to the Restricted Stock, the Executive will have the opportunity each year to receive an annual grant of shares of restricted common stock of the Company, subject to the approval of either the Board or the Compensation Committee in its sole discretion.

(d) Benefits. During the Term, the Executive shall be entitled to participate in all employee benefit plans, practices and programs maintained by the Company and made available to employees generally including, without limitation, all pension, retirement, profit sharing, savings, medical, hospitalization, disability, dental, life or travel accident insurance benefit plans, vacation and sick leave. The Executive’s participation in such plans, practices and programs shall be on the same basis and terms as are applicable to employees of the Company generally.

(e) Expenses. During the Term, the Company agrees to pay all reasonable expenses, subject to reasonable documentation, incurred by the Executive in furtherance of the Company’s business, including, without limitation, traveling and entertainment expenses.

(f) Executive Seminars. During the Term, the Executive agrees to annually attend an executive training seminar at the Company’s expense.

(g) Key Man Life Insurance. At any time during the Term, the Company shall have the right to insure the life of the Executive for the Company’s sole benefit. The Company shall have the right to determine the amount of insurance (“Company Limit”) and the type of policy, provided, however, that the Executive shall have the right, if the policy permits, to require the Company to purchase an amount of insurance in excess of the Company Limit (the “Executive Limit”) if the Executive pays to the Company each month the difference between (i) the insurance premium for a policy at the Company Limit and (ii) the insurance premium for a policy at the Executive Limit. The Executive shall cooperate with the Company in obtaining such insurance policy by submitting to physical examinations, by supplying all information reasonably required by any insurance carrier, and by executing all necessary documents reasonably required by any insurance carrier. Except as otherwise provided in this Section, (i) the Executive shall incur no financial obligation by executing any required document, and (ii) shall have no interest in any such policy.

4. Termination of Employment. The Executive’s employment hereunder may be terminated under the following circumstances:

(a) Disability. The Company may terminate the Executive’s employment after having established the Executive’s Disability or the Executive can terminate if he has established his Disability. For purposes of this Agreement, “Disability” means a physical or mental infirmity which impairs the Executive’s ability to substantially perform his duties under this Agreement for at least one hundred eighty (180) days during any 365-consecutive-day period.

(b) Cause. The Company may terminate the Executive’s employment for “Cause”. A termination for “Cause” shall mean (i) the Executive’s conviction to, plea of no contest to, plea of nolo contendere to, or imposition of unadjudicated probation for any felony

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(other than a traffic offense that does not result in incarceration), (ii) the Executive’s having been the subject of any order, judicial or administrative, obtained or issued by the Securities Exchange Commission, for any securities violation involving fraud or intentional misconduct, including, for example, any such order consented to by the Executive in which findings of facts or any legal conclusions establishing liability are neither admitted nor denied, (iii) a material breach by the Executive of this Agreement; or (iv) the Board in good faith determines that the Executive (A) willfully failed to substantially perform his duties and obligations to the Company or willfully failed to carry out, or comply with, any reasonable and lawful directive of the Board consistent with the terms of this Agreement (other than a failure resulting from the Executive’s incapacity due to physical or mental illness) which, if it is the first instance of such conduct, is not cured within thirty (30) days after a written notice of demand for performance has been delivered to the Executive specifying the manner in which the Executive has failed to perform (and, if it is any instance of such conduct after the first instance thereof and opportunity to cure, then no such opportunity to cure need be provided with respect to such conduct), (B) willfully engaged in conduct which is demonstrably and materially injurious to the Company or any of its Subsidiaries, monetarily or otherwise, or (C) committed a willful breach of fiduciary duty or an act of fraud, embezzlement, or misappropriation against the Company or any of its Subsidiaries; provided, however, that no termination of the Executive’s employment shall be for Cause as set forth in clause (iv) above until (y) there shall have been delivered to the Executive a copy of a written notice setting forth that the Executive was guilty of the conduct set forth in clause (iv) and specifying the particulars thereof in detail, and (z) the Executive shall have been provided an opportunity to be heard by the Board (with the assistance of the Executive’s counsel if the Executive so desires). No act, nor failure to act, on the Executive’s part, shall be considered “willful” unless he has acted or failed to act, with an absence of good faith and without a reasonable belief that his action or failure to take action was in the best interests of the Company.

(c) Good Reason. The Executive may terminate his employment for “Good Reason” at any time within three (3) months of his knowledge of its occurrence. For purposes of this Agreement, “Good Reason” shall mean the occurrence of any of the events or conditions described in the following Subsections hereof:

(i) A change in the Executive’s status, title or position with the Company; or the assignment to the Executive of any material duties or responsibilities that are substantially inconsistent with such status, title or position;

(ii) A change in the Executive’s responsibilities (including reporting responsibilities) with the Company that represents a substantial change in his responsibilities as in effect immediately prior thereto;

(iii) Any failure to pay the Executive his Base Salary or a reduction in the Executive’s Base Salary from the Base Salary in effect in the prior year (unless such reduction is implemented in accordance with Section 3);

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(iv) The Company’s requiring the Executive to be based at any place outside a 50-mile radius from the office in which the Executive is employed on the date hereof, except for reasonably required travel on the Company’s business;

(v) A material breach by the Company of this Agreement;

(vi) A Change in Control; and

(vii) The Company’s giving notice to the Executive of non-extension of this Agreement pursuant to the terms of Section 1.

Notwithstanding the foregoing, the occurrence of any conduct or circumstance covered under clauses (i) through (v) above shall not constitute Good Reason if such conduct or circumstance is cured by the Company within thirty (30) days after written notice thereof has been delivered to the Company by the Executive specifying the nature of such Good Reason.

(d) Notice of Termination. Any purported termination by the Company or by the Executive shall be communicated by written Notice of Termination to the other. For purposes of this Agreement, a “Notice of Termination” shall mean a notice which indicates the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated. For purposes of this Agreement, no such purported termination of employment shall be effective without such Notice of Termination. For the purposes of this Agreement, after a Notice of Termination has been delivered to the Executive by the Company, he may not terminate his employment for Good Reason or otherwise. After the Executive has terminated his employment for Good Reason or otherwise, the Company may not deliver a Notice of Termination to the Executive terminating his employment.

(e) Termination Date, Etc. “Termination Date” shall mean (i) in the case of the Executive’s Death, the Executive’s date of Death, (ii) if the Executive’s employment is terminated for Disability, the date on which the Notice of Termination is given, (iii) if the Executive terminates his employment, on the date no earlier than sixty (60) days following the Notice of Termination if such termination is announced by the Executive; provided, however, that the Company may, in its sole discretion, advance the Termination Date to any date following the Company’s receipt of the Notice of Termination, and (iv) if the Executive’s employment is terminated for any other reason, the date specified in the Notice of Termination, which shall not be longer than seven (7) days after the Notice of Termination.

5. Compensation Upon Termination. Upon termination of the Executive’s employment during the Term, the Executive shall be entitled to the following benefits:

(a) If the Executive’s employment is terminated by the Company for Cause or by the Executive other than for Good Reason, then the Company shall pay the Executive all amounts earned or accrued hereunder through the Termination Date but not paid as of the Termination Date, including (i) Base Salary, (ii) reimbursement for any and all monies advanced

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or expenses incurred in connection with the Executive’s employment and for reasonable and necessary expenses incurred by the Executive on behalf of the Company for the period ending on the Termination Date, (iii) accrued but unused vacation pay, and (iv) any bonuses or incentive compensation with respect to the fiscal year ended prior to the fiscal year in which the Termination Date occurs that was earned and unpaid (collectively, “Accrued Compensation”).

(b) If the Executive’s employment terminates for Disability or for reason of the Executive’s death, then the Executive shall be entitled to the benefits provided below:

(i) The Company shall pay the Executive or his beneficiaries all Accrued Compensation;

(ii) The Company shall pay to the Executive or his beneficiaries an amount equal to the Annual Bonus that the Executive would have been entitled to receive in respect of the fiscal year in which the Executive’s Termination Date occurs had he continued in employment until the end of such fiscal year, calculated as if all target performance targets and goals (if applicable) had been fully met by the Company and by the Executive, as applicable, for such year, multiplied by a fraction the numerator of which is the number of days in such fiscal year through the Termination Date and the denominator of which is 365;

(iii) The Executive’s Restricted Stock shall immediately fully become non-forfeitable with respect to that number of shares of Restricted Stock that were scheduled to become non-forfeitable under the Time-Based Schedule through January 1 of the calendar year following the calendar year in which the Executive’s Termination Date occurs; and

(iv) Immediate and full vesting or lapsing of forfeiture conditions (as applicable) of any shares of restricted stock granted to Executive (A) which are not Restricted Stock, (B) which vest or become non-forfeitable solely based on Executive’s continued employment with the Company, (C) which do not vest or become non-forfeitable subject to the achievement of any performance milestones (the “Additional Time-Based Shares”), and (D) which were scheduled to vest or become non-forfeitable through January 1 of the calendar year following the calendar year in which the Executive’s Termination Date occurs.

(c) If the Executive’s employment with the Company shall be terminated (i) by the Company other than for Cause, death, or Disability, or (2) by the Executive for Good Reason, then, subject to the Executive promptly signing and not revoking a release of claims in substantially the form attached hereto as Exhibit A, the Executive shall be entitled to the benefits as provided below; provided, that no amount shall be payable pursuant to this Section 5(c) on or following the date the Executive first violates any of the covenants set forth in Section 7:

(i) The Company shall pay the Executive all Accrued Compensation;

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(ii) The Company shall pay the Executive as severance pay and in lieu of any further compensation for periods subsequent to the Termination Date, an amount (the “Severance Amount”) equal to two times his then current Base Salary and two times his Target Annual Bonus; which shall, except as otherwise set forth in Section 5(c)(vi), be payable in equal monthly installments during the period beginning on the Termination Date and ending on the date twenty-four (24) months following the Termination Date;

(iii) The Executive shall be entitled to full and immediate vesting and/or lapsing of forfeiture conditions (as applicable) of all of the Executive’s Restricted Stock and Additional Time-Based Shares; and

(iv) Continuation coverage for the Executive and any eligible dependents under all the Company’s group medical, dental, and hospitalization benefit plans (“Continuation Health Coverage”), until earlier of (A) twenty-four (24) months following the Termination Date or (B) the date the Executive first (1) violates any of the covenants set forth in Section 7 or (2) becomes eligible to participate in any other plan that provides medical, dental, or hospitalization benefits. As of the date that the Executive ceases to receive coverage under any of the Company’s group medical, dental, and hospitalization benefit plans pursuant to this Section 5(c)(iv), the Executive shall be eligible to elect to receive “COBRA” continuation coverage to the extent permitted by Section 601 et seq. of the Employee Retirement Income Security Act of 1974, as amended. Notwithstanding the foregoing, the Parties acknowledge and agree that no payment or benefit shall be made pursuant to this Section 5(c)(iv) to the extent that such payment or benefit would constitute a deferral of compensation subject to Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) (and to the extent permissible any such payment or benefit shall be modified to comply with Section 409A of the Code).

(v) In addition to any benefits that the Executive may be entitled to receive pursuant to the provisions in Sections 5(c)(i) to 5(c)(iv), the Company shall pay to the Executive the Change in Control Amount, if the Executive becomes eligible to receive the Change in Control Amount pursuant to the provisions in Section 6.

(vi) Notwithstanding anything to the contrary in Section 5(c)(ii), no Severance Amount will be paid during the six-month period following the Termination Date if either the Board or the Compensation Committee determines, in its good faith judgment, that paying such amounts at the time or times indicated in Section 5(c)(ii) would cause the Executive to incur an additional tax under Section 409A of the Code, in which case such amounts shall be paid at the time or times indicated in this Section 5(c)(vi). If the payment of any Severance Amounts are delayed as a result of the previous sentence, on the first day following the end of the six-month period, the Company will pay the Executive a lump-sum amount equal to the cumulative amount that would have otherwise been previously paid to

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the Executive under this Agreement with the other eighteen months of the Severance Amount payable to the Executive in equal monthly installments during the period beginning on the seven-month anniversary of the Termination Date and ending on the twenty four-month anniversary thereof.

(d) The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Executive in any subsequent employment other than as provided under Section 5(c)(iv).

(e) Executive’s entitlement to any other compensation or benefits shall be determined in accordance with the Company’s employee benefit plans and other applicable programs and practices then in effect.

6. Change in Control Benefits.

(a) General Payments. Upon a Change in Control that occurs during the Term, the Executive will be entitled to full and immediate vesting and/or lapsing of forfeiture provisions (as applicable) of all of the Executive’s Restricted Stock and all of the Executive’s Additional Time-Based Shares. In addition to such full vesting and lapsing of forfeiture provisions (as applicable) and any severance payments and benefits that the Executive may be entitled to receive pursuant to Sections 5(c)(i) to 5(c)(iv), if within twelve (12) months after a Change in Control that occurs during the Term, the Executive’s employment with the Company shall be terminated (a) by the Company other than for Cause, death, or Disability, or (b) by the Executive for Good Reason, then the Executive will be entitled to receive an amount (the “Change in Control Amount”) equal to his then current Base Salary, payable in the same manner as the Severance Amount is payable pursuant to Section 5(c)(ii) or Section 5(c)(vi), as applicable.

(b) Tax Payment. In the event it shall be determined that any payment (other than the payment provided for in this Section 6(b)) or distribution of any type to or for the benefit of the Executive, by the Company, any Affiliate of the Company, any Person (as defined below) who acquires ownership or effective control of the Company or ownership of a substantial portion of the Company’s assets (within the meaning of Section 280G of the Code, and the regulations thereunder) or any Affiliate of such Person, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (the “Payments”), is or will be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax, other than any interest or penalties that arise as a result of Section 409A of the Code (such excise tax, together with any includable interest and penalties, are collectively referred to as the “Excise Tax”), then the Executive shall be entitled to receive a payment in an amount equal to the Excise Tax imposed upon the Payments; provided, however that in the event the aggregate value of the Payments exceeds three times the Executive’s “base amount,” as defined in Section 280G(b)(3) of the Code (the “Parachute Threshold”) by less than 10%, one or more Payments shall be reduced so that the aggregate value of the Payments is $1.00 less than the Threshold Amount. Unless the Executive shall have given prior written notice specifying a different order to the Company to effectuate the

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foregoing, the Company shall reduce or eliminate the Payments by first reducing or eliminating the portion of the Payments which are not payable in cash and then by reducing or eliminating cash payments, in each case in reverse order beginning with payments or benefits which are to be paid the farthest in time from the Determination (as hereinafter defined). Any notice given by the Executive pursuant to the preceding sentence shall take precedence over the provisions of any other plan, arrangement or agreement governing the Executive’s rights and entitlements to any benefits or compensation.

(c) Determination By Accountant. All mathematical determinations, and all determinations as to whether any of the Payments are “parachute payments” (within the meaning of Section 280G of the Code), that are required to be made under Section 6(b), including determinations as to whether a Excise Tax is required, the amount of such Excise Tax and amounts relevant to the last sentence of this Section 6(c) or whether the Payment should be reduced, shall be made by an independent accounting firm selected by the Executive from among the four (4) largest accounting firms in the United States (the “Accounting Firm”), which shall provide its determination (the “Determination”), together with detailed supporting calculations regarding the amount of any Excise Tax and any other relevant matter, both to the Company and the Executive by no later than ten (10) days following the Termination Date, if applicable, or such earlier time as is requested by the Company or the Executive (if the Executive reasonably believes that any of the Payments may be subject to the Excise Tax). If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive and the Company with an opinion reasonably acceptable to the Executive and the Company that no Excise Tax is payable (including the reasons therefore) and that the Executive has substantial authority not to report any Excise Tax on his federal income tax return. If an Excise Tax is determined to be payable, it shall be paid to the Executive within ten (10) days after the Determination (and all accompanying calculations and other material supporting the Determination) is delivered to the Company by the Accounting Firm. Any determination by the Accounting Firm shall be binding upon the Company and the Executive, absent manifest error. As a result of uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Excise Tax payments not made by the Company should have been made (“Underpayment”), or that Excise Tax payments will have been made by the Company which should not have been made (“Overpayments”). In either such event, the Accounting Firm shall determine the amount of the Underpayment or Overpayment that has occurred. In the case of an Underpayment, the amount of such underpayment (together with any interest and penalties, other than interest and penalties that arise under Section 409A of the Code, payable by the Executive as a result of such Underpayment) shall be promptly paid by the Company to or for the benefit of the Executive. In the case of an Overpayment, the Executive shall, at the direction and expense of the Company, take such steps as are reasonably necessary (including, if reasonable, the filing of returns and claims for refund), and otherwise reasonably cooperate with the Company to correct such Overpayment, provided, however, that (1) the Executive shall not in any event be obligated to return to the Company an amount greater than the net after-tax portion of the Overpayment that he has retained or has recovered as a refund from the applicable taxing authorities and (2) this provision shall be interpreted in a manner consistent with the intent of Section 6(b), it being understood that the correction of an Overpayment may result in the Executive repaying to the Company an amount which is less than the Overpayment. The fees and expenses of the Accounting Firm shall be paid by the Company.

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For purposes of this Agreement, “Change in Control” means the occurrence of any of the following events:

(a) An acquisition in one or more transactions (other than directly from the Company) of any voting securities of the Company by any Person (as defined below) immediately after which such Person has Beneficial Ownership (as defined below) of fifty percent (50%) or more of the combined voting power of the Company’s then outstanding voting securities; provided, however, in determining whether a Change in Control has occurred, voting securities which are acquired in a “Non-Control Acquisition” (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A “Non-Control Acquisition” shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof) maintained by (A) the Company or (B) any corporation or other Person of which a majority of its voting power or its voting equity securities or equity interest is owned, directly or indirectly, by the Company (a “Subsidiary”), (ii) the Company or its Subsidiaries, or (iii) any Person in connection with a “Non-Control Transaction” (as hereinafter defined);

(b) The individuals who, as of the date hereof are members of the Board (the “Incumbent Board”), cease for any reason to constitute at least a majority of the members of the Board or, following a Merger (as defined below), the board of directors of the ultimate Parent Corporation (as defined below); provided, however, that if the election, or nomination for election by the Company’s common stockholders, of any new director was approved by a vote of at least a majority of the Incumbent Board (or, with respect to the directors who are not “interested persons” as defined in the Investment Company Act of 1940, by a majority of the directors who are not “interested persons” serving on the Incumbent Board), such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a “Proxy Contest”) including by reason of any agreement intended to avoid or settle any Proxy Contest; or

(c) The consummation of:

(i) A merger, consolidation or reorganization involving the Company (a “Merger”) or an indirect or direct Subsidiary of the Company, or to which securities of the Company are issued, unless:

(A) the stockholders of the Company, immediately before a Merger, own, directly or indirectly, immediately following the Merger, more than fifty percent (50%) of the combined voting power of the outstanding voting securities of (x) the corporation resulting from the Merger (the “Surviving Corporation”) if fifty percent (50%) or more of the combined voting power of the then outstanding voting securities of the Surviving Corporation is not Beneficially Owned, directly or indirectly, by another Person or group of Persons (a “Parent Corporation”), or (y) if there is one or more Parent Corporations, the ultimate Parent Corporation,

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(B) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for a Merger constitute at least a majority of the members of the board of directors of (x) the Surviving Corporation or (y) the ultimate Parent Corporation, if the ultimate Parent Corporation, directly or indirectly, owns fifty percent (50%) or more of the combined voting power of the then outstanding voting securities of the Surviving Corporation, and

(C) no Person other than (a) the Company, (b) any Subsidiary, (c) any employee benefit plan (or any trust forming a part thereof) maintained by the Company, the Surviving Corporation, any Subsidiary, or the ultimate Parent Corporation, or (d) any Person who, together with its Affiliates (as defined below), immediately prior to a Merger had Beneficial Ownership of fifty percent (50%) or more of the then outstanding voting securities, owns, together with its Affiliates, Beneficial Ownership of fifty percent (50%) or more of the combined voting power of the then outstanding voting securities of (x) the Surviving Corporation or (y) the ultimate Parent Corporation.

(D) Each transaction described in clauses (c)(i)(A) through (C) above shall herein be referred to as a “Non-Control Transaction”; or

(ii) The direct or indirect sale or other disposition of all or substantially all of the assets of the Company to any Person (other than (A) a transfer to a Subsidiary, (B) under conditions that would constitute a Non-Control Transaction with the disposition of assets being regarded as a Merger for this purpose, or (C) the distribution to the Company’s stockholders of the stock of a Subsidiary or any other assets).

Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the “Subject Person”) acquired Beneficial Ownership of more than the permitted amount of the then outstanding voting securities as a result of the acquisition of voting securities by the Company which, by reducing the number of voting securities then outstanding, increases the proportional number of shares Beneficially Owned by the Subject Persons, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of voting securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional voting securities which increases the percentage of the then outstanding voting securities Beneficially Owned by the Subject Person, then a Change in Control shall occur. “Affiliate” means, with respect to any Person, any other Person that, directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person. “Beneficial Ownership” means ownership within the meaning of Rule 13d-3 promulgated under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). “Person” means “person” as such

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term is used for purposes of Section 13(d) or 14(d) of the Exchange Act, including without limitation, any individual, corporation, limited liability company, partnership, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity or any group of Persons.

7. Employee Covenants.

(a) Confidentiality. The Executive shall not, without the prior express written consent of the Company, directly or indirectly, use for any purpose any Confidential Information (as defined below) in any way, or divulge, disclose or make available or accessible any Confidential Information to any person, firm, partnership, corporation, trust or any other entity or third party unless (i) such disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Company or (ii) such disclosure is required by applicable law or (iii) the Executive is requested or required by a judicial or arbitration body or governmental agency (by oral question, interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process) to disclose any such information, in which case the Executive will (A) promptly notify the Company of such request or requirement, so that the Company may seek an appropriate protective order and (B) cooperate with the Company, at its expense, in seeking such an order. “Confidential Information” means all information respecting the business and activities of the Company and any of its Subsidiaries, including, without limitation, respecting the clients, customers, suppliers, employees, consultants, prospects, computer or other files, projects, products, computer disks or other media, computer hardware or computer software programs, underwriting, lending or investment standards, marketing plans, financial information, methodologies, know-how, processes, trade secrets, policies, practices, projections, forecasts, formats, operational methods, product development techniques, research, strategies or information agreed to with third-parties to be kept confidential by the Company and any of its Subsidiaries. Notwithstanding the immediately preceding sentence, Confidential Information shall not include any information that is, or becomes, a part of the public domain or generally available to the public (unless such availability occurs as a result of any breach by the Executive of this Agreement or any breach by an employee of the Company of a similar agreement) or any business knowledge and experience of the type usually acquired by persons engaged in positions similar to the Executive’s position with the Company, to the extent such knowledge and experience is not specific to the Company and not proprietary to the Company or any of its Subsidiaries.

(b) Non-Competition. To the maximum extent permitted by applicable law and state bar codes of conduct applicable to the Executive, during the Term and during the Non-Competition Period, as defined in Section 7(d), the Executive shall not, without the prior written consent of the Company, engage in any business or activity, whether as an employee, consultant, partner, principal, agent, representative, stockholder (other than as the holder of an interest of two percent (2%) or less in the equity of a publicly traded corporation) or other individual, corporate or representative capacity, or render any services or provide any advice or assistance to any business, person or entity, if such business, activity, person or entity competes anywhere in the United States with the Company or any of its Subsidiaries in respect of (i) any then current product, service or business of the Company or any of its Subsidiaries on the Termination Date

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or (ii) any product, service or business as to which the Company or any of its Subsidiaries has begun preparing to develop or offer as of the Termination Date. Nothing herein shall be construed to prevent the Executive from being employed by any person or entity in a line of business or activity that does not compete with (i) products, services or businesses offered or conducted by the Company or its Subsidiaries as of the Termination Date, or (ii) products, services or business which the Company or any of its Subsidiaries has begun preparing to develop or offer as of the Termination Date. A product, service or business shall not be deemed to compete with the Company or its Subsidiaries if it is offered in any industry or market sector in which the Company and its Subsidiaries do not compete nor have begun preparing to compete as of the Termination Date.

(c) Non-Solicitation. During the Term and during the Applicable Period (together, the “Non-Solicitation Period”), the Executive shall not divert, solicit or lure away the patronage of (i) any client or business of the Company or any of its Subsidiaries as of or within the two (2) year period prior to the Termination Date or (ii) any prospective client or business of the Company or any of its Subsidiaries. As used herein, “prospective client” means any client that, to the knowledge of the Executive, the Company or any of its Subsidiaries (i) has solicited within the two (2) year period prior to the Termination Date, or (ii) is soliciting as of the Termination Date. Nothing herein shall be construed to prevent the Executive from soliciting clients or prospective clients of the Company or its Subsidiaries with respect to products, services or businesses which the Company and its Subsidiaries neither offer or conduct, nor have begun preparing to develop or offer, as of the Termination Date. The Executive shall not, during the Non-Solicitation Period, directly or indirectly, recruit, hire or assist others in recruiting or hiring, or otherwise solicit for employment, any employees of the Company or any of its Subsidiaries. The provisions of this Section 7(c) shall not be deemed to limit in any way the provisions of any other Section of this Agreement.

(d) The Non-Competition Period and the Applicable Period. For purposes of this Agreement:

(i) the “Non-Competition Period” means:

(A) the period beginning on the Termination Date and ending twenty-four (24) months after the Termination Date, if the Executive’s employment with the Company shall be terminated (1) by the Company other than for Cause or Disability, or (2) by the Executive for Good Reason; or

(B) the period beginning on the Termination Date and ending 90 days after the Termination Date, if the Executive’s employment with the Company shall be terminated (1) by the Company for Cause, (2) by the Executive other than for Good Reason, or (3) due to the Executive’s Disability.

(ii) the “Applicable Period” means:

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(A) the period beginning on the Termination Date and ending twenty-four (24) months after the Termination Date, if the Executive’s employment with the Company shall be terminated (1) by the Company other than for Cause or Disability, or (2) by the Executive for Good Reason; or

(B) the period beginning on the Termination Date and ending twelve (12) months after the Termination Date, if the Executive’s employment with the Company shall be terminated (1) by the Company for Cause, (2) by the Executive other than for Good Reason, or (3) due to the Executive’s Disability.

(iii) Notwithstanding any provision in Section 7(d)(i) or Section 7(d)(ii) to the contrary, the Parties agree that the Company shall have the right to extend the Non-Competition Period and/or the Applicable Period, on a monthly basis, for a maximum of twenty-four (24) months after the Termination Date, by paying to the Executive during each month (the “Monthly Extension Amount”) of the applicable time period that was extended an aggregate amount equal to: (A) two times the Executive’s Base Salary as of the Termination Date and two times the Executive’s Target Annual Bonus as of the Termination Date, divided by (B) twenty-four (24) months (the “Extension Amount”). For example, if both the Non-Competition Period and the Applicable Period are extended so that they last until the date twenty-four (24) months following the Termination Date, then the Company will pay the Executive a total payment equal to the sum of two times the Executive’s Base Salary as of the Termination Date and two times the Executive’s Target Annual Bonus as of the Termination Date, which payment shall be paid on a pro-rata basis over such twenty-four (24) month period.

(e) Interpretation. The Parties hereto recognize that the laws and public policies of the various states of the United States may differ as to the validity and enforceability of covenants similar to those set forth in Sections 7(b) and (c). It is the intention of the Parties that the potential restrictions on the Executive’s activities imposed by Sections 7(b) and (c) be reasonable in both duration and geographic scope and in all other respects, it being understood that the business conducted by the Company and its Subsidiaries is nationwide in scope. It is also the intention of the Parties that the provisions of Sections 7(b) and (c) be enforced to the fullest extent permissible under the laws and policies of each jurisdiction in which enforcement may be sought, and that in the event that any provision of Sections 7(b) and (c) shall, for any reason, be held invalid or unenforceable in any respect, it shall not invalidate, render unenforceable or otherwise affect any other provision hereof, and such invalid or unenforceable provision shall be construed by limiting it so as to be valid and enforceable to the fullest extent permissible under applicable law. If applicable law does not permit an invalid or unenforceable provision to be so construed, then the invalid or unenforceable provision shall be stricken and the remaining portions of Sections 7(b) and (c) shall be enforced to the fullest extent permitted by law. In addition, if any provision of Sections 7(b) and (c) shall be determined to be invalid or unenforceable, such invalidity or unenforceability shall be deemed to apply only with respect to the operation of such provision in the particular jurisdiction in which such determination is made and not with respect to any other provision or jurisdiction.

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(f) Remedies. The Executive agrees that any breach of the terms of this Section 7 would result in irreparable injury and damage to the Company for which the Company would have no adequate remedy at law; the Executive therefore also agrees that in the event of said breach or any threat of breach, the Company shall be entitled to an immediate injunction and restraining order from a court of competent jurisdiction to prevent such breach and/or threatened breach and/or continued breach by the Executive and/or any and all persons and/or entities acting for and/or with the Executive, without having to prove damages. The availability of injunctive relief shall be in addition to any other remedies to which the Company may be entitled at law or in equity, but remedies other than injunctive relief may only be pursued in an arbitration brought in accordance with Section 9 of this Agreement. The terms of this paragraph shall not prevent the Company from pursuing in an arbitration any other available remedies for any breach or threatened breach of this Section 7, including but not limited to the recovery of damages from the Executive.

(g) Survival. The provisions of this Section 7 shall survive any termination of this Agreement, and the existence of any claim or cause of action by the Executive against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants and agreements of this Section 7; provided, however, that this paragraph shall not, in and of itself, preclude the Executive from defending himself against the enforceability of the covenants and agreements of this Section 7.

(h) Return of Materials. Upon the request of the Company and, in any event, upon termination of employment, the Executive will leave with the Company all memoranda, notes, records, manuals, or other documents and media (in whatever form maintained, whether documentary, computer storage or otherwise) pertaining to the Company’s business, including all copies thereof; other than such documents and items that are personal to the employee (e.g., pay stubs, personal tax documentation and other compensation or employment related materials).

(i) Ownership of Executive Developments. All copyrights, patents, trade secrets, or other intellectual property rights associated with any ideas, concepts, techniques, inventions, processes, or works of authorship developed or created by the Executive during the course of performing work for the Company, its Subsidiaries, or its clients, including, but not limited to, software programs, manuals, publications and reports (collectively, the “Work Product”) belongs and shall belong exclusively to the Company and shall, to the extent possible, be considered a work made by the Executive for hire for the Company within the meaning of Title 17 of the United States Code. To the extent the Work Product may not be considered work made by the Executive for hire for the Company, the Executive agrees to assign, and shall automatically assign at the time of creation of the Work Product, without any requirement of further consideration, any right, title, or interest he may have in such Work Product. Upon request of the Company, the Executive shall take such further actions, including execution and delivery of instruments of conveyance, as may be appropriate to give full and proper effect to such assignment. Notwithstanding anything else in this Agreement, any ideas, concepts, techniques, inventions, processes or works of authorship developed or created by the Executive on the Executive’s own time, and which have no application in the business of the Company (“Executive Work Product”), shall not be considered Work Product.

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(j) Consequences of Challenging Enforceability of Non-Competition or Non-Solicitation Covenants. If at any time the Executive or his subsequent employer successfully challenges the enforceability of the non-competition and/or non-solicitation covenants of Sections 7(b) and 7(c), then (A) all references to 90 days, twelve (12) months, eighteen (18) months, or twenty-four (24) months in Sections 5(c) and 7(d) shall instead be references to the time period that such non-competition and non-solicitation covenants actually remain in effect, and (B) the Severance Amount and the Continuation Health Coverage that the Executive may receive pursuant to Section 5(c) and the Extension Amount that the Executive may receive pursuant to Section 7(d) shall automatically be reduced proportionately.

(k) Non-disparagement. During his employment and for an indefinite period following termination of his employment with the Company, the Executive agrees not to disparage in any respect the Company, any of its products or practices, or any of its directors, officers, agents, representatives, stockholders or affiliates, either orally or in writing. During the Term and for an indefinite period following the Term, the Company’s officers and members of its Board shall not disparage in any respect the Executive. Nothing in this paragraph shall prohibit the Executive or the Company’s officers and members of its Board from responding truthfully when required by a governmental agency, law, subpoena or court order.

(l) Cooperation. Executive agrees that during the Term and, upon the Company’s reasonable request and at the Company’s reasonable expense, following the Term, he will provide whatever assistance is required by the Company or its agents, including its attorneys, concerning any matter related to his employment with the Company. Executive further agrees both to immediately notify the Company upon receipt of any court order, subpoena, or any legal discovery device that seeks or might require disclosure of any matter related to his employment with the Company, and to furnish, within three (3) business days of its receipt, a copy of such court order, subpoena, or legal discovery device to the Company, so that the Company may take appropriate measures to quash or otherwise defend its interests.

8. Successors and Assigns.

(a) This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns. The term “Company” as used herein shall include such successors and assigns. The term “successors and assigns” as used herein shall mean a corporation or other entity acquiring all or substantially all the assets and business of the Company (including this Agreement) whether by operation of law or otherwise.

(b) Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive’s legal personal representative.

9. Arbitration. Except as set forth in Section 7(f) hereof, any and all disputes, claims and controversies between the Company or any of its Affiliates and the Executive arising out of

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or relating to this Agreement, or the breach thereof, or otherwise arising out of or relating to the Executive’s employment or the termination thereof shall be resolved by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitration shall take place in the Washington, D.C. metropolitan area. The arbitrator shall have no authority to award punitive damages. The award of the arbitrator shall be final and judgment thereon may be entered in any court having jurisdiction. The Parties shall share the costs of the arbitration equally, unless otherwise ordered by the arbitrator. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction.

10. Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses last given by each party to the other, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof or on the third business day after the mailing thereof, except that notice of change of address shall be effective only upon receipt.

11. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive’s continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its Subsidiaries and for which the Executive may qualify, nor shall anything herein limit or reduce such rights as the Executive may have under any other agreements with the Company or any of its Subsidiaries. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its Subsidiaries shall be payable in accordance with such plan or program, except as explicitly modified by this Agreement.

12. Miscellaneous.

(a) No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement.

(b) To the extent that the Company reasonably determines that any compensation or benefits payable under this Agreement are subject to Section 409A of the Code this Agreement shall incorporate the terms and conditions required by Section 409A of the Code and Department of Treasury regulations as reasonably determined by the Company and the Executive. To the extent applicable, this Agreement shall be interpreted in accordance with Section 409A of the Code and Department of Treasury regulations and other interpretative guidance issued thereunder, including without limitation any such regulations or other such guidance that may be issued after the Effective Date. Notwithstanding any provision of this

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Agreement to the contrary, in the event that, following the Effective Date, the Company reasonably determines that any compensation or benefits payable under this Agreement may be subject to Section 409A of the Code and related Department of Treasury guidance (including such Department of Treasury guidance as may be issued after the Effective Date), the Company and the Executive shall work together to adopt such amendments to this Agreement or adopt other policies or procedures (including amendments, policies and procedures with retroactive effect), or take any other commercially reasonable actions necessary or appropriate to (i) exempt the compensation and benefits payable under this Agreement from Section 409A of the Code and/or preserve the intended tax treatment of the compensation and benefits provided with respect to this Agreement, or (ii) comply with the requirements of Section 409A of the Code and related Department of Treasury guidance.

13. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Virginia without giving effect to the conflict of law principles thereof.

14. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

15. Entire Agreement. This Agreement constitutes the entire agreement between the Parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the Parties hereto with respect to the subject matter hereof.

[Balance of Page Intentionally Blank]

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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Executive has executed this Agreement as of the day and year first above written.

MCG CAPITAL CORPORATION

/s/ Steven F. Tunney

Name: Steven F. Tunney

Title: President and Chief Executive Officer

EXECUTIVE: SAMUEL G. RUBENSTEIN

/s/ Samuel G. Rubenstein

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EXHIBIT A¹

For and in consideration of the payments and other benefits due to _______ (the “Executive”) pursuant to the Employment Agreement dated as of ______ __, 2007 (the “Employment Agreement”), by and between _______________, (the “Company”) and the Executive, and for other good and valuable consideration, the Executive hereby agrees, for the Executive, the Executive’s spouse and child or children (if any), the Executive’s heirs, beneficiaries, devisees, executors, administrators, attorneys, personal representatives, successors and assigns, to forever release, discharge and covenant not to sue the Company or any of its divisions, affiliates, subsidiaries, parents, branches, predecessors, successors, assigns, and, with respect to such entities, their officers, directors, trustees, employees, agents, shareholders, administrators, general or limited partners, representatives, attorneys, insurers and fiduciaries, past, present and future (the “Released Parties”) from any and all claims of any kind arising out of, or related to, his employment with the Company, its affiliates and subsidiaries (collectively, with the Company, the “Affiliated Entities”), the Executive’s separation from employment with the Affiliated Entities, which the Executive now has or may have against the Released Parties, whether known or unknown to the Executive, by reason of facts which have occurred on or prior to the date that the Executive has signed this Release. Such released claims include, without limitation, any and all claims relating to the foregoing under federal, state or local laws pertaining to employment, including, without limitation, the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. Section 2000e et. seq., the Fair Labor Standards Act, as amended, 29 U.S.C. Section 201 et. seq., the Americans with Disabilities Act, as amended, 42 U.S.C. Section 12101 et. seq. the Reconstruction Era Civil Rights Act, as amended, 42 U.S.C. Section 1981 et. seq., the Rehabilitation Act of 1973, as amended, 29 U.S.C. Section 701 et. seq., the Family and Medical Leave Act of 1992, 29 U.S.C. Section 2601 et. seq., and any and all state or local laws regarding employment discrimination and/or federal, state or local laws of any type or description regarding employment, including but not limited to any claims arising from or derivative of the Executive’s employment with the Affiliated Entities, as well as any and all such claims under state contract or tort law.

The Executive has read this Release carefully, acknowledges that the Executive has been given at least 21 days to consider all of its terms and has been advised to consult with any attorney and any other advisors of the Executive’s choice prior to executing this Release, and the Executive fully understands that by signing below the Executive is voluntarily giving up any right which the Executive may have to sue or bring any other claims against the Released Parties, including any rights and claims under the Age Discrimination in Employment Act. The Executive also understands that the Executive has a period of seven days after signing this Release within which to revoke his agreement, and that neither the Company nor any other person is obligated to make any payments or provide any other benefits to the Executive pursuant to the Agreement until eight days have passed since the Executive’s signing of this Release without the Executive’s signature having been revoked other than any accrued obligations or other benefits payable pursuant to the terms of the Company’s normal payroll practices or employee benefit plans. Finally, the Executive has not been forced or pressured in any manner whatsoever to sign this Release, and the Executive agrees to all of its terms voluntarily.

¹ This release may be amended by the Company to reflect new laws and changes in applicable laws.

Notwithstanding anything else herein to the contrary, this Release shall not affect: (i) the Company’s obligations under any compensation or employee benefit plan, program or arrangement (including, without limitation, obligations to the Executive under any stock option, stock award or agreements or obligations under any pension, deferred compensation or retention plan) provided by the Affiliated Entities where the Executive’s compensation or benefits are intended to continue or the Executive is to be provided with compensation or benefits, in accordance with the express written terms of such plan, program or arrangement, beyond the date of the Executive’s termination; or (ii) rights to indemnification the Executive may have as an insured under any director’s and officer’s liability insurance policy now or previously in force.

This Release is final and binding and may not be changed or modified except in a writing signed by both parties.

Date

Date

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EX-10.75

Exhibit 10.75

FORM OF RESTRICTED STOCK AGREEMENT

FOR

NON-EMPLOYEE MEMBERS OF THE BOARD OF DIRECTORS

This Restricted Stock Agreement (“Agreement”) is made this      day of             , 200    , (the “Award Date”) by and between MCG Capital Corporation, a Delaware corporation (the “Company”), and                                           (“Director”).

WHEREAS, in accordance with an order of the Securities and Exchange Commission (“SEC”) dated April 4, 2006 (Release No. 27280) granting certain exemptive relief to the Company regarding the issuance of restricted stock under and in accordance with the Investment Company Act of 1940 (as amended), as well as the approval of the Company’s Board of Directors dated May 12, 2006 and the approval of Company’s Stockholders dated June 12, 2006, the Company has adopted a Restricted Stock Plan (as such plan is further defined below) that governs the issuances of restricted stock from time to time to directors of the Company; and

WHEREAS, on September 22, 2006, the Company filed with the SEC a registration statement on Form S-8 to register the shares of common stock (par value $0.01 per share) of the Company (the “Common Stock”) that are authorized for issuance under the Restricted Stock Plan; and

WHEREAS, subject to and in accordance with the terms and conditions of this Agreement and the Restricted Stock Plan, the Company desires to grant to Director shares of Common Stock (such shares, the “Shares”) in connection with and as consideration for Director’s service on the Company’s Board of Directors during Director’s current term of office (such grant, the “Award”); and

WHEREAS, it is a condition precedent to the Company’s making of the Award that Director enter into this Agreement with the Company concerning the rights and restrictions of the Shares subject to the Award and any additional agreements described herein that the Company may require;

NOW, THEREFORE, in consideration of the mutual covenants herein contained and for other good and valuable consideration (the receipt and adequacy of which are hereby acknowledged), and intending to be legally bound hereby, the parties hereto hereby agree as follows:

I. OWNERSHIP OF SHARES

1.1 Awarded Shares. The Company hereby awards to Director, effective as of the Award Date, the number of Shares set forth on Annex 1. The Shares are subject to certain restrictions and other terms and conditions set forth herein, including without limitation, the forfeiture restrictions set forth in Article IV hereof. The certificates representing the Shares that are subject to forfeiture restrictions under Article IV shall be held in escrow by the Corporate Secretary of the Company as provided in, and in accordance with, Article V.

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1.2 Lapse of Restrictions. Subject to Sections 4.1, 4.2 and 4.3 hereof, the forfeiture restrictions set forth herein shall lapse with respect to the Shares in accordance with the Schedule(s) set forth on Annex 1.

1.3 Restrictive Legends.

(a) In order to reflect the restrictions on disposition of the Shares and the forfeiture restrictions, the stock certificates representing the Shares will be endorsed with the following restrictive legends:

“THE REGISTERED OWNER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS AN AFFILIATE, AS DEFINED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OF THE COMPANY AND MAY NOT TRANSFER THESE SECURITIES EXCEPT (A) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT, INCLUDING RULE 144 UNDER THE ACT, OR (B) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT.”

(b) Upon the lapse of the applicable forfeiture restrictions, at Director’s request, the Company shall issue replacement certificates representing such Shares without the legend set forth in clause (a) of this Section 1.3.

1.4 Definitions. Whenever used in this Agreement, the following terms shall have the meaning specified below unless the context clearly indicates to the contrary.

“Affiliate” means, with respect to any Person, any other Person that, directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person.

“Beneficial Ownership” or “Beneficially Owned” means ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act.

“Board” means the Board of Directors of the Company.

“Change in Capitalization” means any increase or reduction in the number of shares of Common Stock, or any change in the shares of Common Stock or exchange of shares of Common Stock for a different number or kind of shares or other securities of the Company, by reason of a reclassification, recapitalization, merger, consolidation, reorganization, spin-off, split-up, issuance of warrants or rights or debentures, stock dividend, stock split or reverse stock split, cash dividend, property dividend, combination or exchange of shares, change in corporate structure or substantially similar event.

“Change in Control” means the occurrence of any of the following events:

(a) An acquisition in one or more transactions (other than directly from the Company) of any voting securities of the Company by any Person (as defined below) immediately after which such Person has Beneficial Ownership of fifty percent (50%) or more of

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the combined voting power of the Company’s then outstanding voting securities; provided, however, in determining whether a Change in Control has occurred, voting securities which are acquired in a “Non-Control Acquisition” (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A “Non-Control Acquisition” shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof) maintained by (A) the Company or (B) any corporation or other Person of which a majority of its voting power or its voting equity securities or equity interest is owned, directly or indirectly, by the Company (a “Subsidiary”), (ii) the Company or its Subsidiaries, or (iii) any Person in connection with a “Non-Control Transaction” (as hereinafter defined); or

(b) The individuals who, as of the date hereof, are members of the Board (the “Incumbent Board”), cease for any reason to constitute at least a majority of the members of the Board or, following a Merger (as defined below), the board of directors of the ultimate Parent Corporation (as defined below); provided, however, that if the election, or nomination for election by the Company’s common stockholders, of any new director was approved by a vote of at least a majority of the Incumbent Board (or, with respect to the directors who are not “interested persons” as defined in the Investment Company Act of 1940, by a majority of the directors who are not “interested persons” serving on the Incumbent Board), such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a “Proxy Contest”) including by reason of any agreement intended to avoid or settle any Proxy Contest; or

(c) The consummation of:

(i) A merger, consolidation or reorganization involving the Company (a “Merger”) or an indirect or direct subsidiary of the Company, or to which securities of the Company are issued, unless:

(A) the stockholders of the Company, immediately before a Merger, own, directly or indirectly immediately following the Merger, more than fifty percent (50%) of the combined voting power of the outstanding voting securities of (x) the corporation resulting from the Merger (the “Surviving Corporation”) if fifty percent (50%) or more of the combined voting power of the then outstanding voting securities of the Surviving Corporation is not Beneficially Owned, directly or indirectly, by another Person or group of Persons (a “Parent Corporation”), or (y) if there is one or more Parent Corporations, the ultimate Parent Corporation, and

(B) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for a Merger constitute at least a majority of the members of the board of directors of (x) the Surviving Corporation or (y) the ultimate Parent Corporation, if the ultimate Parent Corporation, directly or indirectly, owns fifty percent (50%) or more of the combined voting power of the then outstanding voting securities of the Surviving Corporation, and

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(C) no Person other than (a) the Company, (b) any Subsidiary, (c) any employee benefit plan (or any trust forming a part thereof) maintained by the Company, the Surviving Corporation, any Subsidiary, or the ultimate Parent Corporation, or (d) any Person who, together with its Affiliates (as defined below), immediately prior to a Merger had Beneficial Ownership of fifty percent (50%) or more of the then outstanding voting securities, owns, together with its Affiliates, Beneficial Ownership of fifty percent (50%) or more of the combined voting power of the then outstanding voting securities of (x) the Surviving Corporation or (y) the ultimate Parent Corporation;

(D) Each transaction described in clauses (c)(i)(A) through (C) above shall herein be referred to as a “Non-Control Transaction”; or

(ii) The direct or indirect sale or other disposition of all or substantially all of the assets of the Company to any Person (other than (A) a transfer to a Subsidiary, (B) under conditions that would constitute a Non-Control Transaction with the disposition of assets being regarded as a Merger for this purpose, or (C) the distribution to the Company’s stockholders of the stock of a Subsidiary or any other assets).

Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the “Subject Person”) acquired Beneficial Ownership of more than the permitted amount of the then outstanding voting securities as a result of the acquisition of voting securities by the Company which, by reducing the number of voting securities then outstanding, increases the proportional number of shares Beneficially Owned by the Subject Persons, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of voting securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional voting securities which increases the percentage of the then outstanding voting securities Beneficially Owned by the Subject Person, then a Change in Control shall occur.

“Code” means the Internal Revenue Code of 1986, as amended.

“Dividends” means all cash dividends (including shares of Common Stock acquired through any dividend reinvestment program with respect to regular cash dividends), except for liquidating dividends.

“Exchange Act” means the Securities and Exchange Act of 1934, as amended.

“Fair Market Value” on any date means the closing price per share of Common Stock on such date and, when used with reference to shares of Common Stock for any period shall mean the average of the daily closing prices per share of Common Stock for such period. If the shares of Common Stock are listed or admitted to trading on a national securities exchange, the closing price shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the shares of Common Stock are not

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listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares of Common Stock are listed or admitted to trading or, if the shares of Common Stock are not so listed on any national securities exchange, as reported in the transaction reporting system applicable to securities designated as a “national market system security” or NASDAQ. If the shares of Common Stock are not so listed, admitted to trading or designated, Fair Market Value shall be as determined in good faith by the Board based on an opinion of an independent investment banking firm with an established national reputation with respect to the valuation of securities.

“Forfeitable Shares” means any Shares with respect to which the restrictions have not lapsed in accordance with the Schedule(s) set forth in Annex 1.

“Non-Forfeitable Shares” means any Shares with respect to which the restrictions thereon have lapsed (a) in accordance with the Schedule(s) set forth in Annex 1, or (b) otherwise in accordance with the terms of this Agreement.

“Owner” includes Director and all subsequent holders of the Shares who own such Shares pursuant to a Transfer from Director in accordance with Section 3.1 and Section 3.2.

“Person” means “person” as such term is used for purposes of Section 13(d) or 14(d) of the Exchange Act, including without limitation, any individual, corporation, limited liability company, partnership, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity or any group of Persons.

“Restricted Stock Plan” means the MCG Capital Corporation 2006 Non-Employee Director Restricted Stock Plan, as approved by the Board of Directors of the Company on May 12, 2006, and by the Stockholders of the Company on June 12, 2006, as such Restricted Stock Plan may be amended and modified from time to time.

“Schedule” shall refer to the Schedule(s) set forth on Annex 1.

“Subsidiary” means any corporation which is a subsidiary corporation (within the meaning of Section 424(f) of the Code) with respect to the Company, except that for the purposes of the definition of a “Change in Control,” Subsidiary is defined in such definition.

“Transfer” means a transfer, sale, assignment, pledge, hypothecation or other disposition of any Shares.

II. SPECIAL PROVISIONS

2.1 Stockholder Rights, Including Voting & Dividend Rights. Unless and until any such Shares awarded to Director hereunder are forfeited in accordance with the terms and provisions of this Agreement, Director (or any successor in interest) shall have and be entitled to all of the rights and privileges of a holder of Common Stock of the Company (including, without limitation, voting rights and dividend rights) with respect to both such Forfeitable Shares and such Non-Forfeitable Shares, but subject, however, to the transfer restrictions of Article III.

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2.2 Payment and Reimbursement for Applicable Withholding Taxes. Director understands that (a) all of the Shares that are Forfeitable Shares as of the Award Date are considered to be subject to a substantial risk of forfeiture under Section 83 of the Code, and (b) under Section 83(a) of the Code, upon the lapse of any forfeiture restrictions applicable to any of the Shares, Director is required to include as income (the “Taxable Amount”) the difference (if any) between the price paid (if any) for such Shares and the Fair Market Value of such Shares on the date on which any such forfeiture restrictions applicable to such Shares lapse.

III. TRANSFER RESTRICTIONS

3.1 Restrictions on Transfer of Forfeitable Shares. Director shall not transfer, assign, encumber, or otherwise dispose of all or any part of the Forfeitable Shares, other than to the Company.

3.2 Restrictions on Transfer of Shares; Transferee Obligations.

(a) No Transfer of Shares, whether or not permitted by Sections 3.1, shall be made or recorded on the books of the Company, and any such Transfer shall be void and of no effect, unless:

(i) Such Transfer of the Shares is made pursuant to an effective registration statement under the 1933 Act and applicable state securities laws or pursuant to an exemption therefrom with respect to which the Company may, upon request, require a satisfactory opinion of counsel retained by Director (which counsel shall be acceptable to the Company) to the effect that such Transfer is exempt from the provisions of Section 5 of the 1933 Act and applicable state securities laws; and

(ii) Each person (other than the Company) to whom the Shares are transferred by means of one of the Transfers specified in Section 3.1 above shall, as a condition precedent to the validity of such Transfer, agree in writing to the Company to be bound by the terms and provisions of this Agreement and acknowledge that any such transferred Shares shall be subject to the terms and provisions of this Agreement, (1) the restrictions on transfer contained in Sections 3.1 and 3.2 as applicable, and (2) the forfeiture restrictions contained in Article IV, and (3) the escrow provisions pursuant to Article V, to the same extent as if such Shares continued to be owned by Director.

(b) No Transfer of Shares in violation of this Agreement shall be made or recorded on the books of the Company, and any such Transfer shall be void and of no effect.

IV. FORFEITURE OF FORFEITABLE SHARES

4.1 Termination of Service as a Director. Subject to Section 4.2, upon any resignation or removal of Director as a member of the Board of Directors, all of Director’s Forfeitable Shares shall be forfeited as of such date of resignation or removal.

4.2 Change in Control. Upon a Change in Control, notwithstanding anything to the contrary in this Agreement or in any other agreement between Director and the Company, all of Director’s Forfeitable Shares shall become Non-Forfeitable Shares. The Company shall assign this Agreement and its rights, together with its obligations, hereunder in connection with a Change in Control.

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4.3 Additional Shares or Substituted Securities. Upon the occurrence of any Change in Capitalization, any new, substituted or additional securities or other property (excluding Dividends) that is by reason of any such Change in Capitalization distributed with respect to the Shares shall be immediately subject to the restrictions set forth herein, but only to the extent the Shares are at the time covered by such restrictions. Appropriate adjustments to reflect the distribution of such securities or property shall be made to the number of Shares hereunder in order to reflect the effect of any such transaction upon the Company’s capital structure.

V. ESCROW

5.1 Deposit. Upon issuance, the certificates for the Forfeitable Shares shall be deposited in escrow with the Corporate Secretary of the Company to be held in accordance with the provisions of this Article V. Each deposited certificate shall be accompanied by two original duly executed Assignment Separate from Certificates in the form of Exhibit A. The deposited certificates, together with any other assets or securities from time to time deposited with the Company pursuant to the requirements of this Agreement, shall remain in escrow until such time or times as the certificates (or other assets and securities) are to be released or otherwise surrendered for cancellation in accordance with Section 5.3 below. Upon delivery of the certificates (or other assets and securities) to the Company, the Owner shall be provided with written evidence of the number of Shares (or other assets and securities) delivered in escrow to the Corporate Secretary of the Company.

5.2 Recapitalization. All Dividends shall be paid directly to the Owner and shall not be held in escrow. However, in the event of a Change in Capitalization, any new, substituted or additional securities or other property (excluding Dividends) that is by reason of such transaction distributed with respect to the Shares shall be immediately delivered to the Corporate Secretary of the Company to be held in escrow under this Article V, but only to the extent the Shares are at the time subject to the escrow requirements of Section 5.1.

5.3 Release/Surrender. The Shares, together with any other assets or securities held in escrow hereunder, shall be subject to the following terms and conditions relating to their release from escrow or their surrender to the Company for cancellation:

(a) The certificates for Shares shall be released from escrow and delivered to the Owner after the restrictions on the Forfeitable Shares lapse in accordance with the Schedule(s) or as otherwise set forth herein, upon the written request of the Owner with reasonable advance notice to the Corporate Secretary.

(b) If Forfeitable Shares are forfeited hereunder, then the certificates representing such forfeited Shares shall be surrendered to the Company.

(c) Notwithstanding anything to the contrary contained in this Section 5.3, all Shares (or other assets or securities) released from escrow in accordance with the provisions of Section 5.3(a) shall nevertheless remain subject to the transfer restrictions set forth in Section 3.2 until such restrictions terminate in accordance with the terms of Section 3.2.

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VI. GENERAL PROVISIONS

6.1 Notices. Any notice required in connection with this Agreement shall be given in writing and shall be deemed to have been given when delivered personally to the recipient, sent to the recipient by reputable overnight courier service (charges prepaid) or telecopied to the recipient at the address indicated on Annex 1 or at such other address as such party may designate by ten (10) days’ advance written notice under this Section 4.1 to all other parties to this Agreement.

6.2 No Waiver. No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature.

6.3 Amendment. This Agreement may be modified, amended, suspended or terminated, and terms or conditions may be waived, but only by a written instrument executed by the parties hereto.

6.4 Director Undertaking. Director hereby agrees to take whatever additional action and execute whatever additional documents the Company may, in its judgment, deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either Director or the Shares pursuant to the express provisions of this Agreement.

6.5 Agreement Is Entire Contract. This Agreement constitutes the entire agreement between the parties hereto with regard to the subject matter hereof.

6.6 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, as such laws are applied to contracts entered into and performed in such State, without regard to conflict of laws principles thereof.

6.7 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which, when taken together, shall constitute one and the same instrument.

6.8 Successors and Assigns. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and Director and Director’s legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person shall have become a party to this Agreement and have agreed in writing to join herein and be bound by the terms and conditions hereof.

6.9 Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

* * * Balance of Page Intentionally Blank – Signatures on Next Page * * *

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IN WITNESS WHEREOF, the Parties have executed this Agreement as of the Award Date first indicated above.

THE COMPANY:
MCG CAPITAL CORPORATION
By:
	Name:
	Title:
DIRECTOR:
Name:

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Annex 1

MCG CAPITAL CORPORATION

RESTRICTED STOCK AGREEMENT

Director Name:
Director Address:
Award Date:	, 200     (immediately prior to market  open)
Awarded Shares:

Lapsing of Forfeiture:

From and after the Award Date, but subject to the restrictions and other terms and conditions set forth in this Agreement, the restrictions set forth in Sections 3.1, 3.2, 4.1 and 5.1 shall lapse with respect to 2,500 Shares annually on the last calendar day of the month immediately preceding the month in which Director was most recently elected to the Board, in each such instance only if and to the extent that Director is still then serving as a director on the Board of Directors of the Company on such date.

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EX-10.76

Exhibit 10.76

RESTRICTED STOCK AGREEMENT

FOR

EXECUTIVE OFFICER

This Restricted Stock Agreement (“Agreement”) is made this      day of             ,200    , (the “Award Date”) by and between MCG Capital Corporation, a Delaware corporation (the “Company”), and                                           (“Employee”).

[WHEREAS, the Company and Employee entered into a certain              agreement [DESCRIBE AGREEMENT] dated             , 200     (as may be amended from time to time, the “Employee Agreement”); and

WHEREAS, in accordance with an order of the Securities and Exchange Commission (“SEC”) dated April 4, 2006 (Release No. 27280) granting certain exemptive relief to the Company regarding the issuance of restricted stock under and in accordance with the Investment Company Act of 1940 (as amended), as well as the approval of the Company’s Board of Directors dated May 12, 2006 and the approval of Company’s Stockholders dated June 12, 2006, the Company has adopted a Restricted Stock Plan (as such plan is further defined below) that governs the issuances of restricted stock from time to time to employees of the Company; and

WHEREAS, on September 22, 2006, the Company filed with the SEC a registration statement on Form S-8 to register the shares of common stock (par value $0.01 per share) of the Company (the “Common Stock”) that are authorized for issuance under the Restricted Stock Plan; and

WHEREAS, subject to and in accordance with the terms and conditions of this Agreement and the Restricted Stock Plan, the Company desires to grant to Employee shares of Common Stock (such shares, the “Shares”) in connection with and as consideration for Employee’s various services to and for the benefit of the Company (such grant, the “Award”): and

WHEREAS, it is a condition precedent to the Company’s making of the Award that Employee enter into this Agreement with the Company concerning the rights and restrictions of the Shares subject to the Award and any additional agreements described herein that the Company may require;

NOW, THEREFORE, in consideration of the mutual covenants herein contained and for other good and valuable consideration (the receipt and adequacy of which are hereby acknowledged), and intending to be legally bound hereby, the parties hereto hereby agree as follows:

I. OWNERSHIP OF SHARES

1.1 Awarded Shares. The Company hereby awards to Employee, effective as of the Award Date, the number of Shares set forth on Annex 1. The Shares are subject to certain restrictions and other terms and conditions set forth herein, including without limitation, the

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forfeiture restrictions set forth in Article IV hereof. The certificates representing the Shares that are subject to forfeiture restrictions under Article IV shall be held in escrow by the Corporate Secretary of the Company as provided in, and in accordance with, Article V.

1.2 Lapse of Restrictions. Subject to Sections 4.1, 4.2 and 4.3 hereof, the forfeiture restrictions set forth herein shall lapse with respect to the Shares [(including, without limitation, the Performance-Based Shares)] in accordance with the Schedule(s) set forth on Annex 1.

1.3 Restrictive Legends.

(a) In order to reflect the restrictions on disposition of the Shares and the forfeiture restrictions, the stock certificates representing the Shares will be endorsed with the following restrictive legends:

[“THE REGISTERED OWNER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS AN AFFILIATE, AS DEFINED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OF THE COMPANY AND MAY NOT TRANSFER THESE SECURITIES EXCEPT (A) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT, INCLUDING RULE 144 UNDER THE ACT, OR (B) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT.”]

(b) Upon the lapse of the applicable forfeiture restrictions, at Employee’s request, the Company shall issue replacement certificates representing such Shares without the legend set forth in clause (a) of this Section 1.3.

1.4 Definitions. Whenever used in this Agreement, the following terms shall have the meaning specified below unless the context clearly indicates to the contrary.

“Affiliate” means, with respect to any Person, any other Person that, directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person.

“Beneficial Ownership” or “Beneficially Owned” means ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act.

“Board” means the Board of Directors of the Company.

“Change in Capitalization” means any increase or reduction in the number of shares of Common Stock, or any change in the shares of Common Stock or exchange of shares of Common Stock for a different number or kind of shares or other securities of the Company, by reason of a reclassification, recapitalization, merger, consolidation, reorganization, spin-off, split-up, issuance of warrants or rights or debentures, stock dividend, stock split or reverse stock split, cash dividend, property dividend, combination or exchange of shares, change in corporate structure or substantially similar event.

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“Change in Control” means the occurrence of any of the following events:

(a) An acquisition in one or more transactions (other than directly from the Company) of any voting securities of the Company by any Person (as defined below) immediately after which such Person has Beneficial Ownership of fifty percent (50%) or more of the combined voting power of the Company’s then outstanding voting securities; provided, however, in determining whether a Change in Control has occurred, voting securities which are acquired in a “Non-Control Acquisition” (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A “Non-Control Acquisition” shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof) maintained by (A) the Company or (B) any corporation or other Person of which a majority of its voting power or its voting equity securities or equity interest is owned, directly or indirectly, by the Company (a “Subsidiary”), (ii) the Company or its Subsidiaries, or (iii) any Person in connection with a “Non-Control Transaction” (as hereinafter defined); or

(b) The individuals who, as of the date hereof, are members of the Board (the “Incumbent Board”), cease for any reason to constitute at least a majority of the members of the Board or, following a Merger (as defined below), the board of directors of the ultimate Parent Corporation (as defined below); provided, however, that if the election, or nomination for election by the Company’s common stockholders, of any new director was approved by a vote of at least a majority of the Incumbent Board (or, with respect to the directors who are not “interested persons” as defined in the Investment Company Act of 1940, by a majority of the directors who are not “interested persons” serving on the Incumbent Board), such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a “Proxy Contest”) including by reason of any agreement intended to avoid or settle any Proxy Contest; or

(c) The consummation of:

(i) A merger, consolidation or reorganization involving the Company (a “Merger”) or an indirect or direct subsidiary of the Company, or to which securities of the Company are issued, unless:

(A) the stockholders of the Company, immediately before a Merger, own, directly or indirectly immediately following the Merger, more than fifty percent (50%) of the combined voting power of the outstanding voting securities of (x) the corporation resulting from the Merger (the “Surviving Corporation”) if fifty percent (50%) or more of the combined voting power of the then outstanding voting securities of the Surviving Corporation is not Beneficially Owned, directly or indirectly, by another Person or group of Persons (a “Parent Corporation”), or (y) if there is one or more Parent Corporations, the ultimate Parent Corporation, and

(B) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for a Merger constitute at least a majority of the members of the board of directors of (x) the Surviving Corporation or (y) the ultimate Parent Corporation, if the ultimate Parent Corporation, directly or indirectly, owns fifty percent (50%) or more of the combined voting power of the then outstanding voting securities of the Surviving Corporation, and

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(C) no Person other than (a) the Company, (b) any Subsidiary, (c) any employee benefit plan (or any trust forming a part thereof) maintained by the Company, the Surviving Corporation, any Subsidiary, or the ultimate Parent Corporation, or (d) any Person who, together with its Affiliates (as defined below), immediately prior to a Merger had Beneficial Ownership of fifty percent (50%) or more of the then outstanding voting securities, owns, together with its Affiliates, Beneficial Ownership of fifty percent (50%) or more of the combined voting power of the then outstanding voting securities of (x) the Surviving Corporation or (y) the ultimate Parent Corporation;

(D) Each transaction described in clauses (c)(i)(A) through (C) above shall herein be referred to as a “Non-Control Transaction”; or

(ii) The direct or indirect sale or other disposition of all or substantially all of the assets of the Company to any Person (other than (A) a transfer to a Subsidiary, (B) under conditions that would constitute a Non-Control Transaction with the disposition of assets being regarded as a Merger for this purpose, or (C) the distribution to the Company’s stockholders of the stock of a Subsidiary or any other assets).

Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the “Subject Person”) acquired Beneficial Ownership of more than the permitted amount of the then outstanding voting securities as a result of the acquisition of voting securities by the Company which, by reducing the number of voting securities then outstanding, increases the proportional number of shares Beneficially Owned by the Subject Persons, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of voting securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional voting securities which increases the percentage of the then outstanding voting securities Beneficially Owned by the Subject Person, then a Change in Control shall occur.

“Code” means the Internal Revenue Code of 1986, as amended.

“Committee” means the Compensation Committee of the Board, which is composed solely of independent directors, or another committee of the Board composed solely of independent directors that is appointed by the Board to administer this Agreement.

“Dividends” means all cash dividends (including shares of Common Stock acquired through any dividend reinvestment program with respect to regular cash dividends), except for liquidating dividends.

“Exchange Act” means the Securities and Exchange Act of 1934, as amended.

“Fair Market Value” on any date means the closing price per share of Common Stock on such date and, when used with reference to shares of Common Stock for any period

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shall mean the average of the daily closing prices per share of Common Stock for such period. If the shares of Common Stock are listed or admitted to trading on a national securities exchange, the closing price shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the shares of Common Stock are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares of Common Stock are listed or admitted to trading or, if the shares of Common Stock are not so listed on any national securities exchange, as reported in the transaction reporting system applicable to securities designated as a “national market system security” or NASDAQ. If the shares of Common Stock are not so listed, admitted to trading or designated, Fair Market Value shall be as determined in good faith by the Board based on an opinion of an independent investment banking firm with an established national reputation with respect to the valuation of securities.

“Forfeitable Shares” means any Shares with respect to which the restrictions have not lapsed in accordance with the Schedule(s) set forth in Annex 1[, including any Forfeitable Shares with Special Risk].

[“Forfeitable Shares with Special Risk” means Performance-Based Shares (as defined in the Schedule(s) to Annex 1) with respect to which the restrictions thereon have not lapsed in accordance with the Schedule(s) set forth in Annex 1 on the applicable forfeiture date for such Shares until such time as such Shares become Non-Forfeitable Shares on a subsequent date as a result of either the Board or the Committee (after consultation with Employee) determining that such non-forfeiture of such Performance-Based Shares is warranted due to the achievement of performance milestones or other performance of Employee or the Company prior to or on such subsequent date; provided, however, that unless either the Board or the Committee determines otherwise, then such Forfeitable Shares with Special Risk (and all Dividends paid in connection therewith as of and after the date on which such Shares became Forfeitable Shares with Special Risk, but net of taxes (if any) paid as a result of such payment of Dividends) shall be immediately forfeited upon the earlier to occur of the following: (a) Employee’s termination date (if prior to a Change in Control), or (b) February 28, 2010.]

“Non-Forfeitable Shares” means any Shares with respect to which the restrictions thereon have lapsed (a) in accordance with the Schedule(s) set forth in Annex 1, or (b) otherwise in accordance with the terms of this Agreement, or (c) otherwise upon a determination of the Board or the Committee.

“Owner” includes Employee and all subsequent holders of the Shares who own such Shares pursuant to a Transfer from Employee in accordance with Section 3.1 and Section 3.2.

“Person” means “person” as such term is used for purposes of Section 13(d) or 14(d) of the Exchange Act, including without limitation, any individual, corporation, limited liability company, partnership, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity or any group of Persons.

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“Restricted Stock Plan” means the MCG Capital Corporation 2006 Employee Restricted Stock Plan, as approved by the Board of Directors of the Company on May 12, 2006, and by the Stockholders of the Company on June 12, 2006, as such Restricted Stock Plan may be amended and modified from time to time.

“Schedule” shall refer to the Schedule(s) set forth on Annex 1.

“Subsidiary” means any corporation which is a subsidiary corporation (within the meaning of Section 424(f) of the Code) with respect to the Company, except that for the purposes of the definition of a “Change in Control,” Subsidiary is defined in such definition.

“Transfer” means a transfer, sale, assignment, pledge, hypothecation or other disposition of any Shares.

II. SPECIAL PROVISIONS

2.1 Stockholder Rights, Including Voting & Dividend Rights. Unless and until any such Shares awarded to Employee hereunder are forfeited in accordance with the terms and provisions of this Agreement, Employee (or any successor in interest) shall have and be entitled to all of the rights and privileges of a holder of Common Stock of the Company (including, without limitation, voting rights and dividend rights) with respect to both such Forfeitable Shares and such Non-Forfeitable Shares, but subject, however, to the transfer restrictions of Article III. [Notwithstanding the foregoing, Employee shall not be entitled to retain any Dividends received on Forfeitable Shares with Special Risk unless and until such time as such Shares become Non-Forfeitable Share, and all Dividends paid or payable with respect to Forfeitable Shares with Special Risk as of and after the date on which such Shares become Forfeitable Shares with Special Risk (exclusive of taxes paid, if any, relating to such payment of Dividends) shall be forfeited to the Company if the related Forfeitable Shares with Special Risk are forfeited hereunder.]

2.2 Payment and Reimbursement for Applicable Withholding Taxes. Employee understands that (a) all of the Shares that are Forfeitable Shares as of the Award Date are considered to be subject to a substantial risk of forfeiture under Section 83 of the Code, and (b) under Section 83(a) of the Code, upon the lapse of any forfeiture restrictions applicable to any of the Shares, Employee is required to include as compensation income (the “Taxable Amount”) the difference (if any) between the price paid (if any) for such Shares and the Fair Market Value of such Shares on the date on which any such forfeiture restrictions applicable to such Shares lapse. Employee hereby (i) covenants and agrees to reimburse and pay to the Company, upon written demand (including by email or other electronic means) and strictly in accordance with each such demand, in immediately available funds the full amount of withholding taxes as determined by the Company to be due and payable to the Company with respect to all Taxable Amounts and with respect to any Dividends paid (or to be paid) relating to all of Employee’s Forfeitable Shares, and (ii) hereby authorizes the Company (at its election but without in any manner modifying or limiting Employee’s obligations under clause “(i)” of this sentence) to withhold, deduct and/or set off any and all such amounts owed or to be owed to the Company in accordance with this Section from any and all payroll or other amounts owed by the Company to Employee. If Employee has not paid in full and in

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immediately available funds all amounts owed or to be owed to the Company under this Section (as evidenced by a written demand from the Company) at the time that forfeiture restrictions would otherwise lapse under this Agreement with respect to any of Employee’s Shares, then the lapsing of such forfeiture restrictions with respect to such Shares shall be automatically postponed by 45 calendar days (or the first Business Day thereafter, if such date is not a Business Day). If any such amounts that are owed or to be owed to the Company under this Section or that would be owed to the Company upon the lapsing of forfeiture restrictions the stated time for which has already passed (as determined by the Company) are not paid in full and in immediately available funds prior to the end of such 45-day extension period, then all of the Forfeitable Shares of Employee relating to such delinquent payment(s) shall be permanently forfeited hereunder.

III. TRANSFER RESTRICTIONS

3.1 Restrictions on Transfer of Forfeitable Shares. Employee shall not transfer, assign, encumber, or otherwise dispose of all or any part of the Forfeitable Shares, other than to the Company.

3.2 Restrictions on Transfer of Shares; Transferee Obligations.

(a) No Transfer of Shares, whether or not permitted by Section 3.1, shall be made or recorded on the books of the Company, and any such Transfer shall be void and of no effect, unless:

(i) Such Transfer of the Shares is made pursuant to an effective registration statement under the 1933 Act and applicable state securities laws or pursuant to an exemption therefrom with respect to which the Company may, upon request, require a satisfactory opinion of counsel retained by Employee (which counsel shall be acceptable to the Company) to the effect that such Transfer is exempt from the provisions of Section 5 of the 1933 Act and applicable state securities laws; and

(ii) Each person (other than the Company) to whom the Shares (whether Forfeitable Shares or Non-Forfeitable Shares) are transferred by means of one of the Transfers specified in Section 3.1 above shall, as a condition precedent to the validity of such Transfer, agree in writing to the Company to be bound by the terms and provisions of this Agreement and acknowledge that any such transferred Shares shall be subject to the terms and provisions of this Agreement, including without limitation (1) the restrictions on transfer contained in Sections 3.1 and 3.2 as applicable, and (2) the forfeiture restrictions contained in Article IV, and (3) the escrow provisions pursuant to Article V, to the same extent as if such Shares continued to be owned by Employee.

(b) No Transfer of Shares in violation of this Agreement shall be made or recorded on the books of the Company, and any such Transfer shall be void and of no effect.

IV. FORFEITURE OF FORFEITABLE SHARES

4.1 Termination of Employment. Upon any termination of Employee’s employment with the Company for any reason, unless the Board or the Committee shall otherwise determine

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in its sole discretion to permit all or some portion of the Forfeitable Shares to become Non-Forfeitable Shares, (a) if Employee’s employment with the Company is then subject to the terms of an effective employment or other agreement that contains a provision applicable to such termination, then such agreement shall govern the treatment of Employee’s Forfeitable Shares upon the occurrence of such termination (including, if applicable, with respect to a Change of Control), and (b) if Employee’s employment with the Company is not then subject to the terms of an effective employment or other agreement that contains a provision applicable to such termination, then (subject to Section 4.2) all of Employee’s Forfeitable Shares shall be forfeited as of such date of termination.

4.2 Change in Control. Upon the occurrence of a Change in Control, notwithstanding anything to the contrary in this Agreement or in any employment or other agreement between Employee and the Company that would provide for a lesser benefit, all of Employee’s Forfeitable Shares shall become Non-Forfeitable Shares if, within 365 calendar days after the date of such Change of Control, Employee’s employment with the acquiring company is terminated:

(i) By the acquiring company unless such termination is due to (1) a failure or refusal by Employee to perform reasonably assigned duties, or (2) dishonesty or willful misconduct in the performance of Employee’s duties, or (3) Employee’s engaging in a transaction in connection with the performance of Employee’s duties to the Company or any of its Subsidiaries which transaction is adverse to the interests of the Company or any of its Subsidiaries and which transaction is engaged in for personal profit to Employee, or (4) willful violation by Employee of any law, rule or regulation (other than traffic violations or similar offenses) in connection with the performance of Employee’s duties; or

(ii) By Employee if such termination is due to (1) a change in Employee’s status, title, position or responsibilities (including reporting responsibilities) that represents an adverse change from Employee’s status, title, position or responsibilities as in effect immediately prior to the occurrence of such Change of Control, or (2) a reduction in Employee’s base salary from the base salary in effect during the prior calendar year, or (3) the acquiring company’s requiring Employee (without Employee’s consent or agreement) to be based at a location that is outside a 50-mile radius from the office in which Employee was employed by the Company immediately prior to the occurrence of such Change of Control, except for reasonably required travel in connection with the acquiring company’s business.

4.3 Additional Shares or Substituted Securities. Upon the occurrence of any Change in Capitalization, any new, substituted or additional securities or other property (excluding Dividends) that is by reason of any such Change in Capitalization distributed with respect to the Shares shall be immediately subject to the restrictions set forth herein, but only to the extent the Shares are at the time covered by such restrictions. Appropriate adjustments to reflect the distribution of such securities or property shall be made to the number of Shares hereunder in order to reflect the effect of any such transaction upon the Company’s capital structure.

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V. ESCROW

5.1 Deposit. Upon issuance, the certificates for the Forfeitable Shares shall be deposited in escrow with the Corporate Secretary of the Company to be held in accordance with the provisions of this Article V. Each deposited certificate shall be accompanied by two original duly executed Assignment Separate from Certificates in the form of Exhibit A. The deposited certificates, together with any other assets or securities from time to time deposited with the Company pursuant to the requirements of this Agreement, shall remain in escrow until such time or times as the certificates (or other assets and securities) are to be released or otherwise surrendered for cancellation in accordance with Section 5.3 below. Upon delivery of the certificates (or other assets and securities) to the Company, the Owner shall be provided with written evidence of the number of Shares (or other assets and securities) delivered in escrow to the Corporate Secretary of the Company.

5.2 Recapitalization. All Dividends [(other than Dividends with respect to Forfeitable Shares with Special Risk, but exclusive of taxes paid (if any) relating to the payment of such Dividends)] shall be paid directly to the Owner and shall not be held in escrow. However, in the event of a Change in Capitalization, any new, substituted or additional securities or other property (excluding Dividends) that is by reason of such transaction distributed with respect to the Shares shall be immediately delivered to the Corporate Secretary of the Company to be held in escrow under this Article V, but only to the extent the Shares are at the time subject to the escrow requirements of Section 5.1. [All Dividends paid or payable with respect to Forfeitable Shares with Special Risk as of and after the date on which such Shares become Forfeitable Shares with Special Risk (exclusive of taxes paid, if any, relating to the payment of such Dividends) shall be held in escrow and shall be payable to the Owner or forfeited to the Company, as applicable, in accordance with the terms of this Agreement.]

5.3 Release/Surrender. The Shares, together with any other assets or securities held in escrow hereunder, shall be subject to the following terms and conditions relating to their release from escrow or their surrender to the Company for cancellation:

(a) The certificates for Shares shall be released from escrow (including any Dividends thereon being held in such escrow) and delivered to the Owner after the restrictions on the Forfeitable Shares lapse in accordance with the Schedule(s) or as otherwise set forth herein, upon the written request of the Owner with reasonable advance notice to the Corporate Secretary.

(b) If Forfeitable Shares are forfeited hereunder, then the certificates representing such forfeited Shares (including any Dividends thereon being held in such escrow) shall be surrendered to the Company.

(c) Notwithstanding anything to the contrary contained in this Section 5.3, all Shares (or other assets or securities) released from escrow in accordance with the provisions of Section 5.3(a) shall nevertheless remain subject to the transfer restrictions set forth in Section 3.2 until such restrictions terminate in accordance with the terms of Section 3.2.

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VI. GENERAL PROVISIONS

6.1 No Employment or Service Contract. Nothing in this Agreement shall confer upon Employee any right to continue in the service of the Company (or any subsidiary of the Company employing or retaining Employee) for any period of time or interfere with or restrict in any way the rights of the Company (or any subsidiary of the Company employing or retaining Employee) or Employee, which rights are hereby expressly reserved by each, to terminate the employee status of Employee at any time for any reason whatsoever, with or without cause, subject to the provisions of any employment agreement between the Company and Employee.

6.2 Notices. Any notice required in connection with this Agreement shall be given in writing and shall be deemed to have been given when delivered personally to the recipient, sent to the recipient by reputable overnight courier service (charges prepaid) or telecopied to the recipient at the address indicated on Annex 1 or at such other address as such party may designate by ten (10) days’ advance written notice under this Section 6.2 to all other parties to this Agreement.

6.3 No Waiver. No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature.

6.4 Amendment. This Agreement may be modified, amended, suspended or terminated, and terms or conditions may be waived, but only by a written instrument executed by the parties hereto.

6.5 Employee Undertaking. Employee hereby agrees to take whatever additional action and execute whatever additional documents the Company may, in its judgment, deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either Employee or the Shares pursuant to the express provisions of this Agreement.

6.6 Agreement Is Entire Contract. This Agreement (in conjunction with any applicable employment agreement) constitutes the entire agreement between the parties hereto with regard to the subject matter hereof.

6.7 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, as such laws are applied to contracts entered into and performed in such State, without regard to conflict of laws principles thereof.

6.8 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which, when taken together, shall constitute one and the same instrument.

6.9 Successors and Assigns. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and Employee and Employee’s legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person shall have become a party to this Agreement and have agreed in writing to join herein and be bound by the terms and conditions hereof.

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6.10 Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

* * * Balance of Page Intentionally Blank – Signatures on Next Page * * *

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IN WITNESS WHEREOF, the Parties have executed this Agreement as of the Award Date first indicated above.

THE COMPANY:
MCG CAPITAL CORPORATION
By:
	Name:
	Title:
EMPLOYEE:
Name:

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Annex 1

MCG CAPITAL CORPORATION

RESTRICTED STOCK AGREEMENT

Name:

Address:

Award Date:	, 200      (immediately prior to market open)
Forfeitable Time-Based Shares (     Years):	shares
Forfeitable Performance-Based Shares:	shares

Lapsing of Forfeiture for Time Based Shares ([__] Years):

From and after the Award Date, but subject to the restrictions and other terms and conditions set forth in this Agreement, the restrictions set forth in Sections 3.1, 3.2, 4.1 and 5.1 shall lapse with respect to              Shares of Employee’s Category 2 (Time Based) Shares on the last calendar day of each of the [             (__)] calendar quarters beginning             , 200      and with respect to              Shares of Employee’s Category 2 (Time Base) Shares on             , 200    , in each such instance only if and to the extent that Employee is still then employed by the Company on such date.

Lapsing of Forfeiture for Performance Based Shares:

From and after the Award Date, but subject to the restrictions and other terms and conditions set forth in this Agreement, the restrictions set forth in Sections 3.1, 3.2, 4.1 and 5.1 shall lapse with respect to the Applicable Percentage Earned (as defined below) of              Shares of Employee’s Category 3 (Performance Based) Shares on             , 20      and with respect to the Applicable Percentage Earned of              Shares of Employee’s Category 3 Shares on             , 20     , in each such instance only if and to the extent that Employee is still then employed by the Company on such date. For purposes of this Agreement, the “Applicable Percentage Earned” shall mean the quotient (expressed as a percentage) of (a) the amount paid to Employee as an annual cash incentive bonus for the Company’s most recently ended fiscal year and (b) the amount paid to Employee as annual base compensation during the Company’s most recently ended fiscal year, but in no event may the Applicable Percentage Earned for any lapsing event exceed 100%.

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EX-21

Exhibit 21

Subsidiaries of MCG Capital Corporation

and Jurisdiction of Incorporation/Organization

MCG Finance I, LLC	Delaware
MCG Finance V, LLC	Delaware
MCG Finance VII, LLC	Delaware
MCG Finance VIII, LLC	Delaware
Crystal Media Network, Inc.	Delaware
IH NPS Holdings, LLC	Delaware
IH NYL, Inc.	Delaware
IH Sunshine, Inc.	Delaware
MCG IH Holdings, Inc.	Delaware
Solutions Capital GP, LLC	Delaware
Solutions Capital I, LP	Delaware

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-137565) pertaining to the 2006 Employee Restricted Stock Plan of MCG Capital Corporation and MCG Capital Corporation 2006 Non-Employee Director Restricted Stock Plan of our reports dated February 26, 2007, with respect to the consolidated financial statements and schedules of MCG Capital Corporation, MCG Capital Corporation management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of MCG Capital Corporation, included in the Annual Report (Form 10-K) for the year ended December 31, 2006.

/s/ Ernst & Young LLP

McLean, Virginia

February 26, 2007

EX-31.1

Exhibit 31.1

I, Steven F. Tunney, Chief Executive Officer of MCG Capital Corporation, certify that:

1. I have reviewed this annual report on Form 10-K of MCG Capital Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated this 28^th day of February, 2007.

By:	/s/    STEVEN F. TUNNEY
	Steven F. Tunney Chief Executive Officer

EX-31.2

Exhibit 31.2

I, Michael R. McDonnell, Chief Financial Officer of MCG Capital Corporation, certify that:

1. I have reviewed this annual report on Form 10-K of MCG Capital Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated this 28^th day of February, 2007.

By:	/s/    MICHAEL R. MCDONNELL
	Michael R. McDonnell Chief Financial Officer

EX-31.3

Exhibit 31.3

I, John C. Wellons, Chief Accounting Officer of MCG Capital Corporation, certify that:

1. I have reviewed this annual report on Form 10-K of MCG Capital Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated this 28^th day of February, 2007.

By:	/s/    JOHN C. WELLONS
	John C. Wellons Chief Accounting Officer

EX-32.1

Exhibit 32.1

Certification of Chief Executive Officer

Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

In connection with the Annual Report on Form 10-K for the year ended December 31, 2006 (the “Report”) of MCG Capital Corporation (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, Steven F. Tunney, the Chief Executive Officer of the Registrant, hereby certify, to the best of my knowledge, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

	/s    STEVEN F. TUNNEY
Name:	Steven F. Tunney
Date:	February 28, 2007

EX-32.2

Exhibit 32.2

Certification of Chief Financial Officer

Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

In connection with the Annual Report on Form 10-K for the year ended December 31, 2006 (the “Report”) of MCG Capital Corporation (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, Michael R. McDonnell, the Chief Financial Officer of the Registrant, hereby certify, to the best of my knowledge, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

	/s/    MICHAEL R. MCDONNELL
Name:	Michael R. McDonnell
Date:	February 28, 2007

EX-32.3

Exhibit 32.3

Certification of Chief Accounting Officer

Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

In connection with the Annual Report on Form 10-K for the year ended December 31, 2006 (the “Report”) of MCG Capital Corporation (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, John C. Wellons, the Chief Accounting Officer of the Registrant, hereby certify, to the best of my knowledge, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

	/s/    JOHN C. WELLONS
Name:	John C. Wellons
Date:	February 28, 2007