Edgar Filing: MVC CAPITAL, INC.

e10vq

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549


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

For the quarterly period ended July 31, 2008


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

Commission File Number 814-00201

MVC Capital, Inc.

(Exact name of the registrant as specified in its charter)


DELAWARE		94-3346760
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

287 Bowman Avenue
2nd Floor
Purchase, New York		10577
(Address of principal		(Zip Code)
executive offices)

Registrant’s telephone number, including area code: (914) 701-0310

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 þ No o

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

Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o

(Do not check if a smaller reporting company)

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

There were 24,297,087 shares of the registrant’s common stock, $.01 par value, outstanding as of September 4, 2008.

MVC Capital, Inc.
(A Delaware Corporation)
Index


	Page
Part I. Consolidated Financial Information

Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
- July 31, 2008 and October 31, 2007		3
Consolidated Statements of Operations
- For the Period November 1, 2007 to July 31, 2008 and
- For the Period November 1, 2006 to July 31, 2007		4
Consolidated Statements of Operations
- For the Period May 1, 2008 to July 31, 2008 and
- For the Period May 1, 2007 to July 31, 2007		5
Consolidated Statements of Cash Flows
- For the Period November 1, 2007 to July 31, 2008 and
- For the Period November 1, 2006 to July 31, 2007		6
Consolidated Statements of Changes in Net Assets
- For the Period November 1, 2007 to July 31, 2008
- For the Period November 1, 2006 to July 31, 2007 and
- For the Year ended October 31, 2007		7
Consolidated Selected Per Share Data and Ratios
- For the Period November 1, 2007 to July 31, 2008,
- For the Period November 1, 2006 to July 31, 2007 and
- For the Year ended October 31, 2007		8
Consolidated Schedule of Investments
- July 31, 2008
- October 31, 2007		9
Notes to Consolidated Financial Statements		13

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		28

Item 3. Quantitative and Qualitative Disclosures about Market Risk		60

Item 4. Controls and Procedures		66

Part II. Other Information		67

SIGNATURE		68

Exhibits
EXHIBIT 31
EXHIBIT 32

CONSOLIDATED FINANCIAL STATEMENTS

MVC Capital, Inc.

Consolidated Balance Sheets


	July 31,			October 31,
	2008			2007
	(Unaudited)
ASSETS

Assets
Cash and cash equivalents	$	124,975,545		$	84,727,933
Investments at fair value
Non-control/Non-affiliated investments (cost $123,111,526 and $119,646,416)		95,717,722			85,543,666
Affiliate investments (cost $101,368,066 and $116,118,374)		136,458,948			127,959,158
Control investments (cost $190,393,940 and $157,663,563)		221,124,672			165,664,710

Total investments at fair value (cost $414,873,532 and $393,428,353)		453,301,342			379,167,534
Dividends, interest and fees receivable		2,915,370			3,105,100
Prepaid expenses		2,378,279			2,412,827
Prepaid taxes		570,498			228,159
Deferred tax		910,342			803,283
Deposits		—			25,156
Other assets		—			20,993


Total assets	$	585,051,376		$	470,490,985


LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities
Revolving credit facilities	$	100,000,000		$	30,000,000
Term loan		50,000,000			50,000,000
Provision for incentive compensation (Note 9)		14,298,753			17,875,496
Management fee payable		2,275,896			1,929,258
Other accrued expenses and liabilities		698,703			977,953
Professional fees		361,930			558,091
Consulting fees		32,130			89,452
Directors’ fees		(45,283	)		(36,034	)


Total liabilities		167,622,129			101,394,216


Shareholders’ equity
Common stock, $0.01 par value; 150,000,000 shares authorized; 24,297,087 and 24,265,336 shares outstanding, respectively		283,044			283,044
Additional paid-in-capital		432,033,595			431,814,990
Accumulated earnings		26,863,001			24,375,844
Dividends paid to stockholders		(42,509,674	)		(33,764,634	)
Accumulated net realized loss		(4,865,067	)		(6,283,708	)
Net unrealized appreciation (depreciation)		38,427,810			(14,260,819	)
Treasury stock, at cost, 4,007,361 and 4,039,112 shares held, respectively		(32,803,462	)		(33,067,948	)


Total shareholders’ equity		417,429,247			369,096,769


Total liabilities and shareholders’ equity	$	585,051,376		$	470,490,985


Net asset value per share	$	17.18		$	15.21

The accompanying notes are an integral part of these consolidated financial statements.

MVC Capital, Inc.

Consolidated Statements of Operations

(Unaudited)


	For the Period			For the Period
	November 1, 2007 to			November 1, 2006 to
	July 31, 2008			July 31, 2007
Operating Income:
Dividend income
Affiliate investments	$	3,011,401		$	370,195


Total dividend income		3,011,401			370,195


Interest income
Non-control/Non-affiliated investments		9,446,453			8,494,153
Affiliate investments		3,552,146			3,563,392
Control investments		4,448,154			3,554,022


Total interest income		17,446,753			15,611,567


Fee income
Non-control/Non-affiliated investments		843,636			754,253
Affiliate investments		534,050			678,372
Control investments		1,509,869			845,640


Total fee income		2,887,555			2,278,265


Other income		435,560			252,237


Total operating income		23,781,269			18,512,264


Operating Expenses:
Incentive compensation (Note 9)		9,326,586			10,042,160
Management fee		6,478,911			5,105,029
Interest and other borrowing costs		3,273,869			3,636,241
Other expenses		541,129			360,370
Legal fees		461,000			398,000
Audit fees		351,000			237,000
Insurance		279,725			312,606
Administration		245,062			208,522
Directors fees		180,000			180,000
Printing and postage		102,653			74,700
Consulting fees		88,600			99,500
Public relations fees		71,700			58,201


Total operating expenses		21,400,235			20,712,329


Net operating income (loss) before taxes		2,381,034			(2,200,065	)


Tax (Benefit) Expenses:
Deferred tax benefit		(107,059	)		(175,886	)
Current tax (benefit) expense		936			(276,508	)


Total tax benefit		(106,123	)		(452,394	)


Net operating income (loss)		2,487,157			(1,747,671	)


Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currency:

Net realized gain (loss) on investments and foreign currency
Non-control/Non-affiliated investments		(37,584	)		376,329
Affiliate investments		1,116,952			—
Controlled investments		283,118			65,473,258
Foreign currency		56,155			—


Total net realized gain on investments and foreign currency		1,418,641			65,849,587

Net change in unrealized appreciation (depreciation) on investments		52,688,629			(6,914,139	)


Net realized and unrealized gain on investments and foreign currency		54,107,270			58,935,448


Net increase in net assets resulting from operations	$	56,594,427		$	57,187,777


Net increase in net assets per share resulting from operations	$	2.33		$	2.57


Dividends declared per share	$	0.36		$	0.42

The accompanying notes are an integral part of these consolidated financial statements.

MVC Capital, Inc.

Consolidated Statements of Operations

(Unaudited)


	For the Quarter			For the Quarter
	May 1, 2008 to			May 1, 2007 to
	July 31, 2008			July 31, 2007
Operating Income:
Dividend income
Affiliate investments	$	487,323		$	95,467


Total dividend income		487,323			95,467


Interest income
Non-control/Non-affiliated investments		3,490,136			3,138,337
Affiliate investments		1,061,891			1,464,021
Control investments		878,365			1,323,326


Total interest income		5,430,392			5,925,684


Fee income
Non-control/Non-affiliated investments		216,586			133,973
Affiliate investments		172,974			442,097
Control investments		384,310			327,710


Total fee income		773,870			903,780


Other income		112,788			105,042


Total operating income		6,804,373			7,029,973


Operating Expenses:
Incentive compensation (Note 9)		3,929,249			1,617,808
Management fee		2,275,896			1,616,020
Interest, fees and other borrowing costs		1,021,661			1,252,205
Other expenses		231,865			125,178
Legal fees		187,000			90,000
Audit fees		127,500			75,000
Insurance		93,000			96,000
Administration		84,295			78,238
Directors fees		60,000			60,000
Printing and postage		38,005			26,100
Consulting fees		37,000			36,000
Public relations fees		28,500			21,300


Total operating expenses		8,113,971			5,093,849


Net operating income (loss) before taxes		(1,309,598	)		1,936,124


Tax (Benefit) Expenses:
Deferred tax (benefit) expense		58,023			(189,173	)
Current tax Expense		—			110,922


Total tax (benefit) expense		58,023			(78,251	)


Net operating income (loss)		(1,367,621	)		2,014,375


Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currency:

Net realized gain (loss) on investments and foreign currency
Non-control/Non-affiliated investments		(39,691	)		491,611
Affiliate investments		521,952			—
Control investments		—			65,481,064
Foreign currency		(4,170	)		—


Total net realized gain on investments and foreign currency		478,091			65,972,675

Net change in unrealized appreciation (depreciation) on investments		19,512,726			(54,199,608	)


Net realized and unrealized gain on investments and foreign currency		19,990,817			11,773,067


Net increase in net assets resulting from operations	$	18,623,196		$	13,787,442


Net increase in net assets per share resulting from operations	$	0.77		$	0.57


Dividends declared per share	$	0.12		$	0.12

The accompanying notes are an integral part of these consolidated financial statements.

MVC Capital, Inc.

Consolidated Statements of Cash Flows

(Unaudited)


	For the Period			For the Period
	November 1, 2007 to			November 1, 2006 to
	July 31, 2008			July 31, 2007
Cash flows from Operating Activities:
Net increase in net assets resulting from operations	$	56,594,427		$	57,187,777
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided (used) by operating activities:
Realized gain		(1,418,641	)		(65,849,587	)
Net change in unrealized appreciation		(52,688,629	)		6,914,139
Amortization of discounts and fees		(68,210	)		(69,917	)
Increase in accrued payment-in-kind dividends and interest		(4,218,554	)		(2,418,638	)
Increase in allocation of flow through income		135,508			(140,084	)
Changes in assets and liabilities:
Dividends, interest and fees receivable		189,730			(1,071,561	)
Prepaid expenses		34,548			53,824
Prepaid taxes		(342,339	)		(385,138	)
Deferred tax		(107,059	)		(175,886	)
Deposits		25,156			(322,129	)
Other assets		20,993			25,353
Incentive compensation		(3,576,743	)		9,931,942
Other Liabilities		(195,344	)		3,074,755
Purchases of equity investments		(51,016,525	)		(26,401,201	)
Purchases of debt instruments		(69,984,471	)		(66,922,366	)
Purchases of short term investments		(49,881,375	)		—
Proceeds from equity investments		7,312,817			81,971,300
Proceeds from debt instruments		97,840,522			31,941,271
Sales/maturities of short term investments		49,853,750			—


Net cash provided (used) by operating activities		(21,490,439	)		27,343,854


Cash flows from Financing Activities:
Issuance of common stock		—			83,825,625
Offering expenses		—			(5,431,091	)
Distributions to shareholders paid		(8,261,949	)		(9,122,426	)
Net borrowings (repayments) under revolving credit facilities		70,000,000			(50,000,000	)


Net cash provided by financing activities		61,738,051			19,272,108


Net change in cash and cash equivalents for the period		40,247,612			46,615,962


Cash and cash equivalents, beginning of period		84,727,933			66,217,123


Cash and cash equivalents, end of period	$	124,975,545		$	112,833,085

During the nine months ended July 31, 2008 and 2007 MVC Capital, Inc. paid $2,510,347 and $3,536,606 in interest expense, respectively.

During the nine months ended July 31, 2008 and 2007 MVC Capital, Inc. paid $350,000 and $144,016 in income taxes, respectively.

Non-cash activity:

During the nine months ended July 31, 2008 and 2007, MVC Capital, Inc. recorded payment in kind dividend and interest of $4,218,554 and $2,418,638, respectively. This amount was added to the principal balance of the investments and recorded as interest/dividend income.

During the nine months ended July 31, 2008 and 2007, MVC Capital, Inc. was allocated $435,560 and $246,672, respectively, in flow-through income and $24,130 and $0 respectively, in capital gains from its equity investment in Octagon Credit Investors, LLC. Of these amounts, $324,182, and $106,588, respectively, was received in cash and the balance of $135,508 and $140,282, respectively, was undistributed and therefore increased the cost of the investment. The fair value was then increased by $135,508 and $140,282, respectively, by the Company’s Valuation Committee.

During the nine month period ended July 31, 2008, as was anticipated when the Company made its investment, all 1,535 shares of convertible Series F preferred stock were transferred to a strategic partner of U.S. Gas & Electric, Inc. for services to be performed. If certain conditions are not met by the strategic partner, these shares could be transferred back to the Company.

On November 1, 2006, MVC Capital, Inc. re-issued 2,326 shares of treasury stock, in lieu of a $28,871 cash distribution, in accordance with the Company’s dividend reinvestment plan.

On January 6, 2007, MVC Capital, Inc. re-issued 3,684 shares of treasury stock, in lieu of a $48,641 cash distribution, in accordance with the Company’s dividend reinvestment plan.

On November 1, 2007, MVC Capital, Inc. re-issued 15,821 shares of treasury stock, in lieu of a $240,636 cash distribution, in accordance with the Company’s dividend reinvestment plan.

On December 3, 2007, MVC Capital, Inc. converted the Ohio Medical Corporation Convertible Unsecured Subordinated Promissory Note from $3,405,263.60 of principal and interest to 1,125.700 shares of Ohio Medical Preferred Stock.

On January 9, 2008, MVC Capital, Inc. re-issued 15,930 shares of treasury stock, in lieu of a $242,455 cash distribution, in accordance with the Company’s dividend reinvestment plan.

On June 9, 2008, Auto MOTOL BENI was acquired by MVC Automotive Group B.V. to achieve operating efficiencies. Both entities were 100% owned by the Company. MVC Automotive Group B.V. increased its shareholder’s equity by $14.5 million and assumed $2.0 million of debt as a result of the cashless transaction.

The accompanying notes are an integral part of these consolidated financial statements.

MVC Capital, Inc.

Consolidated Statements of Changes in Net Assets


	For the Period			For the Period
	November 1, 2007 to			November 1, 2006 to			For the Year Ended
	July 31, 2008			July 31, 2007			October 31, 2007
	(Unaudited)			(Unaudited)
Operations:
Net operating income (loss)	$	2,487,157		$	(1,747,671	)	$	2,059,713
Net realized gain on investments and foreign currency		1,418,641			65,849,587			66,943,545
Net change in unrealized appreciation (depreciation) on investments		52,688,629			(6,914,139	)		(3,301,612	)


Net increase in net assets from operations		56,594,427			57,187,777			65,701,646


Shareholder Distributions:
Distributions to shareholders		(8,745,040	)		(9,259,848	)		(12,171,688	)


Net decrease in net assets from shareholder distributions		(8,745,040	)		(9,259,848	)		(12,171,688	)


Capital Share Transactions:
Issuance of common stock		—			83,825,625			83,825,625
Offering expenses		—			(5,431,091	)		(5,431,091	)
Reissuance of treasury stock in lieu of cash dividend		483,091			137,422			178,903


Net increase in net assets from capital share transactions		483,091			78,531,956			78,573,437


Total increase in net assets		48,332,478			126,459,885			132,103,395


Net assets, beginning of period/year		369,096,769			236,993,374			236,993,374


Net assets, end of period/year	$	417,429,247		$	363,453,259		$	369,096,769


Common shares outstanding, end of period/year		24,297,087			24,262,566			24,265,336

The accompanying notes are an integral part of these consolidated financial statements.

MVC Capital, Inc.

Consolidated Selected Per Share Data and Ratios


	For the Period					For the Period					For the
	November 1, 2007 to					November 1, 2006 to					Year Ended
	July 31, 2008					July 31, 2007					October 31, 2007
	(Unaudited)					(Unaudited)
Net asset value, beginning of period/year	$	15.21				$	12.41				$	12.41

Gain (loss) from operations:
Net operating income gain (loss)		0.10					(0.04	)				0.13
Net realized and unrealized gain on investments		2.23					2.61					2.79


Total gain from investment operations		2.33					2.57					2.92


Less distributions from:
Income		(0.36	)				(0.42	)				(0.54	)


Total distributions		(0.36	)				(0.42	)				(0.54	)


Capital share transactions
Anti-dilutive effect of share issuance		—					0.42					0.42


Total capital share transactions		—					0.42					0.42


Net asset value, end of period/year	$	17.18				$	14.98				$	15.21


Market value, end of period/year	$	14.08				$	16.17				$	17.06


Market premium (discount)		(18.04	)%				7.94	%				12.16	%

Total Return — At NAV (a)		15.47	%				24.48	%				27.39	%

Total Return — At Market (a)		(16.11	)%				27.08	%				35.02	%

Ratios and Supplemental Data:

Net assets, end of period/year (in thousands)	$	417,429				$	363,453				$	369,097

Ratios to average net assets:
Expenses excluding tax expense (benefit)		7.30	%	(b	)		9.05	%	(b	)		7.89	%
Expenses including tax expense (benefit)		7.24	%	(b	)		8.86	%	(b	)		7.78	%
Expenses excluding incentive compensation		4.06	%	(b	)		4.47	%	(b	)		4.40	%
Expenses excluding incentive compensation, interest and other borrowing costs		2.95	%	(b	)		2.88	%	(b	)		2.88	%

Net operating income (loss) before tax expense (benefit)		0.81	%	(b	)		(0.96	)%	(b	)		0.53	%
Net operating income (loss) after tax expense (benefit)		0.87	%	(b	)		(0.76	)%	(b	)		0.64	%
Net operating income (loss) before incentive compensation		4.05	%	(b	)		3.63	%	(b	)		4.02	%
Net operating income (loss) before incentive compensation, interest and other borrowing costs		5.16	%	(b	)		5.22	%	(b	)		5.54	%


(a)		Total return is historical and assumes changes in share price, reinvestments of all dividends and distributions, and no sales charge for the period/year.

(b)		Annualized.

The accompanying notes are an integral part of these consolidated financial statements.

MVC Capital, Inc.
Consolidated Schedule of Investments
July 31, 2008
(Unaudited)


Company	Industry	Investment	Principal		Cost		Fair Value
Non-control/Non-affiliated investments - 22.93% (a, c, g, f)

Actelis Networks, Inc.	Technology Investments	Preferred Stock (150,602 shares) (d)			$	5,000,003	$	—

Amersham Corp.	Manufacturer of Precision — Machined Components	Second Lien Seller Note 10.0000%, 06/29/2010 (h)	$	2,473,521		2,473,521		2,473,521
		Second Lien Seller Note 14.0000%, 06/30/2013 (b, h)		3,478,620		3,478,620		3,478,620

						5,952,141		5,952,141

BP Clothing, LLC	Apparel	Second Lien Loan 14.0000%, 07/18/2012 (b, h)		18,113,125		17,877,950		18,113,125
		Term Loan A 7.4600%, 07/18/2011 (h)		2,280,000		2,254,571		2,254,571
		Term Loan B 9.8600%, 07/18/2011 (h)		2,000,000		1,977,839		1,977,839

						22,110,360		22,345,535

DPHI, Inc.	Technology Investments	Preferred Stock (602,131 shares) (d)				4,520,355	—

FOLIOfn, Inc.	Technology Investments	Preferred Stock (5,802,259 shares) (d)				15,000,000		13,600,000

GDC Acquisition, LLC	Electrical Distribution	Senior Subordinated Debt 17.0000%, 01/31/2009 (b, h)		3,283,850		3,273,310		3,283,850

Henry Company	Building Products / Specialty Chemicals	Term Loan A 5.9631%, 04/06/2011 (h)		1,837,309		1,837,309		1,837,309
		Term Loan B 10.2131%, 04/06/2011 (h)		2,000,000		2,000,000		2,000,000

						3,837,309		3,837,309

Innovative Brands, LLC	Consumer Products	Term Loan 11.1250%, 09/25/2011 (h)		13,070,833		13,070,833		13,070,833

Lockorder Limited	Technology Investments	Common Stock (21,064 shares) (d, e)				2,007,701	—

MainStream Data, Inc.	Technology Investments	Common Stock (5,786 shares) (d)				3,750,000	—

Phoenix Coal Corporation	Coal Processing and Production	Common Stock (666,667 shares) (d)				500,000		706,667

SafeStone Technologies Limited	Technology Investments	Common Stock (21,064 shares) (d, e)				2,007,701	—

Sonexis, Inc.	Technology Investments	Common Stock (131,615 shares) (d)				10,000,000	—

SP Industries, Inc.	Laboratory Research Equipment	First Lien Loan 7.4825%, 12/28/2012 (h)		1,015,102		627,004		1,015,102
		Second Lien Loan 15.0000%, 12/31/2013 (b, h)		24,499,174		24,043,060		24,499,174

						24,670,064		25,514,276

Storage Canada, LLC	Self Storage	Term Loan 8.7500%, 03/30/2013 (h)		1,241,000		1,245,638		1,241,000

Total Safety U.S., Inc.	Engineering Services	First Lien Seller Note 5.2125%, 12/08/2012 (h)		985,000		985,000		985,000
		Second Lien Seller Note 9.5419%, 12/08/2013 (h)		3,500,000		3,500,000		3,500,000

						4,485,000		4,485,000

WBS Carbons Acquistions Corp.	Specialty Chemicals	Bridge Loan 5.0000%, 11/22/2011 (b, h)		1,681,111		1,681,111		1,681,111

Sub Total Non-control/Non-affiliated investments						123,111,526		95,717,722


Affiliate investments — 32.69% (a, c, g, f)

Custom Alloy Corporation	Manufacturer of Pipe Fittings	Unsecured Subordinated Loan 14.0000%, 09/18/2012 (b, h)		14,000,000		13,595,287		14,000,000
		Convertible Series A Preferred Stock (9 shares)				44,000		99,000
		Convertible Series B Preferred Stock (1,991 shares)				9,956,000		22,401,000

						23,595,287		36,500,000

Dakota Growers Pasta Company, Inc.	Manufacturer of Packaged Foods	Common Stock (1,016,195 shares)				5,521,742		10,161,950
		Convertible Preferred Stock (1,065,000 shares) (d)				10,357,500		10,650,000

						15,879,242		20,811,950

Endymion Systems, Inc.	Technology Investments	Preferred Stock (7,156,760 shares) (d)				7,000,000	—

HuaMei Capital Company, Inc.	Financial Services	Common Stock (500 shares) (d)				2,000,000		2,000,000

Marine Exhibition Corporation	Theme Park	Senior Subordinated Debt 11.0000%, 06/30/2013 (b, h)		10,829,753		10,688,826		10,829,753
		Convertible Preferred Stock (20,000 shares) (b)				2,338,324		2,338,324

						13,027,150		13,168,077

Octagon Credit Investors, LLC	Financial Services	Term Loan 6.7325%, 12/31/2011 (h)		5,000,000		4,954,442		5,000,000
		Revolving Line of Credit 6.7325%, 12/31/2011 (h)		2,850,000		2,850,000		2,850,000
		Limited Liability Company Interest				1,245,878		3,900,783

						9,050,320		11,750,783

PreVisor, Inc.	Human Capital Management	Common Stock (9 shares) (d)				6,000,000		11,700,000

U.S. Gas & Electric, Inc.	Energy Services	Second Lien Loan 14.0000%, 07/26/2012 (b, h)		5,766,185		5,590,980		5,766,185
		Senior Credit Facility 9.5000% 07/26/2010 (h)		2,451,302		2,451,302		2,451,302
		Senior Credit Facility 8.4638% 07/26/2010 (h)		571,429		571,429		571,429
		Convertible Series B Preferred Stock (32,200 shares) (d)				500,000		5,300,000
		Convertible Series C Preferred Stock (8,216 shares) (d)				—		350,000

						9,113,711		14,438,916

Vitality Foodservice, Inc.	Non-Alcoholic Beverages	Common Stock (556,472 shares) (d)				5,564,716		9,459,333
		Preferred Stock (1,000,000 shares) (b, h)				10,137,640		13,039,411
		Warrants (d)				—		3,590,478

						15,702,356		26,089,222

Sub Total Affiliate investments						101,368,066		136,458,948

The accompanying notes are an integral part of these consolidated financial statements.

MVC Capital, Inc.
Consolidated Schedule of Investments — (Continued)
July 31, 2008
(Unaudited)


Company	Industry	Investment	Principal		Cost		Fair Value
Control Investments - 52.97% (a, c, g, f)

Harmony Pharmacy & Health Center, Inc.	Healthcare — Retail	Revolving Credit Facility 10.0000%, 12/01/2009 (b, h)	$	4,201,938	$	4,201,938	$	4,000,000
		Demand Note 10.0000% (h)		3,300,000		3,300,000		3,300,000
		Common Stock (2,000,000 shares) (d)				750,000		750,000

						8,251,938		8,050,000

MVC Automotive Group B.V.	Automotive Dealerships	Common Equity Interest (d, e)				34,736,939		45,000,000
		Bridge Loan 10.0000%, 12/31/2008 (e, h)		3,643,557		3,643,557		3,643,557

						38,380,496		48,643,557

MVC Partners, LLC	Private Equity Firm	Limited Liability Company Interest (d)				332,698		332,698

Ohio Medical Corporation	Medical Device Manufacturer	Common Stock (5,620 shares) (d)				17,000,000		17,200,000
		Series A Convertible Preferred Stock (10,871 shares) (b, h)				30,000,000		32,885,655

						47,000,000		50,085,655

SGDA Europe B.V.	Soil Remediation	Common Equity Interest (d, e)				7,450,000		7,450,000

SGDA Sanierungsgesellschaft fur Deponien und Altlasten mbH	Soil Remediation	Term Loan 7.0000%, 08/25/2009 (e, h)		6,187,350		6,111,849		6,111,849
		Common Equity Interest (d, e)				438,551		560,000
		Preferred Equity Interest (d, e)				5,000,000		5,975,000

						11,550,400		12,646,849

SIA Tekers Invest	Port Facilities	Common Stock (68,800 shares) (d, e)				2,300,000		3,175,000

Summit Research Labs, Inc.	Specialty Chemicals	Second Lien Loan 14.0000%, 08/15/2012 (b, h)		8,782,543		8,627,277		8,782,543
		Common Stock (1,115 shares) (d)				16,000,000		23,000,000

						24,627,277		31,782,543

Timberland Machines & Irrigation, Inc.	Distributor — Landscaping and Irrigation Equipment	Senior Subordinated Debt 14.5500%, 08/04/2009 (b, h)		7,150,245		7,129,615		7,150,245
		Junior Revolving Line of Credit 12.5000%, 07/07/2009 (h)		5,000,000		5,000,000		5,000,000
		Common Stock (542 shares) (d)				5,420,291	—
		Warrants (d)				—	—

						17,549,906		12,150,245

Turf Products, LLC	Distributor — Landscaping and Irrigation Equipment	Senior Subordinated Debt 15.0000%, 11/30/2010 (b, h)		7,676,330		7,650,115		7,676,330
		Junior Revolving Note 2.0000%, 12/31/2008 (h)		1,000,000		1,000,000		1,000,000
		Limited Liability Company Interest (d)				3,821,794		5,821,794
		Warrants (d)				—	—

						12,471,909		14,498,124

Velocitius B.V.	Renewable Energy	Common Equity Interest (d, e)				11,395,315		22,000,000

Vendio Services, Inc.	Technology Investments	Common Stock (10,476 shares) (d)				5,500,000		15,421
		Preferred Stock (6,443,188 shares) (d)				1,134,001		7,184,580

						6,634,001		7,200,001

Vestal Manufacturing Enterprises, Inc.	Iron Foundries	Senior Subordinated Debt 12.0000%, 04/29/2011 (h)		600,000		600,000		600,000
		Common Stock (81,000 shares) (d)				1,850,000		2,510,000

						2,450,000		3,110,000

Sub Total Control Investments						190,393,940		221,124,672

TOTAL INVESTMENT ASSETS — 108.59% (f)					$	414,873,532	$	453,301,342


(a)		These securities are restricted from public sale without prior registration under the Securities Act of 1933. The Fund negotiates certain aspects of the method and timing of the disposition of these investments, including registration rights and related costs.

(b)		These securities accrue a portion of their interest/dividends in “payment in kind” interest/dividends which is capitalized to the investment.

(c)		All of the Fund’s equity and debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940, except Lockorder Limited, SafeStone Technologies Limited, MVC Automotive Group B.V., SGDA Europe B.V., SGDA Sanierungsgesellschaft fur Deponien und Altlasten mbH, SIA Tekers Invest and Velocitius B.V. The Fund makes available significant managerial assistance to all of the portfolio companies in which it has invested.

(d)		Non-income producing assets.

(e)		The principal operations of these portfolio companies are located outside of the United States.

(f)		Percentages are based on net assets of $417,429,247 as of July 31, 2008.

(g)		See Note 3 for further information regarding “Investment Classification.”

(h)		All or a portion of these securities have been committed as collateral for the Guggenheim Corporate Funding, LLC Credit Facility.

- Denotes zero cost or fair value.

The accompanying notes are an integral part of these consolidated financial statements.

MVC Capital, Inc.

Consolidated Schedule of Investments

October 31, 2007


Company	Industry	Investment	Principal		Cost		Fair Value
Non-control/Non-affiliated investments - 23.18% (a, c, g, f)

Actelis Networks, Inc.	Technology Investments	Preferred Stock (150,602 shares) (d)			$	5,000,003	$	—

Amersham Corp.	Manufacturer of Precision - Machined Components	Second Lien Seller Note 10.0000%, 06/29/2010 (h)	$	2,659,035		2,659,035		2,659,035
		Second Lien Seller Note 16.0000%, 06/30/2013 (b, h)		3,090,594		3,090,594		3,090,594

						5,749,629		5,749,629

BP Clothing, LLC	Apparel	Second Lien Loan 14.0000%, 07/18/2012 (b, h)		17,829,579		17,549,872		17,829,580
		Term Loan A 9.3800%, 07/18/2011 (h)		2,550,000		2,514,351		2,514,351
		Term Loan B 11.5300%, 07/18/2011 (h)		2,000,000		1,972,222		1,972,222

						22,036,445		22,316,153

DPHI, Inc.	Technology Investments	Preferred Stock (602,131 shares) (d)				4,520,355		—

FOLIOfn, Inc.	Technology Investments	Preferred Stock (5,802,259 shares) (d)				15,000,000		7,600,000

Henry Company	Building Products / Specialty Chemicals	Term Loan A 8.6280%, 04/06/2011 (h)		1,837,309		1,837,309		1,837,309
		Term Loan B 12.5025%, 04/06/2011 (h)		2,000,000		2,000,000		2,000,000

						3,837,309		3,837,309

Innovative Brands, LLC	Consumer Products	Term Loan 11.1250%, 09/25/2011 (h)		14,850,000		14,850,000		14,850,000

GDC Acquisition, LLC	Electrical Distribution	Senior Subordinated Debt 17.0000%, 01/31/2009 (b, h)		3,175,371		3,147,234		3,175,371

Lockorder Limited	Technology Investments	Common Stock (21,064 shares) (d, e)				2,007,701		—

MainStream Data, Inc.	Technology Investments	Common Stock (5,786 shares) (d)				3,750,000		—

SafeStone Technologies Limited	Technology Investments	Common Stock (21,064 shares) (d, e)				2,007,701		—

Sonexis, Inc.	Technology Investments	Common Stock (131,615 shares) (d)				10,000,000		—

SP Industries, Inc.	Laboratory Research Equipment	Term Loan B 13.1300%, 03/31/2011 (h)		7,392,634		7,361,420		7,392,634
		Senior Subordinated Debt 16.0000%, 03/31/2012 (b, h)		13,485,570		13,236,072		13,485,570

						20,597,492		20,878,204

Storage Canada, LLC	Self Storage	Term Loan 8.7500%, 03/30/2013 (h)		1,320,500		1,326,047		1,320,500
		Term Loan 8.7500%, 10/06/2013 (h)		619,000		619,000		619,000
		Term Loan 8.7500%, 01/19/2014 (h)		705,000		705,000		705,000

						2,650,047		2,644,500

Total Safety U.S., Inc.	Engineering Services	First Lien Seller Note 8.1425%, 12/08/2012 (h)		992,500		992,500		992,500
		Second Lien Seller Note 11.3318%, 12/08/2013 (h)		3,500,000		3,500,000		3,500,000

						4,492,500		4,492,500

Sub Total Non-control/Non-affiliated investments						119,646,416		85,543,666


Affiliate investments - 34.67% (a, c, g, f)

Custom Alloy Corporation	Manufacturer of Pipe Fittings	Unsecured Subordinated Loan 14.0000%, 09/18/2012 (b, h)		14,035,389		13,557,190		14,035,389
		Convertible Series A Preferred Stock (9 shares) (d)				44,000		44,000
		Convertible Series B Preferred Stock (1,991 shares) (d)				9,956,000		9,956,000

						23,557,190		24,035,389

Dakota Growers Pasta Company, Inc.	Manufacturer of Packaged Foods	Common Stock (1,016,195 shares)				5,521,742		10,161,950
		Convertible Preferred Stock (1,065,000) (d)				10,357,500		10,650,000

						15,879,242		20,811,950

Endymion Systems, Inc.	Technology Investments	Preferred Stock (7,156,760 shares) (d)				7,000,000		—

Genevac U.S. Holdings, Inc.	Laboratory Research Equipment	Senior Subordinated Debt 12.5000%, 01/03/2008 (e, h)		12,962,963		12,962,963		12,962,963
		Common Stock (140 shares) (b, e)				1,103,002		1,103,002

						14,065,965		14,065,965

HuaMei Capital Company, Inc.	Financial Services	Common Stock (500 shares) (d)				2,000,000		2,000,000

Impact Confections, Inc.	Confections Manufacturing and Distribution	Senior Subordinated Debt 17.0000%, 07/30/2009 (b, h)		5,718,372		5,664,803		5,718,372
		Promissory Note 9.1287%, 07/29/2008 (h)		325,000		323,388		325,000
		Common Stock (252 shares) (d)				2,700,000		2,700,000

						8,688,191		8,743,372

Marine Exhibition Corporation	Theme Park	Senior Subordinated Debt 11.0000%, 06/30/2013 (b, h)		10,506,628		10,344,177		10,506,628
		Convertible Preferred Stock (20,000 shares) (b)				2,203,455		2,203,455

						12,547,632		12,710,083

Octagon Credit Investors, LLC	Financial Services	Term Loan 9.3790%, 12/31/2011 (h)		5,000,000		4,944,431		5,000,000
		Revolving Line of Credit 9.3790%, 12/31/2011 (h)		4,100,000		4,100,000		4,100,000
		Limited Liability Company Interest				1,110,370		3,765,275

						10,154,801		12,865,275

Phoenix Coal Corporation	Coal Processing and Production	Common Stock (1,666,667 shares) (d)				1,000,000		1,000,000

PreVisor, Inc.	Human Capital Management	Common Stock (9 shares) (d)				6,000,000		9,000,000

Vitality Foodservice, Inc.	Non-Alcoholic Beverages	Common Stock (556,472 shares) (d)				5,564,716		9,064,716
		Preferred Stock (1,000,000 shares) (b, h)				9,660,637		12,562,408
		Warrants (d)				—		1,100,000

						15,225,353		22,727,124

Sub Total Affiliate investments						116,118,374		127,959,158

The accompanying notes are an integral part of these consolidated financial statements.

MVC Capital, Inc.
Consolidated Schedule of Investments — (Continued)
October 31, 2007


Company	Industry	Investment	Principal		Cost		Fair Value
Control Investments - 44.88% (a, c, g, f)

auto MOTOL BENI	Automotive Dealership	Bridge Loan 12.0000%, 12/31/2007 (e, h)	$	2,000,000	$	2,000,000	$	2,000,000
		Common Stock (200 shares) (d, e)				2,000,000		2,700,000

						4,000,000		4,700,000

Harmony Pharmacy & Health Center, Inc.	Healthcare - Retail	Revolving Credit Facility 10.0000%, 12/01/09 (h)		4,000,000		4,000,000		4,000,000
		Common Stock (2,000,000 shares) (d)				750,000		750,000

						4,750,000		4,750,000

MVC Automotive Group B.V.	Automotive Dealerships	Common Equity Interest (d, e)				20,911,500		20,911,500
		Bridge Loan 10.0000%, 03/17/2008 (e, h)		19,088,500		19,088,500		19,088,500

						40,000,000		40,000,000

MVC Partners, LLC	Private Equity Firm	Limited Liability Company Interest (d)				116,173		116,173

Ohio Medical Corporation	Medical Device Manufacturer	Common Stock (5,620 shares) (d)				17,000,000		17,200,000
		Convertible Unsecured Subordinated Promissary Note 17.1288%, 07/30/2008 (h)		3,250,000		3,250,000		3,250,000

						20,250,000		20,450,000

SIA Tekers Invest	Port Facilities	Common Stock (68,800 shares) (d, e)				2,300,000		2,600,000

SGDA Sanierungsgesellschaft fur Deponien und Altlasten mbH	Soil Remediation	Term Loan 7.0000%, 08/25/2009 (e, h)		6,187,350		6,059,477		6,059,477
		Common Equity Interest (d, e)				438,551		560,000
		Preferred Equity Interest (d, e)				5,000,000		5,600,000

						11,498,028		12,219,477

Summit Research Labs, Inc.	Specialty Chemicals	Second Lien Loan 14.0000%, 08/15/2012 (b, h)		5,414,733		5,334,906		5,414,733
		Common Stock (800 shares) (d)				11,200,000		12,200,000

						16,534,906		17,614,733

Timberland Machines & Irrigation, Inc.	Distributor - Landscaping and Irrigation Equipment	Senior Subordinated Debt 14.5500%, 08/04/2009 (b, h)		6,860,431		6,824,441		6,860,431
		Junior Revolving Line of Credit 12.5000%, 07/07/2009 (h)		4,000,000		4,000,000		4,000,000
		Common Stock (542 shares) (d)				5,420,291		3,420,291
		Warrants (d)				—		—

						16,244,732		14,280,722

Turf Products, LLC	Distributor - Landscaping and Irrigation Equipment	Senior Subordinated Debt 15.0000%, 11/30/2010 (b, h)		7,676,330		7,636,647		7,676,330
		Limited Liability Company Interest (d)				3,821,794		5,821,794
		Warrants (d)				—		—

						11,458,441		13,498,124

U.S. Gas & Electric, Inc.	Energy Services	Second Lien Loan 14.0000%, 07/26/2012 (b, h)		5,551,318		5,343,119		5,551,318
		Senior Credit Facility 12.2500% 7/26/2010 (h)		84,882		84,882		84,882
		Convertible Series B Preferred Stock (32,200 shares) (d)				500,000		500,000
		Convertible Series C Preferred Stock (8,216 shares) (d)				—		—
		Convertible Series F Preferred Stock (1,535 shares) (d)				—		—

						5,928,001		6,136,200

Velocitius B.V.	Renewable Energy	Revolving Credit Facility I, 8.0000%, 10/31/2009 (e, h)		191,084		191,084		191,084
		Revolving Credit Facility II, 8.0000%, 04/30/2010 (e, h)		612,882		612,882		612,882
		Common Equity Interest (d, e)				11,395,315		11,395,315

						12,199,281		12,199,281

Vendio Services, Inc.	Technology Investments	Common Stock (10,476 shares) (d)				5,500,000		15,421
		Preferred Stock (6,443,188 shares) (d)				1,134,001		9,484,579

						6,634,001		9,500,000

Vestal Manufacturing Enterprises, Inc.	Iron Foundries	Senior Subordinated Debt 12.0000%, 04/29/2011 (h)		700,000		700,000		700,000
		Common Stock (81,000 shares) (d)				1,850,000		3,700,000

						2,550,000		4,400,000

WBS Carbons Acquistions Corp.	Specialty Chemicals	Bridge Loan 5.0000%, 11/22/2011 (b, h)		1,600,000		1,600,000		1,600,000
		Common Stock (400 shares) (d)				1,600,000		1,600,000

						3,200,000		3,200,000

Sub Total Control Investments						157,663,563		165,664,710

TOTAL INVESTMENT ASSETS 102.73% (f)					$	393,428,353	$	379,167,534


(a)		These securities are restricted from public sale without prior registration under the Securities Act of 1933. The Fund negotiates certain aspects of the method and timing of the disposition of these investments, including registration rights and related costs.

(b)		These securities accrue a portion of their interest/dividends in “payment in kind” interest/dividends which is capitalized to the investment.

(c)		All of the Fund’s equity and debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940, except auto MOTOL BENI, Genevac U.S. Holdings, Inc., Lockorder Limited, SafeStone Technologies Limited, MVC Automotive B.V., SGDA Sanierungsgesellschaft fur Deponien und Altlasten mbH, SIA Tekers Invest and Velocitius B.V. The Fund makes available significant managerial assistance to all of the portfolio companies in which it has invested.

(d)		Non-income producing assets.

(e)		The principal operations of these portfolio companies are located outside of the United States.

(f)		Percentages are based on net assets of $369,096,769 as of October 31, 2007.

(g)		See Note 3 for further information regarding “Investment Classification.”

(h)		All or a portion of these securities have been committed as collateral for the Guggenheim Corporate Funding, LLC Credit Facility.

- Denotes zero Cost or fair value.

The accompanying notes are an integral part of these consolidated financial statements.

MVC Capital, Inc. (the “Company”)

Notes to Consolidated Financial Statements

July 31, 2008

(Unaudited)

1. Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete consolidated financial statements. Certain amounts have been reclassified to adjust to current period presentations. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2007, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on December 28, 2007 and as amended on May 9, 2008 (File No. 814-00201).

2. Consolidation

On July 16, 2004, the Company formed a wholly-owned subsidiary, MVC Financial Services, Inc. (“MVCFS”). MVCFS is incorporated in Delaware and its principal purpose is to provide advisory, administrative and other services to the Company, the Company’s portfolio companies and other entities. MVCFS had opening equity of $1 (100 shares at $0.01 per share). The Company does not hold MVCFS for investment purposes and does not intend to sell MVCFS. In the consolidation, all intercompany accounts have been eliminated.

3. Investment Classification

As required by the Investment Company Act of 1940, as amended (the “1940 Act”), we classify our investments by level of control. As defined in the 1940 Act, “Control Investments” are investments in those companies that we are deemed to “Control.” “Affiliate Investments” are investments in those companies that are “Affiliated Companies” of us, as defined in the 1940 Act, other than Control Investments. “Non-Control/Non-Affiliate Investments” are those that are neither Control Investments nor Affiliate Investments. Generally, under that 1940 Act, we are deemed to control a company in which we have invested if we own 25% or more of the voting securities of such company or have greater than 50% representation on its board. We are deemed to be an affiliate of a company in which we have invested if we own 5% or more and less than 25% of the voting securities of such company.

4. Concentration of Market Risk

Financial instruments that subjected the Company to concentrations of market risk consisted principally of equity investments, subordinated notes, and debt instruments, which represented approximately 77.48% of the Company’s total assets at July 31, 2008. As discussed in Note 5, these investments consist of securities in companies with no readily determinable market values and as such are valued in accordance with the Company’s fair value policies and procedures. The Company’s investment strategy represents a high degree of business and financial risk due to the fact that the investments (other than cash equivalents) are generally illiquid, in small and middle market companies, and include entities with little operating history or entities that possess operations in new or developing industries. These investments, should they become publicly traded, would generally be (i) subject to restrictions on resale, if they were acquired from the issuer in private placement transactions; and (ii) susceptible to market risk.

5. Portfolio Investments

For the Nine Month Period Ended July 31, 2008

During the nine month period ended July 31, 2008, the Company made two new investments, committing capital totaling approximately $24.8 million. The investments were made in SP Industries, Inc. (“SP”) ($24.0 million) and SGDA Europe B.V. (“SGDA Europe”) ($750,000).

The Company also made nine follow-on investments in existing portfolio companies committing capital totaling approximately $68.7 million. During the nine month period ended July 31, 2008, the Company made additional investments totaling approximately $217,000 in MVC Partners LLC (“MVC Partners”). In connection with these investments, MVC Partners has made an investment in MVC Acquisition Corp., a newly-formed blank check company organized for the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. During the nine month period ended July 31, 2008, the Company also made additional investments totaling $3.3 million in Harmony Pharmacy & Health Center, Inc. (“Harmony Pharmacy”) in the form of a demand note. The demand note has an annual interest rate of 10%. On November 30, 2007, the Company invested an additional $36.7 million in Ohio Medical Corporation (“Ohio Medical”) in the form of a $10.0 million senior subordinated note and $26.7 million in 9,917 shares of convertible preferred stock. At this time, the $3.3 million convertible unsecured subordinated promissory note was converted into preferred stock. The note has an annual interest rate of 16% and a maturity date of May 30, 2012. On December 13, 2007, the Company assigned the Ohio Medical $10.0 million senior subordinated note to AEA Investors LLC. On February 29, 2008, the Company invested an additional $7.8 million in Summit Research Labs, Inc. (“Summit”) in the form of a $3.0 million second lien loan and $4.8 million in common stock. The second lien loan has an annual interest rate of 14% and a maturity date of August 31, 2013. On April 25, 2008, the Company invested an additional $11.8 million in Auto MOTOL BENI (“BENI”) by purchasing 874 shares of common stock. On April 30, 2008 and July 31, 2008, the Company invested an additional $2.7 million and $4.0 million, respectively, in SGDA Europe in the form of equity interest. On July 30, 2008, the Company increased its investment in SP by approximately $1.3 million, investing an additional $1.2 million in the second lien loan and $50,000 in the first lien loan. On July 31, 2008, the Company extended Turf Products LLC (“Turf”) a $1.0 million junior revolving note. The revolving note has an annual interest rate of 2% and a maturity date of December 31, 2008. Turf immediately borrowed $1.0 million on the note.

At the beginning of the 2008 fiscal year, the junior revolving note provided to Timberland Machines & Irrigation, Inc. (“Timberland”) had a balance outstanding of $4.0 million. On January 25, 2008, the amount available on the revolving note was increased by $1.0 million to $5.0 million. Net borrowings during the nine month period ended July 31, 2008 were $1.0 million resulting in a balance as of July 31, 2008 of $5.0 million.

At October 31, 2007, the balance of the revolving credit facility provided to Octagon Credit Investors, LLC (“Octagon”) was $4.1 million. Net repayments during the nine month period ended July 31, 2008 were $1.2 million resulting in a balance outstanding as of July 31, 2008 of $2.9 million.

At October 31, 2007, the balance of Line I (as defined in Note 6 “Commitments and Contingencies”), provided to Velocitius B.V. (“Velocitius”) was approximately $191,000. Repayments during the nine month period ended July 31, 2008 were approximately $191,000. There was no amount outstanding on Line I as of July 31, 2008.

At October 31, 2007, the balance of Line II (as defined in Note 6 “Commitments and Contingencies”), provided to Velocitius was approximately $613,000. Repayments during the nine month period ended July 31, 2008 were approximately $613,000. There was no amount outstanding on Line II as of July 31, 2008.

At October 31, 2007, the balance of the revolving senior credit facility provided to U.S. Gas & Electric, Inc. (“U.S. Gas”) was approximately $85,000. During the nine month period ended July 31, 2008, U.S. Gas entered into a swap agreement which locked in a portion of the senior credit facility with an annual rate of LIBOR plus 6% for a period of two years. This portion of the senior credit facility, in connection to the swap agreement, was approximately $571,000 at July 31, 2008. Net borrowings on the remaining portion of the senior credit facility, which were borrowed at an annual rate of Prime plus 4.5%, were $2.4 million, resulting in a balance outstanding of $2.5 million at such date.

During the nine month period ended July 31, 2008, the Company received approximately $1.5 million in principal payments on the term loan provided to Storage Canada. The balance of the term loan at July 31, 2008 was approximately $1.2 million.

During the nine month period ended July 31, 2008, Phoenix Coal Corporation (“Phoenix Coal”) began trading on the Toronto Stock Exchange. Consistent with the Company’s valuation procedures, effective June 30, 2008, the Company has been marking this investment to its market price.

On November 1, 2007, December 1, 2007, and January 1, 2008, the Company received $111,111, respectively, as principal payments from SP on term loan B.

On November 2, 2007, Genevac U.S. Holdings, Inc. (“Genevac”) made a principal payment of $1.0 million on its senior subordinated loan.

On December 31, 2007, March 31, 2008, and June 30, 2008, the Company received quarterly principal payments from BP Clothing, LLC (“BP”) on term loan A of $90,000. The balance of term loan A as of July 31, 2008 was approximately $2.3 million.

On December 31, 2007, March 31, 2008, and June 30, 2008, Total Safety U.S., Inc. (“Total Safety”) made principal payments of $2,500 on its first lien loan. The balance of the first lien loan as of July 31, 2008 was approximately $985,000.

On December 31, 2007, Turf borrowed $1.0 million from the secured junior revolving note. This was repaid on April 28, 2008. The note matured on May 1, 2008.

On January 2, 2008, February 1, 2008, and July 1, 2008, the Company received principal payments of $37,500, $1,666,667, and $37,500, respectively, on the term loan provided to Innovative Brands, LLC (“Innovative Brands”). The balance of the term loan as of July 31, 2008 was approximately $13.1 million.

On January 2, 2008, SP repaid term loan B and senior subordinated loan in full, including all accrued interest. The total amount received for term loan B was $7.1 million and the amount received for the senior subordinated loan was $13.6 million.

On January 2, 2008, Genevac repaid its senior subordinated loan in full, including all accrued interest totaling, $11.9 million. The Company, at this time, sold 140 shares of Genevac common stock for $1.7 million, resulting in a short-term capital gain of $595,000.

On January 15, 2008, Impact Confections, Inc. (“Impact”) repaid its promissory note and senior subordinated loan in full, including all accrued interest, totaling $6.1 million. The Company, at this time, sold 252 shares of common stock at cost for $2.7 million.

On January 29, 2008, MVC Automotive Group B.V. (“MVC Automotive”) made a principal payment of $17.4 million on its bridge loan, resulting in a principal balance of $1.6 million.

On February 29, 2008, the Company sold 400 shares of WBS Carbons Acquisition Corp. (“WBS”) at its cost of $1.6 million.

On March 31, 2008 and June 30, 2008, SP made principal payments of $17,361 on its first lien loan on each payment date. The balance of the first lien loan as of July 31, 2008, was approximately $1.0 million.

On April 15, 2008, the Company received a principal payment of $100,000 from Vestal Manufacturing Enterprises, Inc. (“Vestal”) on its senior subordinated debt. The balance of the senior subordinated debt as of July 31, 2008, was $600,000.

On June 9, 2008, BENI was acquired by MVC Automotive to achieve operating efficiencies. BENI was, and MVC Automotive continues to be, 100% owned by the Company. MVC Automotive increased its shareholder’s equity by $14.5 million and assumed $2.0 million of debt as a result of the cashless transaction. There was no gain or loss to the Company from this transaction. The balance of the MVC Automotive bridge loan as of July 31, 2008 was $3.6 million and the common stock had a fair value of $45.0 million.

On July 23, 2008, the Company sold 500,000 shares of Phoenix Coal Corporation (“Phoenix Coal”). The total amount received from the sale net of commission was approximately $512,000, resulting in a realized gain of approximately $262,000.

On July 29, 2008, the Company sold 500,000 shares of Phoenix Coal. The total amount received from the sale net of commission was approximately $484,000, resulting in a realized gain of approximately $234,000.

During the nine month period ended July 31, 2008, the Valuation Committee increased the fair value of the Company’s investments in U.S. Gas preferred stock by $5.2 million, SGDA Sanierungsgesellschaft fur Deponien und Altasten mbH (“SGDA”) preferred equity interest by $375,000, Foliofn, Inc. (“Foliofn”) preferred stock by $6.0 million, SIA Tekers Invest (“Tekers”) common stock by $575,000, Custom Alloy Corporation (“Custom Alloy”) preferred stock by $12.5 million, Velocitius equity interest by $10.6 million, MVC Automotive equity interest by $9.6 million, PreVisor, Inc. (“PreVisor”) common stock by $2.7 million, Summit common stock by $6.0 million, and Vitality Foodservice, Inc. (“Vitality”) common stock and warrants by approximately $2.9 million. In addition, increases in the cost basis and fair value of the loans to GDC Acquisitions, LLC (“GDC”), SP, Harmony, Timberland, Amersham Corporation (“Amersham”), Marine Exhibition Corporation (“Marine”), BP, Summit, U.S. Gas, WBS, and Custom Alloy and the Vitality and Marine preferred stock were due to the capitalization of payment in kind (“PIK”) interest/dividends totaling $4,218,554. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $2.9 million due to a PIK distribution which was treated as a return of capital. Also, during the nine month period ended July 31, 2008, the undistributed allocation of flow through income from the Company’s equity investment in Octagon increased the cost basis and fair value of this investment by approximately $136,000. The Valuation Committee also decreased the fair value of the Company’s investments in Vendio Services, Inc. (“Vendio”) preferred stock by $2.3 million, Vestal common stock by $1.2 million and Timberland common stock by $3.4 million during the nine month period ended July 31, 2008.

At July 31, 2008, the fair value of all portfolio investments, exclusive of short-term securities, was $453.3 million with a cost basis of $414.9 million. At July 31, 2008, the fair value and cost basis of portfolio investments made by the Company’s former management team pursuant to the prior investment objective (“Legacy Investments”) was $20.8 million and $55.9 million, respectively, and the fair value and cost basis of portfolio investments made by the Company’s current management team was $432.5 million and $359.0 million, respectively. At October 31, 2007, the fair value of all portfolio investments, exclusive of short-term securities, was $379.2 million with a cost basis of $393.4 million. At October 31, 2007, the fair value and cost basis of Legacy Investments was $17.1 million and $55.9 million, respectively, and the fair value and cost basis of portfolio investments made by the Company’s current management team was $362.1 million and $337.5 million, respectively.

For the Year Ended October 31, 2007

During the fiscal year ended October 31, 2007, the Company made ten new investments, committing capital totaling approximately $117.3 million. The investments were made in WBS ($3.2 million), HuaMei Capital Company, Inc. (“HuaMei”) ($200,000), Levlad Arbonne International LLC (“Levlad”) ($10.1 million), Total Safety ($4.5 million), MVC Partners ($71,000), Genevac ($14.0 million), Tekers ($2.3 million), U.S. Gas ($18.9 million), Custom Alloy ($24.0 million), and MVC Automotive ($40.0 million).

The Company also made 16 follow-on investments in existing portfolio companies committing capital totaling approximately $49.8 million. On November 7, 2006, the Company invested $100,000 in SGDA by purchasing an additional common equity interest. On December 22, 2006, the Company purchased an additional 56,472 shares of common stock in Vitality at a cost of approximately $565,000. On January 9, 2007, the Company extended to Turf a $1.0 million junior revolving note. Turf immediately borrowed $1.0 million from the note. On January 11, 2007, the Company provided Harmony Pharmacy a $4.0 million revolving credit facility. Harmony Pharmacy immediately borrowed $1.75 million from the credit facility. On February 16, 2007, the Company invested $1.8 million in HuaMei purchasing 450 shares of common stock. At the same time, the previously issued $200,000 convertible promissory note was exchanged for 50 shares of HuaMei common stock at the same price. On February 19, 2007, the Company invested an additional $8.4 million of common equity interest in Velocitius. On February 21, 2007 and May 4, 2007, the Company provided BP a $5.0 million and a $2.5 million second lien loan, respectively. On March 26, 2007, the Company extended a $1.0 million bridge loan to BENI. On March 30, 2007, the Company invested an additional $5.0 million in SP in the form of a subordinated term loan B. On May 1, 2007, the Company extended to Velocitius a $650,000 revolving line of credit Line II (as defined in Note 6 “Commitments and Contingencies”). Velocitius immediately borrowed approximately $547,000. The balance of the line of credit as of October 31, 2007 was approximately $613,000. On May 8, 2007, the Company provided Baltic Motors Corporation (“Baltic Motors”) a $5.5 million bridge loan. On May 9, 2007, the Company purchased 1.0 million shares of Dakota Growers Pasta Company, Inc. (“Dakota Growers”) preferred stock at a cost of $10.0 million. At that time, 65,000 shares of Dakota Growers common stock were converted to 65,000 shares of convertible preferred stock. On June 19, 2007, the Company increased the bridge loan to BENI to $2.0 million. The remaining available amount of $1.7 million was immediately drawn. On July 30, 2007, the Company provided Ohio Medical a $2.0 million convertible unsecured promissory note. On August 20, 2007, the Company contributed an additional $45,000 to MVC Partners, increasing the Company’s limited liability interest. On September 27, 2007, the Company invested an additional $1.25 million in Ohio Medical by increasing the convertible unsecured promissory note to $3.25 million.

At the beginning of the 2007 fiscal year, the junior revolving note provided to Timberland had a balance outstanding of approximately $2.8 million. On November 27, 2006, the amount available on the revolving note was increased by $750,000 to $4.0 million. Net borrowings during for the fiscal year ended October 31, 2007 were $1.2 million resulting in a balance as of October 31, 2007 of $4.0 million.

At October 31, 2006, the balance of the revolving credit facility provided to Octagon was $3.25 million. Net borrowings during the fiscal year ended October 31, 2007 were $850,000 resulting in a balance outstanding of $4.1 million.

At October 31, 2006, the balance of Line I provided to Velocitius was approximately $144,000. Net borrowings during the fiscal year October 31, 2007 were approximately $47,000. As of October 31, 2007, the balance of Line I was approximately $191,000.

On December 1, 2006, the Company received a principal payment of approximately $100,000 from Vestal on its senior subordinated debt. As of October 31, 2007, the balance of the loan was $700,000.

On December, 8, 2006, Total Safety repaid term loan A and term loan B in full including all accrued interest and prepayment fees. The total amount received for term loan A was $5,043,775 and for term loan B was $1,009,628.

On December 29, 2006, March 30, 2007, June 29, 2007, and September 28, 2007, the Company received quarterly principal payments from BP on term loan A of $90,000.

On January 1, 2007, April 2, 2007, July 2, 2007, and October 1, 2007, the Company received principal payments of $37,500 on the term loan provided to Innovative Brands on each payment date.

On January 2, 2007, March 1, 2007, and September 27, 2007, the Company received principal payments of approximately $96,000, $1.0 million, and $63,000, respectively, on term loan A from Henry Company.

On January 5, 2007, Baltic Motors repaid the bridge loan in full including all accrued interest. The total amount received from the repayment was $1,033,000.

On January 19, 2007, Storage Canada borrowed an additional $705,000 under their credit facility. The borrowing bears annual interest of 8.75% and has a maturity date of January 19, 2014.

On February 16, 2007, the Company exchanged the $200,000 convertible promissory note due from HuaMei for 50 shares of its common stock.

On March 8, 2007, Levlad repaid its loan in full, including all accrued interest and a prepayment fee. The total amount received from the payment was approximately $10.4 million.

On March 30, 2007, June 29, 2007, and September 28, 2007, Total Safety made principal payments of $2,500 on its first lien loan.

On April 12, 2007 and April 18, 2007, BENI made principal payments of $200,000 and $500,000, respectively, on its bridge loan.

On April 16, 2007, the assets and liabilities of SafeStone Technologies PLC were transferred to two new companies, Lockorder Limited (“Lockorder”) and SafeStone Technologies Limited (“SafeStone Limited”). The Company received 21,064 shares of SafeStone Limited and 21,064 shares of Lockorder as a result of this corporate action. On a combined basis, there was no change in the cost basis or fair value due to this transaction.

On May 1, 2007, Turf repaid its secured junior revolving note in full, including accrued interest. The total amount received from the payment was approximately $1.0 million. There were no borrowings outstanding on the revolving note as of October 31, 2007.

Beginning on May 1, 2007, the Company receives monthly principal payments of $111,111 from SP on term loan B. Total principal payments for the fiscal year ended October 31, 2007 was $666,666.

On July 7, 2007, the Company extended the maturity date of the Timberland junior revolver to July 7, 2009.

On July 24, 2007, the Company sold the common stock of Baltic Motors and SIA BM Auto (“BM Auto”). The amount received from the sale of the 60,684 common shares of Baltic Motors was approximately $62.0

million, net of closing and other transaction costs, working capital adjustments and a reserve established by the Company to satisfy certain post-closing conditions requiring capital and other expenditures. Baltic Motors repaid all debt from the Company in full including all accrued interest. Total amount received from the repayment of the debt was approximately $10.2 million including all accrued interest. The remaining $51.8 million, less the $8.0 million cost basis of Baltic Motors, resulted in $43.8 million recorded as realized gain. The difference between the $51.8 million received from the Baltic Motors equity and the carrying value at October 31, 2006 is $30.6 million and the amount of the increase in net assets attributable to fiscal year 2007. The portion of the capital gain related to the equity investment made on June 24, 2004 ($40.9 million), will be treated as long-term capital gain and the portion related to the equity investment made on September 28, 2006 ($2.9 million) will be treated as a short-term capital gain. The amount received from the sale of the 47,300 common shares of BM Auto was approximately $29.7 million, net of closing and other transaction costs, working capital adjustments and a reserve established by the Company to satisfy certain post-closing conditions requiring capital and other expenditures. The $29.7 million, less the $8.0 million cost basis of BM Auto, resulted in $21.7 million recorded as a long term capital gain. The difference between the $29.7 million received from the BM Auto equity and the carrying value at October 31, 2006 is $21.7 million, which is the amount of the increase in net assets attributable to fiscal year 2007.

As mentioned above, a reserve account of approximately $3.0 million was created for post closing conditions that are required of the seller as a part of the purchase agreement. The cash held in the reserve account was held in Euros. On October 17, 2007, all post-closing conditions from the acquisition were satisfied. Of the $3.0 million held in reserve, $1.0 million was not needed to satisfy the post-closing conditions and as a result was added to the Company’s gain on the sale. Of the $1.0 million gain from the reserve account, approximately $887,000 is attributable to the sale of Baltic Motors and approximately $148,000 is attributable to the sale to BM Auto. The Company also had a currency gain of approximately $42,000 from the reserve account. Total gain from the sale of Baltic Motors and BM Auto was $66.5 million.

On July 27, 2007, U.S. Gas repaid its bridge loan in full, including accrued interest. The total amount received was approximately $908,000.

On August 1, 2007, Phoenix Coal repaid its second lien loan in full including all accrued interest and fees. Total amount received from the repayment was approximately $8.4 million.

On October 31, 2007, the Company restructured the terms of the Amersham loans. The accrued interest on the loan with an outstanding balance of $2.7 million at October 31, 2007 was capitalized. The default PIK interest on the loan with a balance of $3.1 million at October 31, 2007 was forgiven up to 75%. The interest rate on this loan has been reduced to the original rate of 16%.

Net borrowings on the Harmony Pharmacy revolving credit facility during the fiscal year ended October 31, 2007 were $4.0 million, resulting in a balance outstanding of approximately $4.0 million.

Net borrowings on the U.S. Gas senior credit facility during the fiscal year ended October 31, 2007 were approximately $85,000, resulting in a balance outstanding of approximately $85,000.

Also, during the fiscal year ended October 31, 2007, the undistributed allocation of flow through income from the Company’s equity investment in Octagon increased the cost basis and fair value of the Company’s investment by $216,275. The Valuation Committee also decreased the fair value of the Company’s investments in Ohio Medical by $9.0 million and Timberland common stock by $1.0 million during the fiscal year ended October 31, 2007.

At October 31, 2007, the fair value of all portfolio investments was $379.2 million with a cost basis of $393.4 million. At October 31, 2007, the fair value and cost basis of the Legacy Investments was $17.1 million and $55.9 million, respectively, and the fair value and cost basis of portfolio investments made by the Company’s current management team was $362.1 million and $337.5 million, respectively. At October 31, 2006, the fair value of all portfolio investments was $275.9 million with a cost basis of $286.9 million. At October 31, 2006, the fair value and cost basis of Legacy Investments was $8.4 million and $55.9 million, respectively, and the fair value and cost basis of portfolio investments made by the Company’s current management team was $267.5 million and $231.0 million, respectively.

6. Commitments and Contingencies

Commitments to/for Portfolio Companies:

At July 31, 2008, the Company’s existing commitments to portfolio companies consisted of the following:

Commitments of MVC Capital, Inc.


Portfolio Company	Amount Committed		Amount Funded at July 31, 2008
Timberland Junior Revolver	$	5.0 million	$	5.0 million
Storage Canada Loan	$	6.0 million	$	1.2 million
Marine Revolving Loan Facility	$	2.0 million		—
Octagon Revolving Credit Facility	$	12.0 million	$	2.9 million
Velocitius Revolving Line I	$	260,000		—
Turf Junior Revolver	$	1.0 million	$	1.0 million
Harmony Pharmacy Revolving Credit Facility	$	4.0 million	$	4.0 million
Velocitius Revolving Line II	$	650,000		—
Tekers Guarantee	$	2.2 million		—
U.S. Gas Revolving Credit Facility	$	10.0 million	$	3.0 million
U.S. Gas Junior Revolver	$	2.0 million		—
MVC Automotive Guarantee	$	10.1 million		—
MVC Automotive Guarantee	$	6.2 million		—

Total	$	61.4 million	$	17.1 million

On June 30, 2005, the Company pledged its common stock of Ohio Medical to Guggenheim to collateralize a loan made by Guggenheim to Ohio Medical.

On July 8, 2005 the Company extended to Timberland a $3.25 million junior revolving note that bears interest at 12.5% per annum and expires on July 7, 2009. The Company also receives a fee of 0.25% on the unused portion of the note. On November 27, 2006, the amount available on the revolving note was increased by $750,000 to $4.0 million. As of October 31, 2007, the funded debt under the junior revolving line of credit was $4.0 million. On January 25, 2008, the amount available on the revolving note was increased by $1.0 million to $5.0 million. Net borrowings during the nine month period ended July 31, 2008 were $1.0 million resulting in a balance as of July 31, 2008 of $5.0 million.

Any additional borrowings will mature seven years from the date of the subsequent borrowing. The Company also receives a fee of 0.25% on the unused portion of the loan. As of October 31, 2007, the outstanding balance of the loan commitment was $2.7 million. Net repayments during the nine month period ended July 31, 2008 were approximately $1.5 million, resulting in a balance of approximately $1.2 million at such date.

On July 11, 2006, the Company provided Marine a $2.0 million secured revolving loan facility. The revolving loan facility bears annual interest at LIBOR plus 1%. The Company also receives a fee of 0.50% of the unused portion of the revolving loan facility. There was no amount outstanding on the revolving loan facility as of July 31, 2008.

On October 12, 2006, the Company provided a $12.0 million revolving credit facility to Octagon in replacement of the senior secured credit facility provided on May 7, 2004. This credit facility expires on December 31, 2011. The credit facility bears annual interest at LIBOR plus 4.25%. The Company receives a 0.50% unused facility fee on an annual basis and a 0.25% servicing fee on an annual basis for maintaining the credit facility. At October 31, 2007 the outstanding balance of the revolving credit facility provided to Octagon was $4.1 million. Net repayments during the nine month period ended July 31, 2008 were $1.2 million resulting in a balance outstanding of $2.9 million on that date.

On October 30, 2006, the Company provided Velocitius a $260,000 revolving line of credit (“Line I”). Line I expires on October 31, 2009 and bears annual interest at 8%. At October 31, 2007, the balance of the Line I was approximately $191,000. Repayments during the nine month period ended July 31, 2008 were approximately $191,000. There was no amount outstanding on Line I as of July 31, 2008.

On January 9, 2007, the Company extended to Turf a $1.0 million secured junior revolving note. The note bears annual interest at 12.5% and expires on May 1, 2008. The Company also receives a fee of 0.25% of the unused portion of the note. There was no amount outstanding on the secured junior revolving note as of October 31, 2007. On December 31, 2007, Turf borrowed $1.0 million from the secured junior revolving note. Turf repaid $1.0 million on the secured junior revolving note on April 28, 2008. This note matured on May 1, 2008.

On January 11, 2007, the Company provided a $4.0 million revolving credit facility to Harmony Pharmacy. The credit facility bears annual interest at 10%. The Company also receives a fee of 0.50% on the unused portion of the loan. The revolving credit facility expires on December 1, 2009. At October 31, 2007 and July 31, 2008, the outstanding balance of the revolving credit facility provided was $4.0 million.

On May 1, 2007, the Company provided Velocitius a $650,000 revolving line of credit (“Line II”). Line II expires on April 30, 2010 and bears annual interest at 8%. At October 31, 2007, there was approximately $613,000 outstanding. Repayments during the nine month period ended July 31, 2008 were approximately $613,000. There was no amount outstanding on Line II as of July 31, 2008.

On July 19, 2007, the Company agreed to guarantee a 1.4 million Euro mortgage for Tekers, equivalent to approximately $2.2 million at July 31, 2008.

On July 26, 2007, the Company provided a $10.0 million revolving senior credit facility and a $2.0 million junior revolver to U.S. Gas. The senior credit facility bears annual interest at either LIBOR plus 6% or Prime plus 4.5%, this election is at U.S. Gas’ discretion. The junior revolver bears annual interest at 14%. The Company receives a fee of 0.50% on the unused portion of the senior credit facility and the junior revolver. The revolving senior credit facility and junior revolver expire on July 26, 2010. At October 31, 2007, there was approximately $85,000 outstanding on the revolving senior credit facility. During the nine month period ended July 31, 2008, U.S. Gas entered into a swap agreement which locked in a portion of the senior credit facility with a LIBOR based borrowing rate for a period of two years. This portion of the senior credit facility was approximately $571,000 at July 31, 2008.

Net borrowings on the remaining portion of the senior credit facility, which were borrowed at an annual rate of Prime plus 4.5%, were $2.4 million, resulting in a balance outstanding of $2.5 million at such date. There was no amount outstanding on the junior revolver as of October 31, 2007 and July 31, 2008.

On January 15, 2008, the Company agreed to guarantee a 6.5 million Euro mortgage for MVC Automotive, equivalent to approximately $10.1 million at July 31, 2008.

On January 16, 2008, the Company agreed to support a 4.0 million Euro mortgage for a Ford dealership owned and operated by MVC Automotive (equivalent to approximately $6.2 million at July 31, 2008) through making financing available to the dealership and agreeing under certain circumstances not to reduce its equity stake in MVC Automotive.

On July 31, 2008, the Company extended to Turf a $1.0 million secured junior revolving note. The note bears annual interest at 2.0% and expires on December 31, 2008. On July 31, 2008, Turf borrowed $1.0 million from the secured junior revolving note resulting in a balance of $1.0 million at such date.

Timberland also has a floor plan financing program administered by Transamerica. As is typical in Timberland’s industry, under the terms of the dealer financing arrangement, Timberland guarantees the repurchase of product from Transamerica, if a dealer defaults on payment and the underlying assets are repossessed. The Company has agreed to be a limited co-guarantor for up to $500,000 on this repurchase commitment.

Commitments of the Company:

Effective November 1, 2006, under the terms of the Investment Advisory and Management Agreement with TTG Advisers (the “Advisory Agreement”), TTG Advisers is responsible for providing office space to the Company and for the costs associated with providing such office space. The Company’s offices continue to be located on the second floor of 287 Bowman Avenue.

On April 27, 2006, the Company and MVCFS, as co-borrowers, entered into a four-year, $100 million credit facility (“Credit Facility I”), consisting of $50.0 million in term debt and $50.0 million in revolving credit, with Guggenheim as administrative agent for the lenders. At October 31, 2007, there was $50.0 million in term debt and $30.0 million in revolving credit on Credit Facility I outstanding. During the nine month period ended July 31, 2008, the Company’s net borrowings on Credit Facility I were $20.0 million. As of July 31, 2008, there was $50.0 million in term debt and $50.0 million outstanding on the revolving credit facility. The proceeds from borrowings made under Credit Facility I are used to fund new and existing portfolio investments, pay fees and expenses related to obtaining the financing and for general corporate purposes. Credit Facility I will expire on April 27, 2010, at which time all outstanding amounts under Credit Facility I will be due and payable. Borrowings under Credit Facility I will bear interest, at the Company’s option, at a floating rate equal to either (i) the LIBOR rate (for one, two, three or six months), plus a spread of 2.00% per annum, or (ii) the Prime rate in effect from time to time, plus a spread of 1.00% per annum. The Company paid a closing fee, legal and other costs associated with this transaction. These costs will be amortized evenly over the life of the facility. The prepaid expenses on the Balance Sheet include the unamortized portion of these costs. Borrowings under Credit Facility I will be secured, by among other things, cash, cash equivalents, debt investments, accounts receivable, equipment, instruments, general intangibles, the capital stock of MVCFS, and any proceeds from all the aforementioned items, as well as all other property except for equity investments made by the Company.

On April 24, 2008, the Company entered into a two-year, $50 million revolving credit facility (“Credit Facility II”) with Branch Banking and Trust Company (“BB&T”). During the nine month period ended July 31, 2008, the Company’s net borrowings on Credit Facility II were $50.0 million. Credit Facility II provides financing to the Company in addition to the Company’s existing $100 million Credit Facility I with Guggenheim.

Proceeds from borrowings made under Credit Facility II are used to provide the Company with better overall financial flexibility in managing its investment portfolio. Borrowings under Credit Facility II bear interest at LIBOR plus 50 basis points. In addition, the Company is also subject to a 25 basis point utilization fee for the amount of Credit Facility II that is outstanding for more than 33% of the calendar days during each fiscal quarter, as well as an annual fee of 25 basis points of the total amount of the facility. The Company paid a closing fee, legal and other costs associated with this transaction. These costs will be amortized evenly over the life of the facility. The prepaid expenses on the Balance Sheet include the unamortized portion of these costs. Borrowings under Credit Facility II will be secured by cash, short-term and long-term U.S. Treasury securities and other governmental agency securities whose purchase has been approved by BB&T.

The Company enters into contracts with portfolio companies and other parties that contain a variety of indemnifications. The Company’s maximum exposure under these arrangements is unknown. However, the Company has not experienced claims or losses pursuant to these contracts and believes the risk of loss related to indemnifications to be remote.

7. Certain Issuances of Equity Securities by the Issuer

On February 28, 2007, the Company completed its public offering of 5,000,000 shares of the Company’s common stock at a price of $16.25 per share. On March 28, 2007, pursuant to the 30-day over-allotment option granted by the Company to the underwriters in connection with the offering, the underwriters purchased an additional 158,500 shares of common stock at the purchase price of $16.25 per share. The Company raised approximately $78.4 million in net proceeds after deducting the underwriting discount and commissions and estimated offering expenses. The Company expects to use the net proceeds of the offering to fund additional investments and for general corporate purposes, including the repayment of debt.

8. Management

On November 6, 2003, Michael Tokarz assumed his positions as Chairman, Portfolio Manager and Director of the Company. From November 6, 2003 to October 31, 2006, the Company was internally managed. The Company entered into the Advisory Agreement, effective November 1, 2006, which provides for the Company to be managed externally by TTG Advisers, which is controlled by Mr. Tokarz.

Under the terms of the Advisory Agreement, TTG Advisers determines, consistent with the Company’s investment strategy, the composition of the Company’s portfolio, the nature and timing of the changes to the Company’s portfolio and the manner of implementing such changes. TTG Advisers also identifies, and negotiates the structure of the Company’s investments (including performing due diligence on prospective portfolio companies), closes and monitors the Company’s investments, determines the securities and other assets purchased, retains or sells and oversees the administration, recordkeeping and compliance functions of the Company and/or third parties performing such functions for the Company. TTG Advisers’ services under the Advisory Agreement are not exclusive, and it may furnish similar services to other entities. Pursuant to the Advisory Agreement, the Company is required to pay TTG Advisers a fee for investment advisory and management services consisting of two components—a base management fee and an incentive fee. The base management fee is calculated at 2.0% per annum of the Company’s total assets excluding cash and the value of any investment by the Company not made in portfolio companies (“Non-Eligible Assets”) but including assets purchased with borrowed funds that are not Non-Eligible Assets. The incentive fee consists of two parts: (i) one part is based on our pre-incentive fee net operating income; and (ii) the other part is based on the capital gains realized on our portfolio of securities acquired after November 1, 2003. The Advisory Agreement provides for an expense cap pursuant to which TTG Advisers will absorb or reimburse operating expenses of the Company to the extent necessary to limit the Company’s expense ratio (the consolidated expenses of the Company, including any amounts payable to TTG Advisers under the base management fee, but excluding the amount of any interest and other direct borrowing costs, taxes, incentive compensation and extraordinary expenses taken as a percentage of the Company’s average net assets) to 3.25% in each of the 2007 and 2008 fiscal years. Please see Note 9 “Incentive Compensation” for more information.

9. Incentive Compensation

Effective November 1, 2006, Mr. Tokarz’s employment agreement with the Company terminated and the obligations under Mr. Tokarz’s agreement were superseded by those under the Advisory Agreement entered into with TTG Advisers. Pursuant to the Advisory Agreement, the Company pays an incentive fee to TTG Advisers which is generally: (i) 20% of pre-incentive fee net operating income and (ii) 20% of net realized capital gains less unrealized depreciation (on our portfolio securities acquired after November 1, 2003). TTG Advisers is entitled to an incentive fee with respect to our pre-incentive fee net operating income in each fiscal quarter as follows: no incentive fee in any fiscal quarter in which our pre-incentive fee net operating income does not exceed the hurdle rate of 1.75% of net assets, 100% of our pre-incentive fee net operating income with respect to that portion of such pre-incentive fee net operating income, if any, that exceeds the hurdle rate but is less than 2.1875% of net assets in any fiscal quarter and 20% of the amount of our pre-incentive fee net operating income, if any, that exceeds 2.1875% of net assets in any fiscal quarter. Under the Advisory Agreement, the accrual of the provision for incentive compensation for net realized capital gains is consistent with the accrual that was required under the employment agreement with Mr. Tokarz.

Under internal management, Mr. Tokarz was entitled to compensation pursuant to his agreement with the Company, under which the Company was required to pay Mr. Tokarz incentive compensation in an amount equal to the lesser of (a) 20% of the net income of the Company for the fiscal year; or (b) the sum of (i) 20% of the net capital gains realized less unrealized depreciation by the Company in respect of the investments made during his tenure as Portfolio Manager; and (ii) the amount, if any, by which the Company’s total expenses for a fiscal year were less than two percent of the Company’s net assets (determined as of the last day of the period).

At October 31, 2007, the provision for estimated incentive compensation was $17,875,496. During the nine month period ended July 31, 2008, this provision for incentive compensation was decreased by a net amount of $3,576,743 to $14,298,753. The amount of the provision reflects the Valuation Committee’s determination to increase the fair values of nine of the Company’s portfolio investments (U.S. Gas, Vitality, Summit, Tekers, SGDA, Custom Alloy, Velocitius, MVC Automotive and PreVisor) by a total of $50.3 million. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $2.9 million due to a PIK distribution, which was treated as a return of capital. The net decrease in the provision for incentive compensation during the nine month period ended July 31, 2008 was a result of the incentive compensation payment to TTG Advisers of approximately $12.9 million due to the sale of Baltic Motors and BM Auto. Pursuant to the Advisory Agreement, incentive compensation payments will be made to TTG Advisers only upon the occurrence of a realization event (as defined under such agreement). On July 24, 2007, as discussed in “Realized Gains and Losses on Portfolio Securities, For the Fiscal Year Ended October 31, 2007,” the Company realized a gain of $66.5 million from the sale of Baltic Motors and BM Auto. This transaction triggered an incentive compensation payment obligation to TTG Advisers, which payment was not required to be made until the precise amount of the payment obligation was confirmed based on the Company’s completed audited financials for the fiscal year 2007. The payment obligation to TTG Advisers from this transaction totaled approximately $12.9 million (20% of the realized gain from the sale less unrealized depreciation on the portfolio). The net decrease also reflects the Valuation Committee’s determination to decrease the fair values of two of the Company’s portfolio investments (Timberland and Vestal) by a total of $4.6 million. During the nine month period ended July 31, 2008, there was no provision recorded for the net operating income portion of the incentive fee as pre-incentive fee net operating income did not exceed the hurdle rate.

10. Tax Matters

On October 31, 2007, the Company had a net capital loss carryforward of $6,623,425 remaining, of which $3,327,875 will expire in the year 2012 and $3,295,550 will expire in the year 2013. To the extent future capital gains are offset by capital loss carryforwards, such gains need not be distributed. As of October 31, 2007, the Company had net unrealized capital losses of $15,363,252. The gross unrealized capital losses totaled $50,618,032. The total net realized capital loss carryforwards and gross unrealized capital losses at October 31, 2007 were $57,241,457.

In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes. FIN 48 applies to financial statements for fiscal years beginning after December 15, 2006 as deferred by FSP 48-2. FIN 48 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 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. This interpretation requires recognition of the impact of a tax position if that position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In addition, FIN 48 provides measurement guidance whereby a tax position that meets the more-likely-than-not recognition threshold is calculated to determine the amount of benefit to recognize in the financial statements. We do not believe that FIN 48 has a material impact on the Company’s financial condition or results of operations. If the tax law requires interest and/or penalties to be paid on an underpayment of income taxes, interest and penalties will be classified as income taxes on our financial statements, if applicable.

Management has provided a full valuation allowance for the net operating loss deferred tax asset of approximately $414,000 for the nine month period ended July 31, 2008. Based on FAS109, management expects it is more likely than not that all or portion of the deferred tax asset will not be realized in the near future and there is sufficient negative evidence to support this decision. Management will revisit this at year end.

11. Dividends and Distributions to Shareholders

As a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), the Company is required to distribute to its shareholders, in a timely manner, at least 90% of its investment company taxable and tax-exempt income each year. If the Company distributes, in a calendar year, at least 98% of its ordinary income for such calendar year and its capital gain net income for the 12-month period ending on October 31 of such calendar year (as well as any portion of the respective 2% balances not distributed in the previous year), it will not be subject to the 4% non-deductible federal excise tax on certain undistributed income of RICs.

Dividends and capital gain distributions, if any, are recorded on the ex-dividend date. Dividends and capital gain distributions are generally declared and paid quarterly according to the Company’s policy established on July 11, 2005. An additional distribution may be paid by the Company to avoid imposition of federal income tax on any remaining undistributed net investment income and capital gains. Distributions can be made payable by the Company either in the form of a cash distribution or a stock dividend. The amount and character of income and capital gain distributions are determined in accordance with income tax regulations which may differ from U.S. generally accepted accounting principles. These differences are due primarily to differing treatments of income and gain on various investment securities held by the Company, timing differences and differing characterizations of distributions made by the Company. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications and may affect the allocation between net operating income, net realized gain (loss) and paid in capital.

For the Quarter Ended January 31, 2008

On December 20, 2007, the Company’s board of directors declared a dividend of $0.12 per share. The dividend was payable on January 9, 2008 to shareholders of record on December 31, 2007. The total distribution amounted to $2,913,738, including distributions reinvested. In accordance with the Company’s dividend reinvestment plan (the “Plan”), Computershare Ltd., the Plan Agent, re-issued 15,930 shares of common stock from the Company’s treasury to shareholders participating in the Plan.

For the Quarter Ended April 30, 2008

On April 11, 2008, the Company’s board of directors declared a dividend of $0.12 per share. The dividend was payable on April 30, 2008 to shareholders of record on April 23, 2008. The total distribution amounted to $2,915,651, including distributions reinvested.

For the Quarter Ended July 31, 2008

On July 10, 2008, the Company’s board of directors declared a dividend of $0.12 per share. The dividend was payable on July 31, 2008 to shareholders of record on July 24, 2008. The total distribution amounted to $2,915,651, including distributions reinvested.

12. Segment Data

The Company’s reportable segments are its investing operations as a business development company, MVC Capital, Inc., and the financial advisory operations of its wholly-owned subsidiary, MVC Financial Services, Inc.

The following table presents book basis segment data for the nine month period ended July 31, 2008:


	MVC		MVCFS			Consolidated
Interest and dividend income	$	20,347,689	$	110,465		$	20,458,154
Fee income		159,487		2,728,068			2,887,555
Other income		435,560		—			435,560
Total operating income		20,942,736		2,838,533			23,781,269

Total operating expenses		17,229,313		4,170,922			21,400,235

Net operating income (loss) before taxes		3,713,423		(1,332,389	)		2,381,034
Tax benefit		—		(106,123	)		(106,123	)
Net operating income (loss)		3,713,423		(1,226,266	)		2,487,157
Net realized gain on investments and foreign currency		1,418,641		—			1,418,641
Net change in unrealized appreciation on investments		52,688,629		—			52,688,629
Net increase (decrease) in net assets resulting from operations		57,820,693		(1,226,266	)		56,594,427

In all periods prior to July 16, 2004, all business was conducted through MVC Capital, Inc. With the externalization of the Company’s management on November 1, 2006, separate invoices are now sent to MVC Capital and MVCFS for the quarterly base management fee due to TTG Advisers.

13. Recent Accounting Pronouncements

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements Statement No. 157 (“FAS 157”), which provides enhanced guidance for using fair value to measure assets and liabilities. FAS 157 also provides guidance regarding the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. This guidance, as required, will be applicable to our financial statements for our fiscal year 2009. Based upon the Company’s initial review of FAS 157’s impact, FAS 157 is not expected to have a material impact on our consolidated financial statements.

14. Subsequent Events

Since July 31, 2008, net borrowings on the U.S. Gas senior credit facility were approximately $424,000.

Since July 31, 2008, net repayments on the Octagon credit facility were approximately $2.8 million.

On August 4, 2008, U.S.Gas drew on their $2.0 million junior revolver in full. Interest rate on the revolver is 14% with a maturity date of July 25, 2012.

On August 4, 2008, the Company repaid $50.0 million on Credit Facility I and repaid $50.0 million on Credit Facility II.

On August 5, 2008, Custom Alloy made a principal payment of $2.0 million on its unsecured subordinated loan.

On August 12, 2008, the Company invested $1.5 million in TerraMark, L.P. in the form of a senior secured loam. The loan bears annual interest at 10% and matures on February 12, 2009.

On August 29, 2008, GDC made a principal payment of $250,000 on its senior subordinated loan.

On August 29, 2008, the Company borrowed $50.0 million from on Credit Facility I and $50.0 million on Credit Facility II.

On September 3, 2008, the Company invested approximately $28.0 million in Security Holdings B.V. in the form of an equity interest.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company and its investment portfolio companies. Words such as may, will, expect, believe, anticipate, intend, could, estimate, might and continue, and the negative or other variations thereof or comparable terminology, are intended to identify forward-looking statements. Forward-looking statements are included in this report pursuant to the “Safe Harbor” provision of the Private Securities Litigation Reform Act of 1995. Such statements are predictions only, and the actual events or results may differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those relating to investment capital demand, pricing, market acceptance, the effect of economic conditions, litigation and the effect of regulatory proceedings, competitive forces, the results of financing and investing efforts, the ability to complete transactions and other risks identified below or in the Company’s filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. The following analysis of the financial condition and results of operations of the Company should be read in conjunction with the Financial Statements, the Notes thereto and the other financial information included elsewhere in this report and the Company’s annual report on Form 10-K for the year ended October 31, 2007.

SELECTED CONSOLIDATED FINANCIAL DATA:

Financial information for the fiscal year ended October 31, 2007 is derived from the consolidated financial statements, which have been audited by Ernst & Young LLP, the Company’s independent registered public accountants. Quarterly financial information is derived from unaudited financial data, but in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments), which are necessary to present fairly the results for such interim periods.

Selected Consolidated Financial Data


	Nine Month			Nine Month
	Period Ended			Period Ended			Year Ended
	July 31,			July 31,			October 31,
	2008			2007			2007
	(Unaudited)			(Unaudited)
	(In thousands, except per share data)
Operating Data:
Interest and related portfolio income:
Interest and dividend income	$	20,458		$	15,982		$	22,826
Fee income		2,888			2,278			3,750
Other income		435			252			374


Total operating income		23,781			18,512			26,950

Expenses:
Incentive compensation (Note 9)		9,326			10,042			10,813
Administrative		2,321			1,929			2,559
Interest, fees and other borrowing costs		3,274			3,636			4,859
Management fee		6,479			5,105			7,034


Total operating expenses		21,400			20,712			25,265


Net operating income (loss) before taxes		2,381			(2,200	)		1,685

Tax benefit		(106	)		(452	)		(375	)


Net operating income (loss)		2,487			(1,748	)		2,060

Net realized and unrealized gains (losses):
Net realized gains (losses)		1,419			65,850			66,944
Net change in unrealized appreciation (depreciation)		52,689			(6,914	)		(3,302	)


Net realized and unrealized gains on investments		54,108			58,936			63,642


Net increase in net assets resulting from operations	$	56,595		$	57,188		$	65,702


Per Share:
Net increase in net assets per share resulting from operations	$	2.33		$	2.57		$	2.92
Dividends per share	$	0.36		$	0.42		$	0.54

Balance Sheet Data:
Portfolio at fair value	$	453,301		$	316,867		$	379,168
Portfolio at cost		414,874			334,740			393,428
Total assets		585,051			436,549			470,491
Shareholders’ equity		417,429			363,453			369,097
Shareholders’ equity per share (net asset value)	$	17.18		$	14.98		$	15.21
Common shares outstanding at period end		24,297			24,262			24,265
Other Data:
Number of Investments funded in period		11			22			26
Investments funded ($) in period	$	93,471		$	100,700		$	167,134


	2008								2007											2006
	Qtr 3			Qtr 2			Qtr 1		Qtr 4		Qtr 3			Qtr 2			Qtr 1			Qtr 4		Qtr 3		Qtr 2			Qtr 1
									(In thousands, except per share data)
Quarterly Data (Unaudited):

Total operating income		6,804			8,081			8,896		8,438		7,030			6,073			5,409			6,104		4,607		3,915			3,882
Incentive compensation		3,929			3,740			1,657		771		1,618			4,898			3,526			1,338		1,161		2,005			1,551
Interest, fees and other borrowing costs		1,022			1,081			1,171		1,223		1,252			1,256			1,128			910		636		39			9
Management fee		2,276			2,185			2,018		1,929		1,616			1,854			1,635			—		—		—			—
Other expenses		887			753			681		630		608			652			669			2,117		1,676		1,739			1,387
Tax expense (benefit)		58			(186	)		22		77		(78	)		(394	)		20			16		62		(24	)		105
Net operating income (loss) before net realized and unrealized gains		(1,368	)		508			3,347		3,808		2,014			(2,193	)		(1,569	)		1,723		1,072		156			830
Net increase in net assets resulting from operations		18,682			17,158			20,813		8,514		13,788			24,323			19,077			15,866		8,046		11,117			12,307
Net increase in net assets resulting from operations per share		0.77			0.70			0.86		0.35		0.57			1.00			1.00			0.83		0.42		0.58			0.65
Net asset value per share		17.18			16.53			15.95		15.21		14.98			14.53			13.23			12.41		11.70		11.40			10.94

OVERVIEW

The Company is an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a business development company under the 1940 Act. The Company’s investment objective is to seek to maximize total return from capital appreciation and/or income.

On November 6, 2003, Mr. Tokarz assumed his positions as Chairman and Portfolio Manager of the Company. He and the Company’s investment professionals (who, effective November 1, 2006, provide their services to the Company through the Company’s investment adviser, TTG Advisers) are seeking to implement our investment objective (i.e., to maximize total return from capital appreciation and/or income) through making a broad range of private investments in a variety of industries.

The investments can include senior or subordinated loans, convertible debt and convertible preferred securities, common or preferred stock, equity interests, warrants or rights to acquire equity interests, and other private equity transactions. During the year ended October 31, 2007, the Company made ten new investments and 16 follow-on investments in existing portfolio companies, committing capital totaling approximately $167.1 million pursuant to our current investment objective. During the nine month period ended July 31, 2008, the Company made two new investments and nine follow-on investments in existing portfolio companies, committing capital totaling approximately $93.5 million.

Prior to the adoption of our current investment objective, the Company’s investment objective had been to achieve long-term capital appreciation from venture capital investments in information technology companies. The Company’s investments had thus previously focused on investments in equity and debt securities of information technology companies. As of July 31, 2008, 3.56% of the current fair value of our assets consisted of Legacy Investments. We are, however, seeking to manage these Legacy Investments to try and realize maximum returns. We generally seek to capitalize on opportunities to realize cash returns on these investments when presented with a potential “liquidity event,” i.e., a sale, public offering, merger or other reorganization.

Our new portfolio investments are made pursuant to our current objective and strategy. We are concentrating our investment efforts on small and middle-market companies that, in our view, provide opportunities to maximize total return from capital appreciation and/or income. Under our investment approach, we are permitted to invest, without limit, in any one portfolio company, subject to any diversification limits required in order for us to continue to qualify as a RIC under Subchapter M of the Code. Due to our asset growth and composition, compliance with the RIC requirements currently restricts our ability to make additional investments that represent more than 5% of our total assets or more than 10% of the outstanding voting securities of the issuer (“Non-Diversified Investments”).

We participate in the private equity business generally by providing privately negotiated long-term equity and/or debt investment capital to small and middle-market companies. Our financing is generally used to fund growth, buyouts, acquisitions, recapitalizations, note purchases, and/or bridge financings. We generally invest in private companies, though, from time to time, we may invest in public companies that may lack adequate access to public capital.

We may also seek to achieve our investment objective by establishing a subsidiary or subsidiaries that would serve as a general partner or managing member to a private equity or other investment vehicle(s). In fact, during fiscal year 2006, we established MVC Partners for this purpose. Furthermore, our board of directors is currently considering authorizing the establishment of one or more investment vehicles that would have the ability, among other things, to make Non-Diversified Investments. Additionally, we may also acquire a portfolio of existing private equity or debt investments held by financial institutions or other investment funds should such opportunities arise.

OPERATING INCOME

For the Nine Month Periods Ended July 31, 2008 and 2007. Total operating income was $23.8 million for the nine month period ended July 31, 2008 and $18.5 million for the nine month period ended July 31, 2007, an increase of $5.3 million.

For the Nine Month Period Ended July 31, 2008

Total operating income was $23.8 million for the nine month period ended July 31, 2008. The increase in operating income over the same period last year was primarily due to the increase in the number of investments that provide the Company with current income. The main components of investment income were the interest earned on loans and dividend income from portfolio companies and the receipt of closing and monitoring fees from certain portfolio companies by the Company and MVCFS. The Company earned approximately $19.6 million in interest and dividend income from investments in portfolio companies. Of the $19.6 million recorded in interest/dividend income, approximately $4.2 million was “payment in kind” interest/dividends. The “payment in kind” interest/dividends are computed at the contractual rate specified in each investment agreement and added to the principal balance of each investment. The Company’s debt investments yielded rates from 2% to 17%. Also, the Company earned approximately $830,000 in interest income on its cash equivalents and short-term investments. The Company received fee income and other income from portfolio companies and other entities totaling approximately $2.9 million and $436,000, respectively.

For the Nine Month Period Ended July 31, 2007

Total operating income was $18.5 million for the nine month period ended July 31, 2007. The increase in operating income over the same period last year was primarily due to the increase in the number of investments that provide the Company with current income. The main components of investment income were the interest and dividend income earned on loans to portfolio companies and the receipt of closing and monitoring fees from certain portfolio companies by the Company and MVCFS. The Company earned approximately $15.5 million in interest and dividend income from investments in portfolio companies. Of the $15.5 million recorded in interest/dividend income, approximately $2.4 million was “payment in kind” interest/dividends. The “payment in kind” interest/dividends are computed at the contractual rate specified in each investment agreement and added to the principal balance of each investment. The Company’s debt investments yielded rates from 0% to 27%. Also, the Company earned approximately $508,000 in interest income on its cash equivalents and short-term investments. The Company received fee income and other income from portfolio companies and other entities totaling approximately $2.3 million and $252,000, respectively.

OPERATING EXPENSES

For the Nine Month Periods Ended July 31, 2008 and 2007. Operating expenses were $21.4 million for the nine month period ended July 31, 2008 and $20.7 million for the nine month period ended July 31, 2007, an increase of $700,000.

For the Nine Month Period Ended July 31, 2008

Operating expenses were $21.4 million or 7.30% of the Company’s average net assets, when annualized, for the nine month period ended July 31, 2008. Significant components of operating expenses for the nine month period ended July 31, 2008, included the estimated provision for incentive compensation expense of approximately $9.3 million, the management fee of $6.5 million, and interest expense and other borrowing costs of $3.3 million. The estimated provision for incentive compensation expense is a non-cash, not yet payable, provisional expense relating to the Advisory Agreement.

The $700,000 increase in the Company’s operating expenses for the nine month period ended July 31, 2008 compared to the nine month period ended July 31, 2007, was primarily due to the $1.4 million increase in the management fee expense offset by the decrease of $700,000 in the provision for estimated incentive compensation. It should be noted, in this regard, that the Advisory Agreement provides for an expense cap pursuant to which TTG Advisers will absorb or reimburse operating expenses of the Company to the extent necessary to limit the Company’s expense ratio (the consolidated expenses of the Company, including any amounts payable to TTG Advisers under the base management fee, but excluding the amount of any interest and other direct borrowing costs, taxes, incentive compensation and extraordinary expenses taken as a percentage of the Company’s average net assets) to 3.25% in each of the 2007 and 2008 fiscal years. For fiscal year 2007, the expense ratio was 3.0% (taking into account the same carve outs as those applicable to the expense cap).

Pursuant to the terms of the Advisory Agreement, during the nine month period ended July 31, 2008, the estimated provision for incentive compensation on the balance sheet, was decreased by a net amount of $3,576,743 to $14,298,753. The amount of the provision reflects the Valuation Committee’s determination to increase the fair values of nine of the Company’s portfolio investments: U.S. Gas, Vitality, Summit, Tekers, SGDA, Custom Alloy, MVC Automotive, PreVisor and Velocitius by a total of $50.3 million. The provision also reflects the Valuation Committee’s determination to increase the fair value of the Ohio Medical preferred stock by approximately $2.9 million due to a PIK distribution which was treated as a return of capital. The net decrease in the provision for incentive compensation during the nine month period ended July 31, 2008 was a result of the incentive compensation payment to TTG Advisers of $12.9 million due to the sale of Baltic Motors and BM Auto (20% of the realized gain from the sale less unrealized depreciation on the portfolio). Pursuant to the Advisory Agreement, incentive compensation payments will be made only upon the occurrence of a realization event (such as the sale of shares of Baltic Motors and BM Auto). Without this reserve for incentive compensation, operating expenses would have been approximately $12.1 million or 4.06% of average net assets when annualized as compared to 7.24%, which is reported on the Consolidated Per Share Data and Ratios, for the nine month period ended July 31, 2008. The net decrease also reflects the Valuation Committee’s determination to decrease the fair values of two of the Company’s portfolio investments (Timberland and Vestal) by a total of $4.6 million. During the nine month period ended July 31, 2008, there was no provision recorded for the net operating income portion of the incentive fee as pre-incentive fee net operating income did not exceed the hurdle rate. Please see Note 9 “Incentive Compensation” for more information.

In February 2008, the Company renewed its Directors & Officers/Professional Liability Insurance policies at an annual premium expense of approximately $362,000, which is amortized over the twelve month life of the policy. The prior policy premium was $381,000.

For the Nine Month Period Ended July 31, 2007

Operating expenses were $20.7 million or 9.05% of the Company’s average net assets, when annualized, for the nine month period ended July 31, 2007. Significant components of operating expenses for the nine month period ended July 31, 2007 included the estimated provision for incentive compensation expense of approximately $10.0 million, management fee of $5.1 million, and interest expense and other borrowing costs of $3.6 million. The estimated provision for incentive compensation expense is a non-cash, not yet payable, provisional expense relating to the Advisory Agreement.

The $10.5 million increase in the Company’s operating expenses in the nine month period ended July 31, 2007 compared to the nine month period ended July 31, 2006, was primarily due to the $5.3 million increase in the provision for estimated incentive compensation, the $2.9 million increase in the Company’s interest expense and other borrowings, and the $2.3 million increase in the management fee expense compared to the facilities and employee compensation and benefits expense incurred when the Company was internally managed. It should be noted, in this regard, that the Advisory Agreement provides for an expense cap pursuant to which TTG Advisers will absorb or reimburse operating expenses of the Company to the extent necessary to limit the Company’s expense ratio (the consolidated expenses of the Company, including any amounts payable to TTG Advisers under the base management fee, but excluding the amount of any interest and other direct borrowing costs, taxes, incentive compensation and extraordinary expenses taken as a percentage of the Company’s average net assets) to 3.25% in a given fiscal year.

In fiscal year 2006, when the Company was still internally managed and not subject to the expense cap, the expense ratio was 3.22% (taking into account the same carve outs as those applicable to the expense cap). For the nine month period ended July 31, 2007, the expense ratio was 3.07% (taking into account the same carve outs as those applicable to the expense cap).

Pursuant to the terms of the Advisory Agreement, during the nine month period ended July 31, 2007, the provision for incentive compensation was increased by a net amount of $9,931,942 to $17,104,294. The increase in the provision for incentive compensation during the nine month period ended July 31, 2007 primarily resulted from the sale of Baltic Motors and BM Auto for a combined realized gain of $65.5 million, which was a $52.3 million increase from the carrying value at October 31, 2006. The Valuation Committee also determined to increase the fair values of five of the Company’s portfolio investments (Dakota, Octagon, SGDA, PreVisor and Vitality) by a total of $5.8 million and decrease the fair value of Ohio by $9.0 million. During the year ended October 31, 2006, Mr. Tokarz was paid no cash or other compensation. However, on October 2, 2006, the Company realized a gain of $551,092 from the sale of a portion of the Company’s LLC membership interest in Octagon. This transaction triggered an incentive compensation payment obligation of $110,218 to Mr. Tokarz, which was paid on January 12, 2007. After the increase in the provision for incentive compensation due to the sale of Baltic Motors and BM Auto and the decrease in the provision due to the Valuation Committee’s determinations and payment made to Mr. Tokarz, the reserve balance at July 31, 2007 was $17,104,294. This reserve balance of $17,104,294 will remain unpaid until net capital gains are realized, if ever, by the Company. Pursuant to the Advisory Agreement, incentive compensation payments will be made only upon the occurrence of a realization event (such as the sale of shares of Baltic Motors and BM Auto). Without this reserve for incentive compensation, operating expenses would have been approximately $10.7 million or 4.47% of average net assets when annualized as compared to 8.86%, which is reported on the Consolidated Per Share Data and Ratios, for the nine month period ended July 31, 2007. During the nine month period ended July 31, 2007, there was no provision recorded for the net operating income portion of the incentive fee as pre-incentive fee net operating income did not exceed the hurdle rate. Please see Note 9 “Incentive Compensation” for more information.

REALIZED GAINS AND LOSSES ON PORTFOLIO SECURITIES

For the Nine Month Periods Ended July 31, 2008 and 2007. Net realized gains for the nine month period ended July 31, 2008 were $1.4 million and $65.8 million for the nine month period ended July 31, 2007, a decrease of approximately $64.4 million.

For the Nine Month Period Ended July 31, 2008

Net realized gains for the nine month period ended July 31, 2008 were $1.4 million. The significant component of the Company’s net realized gains for the nine month period ended July 31, 2008 was primarily due to the gain on the sale of Genevac common stock and Phoenix Coal common stock. On January 2, 2008, Genevac repaid its senior subordinated loan in full including all accrued interest. The total amount received was $11.9 million. The Company, at this time, sold 140 shares of Genevac common stock for $1.7 million, resulting in a capital gain of $595,000. On July 23, 2008, the Company sold 500,000 shares of Phoenix Coal. The total amount received from the sale net of commission was approximately $512,000, resulting in a realized gain of approximately $262,000. On July 29, 2008, the Company sold 500,000 more shares of Phoenix Coal. The total amount received from the sale net of commission was approximately $484,000, resulting in a realized gain of approximately $234,000. The Company also received a distribution related to the sale of Baltic of approximately $283,000.

The Company also realized a gain on foreign currency of approximately $60,000.

For the Nine Month Period Ended July, 2007

Net realized gains for the nine month period ended July 31, 2007 were $65.8 million. The significant component of the Company’s net realized gains for the nine month period ended July 31, 2007 was primarily due to the gain on the sale of Baltic and BM Auto. On July 24, 2007, the Company sold the common stock of Baltic Motors and BM Auto. The amount received from the sale of the 60,684 common shares of Baltic Motors was approximately $62.0 million, net of closing and other transaction costs, working capital adjustments and a reserve established by the Company to satisfy certain post-closing conditions requiring capital and other expenditures. Baltic Motors repaid all debt from the Company in full including all accrued interest. The total amount received from the repayment of the debt was approximately $10.2 million including all accrued interest. The remaining $51.8 million less the $8.0 million cost basis of Baltic resulted in $43.8 million recorded as realized gain. The difference between the $51.8 million received from the Baltic equity and the carrying value at October 31, 2006 is $30.6 million and the amount of the increase in net assets attributable to fiscal year 2007. The portion of the capital gain related to the equity investment made on June 24, 2004 ($40.9 million), will be treated as long-term capital gain and the portion related to the equity investment made on September 28, 2006 ($2.9 million) will be treated as a short-term capital gain. The amount received from the sale of the 47,300 common shares of BM Auto was approximately $29.7 million, net of closing and other transaction costs, working capital adjustments and a reserve established by the Company to satisfy certain post-closing conditions requiring capital and other expenditures. The $29.7 million less the $8.0 million cost basis of BM Auto resulted in $21.7 million recorded as a long term capital gain. The difference between the $29.7 million received from the BM Auto equity and the carrying value at October 31, 2006 is $21.7 million and the amount of the increase in net assets attributable to fiscal 2007.

As mentioned above, a reserve account of approximately $3.0 million was created for post closing conditions that are required of the seller as a part of the purchase agreement. The cash held in the reserve account is held in Euros. At July 31, 2007, the balance of the reserve account was approximately $2.9 million. Expenses such as finishing a road to a dealership and Latvian tax withholding payments, among other things have been estimated by management and will be paid from this account. This reserve account is owned and controlled by the Company. The Company has recorded the cash in the reserve account to its books denominated as foreign currency. It has also recorded a liability for the same amount so there is no impact to net asset value until all post closing conditions are met. The remaining cash, if any, will be converted to USD and recorded as a long term capital gain. We do not anticipate any overages; however, if they occur it would reduce the capital gain that has already been recorded. Any difference recorded due to changes in exchange rates since the Euros were received will be recorded as currency gain (loss). During the interim, at each month end, the Euros will be valued based on that day’s exchange rate and the liability will be adjusted to match the USD equivalent. Management believes all post closing conditions will be met before October 31, 2007.

On June 14, 2007, the Company received approximately $451,000 as a final disbursement from the sale of Process Claims. This amount was deposited into a reserve account at the time of sale. Due to the contingencies associated with the escrow, the Company placed no value on the proceeds deposited in escrow.

The Company also realized a loss from the prepayment from Levlad on the second lien loan, which was purchased at a premium and thus resulted in a realized loss of approximately $121,000.

UNREALIZED APPRECIATION AND DEPRECIATION OF PORTFOLIO SECURITIES

For the Nine Month Periods Ended July 31, 2008 and 2007. The Company had a net change in unrealized appreciation on portfolio investments of $52.7 million for the nine month period ended July 31, 2008 and unrealized depreciation of $6.9 million for the nine month period ended July 31, 2007.

For the Nine Month Period Ended July 31, 2008

The Company had a net change in unrealized appreciation on portfolio investments of $52.7 million for the nine month period ended July 31, 2008. The change in unrealized appreciation on investment transactions for the nine month period ended July 31, 2008 primarily resulted from the Valuation Committee’s decision to increase the fair value of the Company’s investments in U.S. Gas preferred stock by $5.2 million, SGDA preferred equity interest by $375,000, Foliofn preferred stock by $6.0 million, Tekers common stock by $575,000, Custom Alloy preferred stock by $12.5 million, Velocitius equity interest by $10.6 million, MVC Automotive equity interest by $9.6 million, PreVisor common stock by $2.7 million, Summit common stock by $6.0 million, Vitality common stock and warrants by approximately $2.9 million and Ohio Medical preferred stock by approximately $2.9 million due to a PIK distribution which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Company’s investments in Vendio preferred stock by $2.3 million, Vestal common stock by $1.2 million and Timberland common stock by $3.4 million.

For the Nine Month Period Ended July 31, 2007

The Company had a net change in unrealized depreciation on portfolio investments of $6.9 million for the nine month period ended July 31, 2007. The net change in unrealized depreciation on investment transactions for the nine month period ended July 31, 2007, primarily resulted from the sale of Baltic Motors and BM Auto for a combined realized gain of $65.5 million, which was a $52.3 million increase from the carrying value at October 31, 2006. The Valuation Committee’s decision to increase the fair values of the Company’s investments in Dakota common stock by $1.9 million, Octagon’s membership interest by approximately $1.6 million, SGDA’s preferred equity by $350,000 and common equity by approximately $276,000, PreVisor common stock by $1.7 million, Vendio preferred stock by $6.1 million and common stock by $15,000, Foliofn preferred stock by $2.1 million, and Vitality preferred stock by approximately $1.1 million and a decrease in the fair value of Ohio common stock by $9.0 million, resulted in a net unrealized appreciation of $6.1 million. The net increase of $6.1 million in the fair values of the Company’s investments determined by the Valuation Committee and the sale of Baltic Motors and BM Auto, with a $52.3 million increase from the carrying value at October 31, 2006, was offset by the unrealized depreciation reclassification from unrealized to realized caused by the sale of Baltic Motors and BM Auto of $65.5 million. These were the primary components for the unrealized depreciation of $6.9 million for the nine month period ended July 31, 2007.

PORTFOLIO INVESTMENTS

For the Nine Month Period Ended July 31, 2008 and the Year Ended October 31, 2007. The cost of the portfolio investments held by the Company at July 31, 2008 and at October 31, 2007 was $414.9 million and $393.4 million, respectively, an increase of $21.5 million. The aggregate fair value of portfolio investments at July 31, 2008 and at October 31, 2007 was $453.3 million and $379.2 million, respectively, an increase of $74.1 million. The cost and aggregated market value of short-term securities held by the Company at July 31, 2008 and at October 31, 2007 was $0. The cost and aggregate fair value of cash and cash equivalents held by the Company at July 31, 2008 and at October 31, 2007 was $125.0 million and $84.7, respectively, an increase of approximately $40.3 million.

For the Nine Month Period Ended July 31, 2008

During the nine month period ended July 31, 2008, the Company also made additional investments totaling $3.3 million in Harmony Pharmacy in the form of a demand note. The demand note has an annual interest rate of 10%. On November 30, 2007, the Company invested an additional $36.7 million in Ohio Medical in the form of a $10.0 million senior subordinated note and $26.7 million in 9,917 shares of convertible preferred stock. At this time, the $3.3 million convertible unsecured subordinated promissory note was converted into preferred stock. The note has an annual interest rate of 16% and a maturity date of May 30, 2012. On December 13, 2007, the Company assigned the Ohio Medical $10.0 million senior subordinated note to AEA Investors LLC. On February 29, 2008, the Company invested an additional $7.8 million in Summit in the form of a $3.0 million second lien loan and $4.8 million in common stock. The second lien loan has an annual interest rate of 14% and a maturity date of August 31, 2013. On April 25, 2008, the Company invested an additional $11.8 million in BENI by purchasing 874 shares of common stock. On April 30, 2008 and July 31, 2008, the Company invested an additional $2.7 million and $4.0 million, respectively, in SGDA Europe in the form of equity interest. On July 30, 2008, the Company increased its investment in SP by approximately $1.3 million, investing an additional $1.2 million in the second lien loan and $50,000 in the first lien loan. On July 31, 2008, the Company extended Turf a $1.0 million junior revolving note. The revolving note has an annual interest rate of 2% and a maturity date of December 31, 2008. Turf immediately borrowed $1.0 million on the note.

At the beginning of the 2008 fiscal year, the junior revolving note provided to Timberland had a balance outstanding of $4.0 million. On January 25, 2008, the amount available on the revolving note was increased by $1.0 million to $5.0 million. Net borrowings during the nine month period ended July 31, 2008 were $1.0 million resulting in a balance as of July 31, 2008 of $5.0 million.

At October 31, 2007, the balance of the revolving credit facility provided to Octagon was $4.1 million. Net repayments during the nine month period ended July 31, 2008 were $1.2 million resulting in a balance outstanding as of July 31, 2008 of $2.9 million.

At October 31, 2007, the balance of Line I (as defined in Note 6 “Commitments and Contingencies”), provided to Velocitius was approximately $191,000. Repayments during the nine month period ended July 31, 2008 were approximately $191,000. There was no amount outstanding on Line I as of July 31, 2008.

At October 31, 2007, the balance of the revolving senior credit facility provided to U.S. Gas was approximately $85,000. During the nine month period ended July 31, 2008, U.S. Gas entered into a swap agreement which locked in a portion of the senior credit facility with an annual rate of LIBOR plus 6% for a period of two years. This portion of the senior credit facility, in connection to the swap agreement, was approximately $571,000 at July 31, 2008. Net borrowings on the remaining portion of the senior credit facility, which were borrowed at an annual rate of Prime plus 4.5%, were $2.4 million resulting, in a balance outstanding of $2.5 million at such date.

During the nine month period ended July 31, 2008, Phoenix Coal began trading on the Toronto Stock Exchange. Consistent with the Company’s valuation procedures, effective June 30, 2008, the Company has been marking this investment to its market price.

On November 1, 2007, December 1, 2007, and January 1, 2008, the Company received $111,111, respectively, as principal payments from SP on term loan B.

On November 2, 2007, Genevac made a principal payment of $1.0 million on its senior subordinated loan.

On December 31, 2007, March 31, 2008, and June 30, 2008, the Company received quarterly principal payments from BP on term loan A of $90,000. The balance of term loan A as of July 31, 2008 was approximately $2.3 million.

On December 31, 2007, March 31, 2008, and June 30, 2008, Total Safety made principal payments of $2,500 on its first lien loan. The balance of the first lien loan as of July 31, 2008 was approximately $985,000.

On December 31, 2007, Turf borrowed $1.0 million from the secured junior revolving note. This was repaid on April 28, 2008. The note matured on May 1, 2008.

On January 2, 2008, February 1, 2008, and July 1, 2008, the Company received principal payments of $37,500, $1,666,667, and $37,500, respectively, on the term loan provided to Innovative Brands. The balance of the term loan as of July 31, 2008 was approximately $13.1 million.

On January 15, 2008, Impact repaid its promissory note and senior subordinated loan in full, including all accrued interest, totaling $6.1 million. The Company, at this time, sold 252 shares of common stock at cost for $2.7 million.

On January 29, 2008, MVC Automotive made a principal payment of $17.4 million on its bridge loan, resulting in a principal balance of $1.6 million.

On February 29, 2008, the Company sold 400 shares of WBS at its cost of $1.6 million.

On April 15, 2008, the Company received a principal payment of $100,000 from Vestal on its senior subordinated debt. The balance of the senior subordinated debt as of July 31, 2008, was $600,000.

On June 9, 2008, BENI was acquired by MVC Automotive to achieve operating efficiencies. Both entities were 100% owned by the Company. MVC Automotive increased its shareholder’s equity by $14.5 million and assumed $2.0 million of debt as a result of the cashless transaction. There was no gain or loss to the Company from this transaction. The balance of the MVC Automotive bridge loan as of July 31, 2008 was $3.6 million and the common stock had a fair value of $45.0 million.

On July 23, 2008, the Company sold 500,000 shares of Phoenix Coal. The total amount received from the sale net of commission was approximately $512,000, resulting in a realized gain of approximately $262,000.

During the nine month period ended July 31, 2008, the Valuation Committee increased the fair value of the Company’s investments in U.S. Gas preferred stock by $5.2 million, SGDA preferred equity interest by $375,000, Foliofn preferred stock by $6.0 million, Tekers common stock by $575,000, Custom Alloy preferred stock by $12.5 million, Velocitius equity interest by $10.6 million, MVC Automotive equity interest by $9.6 million, PreVisor common stock by $2.7 million, Summit common stock by $6.0 million, and Vitality common stock and warrants by approximately $2.9 million. In addition, increases in the cost basis and fair value of the loans to GDC, SP, Harmony, Timberland, Amersham, Marine, BP, Summit, U.S. Gas, WBS, and Custom Alloy and the Vitality and Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $4,218,554. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $2.9 million due to a PIK distribution which was treated as a return of capital. Also, during the nine month period ended July 31, 2008, the undistributed allocation of flow through income from the Company’s equity investment in Octagon increased the cost basis and fair value of this investment by approximately $136,000. The Valuation Committee also decreased the fair value of the Company’s investments in Vendio preferred stock by $2.3 million, Vestal common stock by $1.2 million and Timberland common stock by $3.4 million during the nine month period ended July 31, 2008.

At July 31, 2008, the fair value of all portfolio investments, exclusive of short-term securities, was $453.3 million with a cost basis of $414.9 million. At July 31, 2008, the fair value and cost basis of Legacy Investments was $20.8 million and $55.9 million, respectively, and the fair value and cost basis of portfolio investments made by the Company’s current management team was $432.5 million and $359.0 million, respectively. At October 31, 2007, the fair value of all portfolio investments, exclusive of short-term securities, was $379.2 million with a cost basis of $393.4 million. At October 31, 2007, the fair value and cost basis of Legacy Investments was $17.1 million and $55.9 million, respectively, and the fair value and cost basis of portfolio investments made by the Company’s current management team was $362.1 million and $337.5 million, respectively.

For the Year Ended October 31, 2007

During the fiscal year ended October 31, 2007, the Company made ten new investments, committing capital totaling approximately $117.3 million. The investments were made in WBS ($3.2 million), HuaMei ($200,000), Levlad ($10.1 million), Total Safety ($4.5 million), MVC Partners ($71,000), Genevac ($14.0 million), Tekers ($2.3 million), U.S. Gas ($18.9 million), Custom Alloy ($24.0 million), and MVC Automotive ($40.0 million).

Velocitius immediately borrowed approximately $547,000. The balance of the line of credit as of October 31, 2007 was approximately $613,000. On May 8, 2007, the Company provided Baltic Motors a $5.5 million bridge loan. On May 9, 2007, the Company purchased 1.0 million shares of Dakota Growers preferred stock at a cost of $10.0 million. At that time, 65,000 shares of Dakota Growers common stock were converted to 65,000 shares of convertible preferred stock. On June 19, 2007, the Company increased the bridge loan to BENI to $2.0 million. The remaining available amount of $1.7 million was immediately drawn. On July 30, 2007, the Company provided Ohio Medical a $2.0 million convertible unsecured promissory note. On August 20, 2007, the Company contributed an additional $45,000 to MVC Partners, increasing the Company’s limited liability interest. On September 27, 2007, the Company invested an additional $1.25 million in Ohio Medical by increasing the convertible unsecured promissory note to $3.25 million.