GENERAL

We are a specialty finance company that has a leading position in originating, acquiring, and servicing loans that finance taxicab medallions and various types of commercial businesses. A wholly-owned portfolio company of ours, Medallion Bank, also originates consumer loans for the purchase of recreational vehicles, boats, motorcycles, and trailers. Since 1996, the year in which we became a public company, we have increased our taxicab medallion loan portfolio at a compound annual growth rate of 10%, and our commercial loan portfolio at a compound annual growth rate of 7% (12% and 14% on a managed basis combined with Medallion Bank). Since Medallion Bank acquired a consumer loan portfolio and began originating consumer loans in 2004, it has increased its consumer loan portfolio at a compound annual growth rate of 18%. Total assets under our management, which includes assets serviced for third party investors and managed by unconsolidated portfolio companies, were $1,048,705,000 as of September 30, 2008 and $1,002,491,000 as of September 30, 2007, and have grown at a compound annual growth rate of 14% from $215,000,000 at the end of 1996. Since our initial public offering in 1996, we have paid dividends in excess of $128,200,000 or $8.34 per share.

We conduct our business through various wholly-owned investment company subsidiaries including:

• Medallion Funding, an SBIC and a RIC, our primary taxicab lending company;

• Medallion Capital, an SBIC and a RIC, which conducts a mezzanine financing business; and

• Freshstart, an SBIC and a RIC, which originates and services taxicab medallion and commercial loans.

We also conduct business through our asset-based lending division, Medallion Business Credit, an originator of loans to small businesses for the purpose of financing inventory and receivables, which prior to December 31, 2007, was a wholly-owned investment company subsidiary. On December 31, 2007, Medallion Business Credit was merged into us and ceased to exist as a separate legal entity.

In addition, we conduct business through a wholly-owned portfolio company, Medallion Bank, a bank regulated by the FDIC and the Utah Department of Financial Institutions which originates taxicab medallion, commercial, and consumer loans, raises deposits, and conducts other banking activities. Medallion Bank provides us with our lowest cost of funds which it raises through bank certificates of deposit issued to its customers. To take advantage of this low cost of funds, we refer a portion of our taxicab medallion and commercial loans to Medallion Bank, which then originates these loans, which are serviced by us. We earn referral and servicing fees for these activities.

Realized gains or losses on investments are recognized when the investments are sold or written off. The realized gains or losses represent the difference between the proceeds received from the disposition of portfolio assets, if any, and the cost of such portfolio assets. In addition, changes in unrealized appreciation or depreciation on investments are recorded and represent the net change in the estimated fair values of the portfolio assets at the end of the period as compared with their estimated fair values at the beginning of the period. Generally, realized gains (losses) on investments and changes in unrealized appreciation (depreciation) on investments are inversely related. When an appreciated asset is sold to realize a gain, a decrease in the previously recorded unrealized appreciation occurs. Conversely, when a loss previously recorded as unrealized depreciation is realized by the sale or other disposition of a depreciated portfolio asset, the reclassification of the loss from unrealized to realized causes a decrease in net unrealized depreciation and an increase in realized loss.

The credit markets are undergoing a crisis which has disrupted a wide range of traditional financing sources. The crisis has made it increasingly difficult and significantly more expensive through higher credit spreads for finance companies to obtain and renew financing. Continued turmoil in the credit markets could limit our access to funds and restrict us from continuing our current operating strategy or implementing new operating strategies. If funds are available to us, we anticipate that our cost of funds will increase as we obtain new financing.

The credit crisis has also caused many financial institutions to record significant write-downs, mostly on their residential mortgage related assets and structured investment vehicles and due to unsound lending practices. We are not involved in these types of transactions and always understand the importance of proper underwriting. Nonetheless, the judgments used by management in applying the critical accounting policies discussed herein may be affected by a further and prolonged deterioration in the economic environment, which may result in changes to future financial results. Subsequent evaluations of our loan portfolio and other investments, in light of the factors then prevailing, may result in changes to the fair value of the investments, including a decrease in the fair value. In addition, the fair value of investments in our portfolio may be negatively impacted by illiquidity or dislocation in marketplaces resulting in depressed market prices.

Trends in Investment Portfolio

Our investment income is driven by the principal amount of and yields on our
investment portfolio. To identify trends in the balances and yields, the
following table illustrates our investments at fair value, grouped by medallion
loans, commercial loans, investment securities, and equity investments, and also
presents the portfolio information for Medallion Bank, at the dates indicated.



                                                    September 30, 2008                June 30, 2008                   March 31, 2008                December 31, 2007               September 30, 2007
                                                Interest       Investment       Interest       Investment       Interest       Investment       Interest       Investment       Interest       Investment
(Dollars in thousands)                          Rate (1)        Balances        Rate (1)        Balances        Rate (1)        Balances        Rate (1)        Balances        Rate (1)        Balances
Medallion loans
New York                                            6.06 %    $    310,269          6.12 %    $    308,898          6.48 %    $    380,870          6.91 %    $    399,955          6.95 %    $    396,295
Boston                                              7.74            32,907          8.17            31,696          8.38            32,348          8.44            32,446          8.40            34,189
Chicago                                             7.16            28,547          7.38            23,637          7.30            27,459          7.43            33,008          7.33            36,136
Newark                                              8.23            27,529          8.31            25,759          8.39            24,367          8.40            22,058          8.40            21,386
Cambridge                                           7.65             5,199          7.80             5,097          8.49             4,695          8.41             5,174          8.32             8,198
Other                                               7.40             6,749          7.72             6,161          7.65             5,405          7.58             5,481          7.59             5,535

Total medallion loans                               6.46           411,200          6.54           401,248          6.79           475,144          7.13           498,122          7.16           501,739

Deferred loan acquisition costs                                        493                             503                             737                             798                             825
Unrealized depreciation on loans                                        -                               -                              (72 )                           (37 )                           (41 )

Net medallion loans                                           $    411,693                    $    401,751                    $    475,809                    $    498,883                    $    502,523

Commercial loans
Secured mezzanine                                  14.24 %    $     65,177         14.22 %    $     63,425         14.09 %    $     59,187         14.19 %    $     59,152         14.10 %    $     58,909
Asset based                                         6.47            17,234          6.47            21,591          6.92            22,344          8.91            19,870          9.83            19,517
Other secured commercial                            8.42            16,000          8.18            16,671          8.29            17,970          9.05            19,256          9.08            19,003

Total commercial loans                             11.93            98,411         11.59           101,687         11.43            99,501         12.12            98,278         12.27            97,429

Deferred loan acquisition costs                                       (138 )                          (104 )                           (55 )                           (64 )                           (92 )
Unrealized depreciation on loans                                    (3,443 )                        (1,812 )                        (6,752 )                        (6,432 )                        (3,549 )

Net commercial loans                                          $     94,830                    $     99,771                    $     92,694                    $     91,782                    $     93,788

Investment in Medallion Bank and other
controlled subsidiaries, net                        8.65 %    $     71,211          8.97 %    $     68,921          9.46 %    $     65,842         13.79 %    $     57,501         10.85 %    $     55,282

Equity investments                                  4.45 %    $      2,635          5.09 %    $      2,268          5.69 %    $      2,484          4.70 %    $      2,138          4.18 %    $      2,138

Unrealized appreciation on equities                                  2,027                           2,651                           2,619                           2,742                           2,098

Net equity investments                                        $      4,662                    $      4,919                    $      5,103                    $      4,880                    $      4,236

Investment securities                                 -  %    $         -             -  %    $         -             -  %    $         -             -  %    $         -             -  %    $         -

Investments at cost                                 7.64 %    $    583,457          7.72 %    $    574,124          7.77 %    $    642,971          8.45 %    $    656,039          8.22 %    $    656,588

Deferred loan acquisition costs                                        355                             399                             682                             734                             733
Unrealized appreciation on equities                                  2,027                           2,651                           2,619                           2,742                           2,098
Unrealized depreciation on loans                                    (3,443 )                        (1,812 )                        (6,824 )                        (6,469 )                        (3,590 )

Net investments (2)                                           $    582,396                    $    575,362                    $    639,448                    $    653,046                    $    655,829

Medallion Bank investments
Consumer loans                                     18.38 %    $    186,691         18.50 %    $    172,996         18.52 %    $    149,808         18.54 %    $    139,972         18.54 %    $    139,069
Commercial loans                                    7.23            97,972          7.22            91,354          7.43            87,687          9.14            88,785         10.12            75,375
Medallion loans                                     5.92            90,982          5.96            89,156          6.35            85,362          6.72            87,891          6.76            87,486
Investment securities                               5.11            19,614          4.31            21,074          4.43            18,097          4.82            21,707          5.18            23,415

Medallion Bank investments at cost                 12.09           395,259         11.96           374,580         11.87           340,954         12.12           338,355         12.46           325,345

Deferred loan acquisition costs                                      5,807                           5,430                           4,588                           4,569                           4,453
Unrealized appreciation(depreciation) on
investment securities                                                   10                            (185 )                           177                              39                            (224 )
Premiums paid on purchased securities                                  106                             125                             149                              91                             112
Unrealized depreciation on loans                                    (9,885 )                        (8,696 )                        (7,705 )                        (7,311 )                        (7,181 )

Medallion Bank net investments (2)                            $    391,297                    $    371,254                    $    338,163                    $    335,743                    $    322,505

(1) Represents the weighted average interest or dividend rate of the respective portfolio as of the date indicated.

(2) The weighted average interest rate for the entire managed loan portfolio (medallion, commercial, and consumer loans) was 9.61%, 9.57%, 9.28%, 9.57%, and 9.68% at September 30, 2008, June 30, 2008, March 31, 2008, December 31, 2007, and September 30, 2007.

Investment Activity

The following table sets forth the components of investment activity in the
investment portfolio for the periods indicated:



                                                  Three Months Ended            Nine Months Ended
                                                     September 30,                September 30,
(Dollars in thousands)                            2008          2007           2008           2007
Net investments at beginning of period          $ 575,362     $ 632,288     $  653,046     $  592,933
Investments originated                             71,374       106,158        240,644        273,433
Repayments of investments                         (62,243 )     (83,354 )     (308,142 )     (214,564 )
Net realized gains (losses) on investments
(1)                                                   108           287         (5,255 )       12,140
Net increase in unrealized appreciation
(depreciation) (2)                                 (2,120 )         529          1,812         (7,739 )
Transfers from other assets                            -             -             642             -
Amortization of origination costs                     (85 )         (79 )         (351 )         (374 )

Net increase (decrease) in investments              7,034        23,541        (70,650 )       62,896

Net investments at end of period                $ 582,396     $ 655,829     $  582,396     $  655,829

(1) Excludes net realized gains of $0 and $1,386 for the third quarter and nine months ended September 30, 2008, and $0 and $0 for the comparable 2007 periods, related to foreclosed properties, which are carried in other assets on the consolidated balance sheet.

(2) Excludes net unrealized appreciation of $2,705 and $3,827 for the third quarter and nine months ended September 30, 2008, and $1,231 and $4,476 for the comparable 2007 periods, related to foreclosed properties, which are carried in other assets on the consolidated balance sheet.

PORTFOLIO SUMMARY

Total Portfolio Yield

The weighted average yield of the total portfolio at September 30, 2008 was 7.64% (7.52% for the loan portfolio), a decrease of 79 basis points from 8.43% at December 31, 2007, and a decrease of 78 basis points from 8.42% at September 30, 2007. The weighted average yield of the total managed portfolio at September 30, 2008 was 9.39%, (9.61% for the loan portfolio), a decrease of 2 basis points from 9.41% at December 31, 2007, and a decrease of 11 basis points from 9.50% at September 30, 2007. The decreases reflect the fall in interest rates due to Fed rate cuts. Managed portfolio yields were helped by the inclusion and growth of the high-yield consumer loan portfolio. We expect to try to increase the percentage of commercial loans in the total portfolio, the origination of floating and adjustable-rate loans, and the level of non-New York medallion loans to enhance our yields. Additionally, Medallion Bank expects to try to increase the percentage of consumer loans originated for the managed portfolio to increase our overall returns.

Medallion Loan Portfolio

Our medallion loans comprised 71% of the net portfolio of $582,396,000 at September 30, 2008 compared to 76% of the net portfolio of $653,046,000 at December 31, 2007, and 77% of $655,829,000 at September 30, 2007. Our managed medallion loans of $502,372,000 comprised 55% of the net managed portfolio of $912,976,000 compared to 63% of the net managed portfolio of $934,955,000 at December 31, 2007, and 64% of $928,235,000 at September 30, 2007. The medallion loan portfolio decreased by $87,190,000 or 17% in 2008 ($84,126,000 or 14% on a managed basis), primarily reflecting loan payoffs, refinance, and the sale of participation interests to third parties. Total medallion loans serviced for third parties were $66,600,000, $4,443,000, and $4,764,000 at September 30, 2008, December 31, 2007, and September 30, 2007.

The weighted average yield of the medallion loan portfolio at September 30, 2008 was 6.46%, a decrease of 67 basis points from 7.13% at December 31, 2007, and a decrease of 70 basis points from 7.16% at September 30, 2007. The weighted average yield of the managed medallion loan portfolio at September 30, 2008 was 6.36%, a decrease of 71 basis points from 7.07% at December 31, 2007, and a decrease of 74 basis points from 7.10% at September 30, 2007. The decrease in yield primarily reflected the impact of falling interest rates in the economy and the effects of borrower refinancings. At September 30, 2008, 25% of the medallion loan portfolio represented loans outside New York, compared to 20% at December 31, 2007 and 21% at September 30, 2007. At September 30, 2008, 22% of the managed medallion loan portfolio represented loans outside New York, compared to 17% at December 31, 2007 and 18% at September 30, 2007. We continue to focus our efforts on originating higher yielding medallion loans outside the New York market.

Commercial Loan Portfolio

Our commercial loans represented 16%, 14%, and 14% of the net investment portfolio as of September 30, 2008, December 31, 2007, and September 30, 2007 and were 21%, 19%, and 18% on a managed basis for each period. Commercial loans increased by $3,047,000 or 3% during 2008 ($11,933,000 or 7% on a managed basis), reflecting growth in the asset-based and mezzanine loan portfolios, offset by reductions in other secured commercial loans. Net commercial loans serviced by third parties were $12,838,000 at September 30, 2008, compared to $12,643,000 at December 31, 2007, and $473,000 of loans serviced for third parties at September 30, 2007.

The weighted average yield of the commercial loan portfolio at September 30, 2008, was 11.93%, a decrease of 19 basis points from 12.12% at December 31, 2007 and 34 basis points from 12.27% at September 30, 2007. The weighted average yield of the managed commercial loan portfolio at September 30, 2008 was 9.59%, a decrease of 111 basis points from 10.70% at December 31, 2007, and 174 basis points from 11.33% at September 30, 2007. We continue to originate adjustable-rate and floating-rate loans tied to the prime rate to help mitigate our interest rate risk in a rising interest rate environment. At September 30, 2008, variable-rate loans represented approximately 24% of the commercial portfolio, compared to 28% at both December 31, 2007 and September 30, 2007, and were 58%, 57%, and 56% on a managed basis. Although this strategy initially produces a lower yield, we believe that this strategy mitigates interest rate risk by better matching our earning assets to their adjustable-rate funding sources.

Consumer Loan Portfolio

Our managed consumer loans, all of which are held in the portfolio managed by Medallion Bank, represented 20% of the managed net investment portfolio as of September 30, 2008, compared to 15% at December 31, 2007 and 15% at September 30, 2007. Medallion Bank started originating new adjustable rate consumer loans during the 2004 third quarter. Recreational vehicles, boats, motorcycles and trailers located in all 50 states collateralize the loans. The portfolio is serviced by a third party subsidiary of a major commercial bank.

The weighted average gross yield of the managed consumer loan portfolio was 18.38% at September 30, 2008, compared to 18.54% and 18.54% at December 31, 2007 and September 30, 2007. Amortization of the portfolio purchase premium reduced the yield by an average of 0.18%, 0.51%, and 0.45%, for the respective quarters. Adjustable rate loans represented 91% of the managed consumer portfolio at September 30, 2008, December 31, 2007, and September 30, 2007.

Delinquency and Loan Loss Experience

We generally follow a practice of discontinuing the accrual of interest income on our loans that are in arrears as to interest payments for a period of 90 days or more. We deliver a default notice and begin foreclosure and liquidation proceedings when management determines that pursuit of these remedies is the most appropriate course of action under the circumstances. A loan is considered to be delinquent if the borrower fails to make a payment on time; however, during the course of discussion on delinquent status, we may agree to modify the payment terms of the loan with a borrower that cannot make payments in accordance with the original loan agreement. For loan modifications, the loan will only be returned to accrual status if all past due interest payments are brought fully current. For credit that is collateral based, we evaluate the anticipated net residual value we would receive upon foreclosure of such loans, if necessary. There can be no assurance, however, that the collateral securing these loans will be adequate in the event of foreclosure. For credit that is cash flow-based, we assess our collateral position, and evaluate most of these relationships as ongoing businesses, expecting to locate and install a new operator to run the business and reduce the debt.

For the consumer loan portfolio, the process to repossess the collateral is started at 60 days past due. If the collateral is not located and the account reaches 120 days delinquent, the account is charged off to realized losses. If the collateral is repossessed, a realized loss is recorded to write the collateral down to 75% of its net realizable value, and the collateral is sent to auction. When the collateral is sold, the net auction proceeds are applied to the account, and any remaining balance is written off as a realized loss, and any excess proceeds are recorded as a realized gain. Proceeds collected on charged off accounts are recorded as realized gains. All collection, repossession, and recovery efforts are handled on behalf of Medallion Bank by the servicer.

The following table shows the trend in loans 90 days or more past due:

                                          September 30,          June 30,          March 31,         December 31,        September 30,
                                               2008                2008               2008               2007                 2007
(Dollars in thousands)                    Amount     %(1)     Amount    %(1)     Amount    %(1)      Amount    %(1)      Amount     %(1)
Medallion loans                          $     592    0.1 %   $ 1,926    0.4 %   $ 1,953    0.4 %   $  3,519    0.6 %   $   3,415    0.6 %

Commercial loans
Secured mezzanine                              200     -          200     -          200     -         2,819    0.5         4,117    0.7
Asset-based receivable                          -      -           -      -           -      -            -      -             -      -
Other secured commercial                       197     -          209     -          492    0.1        1,195    0.2         1,457    0.2

Total commercial loans                         397    0.1         409    0.1         692    0.1        4,014    0.7         5,574    0.9

Total loans 90 days or more past due     $     989    0.2 %   $ 2,335    0.5 %   $ 2,645    0.5 %   $  7,533    1.3 %   $   8,989    1.5 %

Total Medallion Bank loans               $   1,305    0.3 %   $   728    0.2 %   $   670    0.2 %   $  1,036    0.3 %   $     769    0.3 %

Total managed loans 90 days or more
past due                                 $   2,294    0.3 %   $ 3,063    0.4 %   $ 3,315    0.4 %   $  8,569    0.9 %   $   9,758    1.1 %

(1) Percentages are calculated against the total or managed loan portfolio, as appropriate.

In general, collection efforts since the establishment of our collection department have substantially contributed to the sizable reduction in overall delinquencies. The decrease in medallion delinquencies resulted from a renegotiation with a past due relationship. Secured mezzanine financing delinquencies decreased primarily as a result of debt restructuring and chargeoffs of previously delinquent loans over the last year. Medallion Bank experienced higher delinquencies due to bankruptcies and job losses, resulting from the current state of the economy. We are actively working with each delinquent borrower to bring them current, and believe that any potential loss exposure is reflected in our mark-to-market estimates on each loan. Although there can be no assurances as to changes in the trend rate, management believes that any loss exposures are properly reflected in reported asset values.

We monitor delinquent loans for possible exposure to loss by analyzing various factors, including the value of the collateral securing the loan and the borrower's prior payment history. Under the 1940 Act, our loan portfolio must be recorded at fair value or "marked-to-market." Unlike other lending institutions, we are not permitted to establish reserves for loan losses. Instead, the valuation of our portfolio is adjusted quarterly to reflect our estimate of the current realizable value of our loan portfolio. Since no ready market exists for this portfolio, fair value is subject to the good faith determination of management and the approval of our Board of Directors. Because of the subjectivity of these estimates, there can be no assurance that in the event of a foreclosure or the sale of portfolio loans we would be able to recover the . . .