Report Date: September 14, 2008 PAGE 1 MCGC BUSINESS DESCRIPTION MCG Capital Corporation is a private equity firm specializing in investments in middle market companies. It seeks to invest in small to mid sized companies. The firm prefers to invest in acquisitions, growth financings, and leveraged buyouts. STOCK PERFORMANCE (%) 3 Mo. 1 Yr. 3 Yr (Ann) Price Change -33.55 -78.44 -44.41 GROWTH (%) Last Qtr 12 Mo. 3 Yr CAGR Revenues -38.04 -0.55 17.11 Net Income -282.67 -140.67 NA EPS -252.38 -130.14 NA RETURN ON EQUITY (%) MCGC Ind Avg S&P 500 Q2 2008 -6.27 11.37 11.94 Q2 2007 14.53 20.42 17.02 Q2 2006 12.52 19.49 15.88 P/E COMPARISON n/m MCGC 42.74 Ind Avg 20.68 S&P 500 EPS ANALYSIS¹ ($) 2008 Q2 -0.96 Q1 0.04 2007 Q4 - 0.08 Q3 0.37 Q2 0.63 Q1 0.52 2006 Q4 0.52 Q3 0.42 Q2 0.43 Q1 0.50 NA = not available NM = not meaningful 1 Compustat fiscal year convention is used for all fundamental data items. Weekly Price: (US$) SMA (50) SMA (100) 1 Year 2 Years 2007 2008 2 4 6 8 10 12 14 16 18 20 22 Rating History BUY HOLD SELL HOLD 0 10 20 Volume in Millions COMPUSTAT for Price and Volume, TheStreet.com Ratings, Inc. for Rating History RECOMMENDATION We rate MCG CAPITAL CORP (MCGC) a SELL. This is driven by a number of negative factors, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its feeble growth in its earnings per share, deteriorating net income, disappointing return on equity, weak operating cash flow and generally disappointing historical performance in the stock itself. HIGHLIGHTS MCG CAPITAL CORP has exprienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. Earnings per share have declined over the last year. We anticipate that this should continue in the coming year. During the past fiscal year, MCG CAPITAL CORP reported lower earnings of $1.44 versus $1.87 in the prior year. For the next year, the market is expecting a contraction of 40.3% in earnings ($0.86 versus $1.44). The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Capital Markets industry. The net income has significantly decreased by 282.7% when compared to the same quarter one year ago, falling from $38.05 million to -$69.50 million. Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Capital Markets industry and the overall market, MCG CAPITAL CORP's return on equity significantly trails that of both the industry average and the S&P 500. Net operating cash flow has decreased to $14.80 million or 34.39% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower. Despite any intermediate fluctuations, we have only bad news to report on this stock's performance over the last year: it has tumbled by 78.44%, worse than the S&P 500's performance. Consistent with the plunge in the stock price, the company's earnings per share are down 252.38% compared to the year-earlier quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.