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

This Quarterly Report on Form 10-Q, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates, forecasts, projections, intentions, goals, strategies, plans, prospects and the beliefs and assumptions of our management including, without limitation, our expectations regarding our results of operations, including revenues, net operating income, distributable net operating income and general and administrative expenses and the factors that may affect such results, the cause of net unrealized losses and our ability to recover any such losses, the performance of our portfolio companies, the continued engagement of third party independent valuation firms to conduct independent valuations of investments in our portfolio, our current strategic direction, including opportunistically monetizing assets and the amount and timing of such monetizations, the preservation of liquidity, building our cash position, deleveraging our balance sheet and increasing our BDC asset coverage ratio, the amount of additional borrowings and excess capacity available to us in relation to our BDC asset coverage ratio, the level and timing of originations, the application of tax losses, the projected savings through expense reductions, the timing and amount of dividend distributions, the evaluation of potential share repurchases, the compliance with credit facility covenants and our ability to renew, extend the maturity date of and repay such facilities, the ability to increase shareholder value, the ability to access our SBIC facility and to exclude debt from our BDC asset coverage ratio, general market conditions, economic and other factors. Forward-looking statements can be identified by terminology such as "anticipate," "believe," "could," "could increase the likelihood," "hope," "target," "project," "goals," "potential," "predict," "might," "estimate," "expect," "intend," "is planned," "may," "should," "will," "will enable," "would be expected," "look forward," "may provide," "would" or similar terms, variations of such terms or the negative of those terms. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict. Important factors could cause our actual results to differ materially from those indicated or implied by forward-looking statements. Such factors that could cause or contribute to such differences include those risk factors discussed in Item IA of Part II of this Quarterly Report on Form 10-Q.

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

We are a solutions-focused commercial finance company providing capital and advisory services to middle-market companies throughout the United States. We make debt and equity investments primarily in companies with annual revenue of $20 million to $200 million and earnings before interest, taxes, depreciation and amortization, or EBITDA, of $3 million to $25 million, which we refer to as "middle-market" companies. Generally, our portfolio companies use our capital investment to finance acquisitions, recapitalizations, buyouts, organic growth and working capital. We identify and source new customers through multiple channels, including private equity sponsors, investment bankers, brokers, fund-less sponsors, institutional syndication partners, other club lenders and owner operators.

We are an internally managed, non-diversified, closed-end investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, or the 1940 Act. As a business development company, or BDC, we are required to meet various regulatory tests, which include investing at least 70% of our total assets in private or thinly traded public U.S.-based companies and meeting a coverage ratio of total net assets to total senior securities, which include all of our borrowings (including accrued interest payable) and any preferred stock we may issue in the future, of at least 200%. In addition, we have

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

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

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

The $13.0 million of net operating income that we reported for the quarter ended September 30, 2008 was consistent with our expectations for the quarter. The $11.2 million, or 46.3%, decrease in net operating income during the third quarter of 2008 from the same quarter in 2007 was attributable primarily to the absence of dividend income on our Broadview investment, which we ceased to accrete beginning in the quarter ended June 30, 2008, because our fair value for this investment represents Broadview's enterprise value. A decrease in fee income resulting from lower origination activity also contributed to the decrease in our net operating income during the quarter ended September 30, 2008.

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

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

We are also focused on preserving our liquidity. In this regard, last quarter we announced the elimination of dividends for the balance of 2008, which was expected to preserve $40.0 million in capital. In addition, we made expense reductions that we anticipate will result in $12.0 million to $14.0 million of savings through December 2009. Currently, we expect to apply certain losses for tax purposes in 2009 that we recognized for book purposes during 2008, which will significantly reduce our statutorily required dividend payment in 2009. In order to preserve capital, we intend to pay the statutory minimum dividend for 2009, which could be as low as zero for all of 2009. This action would preserve over $80.0 million in capital versus the dividend paid during the third quarter of 2008 of $0.27 per share. Variables that could necessitate a dividend in 2009 include the actual timing of gains and losses for tax purposes and equity investment monetizations. We will make decisions with respect to the actual level of 2009 dividends on a quarter-by-quarter basis during 2009, after taking into account the minimum statutorily required level of distributions, gains and losses recognized for tax purposes, monetizations, our liquidity and our BDC asset coverage ratio at the time of such decision.

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

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

PORTFOLIOCOMPOSITION

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



                                                  September 30, 2008                         December 31, 2007
                                          Investments at        Percent of           Investments at        Percent of
(dollars in thousands)                      Fair Value        Total Portfolio          Fair Value        Total Portfolio
Debt investments(a)
Senior secured debt                      $        383,493                29.6 %     $        479,214                31.0 %
Subordinated debt
Secured                                           453,336                35.0                522,742                33.9
Unsecured                                          29,967                 2.3                 32,189                 2.1

Total debt investments                            866,796                66.9              1,034,145                67.0

Equity investments
Preferred equity                                  369,513                28.5                447,229                28.9
Common/Common equivalents equity                   60,160                 4.6                 63,716                 4.1

Total equity investments                          429,673                33.1                510,945                33.0

Total investments(a)                     $      1,296,469               100.0 %     $      1,545,090               100.0 %

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

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

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

Total                     $      1,296,469             100.0 %   $      1,545,090             100.0 %

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

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

As of September 30, 2008, our ten largest portfolio companies comprised 41.9% of the fair value of our investment portfolio. These ten customers accounted for 31.3% of our total revenue during the nine months ended September 30, 2008. As of September 30, 2008, approximately 16.8% of the fair value of our portfolio was invested in companies in the communications industry, of which 14.2% were competitive local exchange carriers, or CLECs. Our largest portfolio company, Broadview, which is a CLEC that represents 11.2% of the fair value of our portfolio. Our remaining investments in the communications industry include telecommunications tower companies, rural local exchange carriers, Internet service providers, wireless companies and security alarm companies. See Results of Operations for additional information regarding our investment in Broadview.

OVERVIEW OF CHANGES IN INVESTMENTPORTFOLIO

During the nine months ended September 30, 2008, we made $103.1 million of
originations and advances to eight existing portfolio companies compared to
$510.9 of originations and advances during the nine moths ended September 30,
2007. The following table summarizes our total portfolio investment activity
during the nine months ended September 30, 2008 and 2007:



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

  Ending investment portfolio                           $ 1,296,469     $ 1,514,957

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

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

                                                 Nine months ended September 30,
                                                 2008                       2007
(dollars in thousands)                      $       % of Total         $       % of Total
Debt investments
Senior secured debt                     $  36,741         35.6 %   $ 236,863         46.5 %
Subordinated debt
Secured                                    39,671         38.5       133,995         26.3
Unsecured                                   2,218          2.2        24,559          4.8

Total debt investments                     78,630         76.3       395,417         77.6

Equity investments
Preferred equity                           24,430         23.7       108,210         21.2
Common/common equivalents equity               37           -          6,303          1.2

Total equity investments                   24,467         23.7       114,513         22.4

Total gross originations and advances   $ 103,097        100.0 %   $ 509,930        100.0 %

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

                                                          Nine months ended September 30,
                                                         2008                         2007
(dollars in thousands)                              $        % of Total          $        % of Total
Debt investments
Senior secured debt                             $ 100,993          58.5 %    $ 127,908          48.6 %
Subordinated debt
Secured                                            42,183          24.4         96,974          36.9
Unsecured                                              -             -           1,555           0.6

Total debt investments                            143,176          82.9        226,437          86.1

Equity investments
Preferred equity                                   17,712          10.3         14,014           5.3
Common/common equivalents equity                   11,787           6.8         22,705           8.6

Total equity investments                           29,499          17.1         36,719          13.9

Total gross payments, reductions and sales
of securities                                   $ 172,675         100.0 %    $ 263,156         100.0 %

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

                                                                Nine months ended
                                                                  September 30,
  (in thousands)                                                2008        2007
  Principal repayments                                        $  83,384   $ 173,758
  Scheduled principal amortization                               39,430      36,770
  Sale of equity investments                                     22,726      31,783
  Senior loan sales                                              18,733       4,603
  Collection of accrued paid-in-kind interest and dividends       8,402      16,242

  Total gross payments, reductions and sales of securities    $ 172,675   $ 263,156

SIGNIFICANT CHANGES IN PORTFOLIO

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

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

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

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

                                              Nine months ended
                 (dollars in thousands)       September 30, 2008
                 Debt investments
                 Senior secured debt         $            (16,324 )
                 Secured subordinated debt                (12,437 )

                 Total debt investments                   (28,761 )
                 Preferred equity                          28,761

                 Net                         $                 -

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

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

Investment
Rating           Summary Description
1                Capital gain expected or realized

2                Full return of principal and interest or dividend expected with
                 customer performing in accordance with plan

3                Full return of principal and interest or dividend expected, but
                 customer requires closer monitoring

4                Some loss of interest or dividend expected, but still expect an
                 overall positive internal rate of return on the investment

. . .