<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                               -----------------

                                   FORM 10-K

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                                      OR

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

                 FOR THE TRANSITION PERIOD FROM       TO

                        COMMISSION FILE NUMBER: 0-33377

                            MCG CAPITAL CORPORATION
            (Exact name of registrant as specified in its charter)

                      Delaware                 54-7889518
              (State of Incorporation)      (I.R.S. Employer
                                         Identification Number)

                     1100 Wilson
                   Boulevard Suite
                  800 Arlington, VA               22209
                (Address of principal
                  executive offices)           (Zip Code)

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

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

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

                              Title of each class
                                 -------------

                            Common Stock, par value
                                $0.01 per share

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

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

   The aggregate market value of common stock held by non-affiliates of the
Registrant as of March 28, 2002 was approximately $314,342,223 based on the
closing price on the Nasdaq National Market. For purposes of this computation,
shares held by certain stockholders and by directors and executive officers of
the Registrant have been excluded. Such exclusion of shares held by such
persons is not intended, nor shall it be deemed, to be an admission that such
persons are affiliates of the Registrant. There were 28,289,884 shares of the
Registrant's common stock outstanding as of March 28, 2002.

                      Documents Incorporated by Reference

   Portions of the Registrant's definitive Proxy Statement relating to the 2002
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission, are incorporated by reference in Part III of this Annual Report on
Form 10-K as indicated herein.

<PAGE>

                            MCG CAPITAL CORPORATION

                         2001 FORM 10-K ANNUAL REPORT

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                   PAGE
                                                                                   ----
<S>          <C>                                                                   <C>
                                            PART I
  Item 1.    Business.............................................................   1
  Item 2.    Properties...........................................................  20
  Item 3.    Legal Proceedings....................................................  21
  Item 4.    Submission of Matters to a Vote of Security Holders..................  21

                                            PART II
  Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters  23
  Item 6.    Selected Financial Data..............................................  24
  Item 7.    Management's Discussion and Analysis of Financial Condition and
               Results of Operations..............................................  25
  Item 7a.   Quantitative and Qualitative Disclosures about Market Risk...........  42
  Item 8.    Consolidated Financial Statements and Supplementary Data.............  43
  Item 9.    Changes in and Disagreements with Accountants on Accounting
               and Financial Disclosure...........................................  73

                                           PART III
  Item 10.   Directors and Executive Officers of the Registrant...................  73
  Item 11.   Executive Compensation...............................................  73
  Item 12.   Security Ownership of Certain Beneficial Owners and Management.......  73
  Item 13.   Certain Relationships and Related Transactions.......................  73

                                            PART IV
  Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K......  73

</TABLE>

<PAGE>

                                    PART I

   In this Annual Report, the "Company", "MCG", "we", "us" and "our" refer to
MCG Capital Corporation and its wholly owned subsidiaries and its affiliated
securitization trusts unless the context otherwise requires.

Item 1.  Business

                                    GENERAL

   We are a solutions-focused financial services firm that primarily provides
capital to support the internal growth and corporate development initiatives of
small- to medium-sized private companies throughout the United States. Since
1990, we and our predecessor have originated an aggregate of over $2 billion in
investments in over 200 transactions, primarily in the form of senior secured
commercial loans and, to a small extent, in the form of subordinated debt and
equity-based investments. We intend to increase gradually our level of
subordinated debt and equity-based investments. However, a substantial majority
of our portfolio will continue to consist of investments in senior secured
commercial loans.

   Our investment objective is to achieve current income and capital gains. To
meet this objective, we employ an "expert-activist" investment philosophy to
identify attractive investment opportunities and develop strong customer
relationships. As an expert, we are highly knowledgeable about our target
markets and customers. As an activist, we work with our customers' management
teams and owners to create and execute effective capital deployment strategies.
In addition, we use a "flexible funding" approach that permits adjustments to
transaction terms, including pricing terms, to accommodate the shifting
corporate development needs of our customers. The ongoing consulting services
we provide also support our customers' growth and risk management strategies.

   We have built our portfolio through effective origination, disciplined
underwriting and investment approval processes and focused portfolio
management. We typically lend to and invest in companies with $5 million to
$100 million in annual revenues that operate in our target industry sectors. As
of December 31, 2001, our geographically diverse customer base consisted of
approximately 74 companies with headquarters in 26 states and Washington, DC.
Our investment decisions are based on extensive analysis of potential
customers' business operations and asset valuations supported by an in-depth
understanding of the quality of their recurring revenues and cash flow,
variability of costs and the inherent value of their proprietary intangible
assets and intellectual property. We have developed specialized risk management
metrics, pricing tools, due diligence methodologies and data management
processes that are designed to help us maximize our return on investment.

   We have a loyal customer base. In 2001, 31 of our closed transactions,
representing approximately 40% of the loans we originated, involved existing
customers. As of December 31, 2001, approximately 52% of the companies that
have been our customers for one year or more had completed two or more
transactions with us and approximately 27% had completed three or more
transactions with us.

   As of December 31, 2001, we had outstanding commercial loans of $596.0
million, an increase of $101.9 million or 20.6% from $494.1 million at December
31, 2000 and equity investments of $21.2 million at December 31, 2001 compared
to $6.7 million at December 31, 2000, an increase of $14.5 million or 216.4%.
We acquire our equity investments primarily in connection with our loans,
through a direct purchase or through foreclosure of a borrower's assets or
equity. For the year ended December 31, 2001, we originated approximately
$147.7 million of loans, a decrease of $63.5 million or 30.1% from $211.2
million for the year ended December 31, 2000.

                         CORPORATE HISTORY AND OFFICES

   We were formed by our management and affiliates of Goldman, Sachs & Co. to
purchase a loan portfolio and certain other assets from First Union National
Bank in a management buyout. Our business was originally a

<PAGE>

separate division of Signet Bank, whose parent Signet Banking Corporation was
acquired by First Union Corporation in 1997. This separate division was known
as the media communications group. We completed the buyout from First Union
National Bank on June 24, 1998. First Union Corporation changed its name to
Wachovia Corporation on September 1, 2001 following the merger of Wachovia
Corporation with and into First Union Corporation.

   Immediately following the completion of our initial public offering in
December 2001, we became an internally managed, non-diversified closed-end
investment company that elected to be regulated as a business development
company under the Investment Company Act of 1940. As a business development
company, we are required to meet regulatory tests, the most significant of
which relate to our investments and borrowings. A business development company
is required to invest at least 70% of its total assets in private or thinly
traded, public U.S.-based companies. A business development company also must
meet a coverage ratio of total assets to total senior securities, which include
all of our borrowings and any preferred stock we may issue in the future, of at
least 200%. In addition, we will elect, effective as of January 1, 2002, to be
taxed for federal income tax purposes as a regulated investment company under
the Internal Revenue Code.

                              MARKET OPPORTUNITY

   Small- and medium-sized businesses are becoming more significant to the U.S.
economy. At the same time, we believe that many such businesses, including our
target customers, have less access to high-quality corporate financial services
than in the past. We also believe this trend is likely to continue given the
broad-based consolidation in the financial services industry. Our focus on
selected markets with strong growth prospects, combined with our customers'
growing demand for capital and the corporate finance and consulting services we
offer enhance our market opportunity.

   We target only those sectors deemed attractive by our investment committee.
Before we target a new industry sector or a new industry sub-sector within our
existing industry sectors, our research team performs a market analysis and
identifies specific operational norms and risks of that sector or sub-sector.
Management, working with our credit committee, then develops our lending and
investment criteria for that sector or sub-sector. We analyze new industry
sub-sectors in conjunction with refining and revalidating investment approaches
for our existing industry sectors. Also, on an ongoing basis, our investment
committee and credit committee monitor the level of diversification within the
portfolio for risk associated with sector concentration.

   We currently focus on the communications, information services, media, and
technology industry sectors. We believe that traditional financial services
providers typically lack infrastructure and dedicated expertise to focus on
small- and medium-sized companies within these industries. We believe that each
of these sectors has distinct characteristics in terms of risk, capital
requirements, industry and general economic cycles, stage of development and
rates of return. Each such sector also is characterized by ongoing
consolidation and convergence and by substantial new business formation. We
also believe that these sectors have a number of common features, including
favorable regulatory environments, rising projected revenue growth rates,
recurring revenue characteristics and enterprise values that depend
significantly on intangible assets and intellectual property. As a result, we
believe we have a large market opportunity in our target industry sectors. In a
typical year, we estimate that we consider capital transactions with
approximately 650 small- and medium-sized companies in our target industry
sectors, which we believe represents approximately 10% of the companies in our
target industry sectors that we monitor from time to time. We believe that
there are more small- and medium-sized companies in our targeted industry
sectors than the companies we monitor.

    .  Communications.  Our targeted communications businesses consist of voice
       and data local and long distance carriers, integrated communications
       providers, and wireless services and infrastructure companies, including
       companies that operate communications towers and security alarm and
       monitoring systems. These businesses generally are non- or
       counter-cyclical. Revenues in these businesses are end-user driven and
       recurring in nature. We focus specifically on companies that have
       achieved a critical mass of customers because we strongly believe that
       the primary asset of communications companies is their customer base.
       This approach differentiates us from other lenders that focus on the
       potential value of equipment and other network assets as their primary
       source of collateral.

                                      2

<PAGE>

    .  Information Services.  Our targeted information services businesses
       produce and deliver information-based products and services, which their
       customers use to generate insights and make business decisions. The
       information these businesses provide may be proprietary or public and is
       frequently delivered through paper documents, online services, magnetic
       tape or disks and CD-ROM. It also may be bundled with consulting
       services or other live events in what is known as continuous information
       services. These businesses are generally non-cyclical to
       counter-cyclical. Top performing information services companies
       typically price their products and services based on the utility
       provided to the end-user rather than the cost to produce and distribute
       resulting in relatively high margins. We seek companies that define
       their market opportunity through proprietary content-based products and
       services within specific industries.

    .  Media.  Our targeted media businesses focus on niche, high
       affinity-based businesses in consumer special interest publishing, trade
       publishing, radio broadcasting, television broadcasting and community
       newspaper publishing. Revenue in these businesses is derived largely
       from advertising sales and therefore tends to be more cyclical. Our
       focus on niche, high-affinity based businesses in this sector is
       designed to mitigate the risk of cyclicality because those businesses
       tend to have more stable advertising revenues.

    .  Technology.  Our targeted technology businesses provide outsourced
       business services in areas such as network security, network operations,
       application services and business-to-business transaction enabling, as
       well as software applications, including component middleware,
       enterprise software and enterprise (intra-corporate) portals. These
       businesses are generally moderately cyclical to non-cyclical.

   Set forth below is a table showing the composition of our loan portfolio for
the periods ended December 31, 2001 and December 31, 2000, by industry sector.

                 Loan Portfolio Composition by Industry Sector
                            (Dollars in thousands)

<TABLE>
<CAPTION>
                                December 31, 2001                       December 31, 2000
                     --------------------------------------  --------------------------------------
                     # of       Loans      % of    Average   # of       Loans      % of    Average
                     Loans Outstanding (1) Total  Spread (2) Loans Outstanding (1) Total  Spread (2)
Industry Sector      ----- --------------- -----  ---------- ----- --------------- -----  ----------
<S>                  <C>   <C>             <C>    <C>        <C>   <C>             <C>    <C>
Media...............  37      $324,992      54.5%    6.2%     35      $272,529      54.0%    5.6%
Communications......  19       175,174      29.4     7.6      19       152,235      30.2     8.4
Information Services   8        70,793      11.9     7.0       7        52,509      10.4     4.0
Technology..........   3        23,750       4.0     3.4       3        25,500       5.1     3.5
Other...............   1         1,293       0.2     6.0       2         1,441       0.3     9.2
                      --      --------     -----     ---      --      --------     -----     ---
Total...............  68      $596,002     100.0%    6.6%     66      $504,214     100.0%    6.2%
                      ==      ========     =====     ===      ==      ========     =====     ===
</TABLE>
--------
(1) Loans outstanding at December 31, 2000 are reported at cost. Following our
    conversion to a business development company, we are required to carry
    loans at fair value as determined by our board of directors. Therefore,
    loans outstanding at December 31, 2001 are reported at fair value.
(2) Represents the weighted average contractual interest rate minus a benchmark
    reference rate (e.g., LIBOR). The average spread is affected by loans
    included in the calculation which have fixed interest rates, and therefore
    have no spread, or are based on the prime rate and have lower spreads than
    loans with LIBOR-based spreads.

                                   STRATEGY

   We seek to achieve favorable risk-adjusted rates of return in the form of
current yield and capital appreciation, while maintaining strong credit quality
in our asset portfolio. We believe our strong financial performance is a
product of our industry knowledge and insight, effectiveness in targeting
potential customers and serving them, risk-based pricing techniques and
disciplined portfolio and risk management.

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

    .  generate favorable risk-adjusted rates of return by delivering capital
       and strategic insight to enhance our customers' enterprise value;

                                      3

<PAGE>

    .  maintain sound credit and pricing practices regardless of market
       conditions;

    .  avoid adverse investment selection by applying our expert-activist
       philosophy and a flexible funding approach; and

    .  enhance effective risk management by utilizing an integrated team
       approach to customer acquisition, research, underwriting, compliance and
       loan servicing activities.

Expert-Activist Philosophy


   Our "expert-activist" philosophy is one of the foundations of our investment
process. It enables us to make lending and investment decisions quickly and
confidently because we have a firm understanding of the operating
characteristics of our customers' businesses and their associated industry
sectors. We enhance our detailed understanding of our targeted industry sectors
through continuous engagement with existing and prospective customers. We
gather and manage the knowledge and insights gained through this process using
customized databases and work flow methodologies. We use this information to
enhance the quality of our research and the effectiveness of our credit
analysis and to refine and revalidate our investment approaches within
particular sectors and sub-sectors.

   We work with our customers to understand the costs and benefits of their
corporate development initiatives, business opportunities, threats to their
businesses and acceptable risks and returns. This understanding, together with
our flexible funding approach, enables us to facilitate customers' corporate
development decisions even in cases where short-term financial performance may
suffer. We believe that this approach differentiates us from most other
commercial lenders and helps to create strong and long-term relationships with
our customers. Our approach to date also has enabled us to originate loans
based on the value we help to create rather than solely on the basis of the
price we charge for capital in order to achieve attractive risk-adjusted
investment returns.

                                  OPERATIONS

   To achieve our goal of being the leading provider of solutions-focused
financial services to companies in our target sectors, we foster a credit and
business culture that strives to protect our principal and interest, generate
meaningful capital gains on our equity investments and support gains in our
customers' enterprise values.

Identifying Prospective Customers

   We identify and source leads through various data services, customized
Internet searches, industry associations, investment bankers, accountants and
lawyers. Although some customers initiate their first contact with us, we find
that we generally acquire most of our customers through our own initiative.
After our initial contact with a prospect, we then conduct ongoing reviews of
its financial reports and corporate development activity by analyzing the
source data and information regarding the prospects gathered from third-party
databases, industry sector reports, trade and consumer magazines, newspapers
and newsletters. We maintain the data from these sources in an internal
database that not only supports the identification of potential customer
opportunities, but also assists us in understanding our target industry
sectors. We market on a national scale and are well-known in our primary
markets. We also participate in a variety of industry associations and our
employees attend and give presentations at numerous forums, conferences and
meetings annually.

Research

   Our unique research capabilities create the foundation for our
"expert-activist" philosophy of investing and give us a competitive advantage.
Our contacts with customers in our targeted industries helps us to continuously
refine and validate our investment philosophy. Our research group's function is
to support and augment the business development process through the
identification of attractive industry sectors and emerging trends, investment
and risk analysis and marketing of our industry expertise.

   Through strategic industry analysis, we update our investment perspective in
our target industry sectors and develop investment hypotheses for new industry
sub-sectors. Our research capabilities and findings also are valuable in
attracting customers who are able to draw from our industry expertise to help
refine their strategic plans, identify acquisition opportunities and set
appropriate financial and operating benchmarks.

                                      4

<PAGE>

   Our research department writes and distributes publications to portfolio
companies, prospective customers, investors, and others to facilitate a
dialogue, promote a common strategic outlook and a shared perception of
industry risk and opportunity. This shared perception helps us and our
customers develop mutually agreeable financing structures that mitigate risk to
us and our customers. Our publications also increase our visibility within our
target industry sectors and support our expert-activist investment methodology.

   Our research department publishes the following reports:

    .  regular comprehensive industry research reports that incorporate our
       investment perspectives and operational insights, which are supported by
       normative data and perceived best practices for our target industries;

    .  Insights and Outlooks, our periodic publication that reports our views
       and interpretation of significant events that impact our customers and
       prospective customers; and

    .  Transactions, our periodic newsletter, which focuses on merger and
       acquisition activity within our industry sectors.

   In addition, our research department supports our active engagement with
third-party publishers who seek articles from our professionals for their
various publications and reports.

Underwriting

   We have always placed primary emphasis on credit and risk analysis and
incorporated the underwriting function directly into the business development
process. Our underwriting team consists of investment professionals who perform
due diligence, credit and corporate financial analyses, deal sponsors who
possess specific industry expertise and are responsible for originating and
managing the transaction, a member of our credit committee and our in-house
counsel. Since we became an independent company in June 1998, our deal sponsors
have led our underwriting teams in originating approximately 140 transactions
with an aggregate value of approximately $747.0 million in loan commitments
resulting in approximately $624.0 million in loans outstanding through December
31, 2001.

   To ensure consistent underwriting, we use our sector-specific due diligence
methodologies, developed over the last 10 years, which include standard due
diligence on financial performance and customized analysis of the operations,
systems, accounting policies, human resources and the legal and regulatory
framework of a prospective customer. The members of the underwriting team work
together to conduct due diligence and understand the relationships among the
customer's business plan, operations and financial performance.

   As part of our evaluation of a proposed investment, the underwriting team
prepares an investment memorandum for presentation to the credit committee and,
in some instances, the investment committee. In preparing the investment
memorandum, the underwriting team assembles information critical to the
investment decision and regularly seeks information from the research
department on macroeconomic viewpoints, forecasted trends and firm valuation.
The investment memorandum serves as the framework for underwriting the
transaction and generally consists of:

    .  business description;

    .  risk evaluation specific to the prospect's business, considering the
       anticipated use of proceeds of our loan, and industry sector; and

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

                                      5

<PAGE>

   Business Description.  The business description of a prospective customer
presents the history, organization and product lines of the customer. In
addition, we analyze the prospective customer's industry sector and sub-sector,
competition and market share, obsolescence and substitution risk, customers and
markets served, legal and regulatory framework and technology issues. The
business description also explicitly discusses unique risks associated with a
proposed transaction. In particular, we analyze the following risks:

    .  Sector Risk Analysis.  Analysis of specific vulnerability to industry
       sector risk, such as industry maturity, cyclicality, profitability and
       seasonality trends.

    .  Competitive Risks.  Analysis of the strengths and weaknesses of the
       prospective customer relative to its primary and secondary competitors.
       The factors we consider include relative pricing, product quality,
       customer loyalty, substitution and switching costs, brand positioning
       and comparative capitalization. We also assess the defensibility of a
       prospect's market position and its opportunity for increasing market
       share.

    .  Regulatory Risks.  We follow current regulatory developments in each of
       our targeted sectors and describe how credit and business risks have
       changed with the evolution of regulation and what risks are presented by
       existing and currently proposed regulations.

    .  Customer Concentration and Market Risks.  We typically determine the
       values of companies in our target sectors largely based upon the
       stability of their customer base. We analyze the number and size of
       customers and their attrition rates, including the potential impact of
       above average customer attrition, low renewals and the risk of loss of
       significant customers.

    .  Technology Risks.  Companies in certain sectors rely on the acquisition
       or development of proprietary technology for distribution, production,
       or administration and others rely on such technology as the products or
       services that they offer. We also consider the likely positive or
       negative effect of technological advances on the value of their services.

   Financial and Customer Risk Assessment.  As part of our financial and
customer risk assessment process, we try to determine comparable levels of risk
across industry sectors and customers. Our financial analysis is based on an
integrated financial model that is built upon the historical and projected
financial performance of a prospect. The model also presents the pro forma
post-funding capital structure, along with the sources and uses of funding in
the proposed transaction.

   Each model incorporates historical financial results and an underlying set
of assumptions for operating margins, growth rates, capital structure, rates of
return, working capital investment and fixed asset expenditures. A base case is
prepared with assumptions provided by the customer's management. We use
alternative sets of assumptions to evaluate the prospect's ability to support
different capital structures, growth rates, margins, rates of return, and
working capital and fixed asset expenditures. This integrated financial model
goes beyond forecasting financial statements by incorporating cash flow
coverage forecasts, covenant compliance tests, valuation matrices, and an
executive summary, which details investment-specific terms. Financial risk
assessment allows us to evaluate a prospect based on our pre-established risk
acceptance criteria.

   We also assess the intangible attributes of a transaction typically embodied
in a prospect's management's track record, business plan, judgments about its
products and other subjective characteristics that may significantly affect the
ultimate risk of a transaction. This assessment entails a subjective
consideration of the quantitative and qualitative attributes of a prospect
considered in the context of its industry sector rather than an assessment
based exclusively on past historical financial performance. Quantitative
attributes we evaluate include sector-specific comparisons such as cash flow
margins, product and cash flow diversification, revenue growth rates, cost
structure and other operating benchmarks that are derived from historical
financial statements.

                                      6

<PAGE>

Qualitative attributes we evaluate may include management skill and depth,
industry risk, substitution risk, cyclicality, geographic diversification,
facilities infrastructure, administration requirements and product quality and
ranking. Based on this assessment, we assign a low, medium or high volatility
factor to the prospect.

   Investment Structure.  In underwriting prospective customers, we also focus
on investment structure, payment priority, collateral or asset value, tenor,
and financial support from guarantors and other credit enhancements. We use
loan structure to mitigate the higher risk associated with a higher volatility
factor by requiring better financial and collateral coverage thresholds for
those prospects. In most of our loans, we receive a perfected, first priority
security interest in substantially all of our customers' assets, which entitles
us to a preferred position on payments in the event of liquidation, and a
pledge of the equity by the equity owners. In addition, we structure loan
covenants to assist in the management of risk. Our loan documents ordinarily
include affirmative covenants that require the customers to take specific
actions such as periodic financial reporting, notification of material events
and compliance with laws, restrictive covenants that prevent customers from
taking a range of significant actions such as incurring additional indebtedness
or making acquisitions without our consent, covenants requiring the customer to
maintain or achieve specified financial ratios such as cash flow leverage,
interest coverage and fixed charge coverage, and operating covenants requiring
them to maintain certain operational benchmarks such as minimum revenue or
minimum cash flow. Our loan documents also contain customary events of default
such as non-payment, breach of representation, breach of covenant, insolvency
and change of control. Our direct equity investments at the time they are made
are typically pari passu with or senior to the customers' other equity
securities.

  Flexible Funding

   We recognize that growth-oriented companies regularly make corporate
development decisions that impact their financial performance, valuation and
risk profile. Often these decisions can favorably impact enterprise value at
the expense of short-term financial performance. Our "flexible funding"
strategy allows us to adjust the return on our capital through risk-based
pricing grids that account for shifts in the customer's financial performance
associated with these decisions. Our loan structures take into account our
customers' potentially varying financial performance so that customers can
retain access to committed capital at different stages in their growth and
development. We calculate rates of return based on a combination of up-front
fees, current and deferred interest rates and residual values in the form of
equity interests, such as warrants, appreciation rights or future contract
payments. Our internal rates of return on invested capital and the customer's
cost of debt capital are generally highest when our customer utilizes high
levels of leverage.

   We believe that this method of flexible performance-based pricing allows our
customers to build a long-term relationship with us as a preferred provider. We
also believe our approach presents debt as a viable alternative to raising
additional equity, which permits our customers to avoid the permanently
dilutive effect on existing equity holders associated with equity financing
transactions.

   Our loans typically include a variable interest rate component designed to
reflect credit risk, which allows the interest rates our customers pay to
increase or decrease automatically based on changes in their operating and
financial performance. For example, if a customer fails to achieve the
operating or financial performance targets set forth in the loan agreement, the
interest rate payable on our loan typically increases automatically to reflect
the increased credit risk. Conversely, if the customer outperforms, the
interest rate payable would typically decrease to reflect our decreased credit
risk. However, in such a scenario, our decrease in interest income as a result
of the favorable interest rate adjustment is likely to be offset for certain
loans by increases in the value of our upside investments, such as warrants,
stock appreciation rights or direct equity investments.

  Investment Approval Process

   Our credit committee approves all of our investments, while the investment
committee of our board of directors also must approve some investments. The
four members of our credit committee are Bryan J. Mitchell, our Chairman and
Chief Executive Officer, Steven F. Tunney, our President and Chief Operating
Officer, Robert

                                      7

<PAGE>

J. Merrick, our Chief Credit Officer and B. Hagen Saville, one of our Executive
Vice Presidents. Credit committee approval requires the approval of Mr. Merrick
and two of the three other members of the credit committee. The investment
committee of our board must approve loans to any customer exceeding $10 million
and all equity investments.

  Loan Servicing

   After a loan is approved and funded, the underwriting team, along with the
loan administration group and the compliance group, remain involved in the
transaction by reviewing covenant compliance and quarterly financial
performance and by collecting additional industry sector data for inclusion in
our databases.

   Loan Administration Group.  This group administers the loans on our loan
administration system and is responsible for:

    .  funding the loans in accordance with the credit committee's and, if
       applicable, investment committee's approval;
    .  recording the loans into our loan administration system;
    .  ensuring that billing and collections are done in an accurate and timely
       fashion;
    .  collecting on past due accounts; and
    .  maintaining the collateral that is in our possession.

   Compliance Administration Group.  This group tracks covenant compliance and
oversees a monthly review of our critical functions to ensure adherence with
our internal policies and procedures. The compliance administration staff is
responsible for:

    .  reviewing the credit agreement to ensure that the final loan documents
       reflect the terms approved by the credit committee and, if applicable,
       the investment committee and advising the credit committee of any
       deviations;
    .  ensuring that the customer compliance package is prepared in accordance
       with the loan covenant requirements;
    .  inputting the customer's financial statements into our tracking
       schedules and entering the loan covenants into the covenant tracking
       system;
    .  ensuring the mathematical accuracy of all covenant requirements;
    .  reviewing the customer's financial statements to ensure that the
       customer performs in accordance with our expectations;
    .  reporting all covenant violations, loan amendments and covenant waivers
       to the credit committee;
    .  plotting the customer's actual performance against our risk acceptance
       criteria grids each quarter to ensure that the risk rating is still
       appropriate; and
    .  preparing annual reviews and quarterly collateral valuation updates for
       each customer.

   Loan Monitoring and Restructuring Procedures.  We monitor individual
customer's financial trends in order to assess the appropriate course of action
for each customer and to evaluate overall portfolio quality. We closely monitor
the status and performance of each individual investment on a quarterly and, in
some cases, a monthly basis. Because we are a provider of long-term privately
negotiated investment capital to high-growth companies, we do not believe
contract exceptions are necessarily an indication of credit quality or the need
to pursue remedies or an active workout of a portfolio investment.

   When principal and interest on a loan is not paid within the applicable
grace period, our loan administration group will contact the customer for
collection. At that time, we will make a determination as to the extent of the
problem, if any. We will then pursue a commitment for immediate payment and
will begin to more actively monitor the investment. We will formulate
strategies to optimize the resolution process and begin the process of
restructuring the investment to better reflect the current financial
performance of the customer. Such a restructuring may involve deferring
payments of principal and interest, adjusting interest rates or warrant

                                      8

<PAGE>

positions, imposing additional fees, amending financial or operating covenants
or converting debt to equity. In general, in order to compensate us for any
enhanced risk, we receive appropriate compensation from the customer in
connection with a restructuring. During the process of monitoring a loan in
default, we will in appropriate circumstances send a notice of non-compliance
outlining the specific defaults that have occurred and preserving our remedies,
and initiate a review of the collateral. When a restructuring is not the most
appropriate course of action, we may determine to pursue remedies available
under our loan documents or at law to minimize any potential losses, including
initiating foreclosure and/or liquidation proceedings.

   When a loan becomes 90 days or more past due, or if we otherwise do not
expect the customer to be able to service its debt and other obligations, we
will, as a general matter, place the loan on non-accrual status and stop
recognizing interest income on that loan until all principal has been paid.
However, we will make exceptions to this policy if the investment is well
secured and in the process of collection. For federal income tax purposes, this
interest income is included in taxable income.

  Portfolio Overview

   Our investments consist primarily of senior secured commercial loans. We
intend to increase gradually our level of subordinated debt and equity-based
investments. However, a substantial majority of our portfolio will continue to
consist of investments in senior secured commercial loans. Some of our loans
include warrants, options, success fees and other equity-like features. At
December 31, 2001, our largest customer represented approximately 3.9% of the
total fair value of our investments and our 10 largest customers represented
approximately 30.8%. Our customer base includes primarily small- and
medium-sized private companies in the communications, information services,
media, and technology industry sectors. The proceeds of the loans to these
companies are generally used for buyouts, growth, acquisitions, liquidity,
refinancings and restructurings. In addition, we have occasionally made loans
to individuals who are principals in these companies where the proceeds are
used by or in connection with the operations or capitalization of such
companies. Our debt instruments generally provide for a contractual variable
interest rate generally ranging from approximately 400 to 1400 basis points
above LIBOR, in some cases, a portion of which may be deferred. The weighted
average interest coupon yield of our portfolio at December 31, 2001 was 9.2%.
In the future, we also intend to invest in subordinated secured debt
instruments, which we expect will provide for a contractual rate of interest
between 14% and 25%, in some cases, a portion of which may be deferred. Our
loans generally have stated maturities at origination that range from 3 to 7
years. The weighted average maturity of our entire loan portfolio at December
31, 2001 was approximately 5.7 years. The weighted average maturity of our loan
portfolio excluding our investments in the newspaper sub-sector was 4.6 years.
Our customers typically pay us an origination fee based on a percentage of the
commitment amount, and in most instances our customers are permitted to prepay
our loans without penalty. They also often pay us a fee based on any undrawn
commitments.

   At December 31, 2001, approximately 50% of our loans had associated warrants
or options to purchase warrants, appreciation rights or other equity interests
or other provisions designed to provide us with an enhanced internal rate of
return. These equity and equity-like instruments generally do not produce a
current return, but are held for potential investment appreciation and capital
gains. The warrants and options to purchase warrants typically are exercisable
immediately and typically remain exercisable for 10 years. The exercise prices
on the warrants vary from nominal exercise prices to exercise prices that are
at or above the current fair market value of the equity for which we are
receiving warrants. In some cases, some or all of the deferred interest may be
exchanged as the exercise price for the option to purchase warrants. The equity
interests and warrants and options to purchase warrants often include
registration rights, which allow us to register the securities after a public
offering. We intend to continue to obtain equity and equity-like instruments
with similar features from our customers.

   In most cases, the warrants and options to purchase warrants have a put
right that requires the customer to repurchase our equity position after a
specified period of time at its market value or at a formula price generally
designed to approximate its market value. The warrants and options to purchase
warrants also typically contain

                                      9

<PAGE>

customary anti-dilution protection and preemptive rights. Many of the warrants
also give us the right to obtain a seat on the customer's board of directors if
and when we exercise the warrants. The warrants and options to purchase
warrants are generally freely transferable in accordance with applicable law,
although some of the warrants and options to purchase warrants contain rights
of first refusal and restrictions on transfers to competitors. We expect that
we will generally have similar rights with respect to equity and equity-like
investments we make in the future.

  Investment Rating System

   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. Below is a description of the conditions associated
with each investment rating.

<TABLE>
<CAPTION>
Rating Summary Description
------ -------------------
<S>    <C>
  1... Capital gain expected
  2... Full return of principal and interest or dividend expected with customer
       performing in accordance with plan
  3... Full return of principal and interest or dividend expected but customer
       requires closer monitoring
  4... Some loss of interest or dividend expected but still expecting an overall
       positive internal rate of return on the investment
  5... Loss of interest or dividend and some loss of principal investment
       expected which would result in an overall negative internal rate of
       return on the investment
</TABLE>

   We monitor and, when appropriate, recommend changes to investment ratings.
Our president and chief credit officer review the recommendations and affirm or
change the investment ratings at least quarterly.

   The following table shows the distribution of our investments on the 1 to 5
investment rating scale at fair value as of December 31, 2001:

<TABLE>
<CAPTION>
                                    Distribution of Portfolio by
                                         Investment Rating
                                           (in thousands)
                                    ---------------------------
                                     Fair Value at December 31,
                                                2001
                                    ---------------------------
                  Investment Rating   Amount      % of Portfolio
                  -----------------  --------     --------------
                  <S>               <C>           <C>
                          1........ $135,230           21.9%
                          2........  275,055           44.5
                          3........  158,595           25.7
                          4........   46,726            7.6
                          5........    1,597            0.3
                                     --------          ----
                                    $617,203            100%
                                     ========          ====
</TABLE>

                                      10

<PAGE>

                                  COMPETITION

   We compete with a large number of financial services companies, including
specialty and commercial finance companies, commercial banks and private
mezzanine funds, and other sources of financing such as private equity funds,
venture capital companies, investment banks and other equity and non-equity
based investment funds. Although we do not have a direct competitor that
competes in all of our product lines and geographic regions, we compete with
financial services companies who target some of our chosen industry sectors or
geographic areas, or who may only provide corporate finance services to larger
companies. Some of the companies we have competed with in the past include
community banks that are located in our customers' and targeted prospects' home
markets. These community banks typically do not focus on our target industry
sectors. We also compete against regional and national financial institutions.
These include banks such as FleetBoston Financial Corporation, Union Bank of
California, Comerica Bank, Silicon Valley Bank and Wells Fargo & Company;
commercial finance companies such as Coast Business Credit; and finance
subsidiaries of large industrial corporations such as General Electric Capital
Corporation, The CIT Group and Textron Financial Corporation.

   We do not seek to compete primarily based on the interest rates we offer,
and we believe that some of our competitors make senior secured commercial
loans with interest rates that are comparable to or lower than the rates we
offer. We believe we compete based on:

    .  our insight into our customers' business needs that we derive from
       information, analytics and effective interaction between our customers'
       decision makers and our knowledgeable professionals; and

    .  our offering of capital coupled with an expanded range of corporate
       finance services and information products designed to enhance our
       customers' business prospects.

                               OUR SUBSIDIARIES

   We conduct some of our activities through our wholly owned subsidiaries, MCG
Finance I, LLC, MCG Finance II, LLC and MCG Finance III, LLC. From time to
time, MCG Finance I may originate or be the holder of certain loans and
investments we make.

   We originate loans and sell them to MCG Finance II, a wholly owned special
purpose finance subsidiary. MCG Finance II in turn sells the loans to MCG
Master Trust, a Delaware business trust we formed in connection with the
securitization facility we established in June 2000. The loans MCG Finance II
sells to MCG Master Trust must satisfy specific criteria, including commitment
amount, sector and sub-sector concentration, credit risk, collateral and
payment performance. These criteria are established in our loan agreements and
credit policy and lending standards. These transactions are structured as
on-balance sheet securitizations for accounting purposes.

   We also originate loans and sell them to MCG Finance III, another wholly
owned special purpose finance subsidiary. MCG Finance III in turn sells the
loans to MCG Commercial Loan Trust 2001-1, a Delaware business trust we formed
in connection with the securitization facility we established in December 2001.
These transactions are structured as on-balance sheet securitizations for
accounting purposes.

                              INVESTMENT POLICIES

   The following restrictions are our only "fundamental" policies, which are
policies that may not be changed without the approval of the holders of the
majority of our outstanding voting securities, as defined in the 1940 Act.

   We will not:

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

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

                                      11

<PAGE>

    .  sell securities short in an uncovered position;

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

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

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

   Accordingly, all of the other investment and lending guidelines set by our
board of directors or any committees, including our investment objective to
achieve current income and capital gains, are not fundamental. Therefore, our
board may change them without notice to or approval by our stockholders, but
any change may require the consent of our lenders.

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

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

   We propose to concentrate our investments in the communications, information
services, media, and technology industry sectors. From time to time, we may add
new sectors or subsectors.

   We may issue senior securities to the extent permitted by the 1940 Act for
the purpose of making investments, as long as we meet a coverage ratio of total
assets to total senior securities of at least 200% after each issuance of
senior securities. Senior securities include all of our borrowings and any
preferred stock we may issue in the future.

   In connection with our 2002 Annual Meeting of Stockholders, we are seeking
stockholder approval to eliminate the fundamental nature of the investment
policies, as noted above.

                                   EMPLOYEES

   As of December 31, 2001, we employed 57 employees in our three offices,
including investment and portfolio management professionals, operations
professionals, legal counsel, and administrative staff. Of the 57 employees, 44
are based in our Arlington, Virginia office, 6 are based in our Boston,
Massachusetts office and 7 are based in our Richmond, Virginia office. We
believe that our relations with our employees are good.

                       CERTAIN U.S. FEDERAL TAX MATTERS

   Until December 31, 2001, we were subject to tax as an ordinary corporation
under Subchapter C of the Internal Revenue Code. We will elect, effective as of
January 1, 2002, to be taxed for federal income tax purposes as a "regulated
investment company" or "RIC" under Subchapter M of the Internal Revenue Code.
As a RIC, we generally will not have to pay corporate taxes on any income we
distribute to our stockholders as dividends, which will allow us to
substantially reduce or eliminate our corporate-level tax liability.

   One requirement to qualify as a RIC is that, by December 31, 2002, we must
eliminate the earnings and profits accumulated while we were taxable under
Subchapter C. We accomplished this by declaring in the fourth quarter of 2001,
and paying to our stockholders in the first quarter of 2002, a cash dividend of
$0.86 per share, representing all of our accumulated earnings and profits for
the period from our inception through December 31, 2001. The dividend is in
addition to the dividends we intend to pay (or be deemed to have distributed)
during 2002 equal to our net income for 2002.

                                      12

<PAGE>

                  Taxation as a Regulated Investment Company

   If we:

    .  qualify as a RIC, and

    .  distribute each year to stockholders at least 90% of our "investment
       company taxable income" (which is defined in the Internal Revenue Code
       generally as ordinary income plus net short-term capital gains over net
       long-term capital losses), and 90% of any ordinary pre-RIC built-in
       gains we recognize between January 1, 2002 and December 31, 2011, less
       our taxes on those gains (collectively, the "90% distribution
       requirement"),

we will not be subject to U.S. federal income tax on the portion of our income
we distribute to stockholders other than any built-in gain recognized between
January 1, 2002 and December 31, 2011.

   We will be subject to a 4% nondeductible U.S. federal excise tax to the
extent we do not distribute (actually or on a deemed basis) 98% of our income
(both ordinary income and net capital gains). The excise tax will apply to the
excess of 98% of our income over the amount of income actually (or deemed)
distributed to our stockholders.

   We generally will endeavor in each taxable year to avoid any U.S. federal
excise taxes on our earnings. As discussed below, we can satisfy the
requirement to distribute 98% of our net capital gain by making a deemed
distribution of this amount. (We cannot make deemed distributions of our
ordinary income.) We will, however, be subject to U.S. federal income tax at
the regular corporate rate on any income or capital gain not actually
distributed to our stockholders.

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

    .  continue to qualify as a business development company under the 1940 Act;

    .  derive in each taxable year at least 90% of our gross income from
       dividends, interest, payments with respect to securities loans, gains
       from the sale of stock or other securities, or other income derived with
       respect to our business of investing in such stock or securities; and

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

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

       .  no more than 25% of the value of our assets is invested in the
          securities, other than U.S. government securities or securities of
          other RICs, of one issuer or of two or more issuers that are
          controlled, as determined under applicable Internal Revenue Code
          rules, by us and are engaged in the same or similar or related trades
          or businesses.

   If we fail to satisfy the 90% Distribution Requirement or otherwise fail to
qualify as a RIC in any taxable year, we will be subject to tax in that year on
all of our taxable income, regardless of whether we make any distributions to
our stockholders. In that case, all of our income will be subject to
corporate-level tax, reducing the amount available to be distributed to our
stockholders, and all of our distributions to our stockholders will be
characterized as ordinary income (to the extent of our current and accumulated
earnings and profits). After January 1, 2002, our corporate-level tax should be
substantially reduced or eliminated, and a portion of our distributions or
deemed distributions may be characterized as long-term capital gain in the
hands of stockholders.

                   Treatment of Pre-Conversion Built-in Gain

   As of January 1, 2002, we held substantial assets (including intangible
assets not reflected on the balance sheet, such as goodwill) with "built in
gain," which are assets whose fair market value on that date exceeded their tax
basis.

   We intend to make an election applicable to a corporation that converts from
taxation under Subchapter C to taxation as a RIC to pay corporate level tax on
the amount of net built-in gain we recognize within 10 years after the
effective date of our election to be treated as a RIC. Any such corporate level
tax is payable at the time those gains are recognized (which, generally, will
occur when the built-in gain assets are sold or disposed of in a taxable
transaction).

                                      13

<PAGE>

   Based on the assets we currently anticipate selling within the ten year
period beginning January 1, 2002 and ending December 31, 2011, we expect we may
have to pay a built-in gain tax of up to $1.1 million at current corporate tax
rates. The amount of this tax will vary depending on the assets that are
actually sold by us in this 10-year period and tax rates. Under newly issued
Treasury Regulations, recognized built-in gains and losses will generally
retain their character as capital gain or ordinary income. Recognized built-in
gains and losses that are ordinary income will be included in our investment
company taxable income and we must distribute to our stockholders at least 90%
of any such built-in gains recognized within the 10 year period, net of the
corporate taxes paid by us on the built-in gains. Any such amount distributed
will be taxable to stockholders as an ordinary dividend. Recognized built-in
gains and losses within the 10 year period, net of taxes, that are capital
gains will be distributed or deemed distributed to our stockholders. Any such
amount distributed or deemed distributed will be taxable to stockholders as a
capital gain.

                 REGULATION AS A BUSINESS DEVELOPMENT COMPANY

   A business development company is regulated by the 1940 Act. It is a unique
kind of investment company that primarily focuses on investing in or lending to
small private companies and making managerial assistance available to them. A
business development company may use capital provided by public stockholders
and from other sources to invest in growing small businesses.

   A business development company provides stockholders the ability to retain
the liquidity of a publicly traded stock, while sharing in the possible
benefits of investing in privately owned small- and medium-sized companies.

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

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

       .  is organized and has its principal place of business in the U.S.,
       .  is not an investment company or a company operating pursuant to
          certain exemptions under the 1940 Act other than a small business
          investment company wholly owned by a business development company, and

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

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

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

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

   As a business development company, we are required to meet a coverage ratio
of the value of total assets to total senior securities, which include all of
our borrowings and any preferred stock we may issue in the future, of at least
200%. We may also be prohibited under the 1940 Act from conducting certain
transactions with our affiliates without the prior approval of our directors
who are not interested persons and, in some cases, prior approval by the SEC.

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

                                      14

<PAGE>

                              PORTFOLIO COMPANIES

   The following table sets forth certain information as of December 31, 2001
regarding each portfolio company in which we had a debt or equity investment.
We make available significant managerial assistance to our portfolio companies.
No portfolio company accounts for more than 5% of our assets. The general terms
of our loans and other investments are described in
"Business--Underwriting--Investment Structure," "Business--Flexible Funding"
and "Business--Portfolio Overview." Other than these investments, our only
relationships with our portfolio companies are:

    .  The consulting services we provide separately to the portfolio companies
       indicated by footnote 6 in the table below, which services are typically
       ancillary to our investments and which produced aggregate revenues of
       approximately $1.1 million for the year ended December 31, 2001; and

    .  The service by our professionals on the board of directors of the
       portfolio companies indicated by footnote 8 in the table below.

<TABLE>
<CAPTION>
                                                                                       Fair
                                                      Title of Securities     Cost   Value(2)
                                  Nature of Its           Held by the        ------- --------
       Portfolio Company        Principal Business        Company(1)          (in thousands)
       -----------------        ------------------ ------------------------- ----------------
<S>                             <C>                <C>                       <C>     <C>
The Adrenaline Group, Inc.(3)   Technology         Senior Debt               $   750 $   750

                                                   Warrants to purchase
                                                   Common Stock                   --      --
------------------------------- ------------------ ------------------------- ------- --------
Alarm Management II LLC(3)      Security Alarms    Senior Debt                 1,800   1,800
------------------------------- ------------------ ------------------------- ------- --------
Amalfi Coast                    Broadcasting       Senior Debt                13,000  13,000
------------------------------- ------------------ ------------------------- ------- --------
AMI Telecommunications          Telecommunications Senior Debt                10,715  10,715
  Corporation(3)
                                                   Common Stock                  200      --
------------------------------- ------------------ ------------------------- ------- --------
Badoud Enterprises, Inc.(3)     Newspaper          Senior Debt                11,320  11,320
------------------------------- ------------------ ------------------------- ------- --------
Barcom Inc. and U.S. Alarm Inc. Security Alarms    Senior Debt                 3,911   3,911
------------------------------- ------------------ ------------------------- ------- --------
Biznessonline.com, Inc.(3) (4)  Telecommunications Senior Debt                13,529  13,529

                                                   Common Stock                   18      27

                                                   Preferred Stock             2,864     100

                                                   Warrants to purchase
                                                   Common Stock                  253     253
------------------------------- ------------------ ------------------------- ------- --------
Boucher Communications, Inc.(3) Publishing         Senior Debt                 2,450   2,450
                                                   Stock Appreciation Rights      --     297
------------------------------- ------------------ ------------------------- ------- --------
Bridgecom Holdings, Inc.(3)(5)  Telecommunications Senior Debt                17,969  17,969

                                                   Warrants to purchase
                                                   Common Stock                   --      --
------------------------------- ------------------ ------------------------- ------- --------
</TABLE>

                                      15

<PAGE>

<TABLE>
<CAPTION>
                                                                                          Fair
                                                        Title of Securities    Cost     Value(2)
                                     Nature of Its          Held by the       -------   --------
                                   Principal Business       Company(1)         (in thousands)
        Portfolio Company         -------------------- ---------------------- ----------------
<S>                               <C>                  <C>                    <C>       <C>
Brookings Newspapers, L.L.C.(3)   Newspaper            Senior Debt            $ 3,500   $3,500
--------------------------------- -------------------- ---------------------- -------   --------
BuyMedia Inc.(9)                  Radio Advertising    Warrants to purchase

                                  Selling Service      Common Stock                --       42
--------------------------------- -------------------- ---------------------- -------   --------
Cambridge Information Group, Inc.
(3)(5)                            Information Services Senior Debt             19,334    19,334
--------------------------------- -------------------- ---------------------- -------   --------
CCG Consulting, LLC               Consulting           Senior Debt              1,293     1,293

                                                       Warrants to purchase        --       294
                                                       membership interest in
                                                       LLC

                                                       Option to purchase
                                                       additional equity           --        --
--------------------------------- -------------------- ---------------------- -------   --------
Community Media Group, Inc. (3)   Newspaper            Senior Debt             13,505   13,505
--------------------------------- -------------------- ---------------------- -------   --------
Connective Corp.(4)(9)            Publishing           Common Stock                57       13
--------------------------------- -------------------- ---------------------- -------   --------
Corporate Legal Times L.L.C.      Publishing           Senior Debt              4,813     4,813

                                                       Warrants to purchase
                                                       membership interest in
                                                       LLC                        153        86
--------------------------------- -------------------- ---------------------- -------   --------
Costa De Oro Television, Inc.     Broadcasting         Senior Debt              5,011     5,011
--------------------------------- -------------------- ---------------------- -------   --------
Country Media, Inc.               Newspaper            Senior Debt              8,448     8,448

                                                       Common Stock               100       205
--------------------------------- -------------------- ---------------------- -------   --------
Creatas, L.L.C.(3)                Information Services Senior Debt             13,664    13,664
                                                       LLC Interest               100       465
--------------------------------- -------------------- ---------------------- -------   --------
Creative Loafing, Inc.(3)         Newspaper            Senior Debt             16,795    16,795
--------------------------------- -------------------- ---------------------- -------   --------
Crescent Publishing Company LLC   Publishing           Senior Debt             13,700    13,700
--------------------------------- -------------------- ---------------------- -------   --------
Dowden Health Media, Inc.         Publishing           Senior Debt              1,500     1,500
--------------------------------- -------------------- ---------------------- -------   --------
Edgell Communications, Inc.(3)    Publishing           Senior Debt                520       520
--------------------------------- -------------------- ---------------------- -------   --------
                                  Media Investment
The e-Media Club, LLC             Group                LLC Interest               908        90
--------------------------------- -------------------- ---------------------- -------   --------
Executive Enterprise Institute,
LLC(3)(8)                         Business Conference  LLC Interest               301       167
--------------------------------- -------------------- ---------------------- -------   --------
Fawcette Technical Publications   Publishing           Senior Debt             14,787    14,787
Holdings(3)
                                                       Warrants to purchase
                                                       Common Stock               519       519
--------------------------------- -------------------- ---------------------- -------   --------
Financial Technologies Holdings,  Technology           Senior Debt             20,500    20,500
Inc.(3)
                                                       Warrants to purchase
                                                       Common Stock                --        --
--------------------------------- -------------------- ---------------------- -------   --------
</TABLE>

                                      16

<PAGE>

<TABLE>
<CAPTION>
                                                                                              Fair
                                                          Title of Securities     Cost      Value(2)
                                       Nature of Its          Held by the       --------    --------
         Portfolio Company           Principal Business       Company(1)         (in thousands)
         -----------------          -------------------- ---------------------- -----------------
<S>                                 <C>                  <C>                    <C>         <C>
Halcyon Business Publications, Inc. Publishing           Senior Debt            $    275    $   275
----------------------------------- -------------------- ---------------------- --------    --------
I-55 Internet Services, Inc.        Telecommunications   Senior Debt               3,623      3,623

                                                         Warrants to purchase
                                                         Common Stock                 --         --
----------------------------------- -------------------- ---------------------- --------    --------
IDS Telecom LLC                     Telecommunications   Senior Debt              17,039     17,039

                                                         Warrants to purchase
                                                         membership interest in
                                                         LLC                         376        637
----------------------------------- -------------------- ---------------------- --------    --------
Images.com, Inc.                    Information Services Senior Debt               2,775      2,775
----------------------------------- -------------------- ---------------------- --------    --------
Information Today, Incorporated     Information Services Senior Debt               7,500      7,500
----------------------------------- -------------------- ---------------------- --------    --------
Intellisec Holdings, Inc(3)         Security Alarms      Senior Debt              14,265     14,265

                                                         Warrants to purchase
                                                         Common Stock                 --         --
----------------------------------- -------------------- ---------------------- --------    --------
Intellisec Holdings, Inc(3)         Security Alarms      Senior Debt              14,265     14,265
----------------------------------- -------------------- ---------------------- --------    --------
Jeffrey A. Stern                    Publishing           Senior Debt                 157        157
----------------------------------- -------------------- ---------------------- --------    --------
JMP Media, L.L.C.                   Broadcasting         Senior Debt              15,781     15,781
----------------------------------- -------------------- ---------------------- --------    --------
Joseph C. Millstone                 Telecommunications   Senior Debt                 500        500
----------------------------------- -------------------- ---------------------- --------    --------
The Joseph F. Biddle Publishing
Company(3)                          Newspaper            Senior Debt              14,207     14,207
----------------------------------- -------------------- ---------------------- --------    --------
Kings III of America, Inc., North
America                             Security Alarms      Senior Debt               4,997      4,997
----------------------------------- -------------------- ---------------------- --------    --------
The Korea Times Los Angeles, Inc.   Newspaper            Senior Debt              11,927     11,927
----------------------------------- -------------------- ---------------------- --------    --------
Manhattan Telecommunications        Telecommunications   Senior Debt              22,975     22,975
  Corporation

                                                         Warrants to purchase        754        644
                                                         Common Stock
----------------------------------- -------------------- ---------------------- --------    --------
McGinnis-Johnson Consulting, LLC    Newspaper            Subordinated Debt         7,828      7,828
----------------------------------- -------------------- ---------------------- --------    --------
Media Central LLP/Primedia          Publishing           Senior Debt              10,000     10,000
----------------------------------- -------------------- ---------------------- --------    --------
                                    Telecommunications
Midwest Towers Partners, LLC(3)     Towers               Senior Debt              16,307     16,307
----------------------------------- -------------------- ---------------------- --------    --------
Miles Media Group, Inc.(3)          Publishing           Senior Debt               7,850      7,850

                                                         Warrants to purchase
                                                         Common Stock                 20        490
----------------------------------- -------------------- ---------------------- --------    --------
Minnesota Publishers, Inc.(3)       Newspaper            Senior Debt              14,250     14,250
----------------------------------- -------------------- ---------------------- --------    --------
Murphy McGinnis Media, Inc.(3)      Newspaper            Senior Debt              14,000     14,000
----------------------------------- -------------------- ---------------------- --------    --------
NBG Radio Networks, Inc.(4)         Broadcasting         Senior Debt               6,298      6,298

                                                         Warrants to purchase
                                                         Common Stock                 --         --
----------------------------------- -------------------- ---------------------- --------    --------
</TABLE>

                                      17

<PAGE>

<TABLE>
<CAPTION>
                                                                                           Fair
                                                        Title of Securities    Cost      Value(2)
                                     Nature of Its          Held by the       -------    --------
        Portfolio Company          Principal Business       Company(1)         (in thousands)
        -----------------         -------------------- ---------------------- ----------------
<S>                               <C>                  <C>                    <C>        <C>
Netplexus Corporation             Technology           Senior Debt            $ 3,500    $ 2,500

                                                       Preferred Stock            766         --

                                                       Warrants to purchase
                                                       Common Stock                --         --
--------------------------------- -------------------- ---------------------- -------    --------

New Century Companies, Inc.(4)(9) Other                Common Stock               157        294

                                                       Preferred Stock             --         42

                                                       Warrants to purchase
                                                       Common Stock                --         33
--------------------------------- -------------------- ---------------------- -------    --------

nii communications, Inc.(3)       Telecommunications   Senior Debt              5,565      5,565

                                                       Common Stock               400        162

                                                       Warrants to purchase
                                                       Common Stock               747        991
--------------------------------- -------------------- ---------------------- -------    --------

New Northwest Broadcasters,
Inc.(3)                           Broadcasting         Senior Debt             10,853     10,853
--------------------------------- -------------------- ---------------------- -------    --------

Newsletter Holdings, LLC(3)       Publishing           Senior Debt              1,340      1,340
--------------------------------- -------------------- ---------------------- -------    --------

NOW Communications, Inc.(3)       Telecommunications   Senior Debt              4,367      4,367

                                                       Warrants to purchase
                                                       Common Stock                --         --
--------------------------------- -------------------- ---------------------- -------    --------

Pacific-Sierra Publishing, Inc.   Newspaper            Senior Debt             24,160     24,160
--------------------------------- -------------------- ---------------------- -------    --------

Pfingsten Publishing, LLC(3)      Publishing           Senior Debt             10,250     10,250
--------------------------------- -------------------- ---------------------- -------    --------

Powercom Corporation(3)           Telecommunications   Senior Debt              3,917      3,917

                                                       Warrants to purchase
                                                       Common Stock               139        105
--------------------------------- -------------------- ---------------------- -------    --------

R.R. Bowker LLC                   Information Services Senior Debt             15,000     15,000

                                                       Warrants to purchase
                                                       Common Stock               882        882
--------------------------------- -------------------- ---------------------- -------    --------

Rising Tide Holdings LLC(3)       Publishing           Senior Debt              3,097      1,597

                                                       Warrants to purchase
                                                       membership interest in
                                                       LLC                         --         --
--------------------------------- -------------------- ---------------------- -------    --------

Robert N. Snyder                  Information Services Senior Debt              1,300      1,300
--------------------------------- -------------------- ---------------------- -------    --------

Sabot Publishing, Inc.(3)         Publishing           Senior Debt              9,800      9,800
--------------------------------- -------------------- ---------------------- -------    --------
</TABLE>

                                      18

<PAGE>

<TABLE>
<CAPTION>
                                                                                           Fair
                                                        Title of Securities    Cost      Value(2)
                                     Nature of Its          Held by the       -------    --------
        Portfolio Company          Principal Business       Company(1)         (in thousands)
        -----------------         -------------------- ---------------------- ----------------
<S>                               <C>                  <C>                    <C>        <C>

Stonebridge Press, Inc.(3)        Newspaper            Senior Debt            $ 5,473    $ 5,473
--------------------------------- -------------------- ---------------------- -------    --------
Sunshine Media Corp.(3)           Publishing           Senior Debt             13,094     13,094

                                                       LLC Interest Class A       500        553

                                                       Warrants to purchase
                                                       membership interest in
                                                       LLC Class B                 --         --
--------------------------------- -------------------- ---------------------- -------    --------
Talk America Holdings, Inc.(3)(4) Telecommunications   Senior Debt             17,500     17,500
  (5)

                                                       Common Stock             1,050        482

                                                       Warrants to purchase
                                                       Common Stock                25         --
--------------------------------- -------------------- ---------------------- -------    --------
TGI Group, LLC                    Information Services Senior Debt              7,920      7,920

                                                       Warrants to purchase
                                                       membership interest in
                                                       LLC                        126         23
--------------------------------- -------------------- ---------------------- -------    --------
THE Journal, LLC                  Publishing           Senior Debt              3,196      2,100
--------------------------------- -------------------- ---------------------- -------    --------
Tower Resource Management,        Telecommunications   Senior Debt              1,573      1,573
  Inc.(3)                         Towers

                                                       Warrants to purchase
                                                       Common Stock                --         --
--------------------------------- -------------------- ---------------------- -------    --------
Unifocus, Inc.(3)                 Information Services Senior Debt              3,300      3,300

                                                       Warrants to purchase
                                                       Equity                     139        369
--------------------------------- -------------------- ---------------------- -------    --------
UMAC, Inc.(8)(9)(10)              Publishing           Common Stock             8,360      8,360
--------------------------------- -------------------- ---------------------- -------    --------
ValuePage Holdings, Inc.(3)       Telecommunications   Senior Debt             13,105      8,472
--------------------------------- -------------------- ---------------------- -------    --------
VS&A-PBI Holding LLC(3)           Publishing           Senior Debt             12,375     12,375

                                                       LLC Interest               500         --
--------------------------------- -------------------- ---------------------- -------    --------
WirelessLines, Inc.(3)            Telecommunications   Senior Debt              6,150      6,150

                                                       Warrants to purchase
                                                       Common Stock                --         --
--------------------------------- -------------------- ---------------------- -------    --------
Witter Publishing Corporation     Publishing           Senior Debt              2,747      2,747

                                                       Warrants to purchase
                                                       Common Stock                78         76
--------------------------------- -------------------- ---------------------- -------    --------
Working Mother Media, Inc.(7)(8)  Publishing           Senior Debt              6,718      6,718

                                                       Preferred Stock          4,499      4,499

                                                       Common Stock                 1          1
--------------------------------- -------------------- ---------------------- -------    --------
Wyoming Newspapers, Inc.(3)       Newspaper            Senior Debt             12,563     12,563
--------------------------------- -------------------- ---------------------- -------    --------
</TABLE>

                                      19

<PAGE>

<TABLE>
<C>  <S>

(1)  Some of the warrants listed are structured as options to purchase warrants. Such options are freely exercisable by us at
      any time.
(2)  Fair value refers to market value or fair value, as appropriate.
(3)  Some of the listed securities are issued by affiliates of the listed portfolio company.
(4)  This is a public company.
(5)  We provide consulting services to this portfolio company.
(6)  Intentionally omitted.
(7)  In August 2001, we foreclosed on the assets of MacDonald Communication Corporation and transferred them to
      Working Mother Media, Inc. (formerly WMAC, Inc.), a majority owned subsidiary of MCG Finance I, LLC
      (formerly MCG Finance Corporation).
(8)  We hold a board position(s) in this portfolio company.
(9)  Non-income producing.
(10) In September 2001, we foreclosed on the assets of Upside Media, Inc. and transferred them to UMAC, Inc., a wholly
      owned subsidiary of MCG Finance I, LLC (formerly MCG Finance Corporation).
</TABLE>

                       DETERMINATION OF NET ASSET VALUE

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

   Portfolio assets for which market prices are available are valued at those
prices. However, most of our assets were acquired in privately negotiated
transactions and have no readily determinable market values. They are carried
at fair value as determined by our board of directors. The valuation committee
of our board of directors will review our loans and investments and will make
recommendations to our board of directors.

   As a general rule, we do not value our loans above cost, but loans will be
subject to depreciation events when the asset is considered impaired. Also, our
valuation of our equity securities may increase if circumstances warrant. With
respect to private equity securities, each investment is valued using industry
valuation benchmarks, and then the value is assigned a discount reflecting the
illiquid nature of the investment, as well as our minority, non-control
position. When an external event such as a purchase transaction, public
offering, or subsequent equity sale occurs, the pricing indicated by the
external event will be used to corroborate our private equity valuation.
Securities that are traded in the over-the-counter market or on a stock
exchange generally are valued at the prevailing bid price on the valuation
date. However, restricted and unrestricted publicly traded securities may be
valued at discounts from the public market value due to restrictions on sale,
the size of our investment or market liquidity concerns. A substantial portion
of our assets consist of securities carried at fair value determined by our
board of directors. Determination of fair value involves subjective judgments
and the resultant values may not represent amounts at which investments could
be bought or sold in an independent third party transaction and the difference
could be material.

Item 2.  Properties

   Neither we nor any of our subsidiaries own any real estate or other physical
properties materially important to our operation or any of our subsidiaries. We
lease approximately 23,480 square feet of office space in Arlington, Virginia
for our corporate headquarters under a lease expiring July 31, 2002. We also
lease office space in Boston, Massachusetts and Richmond, Virginia.

                                      20

<PAGE>

Item 3.  Legal Proceedings

   Although we may, from time to time, be involved in litigation and claims
arising out of our operations in the normal course of our business, as of
December 31, 2001, we were not a party to any material pending legal
proceedings.

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

   On October 12, 2001, we held an Annual Meeting of Stockholders to elect our
directors. The following individuals were elected by the following vote as
directors to serve on our Board of Directors until their successor is duly
elected and qualified:

<TABLE>
<CAPTION>
                                              Percentage  Total Vote
                                   Total Vote  of Class    Withheld
                                    For Each  Entitled to From Each
           Name                     Director     Vote      Director
           ----                    ---------- ----------- ----------
           <S>                     <C>        <C>         <C>
           Bryan J. Mitchell...... 11,894,953    99.17%       --
           Robert J. Merrick...... 11,894,953    99.17        --
           Wallace B. Millner, III 11,894,953    99.17        --
           Steven F. Tunney....... 11,894,953    99.17        --
           Joseph P. DiSabato.....  6,816,066    99.78        --
           Joseph Gleberman.......  6,816,066    99.78        --
           Norman W. Alpert.......  4,700,000      100        --
           Todd N. Khoury.........  4,700,000      100        --
           Michael A. Pruzan......  4,700,000      100        --
</TABLE>

   In connection with our initial public offering and pursuant to our
certificate of incorporation in effect prior to our initial public offering,
Messrs. Mitchell, Merrick, Millner and Tunney were elected by our Class A,
Class B and Class E common stockholders; Messrs. DiSabato and Gleberman were
elected by our Class A stockholders and Messrs. Alpert, Khoury and Pruzan were
elected by our Class E stockholders.

   During the fourth quarter of 2001, prior to the completion of our initial
public offering, our stockholders executed written consents approving the
following transactions:

   On October 31, 2001, our common stockholders acted by majority written
consent for the purpose of approving (i) our Restated Certificate of
Incorporation to be effective immediately prior to the consummation of our
initial public offering; (ii) our Restated Certificate of Incorporation to be
effective upon the consummation of our initial public offering; (iii) the
Recapitalization and Transaction Agreement between us and certain stockholders
in connection with our initial public offering; and (iv) our Amended and
Restated Bylaws. The holders of 11,575,387 shares of common stock or 91.35% of
our outstanding shares of common stock approved these actions.

   On October 31, 2001, our Class A and Class E stockholders acted by majority
written consent for the purpose of approving (i) the initial public offering of
our common stock; (ii) our Restated Certificate of Incorporation to be
effective immediately prior to the consummation of our initial public offering
(iii) our Restated Certificate of Incorporation to be effective upon
consummation of our initial public offering; (iv) the Recapitalization and
Transaction Agreement between us and certain stockholders in connection with
our initial public offering; (v) our election to be a closed-end investment
company and business development company; (vi) our election to withdraw as a
closed-end investment company; (vii) the issuance of 1,539,851 shares of our
common stock in connection with the termination of our stock option plan;
(viii) our election to be regulated as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended; and (ix) the
incorporation of two wholly-owned subsidiaries of MCG Finance I, LLC (formerly
MCG Finance Corporation), one of our subsidiaries, for the purpose of working
out, restructuring and/or foreclosing upon our loans to two entities. The
holders of 6,496,500 Class A shares, or 95.10% of our outstanding Class A
shares approved these actions and the holders of 4,666,667 Class E shares or
99.29% of our outstanding Class E shares approved these actions.

                                      21

<PAGE>

   On October 31, 2001, our Class B and Class D stockholders acted by majority
written consent for the purpose of approving (i) our Restated Certificate of
Incorporation to be effective immediately prior to the consummation of our
initial public offering and (ii) our Restated Certificate of Incorporation to
be effective upon consummation of our initial public offering. The holders of
378,887 Class B shares or 81.85% of our outstanding Class B shares approved the
above referenced transactions and the holders of 677,934 Class D shares or 100%
of our outstanding Class D shares approved these actions.

   On November 19, 2001, our common stockholders acted by majority written
consent for the purpose of approving the classification of our Board of
Directors into the following three classes: (i) directors whose terms expire at
the annual meeting of the stockholders in 2002, Robert J. Merrick, Wallace B.
Millner, III and Bryan J. Mitchell; (ii) directors whose terms expire at the
annual meeting of the stockholders in 2003, Jeffrey M. Bucher, Kenneth J.
O'Keefe and Michael A. Pruzan; and (iii) directors whose terms expire at the
annual meeting of the stockholders in 2004, Norman W. Alpert, Joseph H.
Gleberman and Steven F. Tunney. The holders of 11,575,387 shares of common
stock or 91.35% of our outstanding shares of common stock approved these
actions.

                                      22

<PAGE>

                                    PART II

Item 5.  Market for the Registrant's Common Equity and Related Stockholder
Matters

                          PRICE RANGE OF COMMON STOCK

   Our common stock is traded on the Nasdaq National Market under the symbol
"MCGC." We completed our initial public offering of common stock in December
2001 at the price of $17 per share. Prior to such date there was no public
market for our common stock.

   The following table sets forth the range of high and low closing prices of
our common stock as reported on the Nasdaq National Market and the dividends
declared by the Company for the fourth quarter of 2001. We declared a dividend
consisting of a fourth quarter dividend and an earnings and profit dividend
that was paid on January 31, 2002 to stockholders of record on January 22, 2002.

<TABLE>
<CAPTION>
                                                       Price Range    Cash
                                                      ------------- Dividend
                                                       High   Low   Per Share
                                                      ------ ------ ---------
   <S>                                                <C>    <C>    <C>
   Fiscal 2001
      Fiscal 2001 Fourth quarter ended December 31
      (beginning November 29, 2001).................. $17.80 $14.95   $0.86
</TABLE>

   As of March 28, 2002, we had approximately 104 shareholders of record.

                    RECENT SALES OF UNREGISTERED SECURITIES

   During our last fiscal year, we issued 2,239,781 shares of our common stock
pursuant to an exemption from the registration requirements of the Securities
Act of 1933, as amended, under Section 4(2) of the Securities Act as
transactions by an issuer not involving any public offering, or under Rule 701
thereunder. Of the total 2,239,781 shares, 1,539,851 shares of our common stock
were issued prior to the completion of our initial public offering in
connection with the termination of all options outstanding under our stock
option plan; 6,000 shares of our common stock were issued prior to the
completion of our initial public offering to three directors in connection with
their service on our board of directors; 68,930 shares of our common stock were
issued prior to the completion of our initial public offering to one of our
investors for the termination of all of its outstanding warrants to purchase
shares of our common stock; and 625,000 shares of our common stock were issued
in a private offering concurrent with our initial public offering.

                                DIVIDEND POLICY

   We intend to make quarterly distributions to holders of our common stock.
The amount of our quarterly distributions will be determined by our board of
directors. We intend to distribute to our stockholders all of our income,
except for certain net capital gains. We intend to make deemed distributions to
our stockholders of any retained net capital gains. We declared an aggregate
dividend of $0.86 per share in December 2001 consisting of a dividend of $0.25
per share for the fourth quarter of 2001 and an additional dividend of $0.61
per share representing the distribution of substantially all of our earnings
and profits since inception.

   Our ability to make distributions will be limited by asset coverage
requirements under the 1940 Act. Covenants and provisions in our credit
facilities currently limit the ability of MCG Finance II, LLC, MCG Finance III,
LLC and our securitization trusts to make distributions to MCG Capital, which
could affect our ability to make distributions to our stockholders and to
maintain our status as a regulated investment company.

                                      23

<PAGE>

Item 6.  Selected Financial Data

   The selected financial data should be read in conjunction with our
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and notes thereto. As
discussed in Note A to the Consolidated Financial Statements we completed an
initial public offering and concurrent private offering of our common stock on
December 4, 2001. The results of operations for 2001 are divided into two
periods, the "Post-IPO as a Business Development Company" period and "Pre-IPO
prior to becoming a Business Development Company" period. Different accounting
principles are used in the preparation of financial statements of a business
development company under the Investment Company Act of 1940 and, as a result,
the financial results for periods prior to December 1, 2001 are not comparable
to the period commencing on December 1, 2001 and are not expected to be
representative of our financial results in the future. On January 1, 2001, we
adopted the provisions of Financial Accounting Standards Board Statements
("SFAS") No. 133 and 138, "Accounting for Derivative Instruments and Hedging
Activities". As a result of the changes, the financial results for periods
prior to January 1, 2001 are not comparable to the period commencing on January
1, 2001 and are not expected to be representative of the financial results of
the Company in the future.

<TABLE>
<CAPTION>
                                Post-IPO as a
                                  Business                                                          Predecessor as
                                 Development               Pre-IPO prior to becoming a              a division of
                                   Company                Business Development Company               Signet Bank
                                ------------- ----------------------------------------------------- --------------
                                  One Month   Eleven Months                           June 25, 1998   January 1,
                                    Ended         Ended      Year Ended   Year Ended     through         1998       Year Ended
                                December 31,  November 30,  December 31, December 31, December 31,     through     December 31,
 (Dollars in thousands except       2001          2001          2000         1999         1998      June 24, 1998      1997
       per share data)          ------------- ------------- ------------ ------------ ------------- -------------- ------------
<S>                             <C>           <C>           <C>          <C>          <C>           <C>            <C>
Income Statement Data:
Operating income...............   $  6,012       $65,789      $ 63,750     $ 28,429     $ 10,256        $9,975       $ 22,276
Income (loss) before cumulative
 effect of accounting changes..     (2,270)        8,779        14,071        5,783          800         1,966          2,744
Net (decrease) increase in
 stockholders' equity resulting
 from earnings (loss)/net
 income (loss).................     (6,742)       10,556        14,071        5,783          800         1,974          3,077

Per Common Share Data:
Income (loss) before cumulative
 effect of accounting changes
 per common share--basic
 and diluted...................   $  (0.08)      $  0.69      $   1.35     $   0.87     $   0.13            (a)            (a)
Net income (loss) per common
 share--basic and diluted......      (0.25)         0.83          1.35         0.87         0.13            (a)            (a)
Net asset value per common
 share.........................      12.46         13.31         12.54        10.01         9.10            (a)            (a)
Dividends per common share.....       0.86            --            --           --           --            (a)            (a)

Selected Period-End Balances:
Total investment portfolio.....   $605,069            (a)     $490,892     $301,963     $180,865            (a)      $232,868
Total assets...................    673,066            (a)      526,493      326,314      199,432            (a)       237,267
Borrowings.....................    287,808            (a)      356,833      248,217      138,785            (a)       183,537

Other data:
Number of portfolio companies..         74            (a)           70           52           37            (a)            43
Number of employees                     57            57            46           33           27            (a)            (a)
</TABLE>
--------
(a) Certain information in the "Pre-IPO prior to becoming a Business
    Development Company" and "Predecessor as a division of Signet Bank" periods
    are not meaningful for comparative purposes.

                                      24

<PAGE>

Item 7.  Management's Discussion and Analysis of Financial Condition and
Results of Operations

   The information contained in this section should be read in conjunction with
the Selected Consolidated Financial and Other Data and our Consolidated
Financial Statements and notes thereto appearing elsewhere in this Annual
Report. The Annual Report, including the Management's Discussion and Analysis
of Financial Condition and Results of Operations, contains forward-looking
statements that involve substantial risks and uncertainties. These
forward-looking statements are not historical facts, but rather are based on
current expectations, estimates and projections about our industry, our
beliefs, and our assumptions. Words such as "anticipates", "expects",
"intends", "plans", "believes", "seeks", and "estimates" and variations of
these words and similar expressions are intended to identify forward-looking
statements. These statements are not guarantees of future performance and are
subject to risks, uncertainties, and other factors, some of which are beyond
our control and difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in the forward-looking statements
including without limitation (1) an economic downturn could impair our
customers' ability to repay our loans and increase our non-performing assets,
(2) an economic downturn could disproportionately impact the communications,
information services, media and technology industries in which we concentrate
causing us to suffer losses in our portfolio and experience diminished demand
for capital in these industry sectors, (3) a contraction of available credit
and/or an inability to access the equity markets could impair our lending and
investment activities, (4) interest rate volatility could adversely affect our
results and (5) the risks, uncertainties and other factors we identify from
time to time in our filings with the Securities and Exchange Commission,
including our Form 10-K's, Form 10-Q's and Form 8-K's. Although we believe that
the assumptions on which these forward-looking statements are based are
reasonable, any of those assumptions could prove to be inaccurate, and as a
result, the forward-looking statements based on those assumptions also could be
incorrect. In light of these and other uncertainties, the inclusion of a
projection or forward-looking statement in this Annual Report should not be
regarded as a representation by us that our plans and objectives will be
achieved. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this Annual Report.

                                   Overview

   MCG Capital Corporation is a solutions-focused financial services company
providing financing and advisory services to companies throughout the United
States in the communications, information services, media and technology
industry sectors. On December 4, 2001, we completed an initial public offering
of 13,375,000 shares of our common stock and concurrent private offering of
625,000 shares of our common stock with gross proceeds totaling $237.3 million.
Upon completion of these offerings, we became an internally managed,
non-diversified, closed-end investment company that elected to be treated as a
business development company under the Investment Company Act of 1940. We will
elect, effective as of January 1, 2002, to be taxed as a regulated investment
company for U.S. federal income tax purposes. Pursuant to this election, we
generally will not have to pay corporate-level taxes on any income we
distribute to our stockholders as dividends, allowing us to substantially
reduce or eliminate our corporate-level tax liability.

   The results of operations for 2001 are divided into two periods. The
eleven-month period from January 1, 2001 through November 30, 2001 reflects our
results prior to operating as a business development company under the
Investment Company Act of 1940. The one-month period from December 1, 2001
through December 31, 2001 reflects our results as a business development
company under the Investment Company Act of 1940, including a one-time
conversion adjustment. The principal differences between these two periods
relate to accounting for investments and income taxes. See Note A to our
Consolidated Financial Statements. In addition, certain prior year items have
been reclassified to conform to the current year presentation as a business
development company.

                                      25

<PAGE>

   We were formed by our management and affiliates of Goldman, Sachs & Co. to
purchase a loan portfolio and certain other assets from First Union National
Bank in a management buyout that was completed on June 24, 1998. Prior to this
purchase, we conducted our business as a division of Signet Bank. This separate
division was known as the media communications group. Signet Banking
Corporation, the parent of Signet Bank, was acquired by First Union Corporation
(now Wachovia Corporation) on November 28, 1997.

                    Portfolio Composition and Asset Quality

   Our primary business is lending to and investing in businesses, primarily in
the communications, information services, media, and technology industry
sectors, through investments in senior debt, subordinated debt and equity-based
investments, including warrants and equity appreciation rights. We intend to
increase gradually our level of subordinated debt and equity-based investments.
However, a substantial majority of our portfolio will continue to consist of
investments in senior secured commercial loans. The total portfolio value of
investments in publicly traded and non-publicly traded securities was $617.2
million, $510.9 million, and $313.4 million at December 31, 2001, 2000, and
1999, respectively. The increase in the value of investments during each period
was primarily attributable to originated senior debt securities. See Note A to
our consolidated financial statements for further discussion of investment
valuations.

   Total portfolio investment activity as of and for the years ended December
31, 2001, 2000, and 1999 was as follows: (Dollars in millions)

<TABLE>
<CAPTION>
                                   December 31,  December 31, December 31,
                                     2001 (a)      2000(a)      1999(a)
      (Dollars in millions)        ------------  ------------ ------------
      <S>                          <C>           <C>          <C>
      Beginning Portfolio.........    $510.9        $313.4       $184.2
      Originations/Draws/Purchases     167.6         258.1        164.5
      Pay-offs/Sales of Securities     (33.0)        (62.8)       (39.1)
      Charge-offs/Write-downs.....     (14.8)(b)      (0.5)          --
      Realized Gains (Losses).....      (1.7)          2.1          3.8
      Unrealized Gains (Losses)...     (11.8)          0.6           --
                                      ------        ------       ------
      Ending Portfolio............    $617.2        $510.9       $313.4
                                      ======        ======       ======
</TABLE>
--------
(a) Balances prior to our election to be regulated as a business development
    company primarily include amounts at cost.
(b) Represents $14.8 million of loan charge-offs against the allowance for loan
    losses previously provided for prior to our election to be regulated as a
    business development company. We had provided for loan losses of $20.3
    million from inception through November 30, 2001 including $2.0 million of
    allowance recorded in the asset acquisition on June 24, 1998.

   The majority of our commercial loans are senior secured loans. The majority
of our non-loan investments are either warrants to acquire equity interests or
direct equity investments. The receipt of warrants allows us to participate in
positive changes in the value of the portfolio company, while minimizing the
amount of upfront cost to us. The following table shows the fair value of our
portfolio of investments by asset class as of December 31, 2001, 2000 and 1999:

<TABLE>
<CAPTION>
                              December 31, December 31, December 31,
                                  2001         2000         1999
                              ------------ ------------ ------------
            <S>               <C>          <C>          <C>
            Senior Debt......     95.3%        96.8%        93.7%
            Subordinated Debt      1.2          1.4          2.0
            Equity...........      3.5          1.8          4.3
                                 -----        -----        -----
                                 100.0%       100.0%       100.0%
                                 =====        =====        =====
</TABLE>

                                      26

<PAGE>

   Asset quality is generally a function of our underwriting and ongoing
management of our investment portfolio. As a business development company, our
loans and equity investments are carried at market value or, in the absence of
market value, at fair value as determined by our Board of Directors on a
quarterly basis. As of December 31, 2001, unrealized depreciation on
investments totaled $11.2 million.

   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. Below is a description of the conditions associated
with each investment rating:
<TABLE>
<CAPTION>
Investment
  Rating    Summary Description
  ------    -------------------
<C>        <S>
    1      Capital gain expected
    2      Full return of principal and interest or dividend expected with customer
           performing in accordance with plan
    3      Full return of principal and interest or dividend expected but customer requires
           closer monitoring
    4      Some loss of interest or dividend expected but still expecting an overall positive
           internal rate of return on the investment
    5      Loss of interest or dividend and some loss of principal investment expected
           which would result in an overall negative internal rate of return on the investment
</TABLE>

   The following table shows the distribution of our investments on the 1 to 5
investment rating scale at fair value as of December 31, 2001:

                Distribution of Portfolio by Investment Rating
<TABLE>
<CAPTION>
                    Investment Rating Amount % of Portfolio
                    ----------------- ------ --------------
                             (Dollars in millions)
                    <S>               <C>    <C>
                            1         $135.2      21.9%
                            2          275.1      44.5
                            3          158.6      25.7
                            4           46.7       7.6
                            5            1.6       0.3
                                      $617.2     100.0%
</TABLE>

   We manage loan concentrations in our portfolio, both on an individual loan
basis and on a sector or industry basis, to manage overall portfolio
performance due to specific customer issues or specific industry issues.

    [Graphic--Heading -- Distribution of Portfolio by Investment Rating ("IR")
                               -- Pie Chart 1 --
                      Total Portfolio at December 31, 2001

<TABLE>
                                    <S>  <C>
                                    IR-1 22%
                                    IR-2 44%
                                    IR-3 26%
                                    IR-4  8%
                                    IR-5  0%
</TABLE>

          Graphic--Heading -- 2001 New Originations -- Pie Chart 2 --

<TABLE>
                                   <S>  <C>
                                   IR-1 31%
                                   IR-2 61%
                                   IR-3  7%
                                   IR-4  1%]
</TABLE>

                                      27

<PAGE>

   Set forth below is a table showing the composition of MCG's portfolio by
industry sector at fair value at December 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                      December 31, December 31,
                                          2001         2000
                                      ------------ ------------
                 <S>                  <C>          <C>
                 Media...............     55.2%        53.8%
                 Communications......     28.9         29.9
                 Information Services     11.8         10.3
                 Technology..........      3.8          5.6
                 Other...............      0.3          0.4
                                         -----        -----
                                         100.0%       100.0%
                                         =====        =====
</TABLE>



           [Graphic--Distribution of Portfolio by Detailed Industry

Heading -- Distribution of Portfolio by Detailed Industry Pie Chart 1 --
                      Total Portfolio at December 31, 2001

<TABLE>
                           <S>                  <C>
                           Newspaper             28%
                           Telecom               25%
                           Publishing            19%
                           Information Services  12%
                           Broadcast              8%
                           Security               4%
                           Other                  4%
</TABLE>

Pie Chart 2 -- 2001 New Originations

<TABLE>
                           <S>                  <C>
                           Newspaper             27%
                           Telecom               14%
                           Publishing            18%
                           Information Services  22%
                           Broadcast             14%
                           Security               5%]
</TABLE>

   We monitor individual customer's financial trends in order to assess the
appropriate course of action with respect to each customer and to evaluate
overall portfolio quality. We closely monitor the status and performance of
each individual investment on a quarterly and, in some cases, a monthly basis.
Because we are a provider of long-term privately negotiated investment capital
to high-growth companies and we actively manage our investments through tightly
structured contracts, we do not believe contract exceptions are necessarily an
indication of credit quality or the need to pursue remedies or an active
workout of a portfolio investment.

                                      28

<PAGE>

   At December 31, 2001, 2000 and 1999 there were $8.6 million, $0 and $0,
respectively, of loans greater than 60 days past due. When a loan becomes 90
days or more past due, or if we otherwise do not expect the customer to be able
to service its debt and other obligations, we will, as a general matter, place
the loan on non-accrual status and stop recognizing interest income on that
loan until all principal has been paid. However, we will make exceptions to
this policy if the investment is well secured and in the process of collection.

   When principal and interest on a loan is not paid within the applicable
grace period, we will contact the customer for collection. At that time, we
will make a determination as to the extent of the problem, if any. We will then
pursue a commitment for immediate payment and will begin to more actively
monitor the investment. We will formulate strategies to optimize the resolution
process and will begin the process of restructuring the investment to better
reflect the current financial performance of the customer. Such a restructuring
may involve deferring payments of principal and interest, adjusting interest
rates or warrant positions, imposing additional fees, amending financial or
operating covenants or converting debt to equity. In general, in order to
compensate us for any enhanced risk, we receive appropriate compensation from
the customer in connection with a restructuring. During the process of
monitoring a loan which is out of compliance, we will in appropriate
circumstances send a notice of non-compliance outlining the specific defaults
that have occurred and preserving our remedies, and initiate a review of the
collateral. When a restructuring is not the most appropriate course of action,
we may determine to pursue remedies available under our loan documents or at
law to minimize any potential losses, including initiating foreclosure and/or
liquidation proceedings. During 2001, we foreclosed upon 2 of our portfolio
companies, which had a fair value of $19.6 million as of December 31, 2001. Of
the $14.8 million of charge-offs during 2001, $4.5 million related to these
foreclosures.

   Prior to the conversion to a business development company, we provided an
allowance for loan losses estimated to be sufficient to absorb probable future
losses, net of recoveries. From inception through November 30, 2001, we had
provided $20.3 million of allowance for loan losses, including $2.0 million of
allowance recorded in the asset acquisition and have charged-off $14.8 million.
We had no charge-offs during the years ended December 31, 2000 and 1999.

                             Results of Operations

   The following table shows our consolidated results of operations for the
one-month period ended December 31, 2001, the eleventh-month period ended
November 30, 2001, and the years ended December 31, 2001, 2000 and 1999. For
2001, the one-month period from December 1, 2001 to December 31, 2001 reflects
our financial results as a business development company, and the eleven-month
period from January 1, 2001 to November 30, 2001, reflects our financial
results prior to operating as a business development company. Certain
accounting adjustments were made to our financial results for the one-month
period from December 1, 2001 to December 31, 2001 due to our conversion to a
business development company. The adjustments primarily relate to the value at
which we carry our investments in our financial statements and the benefits
associated with being a regulated investment company for U.S. federal income
tax purposes. See Note A to Consolidated Financial Statements. To help you
better understand our 2001 results of operations compared to 2000, we have
combined certain items in the table below, under the heading "Year Ended
December 31, 2001" for purposes of this

                                      29

<PAGE>

Management's Discussion and Analysis of Financial Condition and Results of
Operations, that were not affected by the change in accounting principles
resulting from our conversion to a business development company.

<TABLE>
<CAPTION>
                                                  One Month   Eleven Months
                                                    Ended         Ended     Year Ended December 31,
                                                 December 31, November 30,  -----------------------
                                                     2001         2001       2001    2000    1999
(Dollars in thousands)                           ------------ ------------- ------- ------- -------
<S>                                              <C>          <C>           <C>     <C>     <C>
Operating income
Interest and fees on commercial loans...........   $ 5,949       $64,032    $69,981 $62,621 $28,256
Advisory fees and other income..................        63         1,757      1,820   1,129     173
                                                   -------       -------    ------- ------- -------
Total operating income..........................     6,012        65,789     71,801  63,750  28,429

Operating expenses
Interest expense................................     1,198        24,661     25,859  26,648  14,317
Employee compensation:
 Salaries and benefits..........................       884         8,038      8,922   7,626   4,034
 Long-term incentive compensation...............     4,944            --      4,944      --      --
                                                   -------       -------    ------- ------- -------
Total employee compensation.....................     5,828         8,038     13,866   7,626   4,034

General and administrative expense..............       594         4,619      5,213   2,413   2,348
                                                   -------       -------    ------- ------- -------
Total operating expense.........................     7,620        37,318     44,938  36,687  20,699
                                                   -------       -------    ------- ------- -------
Net operating income (loss) before provision for
  loan losses and investment gains (losses).....    (1,608)       28,471     26,863  27,063   7,730
Long-term incentive compensation (a)............     4,944            --      4,944      --      --
                                                   -------       -------    ------- ------- -------
Distributable net operating income (b)..........   $ 3,336       $28,471    $31,807 $27,063 $ 7,730
                                                   =======       =======    ======= ======= =======
</TABLE>
--------
(a) Includes expenses related to termination of the stock option plan and
    issuance of related restricted stock awards. See Note J to the Consolidated
    Financial Statements.
(b) Distributable net operating income is presented to facilitate the
    understanding of the amount of net earnings we may have potentially
    distributed if we had been a business development company and regulated
    investment company (without the effect of de-leveraging) for the periods
    presented. The amounts of the distributable net operating income identified
    in this table are not intended to represent amounts we will distribute in
    future periods. Distributable net operating income may not be comparable to
    similarly titled measures reported by other companies. Distributable net
    operating income does not represent net increase (decrease) in
    stockholders' equity resulting from operations or cash generated from
    operating activities in accordance with GAAP and should not be considered
    an alternative to net income as an indication of our performance or to cash
    flows as a measure of liquidity or ability to make distributions. For
    additional information on distributions, see the section entitled
    "Financial Condition, Liquidity and Capital Resources--Dividends."

Operating Income

   Operating income includes interest income on commercial loans, advisory fees
and other income. Interest income is comprised of commercial loan interest at
contractual rates and upfront fees that are amortized into income over the life
of the loan. Most of our loans contain lending features that adjust the rate
margin based on the financial and operating performance of the borrower, which
generally occurs quarterly.

                                      30

<PAGE>

   The change in operating income from 2000 to 2001 and 1999 to 2000 is
attributable to the following items:

<TABLE>
<CAPTION>
                                           2001 vs. 2000 2000 vs. 1999
          (Dollars in millions)            ------------- -------------
          <S>                              <C>           <C>
          Change due to:
           Loan Growth (a)................    $ 17.2         $21.7
           Change in LIBOR (a)............     (10.9)          2.6
           Change in spread (a)...........       5.7           2.6
           Fee amortization...............      (4.6)          7.5
           Advisory and other income......       0.7           0.9
                                              ------         -----
          Total change in operating income    $  8.1         $35.3
                                              ======         =====
</TABLE>
--------
(a) The change in interest income due to rate and growth has been allocated in
    proportion to the absolute dollar amounts of the change in each. The change
    due to rate has been allocated to the spread.

   Total operating income for the year ended December 31, 2001 increased $8.1
million, or 12.7%, to $71.8 million from $63.7 million for the year ended
December 31, 2000. The increase was primarily due loan growth and increased
spreads. Average commercial loans increased 41% for 2001 and spreads increased
115 basis points. This was offset by decreases in actual LIBOR rates in 2001.
In addition, in 2000 we recognized a $5.5 million fee in conjunction with the
recapitalization, refinancing and partial loan paydown of one of our portfolio
companies.

   Total operating income for the year ended December 31, 2000 increased $35.3
million, or 124.3%, to $63.7 million from $28.4 million for the year ended
December 31, 1999. The increase was primarily due to an increase in average
commercial loans, higher LIBOR and spreads and an acceleration of deferred fees
on refinanced and paid off loans.

   The following bar graph shows the growth in the carrying value of our
portfolio from December 31, 1999 to December 31, 2001 and the increase in the
weighted average interest spread to 3 month LIBOR over the same period, which
results in a compound annual growth rate ("CAGR") of 40%:

[Graphic--Heading--Carrying Value of Portfolio and Weighted Average Rate Spread

Carrying value of portfolio (bar graph)

           31-Dec-1999        $313 million
           31-Dec-2000        $511 million
           31-Dec-2001        $617 million

Weighted Average Rate Spread (line graph)

           31-Dec-1999        7.3%
           31-Dec-2000        7.7%(a)
           31-Dec-2001        8.7%

Compound Annual Growth Rate ("CAGR") = 40%

(a) Fees exclude the one time $5.5 million fee discussed in Operating Income
    above.]

Operating Expenses

   Operating expenses include interest expense on borrowings, including
amortization of deferred debt issuance costs, employee compensation, and
general and administrative expenses.

                                      31

<PAGE>

   The change in operating expense from 2000 to 2001 and 1999 to 2000 is
attributable to the following items:

<TABLE>
<CAPTION>
                                                    2001   2000
                                                    vs.    vs.
                                                    2000   1999
               (Dollars in millions)                -----  -----
               <S>                                  <C>    <C>
               Change due to:
                Increase in borrowings (a)......... $ 7.7  $10.2
                Change in LIBOR (a)................  (7.4)   2.0
                Change in spread (a)...............  (1.6)  (0.1)
                Debt cost amortization.............   0.5    0.2
                Salaries and benefits..............   1.3    3.6
                Long-term incentive compensation...   4.9     --
                General and administrative expenses   2.9    0.1
                                                    -----  -----
               Total change in operating expense... $ 8.3  $16.0
                                                    =====  =====
</TABLE>
--------
(a) The change in interest expense due to rate and growth has been allocated in
    proportion to the absolute dollar amounts of the change in each. The change
    due to rate has been allocated to the spread.

   Total operating expenses for the year ended December 31, 2001 increased $8.3
million, or 22.7%, to $44.9 million from $36.6 million for the year ended
December 31, 2000. The increase was primarily due to increases in salaries and
benefits of $1.3 million, or 17.1%, an increase in long-term incentive
compensation of $4.9 million from $0 in 2000, and an increase in general and
administrative expenses of $2.9 million. The increase in salaries and benefits
is due to an increase in employees from 46 at the end of 2000 to 57 at the end
of 2001. The increase in long-term incentive compensation is related to the
amortization of restricted stock awards, related cash payments to non-executive
staff and administrative employees in connection with the cancellation of the
stock option plan, related restricted stock awards and dividends on stock used
as collateral for non-recourse loans. See note J to Consolidated Financial
Statements. The increase in general and administrative expenses is due
primarily to the growth in size and scope of our business activities.

   Total operating expense for the year ended December 31, 2000 increased $16.0
million, or 77.7%, to $36.6 million from $20.6 million for the year ended
December 31, 1999. Contributing to the increase was higher interest expense,
which increased $12.3 million or 86.0%, and higher salaries and benefits, which
increased $3.6 million, or 90.0%. The higher interest expense is primarily a
result of an increase in borrowings. Average borrowings for the year ended
December 31, 2000 were $295.9 million compared to $172.3 million for 1999. The
higher employee compensation is attributable to an increase in employees from
33 to 46 as well as higher variable compensation related to overall financial
performance for the year.

Reconciliation of Net Operating Income Before Provision for Loan Losses and
Investment Gains and Losses to Net (Decrease) Increase in Stockholders' Equity
from Earnings (Loss)

  Provision for Loan Losses

   Since we are a business development company and our investments are carried
at fair value, we no longer provide a provision for loan losses. See discussion
in the "Overview" section.

   For the periods prior to conversion to a business development company, the
provision for loan losses increased $4.9 million from $5.4 million for the year
ended December 31, 2000 to $10.3 million for the eleven-month period ended
November 30, 2001. In 2001, the increased provision was attributable to
provision associated with growth in the portfolio and additional provisions for
declining economic conditions. Industry conditions in certain subsectors of our
communications portfolio deteriorated throughout the year and the publishing
industry experienced weakened advertising sales associated with a cyclical
downturn.

                                      32

<PAGE>

   The provision for loan losses totaled $5.4 million for the year ended
December 31, 2000, an increase of $3.3 million from $2.1 million for the year
ended December 31, 1999. The increase in the provision for loan losses was due
to growth in commercial loan balances from 1999 to 2000 in addition to the
beginning of the deterioration in economic conditions mentioned above.

  Realized/unrealized gains and losses

   Investment losses-realized totaled $1.7 million for the eleven-month period
ended November 30, 2001 and represented impairment write-offs on equity
investments and for the year ended December 31, 2000 net realized gains totaled
$2.1 million and were primarily related to gains on the sale of warrants during
the year. Investment gains-realized, primarily related to gains on the sale of
warrants, were 3.8 million for the year ended December 31, 1999 compared to the
gain of $2.1 million for the year ended December 31, 2000.

   Investment losses-unrealized of $1.3 million for the one-month period ended
December 31, 2001 reflects the change in fair value for all investments from
the date of conversion to a business development company. Prior to conversion,
only certain investments were carried at fair value. Investment
losses-unrealized were $1.6 million for the eleven-month period ended November
30, 2001 and were related to the write down in the fair market value of certain
warrants accounted for in accordance with SFAS No. 133 and 138.

  Income Taxes

   Through December 31, 2001 we were taxed under Subchapter C of the Internal
Revenue Code. As of January 1, 2002, we will elect to be a regulated investment
company under Subchapter M of the Internal Revenue Code and will not be subject
to taxation of income to the extent such income is distributed to stockholders
and we meet certain minimum dividend distribution and other requirements.

   Our effective tax rates for the periods ended December 31, 2001, November
30, 2001, December 31, 2000, and 1999 were 21.8%, 41.0%, 40.7%, and 40.4%,
respectively. The effective rates include both federal and state income tax
components. The decrease in the effective rate for the one-month period ended
December 31, 2001 is due to the change in accounting for income taxes in
connection with the conversion to a business development company. Certain
differences between book and tax accounting, relating primarily to the tax
treatment of long-term incentive compensation, are no longer reflected as
deferred tax expenses or benefits. The increases in the effective tax rates for
the eleven-months ending November 30, 2001 and the year ending December 31,
2000 are attributable to higher state income tax expense and the loss of the
benefits of the graduated tax rates due to the higher levels of pre-tax income.

  Cumulative effect of accounting changes

   The cumulative effect of accounting changes for the eleven-month period
ended November 30, 2001 reflects the initial fair value adjustment of $3.0
million for warrant positions subject to fair value accounting under SFAS No.
133 and 138 net of related taxes of $1.2 million. The cumulative effect of
accounting changes for the one-month period ended December 31, 2001 reflects
our business development company conversion adjustments of $4.5 million. See
Note A to our Consolidated Financial Statements. See detail of conversion
adjustments below:

<TABLE>
<CAPTION>
                                                                  (Dollars
                                                                     in
     Cumulative Effect of Business Development Company Conversion millions)
     ------------------------------------------------------------ ---------
     <S>                                                          <C>
         Effect of recording loans at fair value.................  $(10.1)
         Effect of recording equity investments at fair value....    (1.0)
         Elimination of allowance for loan losses................     5.5
         Elimination of certain deferred taxes...................     1.1
                                                                   ------
                                                                   $ (4.5)
                                                                   ======
</TABLE>

                                      33

<PAGE>

             Financial Condition, Liquidity and Capital Resources

Cash and Cash Equivalents

   At December 31, 2001 and December 31, 2000, we had $48.1 million and $16.8
million, respectively, in cash and cash equivalents. We invest cash on hand in
interest bearing deposit accounts with daily sweep features. On December 4,
2001, we completed an initial public offering of 13,375,000 shares of our
common stock and concurrent private offering of 625,000 shares of our common
stock with gross proceeds totaling $237.3 million. The increase in cash for
2001 is due to remaining proceeds from our initial public offering. Our
objective is to maintain a low cash balance, while keeping sufficient cash on
hand to cover current funding requirements.

Liquidity and Capital Resources

   We expect our cash on hand and cash generated from operations to be adequate
to meet our cash needs at our current level of operations, including the next
twelve months. We generally fund new originations using cash on hand and
advances under our credit facilities.

   As of December 31, 2001 we had unused commitments to extend credit to our
customers of $29.4 million which are not reflected on the balance sheet. At the
same time, subject to certain minimum equity restrictions and other covenants,
total unused available commitments from our commercial paper facility totaled
$177.4 million. See "Borrowings" section below for discussion of our borrowing
facilities.

   The following table shows our contractual obligations as of December 31,
2001:

<TABLE>
<CAPTION>
                                              Payments Due by Period
                                   --------------------------------------------
                                              (Dollars in millions)
                                          Less than                     After 5
 Contractual Obligations (a)       Total   1 year   1-3 years 4-5 years  years
 ---------------------------       ------ --------- --------- --------- -------
 <S>                               <C>    <C>       <C>       <C>       <C>
 Borrowings (b)................... $287.8             $22.6             $265.2
 Future minimum rental obligations    1.5   $0.8        0.5     $0.2
                                   ------   ----      -----     ----    ------
 Total contractual obligations.... $289.3   $0.8      $23.1     $0.2    $265.2
                                   ======   ====      =====     ====    ======
</TABLE>
--------
(a) This excludes the unused commitments to extend credit to our customers of
    $29.4 million as discussed above.

(b) Borrowings are listed based on the contractual maturity of the facility,
    however, actual payments on borrowings could be earlier since they are
    based primarily on when we receive payments from our customers on the
    commercial loans collateralizing the borrowings.

   In order to satisfy the requirements applicable to a regulated investment
company, we intend to distribute to our stockholders all of our income except
for certain net capital gains and adjustments for long-term incentive
compensation. In addition, as a business development company, we generally will
be required to meet a coverage ratio of total assets to total senior
securities, which include all of our borrowings and any preferred stock we may
issue in the future, of at least 200%. This requirement limits the amount that
we may borrow. We anticipate needing to raise additional equity through the
capital markets to fund anticipated growth in our loan and investment portfolio.

Borrowings

   On December 27, 2001, we established the MCG Commercial Loan Trust 2001-1
(the "Trust"), which issued two classes of Series 2001-1 Notes to 15
institutional investors. The facility is secured by all of the Trust's existing
assets totaling $349.5 million as of December 31, 2001. This facility is
scheduled to terminate on February 20, 2013 or sooner upon full repayment of
the Class A and Class B Notes.

   The Trust issued $229.8 million of Class A Notes rated AAA/Aaa/AAA, and
$35.4 million Class B Notes rated A/A2/A (the "Series 2001-1 Class A Asset
Backed Bonds" and "Series 2001-1 Class B Asset Backed

                                      34

<PAGE>

Bonds") as rated by Standard & Poors, Moody's and Fitch, respectively. All of
the Series 2001-1 Notes remained outstanding as of December 31, 2001. The
Series 2001-1 Class A Asset Backed Bonds bear interest of LIBOR plus 0.60% and
Series 2001-1 Class B Asset Backed Bonds bear interest of LIBOR plus 1.75%, and
interest on both is payable quarterly.

   As of June 1, 2000, we established a revolving credit facility (the
"Revolving Credit Facility"), which allows us to issue up to $200.0 million of
Series 2000-1 Class A Notes (the "Series 2000-1 Notes" or "Series 2000-1 Class
A Asset Backed Securities"). As of December 31, 2001 $22.6 million of the
Series 2000-1 Notes were outstanding with one investor. The Revolving Credit
Facility is secured by $71.7 million of commercial loans as of December 31,
2001. We are subject to certain limitations on the amount of Series 2000-1
Notes we may issue at any point in time including the requirement for a minimum
of $30.0 million of unleveraged loans as collateral for the indebteness. The
Series 2000-1 Notes bear interest based on a commercial paper rate plus 1.0%
and interest is payable monthly. This facility is scheduled to terminate on May
31, 2003.

   The Trust and the Revolving Credit Facility are both funded through
bankruptcy remote, special purpose, wholly owned subsidiaries of ours and,
therefore, their assets are not available to our creditors.

   On June 24, 1998, one of our subsidiaries entered into a $400.0 million
senior secured credit facility (the "Facility"). The arrangement was due to
expire on January 2, 2002. The lead bank for this Facility, Heller Financial,
Inc. ("Heller"), held 334,566 Class A shares and 677,934 Class D shares at
December 31, 2000 which it purchased, along with Goldman Sachs, at the our
inception. On October 25, 2001, Heller was acquired by G.E. Capital. During
2001, the proceeds from our IPO and the sale of loans to the Trust were used to
pay off the Facility's outstanding balance of $342.7 million. This Facility has
been terminated and is no longer in place.

   At December 31, 2001, we had aggregate outstanding borrowings of $287.8
million. The following table shows the facility amounts and outstanding
borrowings from third-party lenders at December 31, 2001:

<TABLE>
<CAPTION>
                                                Facility   Amount    Interest
                                                 amount  outstanding   (a)
                                                -------- ----------- --------
                                                    (Dollars in millions)
  <S>                                           <C>      <C>         <C>
  Series 2001-1 Class A Asset Backed Bonds.....  $229.8    $229.8      2.50%
  Series 2001-1 Class B Asset Backed Bonds.....    35.4      35.4      3.65
  Series 2000-1 Class A Asset Backed Securities   200.0      22.6      3.06
                                                 ------    ------      ----
  Total borrowings.............................  $465.2    $287.8      2.69%
                                                 ======    ======      ====
</TABLE>
--------
(a) Excludes the cost of commitment fees and other facility fees.

   See Note C to the Consolidated Financial Statements for further discussion
of our borrowings.

Dividends

   Prior to our conversion, we did not make distributions to our stockholders,
but instead retained all of our income. As a regulated investment company, we
are required to distribute at least 90% of our investment company taxable
income to avoid corporate level taxes and at least 98% of our investment
company taxable income to avoid an excise tax. We intend to make distributions
on a quarterly basis to our stockholders of all of our income, except for
certain net capital gains and adjustments for long-term incentive compensation
expense.

   We may not be able to achieve operating results that will allow us to make
distributions at a specific level or to increase the amount of these
distributions from time to time. In addition, we may be limited in our ability
to make distributions due to the asset coverage test for borrowings applicable
to us as a business development company under the Investment Company Act of
1940 and due to provisions in our credit facilities. If we do not distribute a
certain percentage of our income annually, we will suffer adverse tax
consequences, including

                                      35

<PAGE>

possible loss of our status as a regulated investment company. We cannot assure
shareholders that they will receive any distributions or distributions at a
particular level.

   We declared an aggregate dividend of $0.86 per share in December 2001 to our
stockholders of record on January 22, 2002 consisting of a dividend of $0.25
per share for the fourth quarter of 2001 and an additional dividend of $0.61
per share representing the distribution of substantially all of our earnings
and profits since inception through December 31, 2001, including the period
after we elected to be a business development company through the effective
date of our election to be a regulated investment company for tax purposes.
This dividend was required for us to qualify as a regulated investment company.

Related Party Transactions

   We terminated our stock option plan and adopted a restricted stock program
under which we issued 1,539,851 shares of restricted common stock to employees
and directors. The total number of shares issued for the termination of the
option plan was based upon the Black-Scholes option-pricing model and
assumptions and approved by our Board of Directors. See Notes to Consolidated
Financial Statements.

   Immediately prior to the initial public offering, we issued 68,930 shares of
common stock for the termination of all warrants held by Wachovia Corporation
related to the management buyout in 1998 without regard to exercise price. At
that time, Wachovia Corporation was also a shareholder. The total number of
shares issued for the termination of the warrants was based on the
Black-Scholes option-pricing model and assumptions negotiated with Wachovia
Corporation and approved by our Board of Directors. Interest paid to an
affiliate of Wachovia holding the Master Trust Class A Notes totaled $4.9
million for the year ended December 31, 2001.

   We made cash payments totaling $1.7 million to non-executive employees for
the taxes imposed on them associated with the issuance of restricted common
stock. The cash payments assumed a combined federal and state tax rate of 48%
for each employee.

   Additionally, in connection with the termination of our stock option plan,
certain executive officers and employees purchased a portion of the 1,539,851
shares of restricted common stock at a per share price of $17.00. Those
executive officers and employees issued partially non-recourse notes to us,
with an aggregate face value of $5.8 million secured by approximately 1.4
million shares with a value of $23.8 million at the initial public offering
price. The notes are payable at the end of a four and a half-year term, subject
to acceleration, bear interest at 4.13% payable annually and are secured by all
of the restricted common stock held by such employee and for some employees,
for a specified time-period, additional shares of our common stock the employee
owns. The notes are non-recourse as to the principal amount but recourse as to
the interest. Amounts due on these loans are reflected as a reduction of
stockholders' equity in the consolidated balance sheets.

   Heller Financial, Inc., a shareholder, provided our primary lending facility
prior to December 28, 2001. Interest paid to Heller Financial, Inc., as agent,
totaled $20.2 million for the year ended December 31, 2001. The Heller lending
facility was paid off on December 28, 2001.

                         Critical Accounting Policies

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

Income recognition

   Interest on commercial loans is computed by methods that generally result in
level rates of return on principal amounts outstanding. It is management's
practice to cease accruing interest on commercial loans when payments are 90
days delinquent. However, management may elect to continue the accrual of
interest when the

                                      36

<PAGE>

estimated net realizable value of collateral is sufficient to cover the
principal balance and accrued interest, and the loan is in the process of
collection.

   We include in income certain amounts that we have not yet received in cash,
such as contracted payment-in-kind (PIK) interest, which represents contractual
interest added to the loan balance and is due at the end of the loan term. PIK
represented $14.2 million or 2.3% of our portfolio of investments. 98.8% of the
$14.2 million of PIK loans have an investment rating of 3 or better. The
increase in loan balances as a result of contracted PIK arrangements are
separately identified on our consolidated statements of cash flows.

   Loan origination fees paid up front are deferred and amortized as
adjustments of the related loan's yield over the contractual life. In certain
loan arrangements, warrants or other equity interests are received from the
borrower as additional origination fees. The borrowers granting these interests
are typically non-publicly traded companies. We record the financial
instruments received at estimated fair value as determined by our Board of
Directors. Fair values are estimated using various valuation models which
attempt to estimate the underlying value of the associated entity. These models
are then applied to our ownership share considering any discounts for transfer
restrictions or other terms which impact the value. Changes in these values are
recorded through our statement of operations. Any resulting discount on the
loan from recordation of warrant and other equity instruments are accreted into
income over the term of the loan. As of December 31, 2001, we had $12.1 million
of unearned fees and recognized $4.7 million of these fess in income during
2001.

Valuation of Investments

   Portfolio assets for which market prices are available are valued at those
prices. However, most of our assets were acquired in privately negotiated
transactions and have no readily determinable market values. These securities
are carried at fair value as determined by our Board of Directors under our
valuation policy. The valuation committee of our Board of Directors reviews our
loans and investments and will make recommendations to our Board of Directors.

   As a general rule, we do not value our loans above cost, but loans will be
subject to fair value write-downs when the asset is considered impaired.
Substantially all of our commercial loans bear interest at LIBOR-based variable
rates, which include a base index rate and a spread that changes with the
overall financial and operational performance of the customer. In many cases,
our loan agreements allow for increases in the spread to the base index rate if
the financial or operational performance of the customer deteriorates or shows
negative variances from the customer's business plan and, in some cases, allow
for decreases in the spread if financial or operational performance improves or
exceeds the customer's plan.

   With respect to private equity securities, each investment is valued using
industry valuation benchmarks, and then the value is assigned a discount
reflecting the illiquid nature of the investment, as well as our minority,
non-control position. When an external event such as a purchase transaction,
public offering, or subsequent equity sale occurs, the pricing indicated by the
external event will be used to corroborate our private equity valuation.
Securities that are traded in the over-the-counter market or on a stock
exchange generally will be valued at the prevailing bid price on the valuation
date. However, restricted and unrestricted publicly traded securities may be
valued at discounts from the public market value due to restrictions on sale,
the size of our investment or market liquidity concerns.

   Substantially all of our assets consist of securities carried at fair value
as determined by our Board of Directors. Determination of fair value involves
subjective judgments and the resultant values may not represent amounts at
which investments could be bought or sold in an independent third party
transaction and the differences could be material.

Securitization Transactions

   Periodically, the Company transfers pools of loans to special purpose
entities (SPEs) for use in securitization transactions. These on-balance sheet
securitization transactions comprise a significant source of

                                      37

<PAGE>

our overall funding, with the total face amount of the outstanding loans
assumed by third parties equaling $421.1 at December 31, 2001. On April 1,
2001, the Company adopted the requirements of SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", which applies prospectively to all securitization transactions
occurring after March 31, 2001. Adoption of SFAS No. 140 did not have a
material impact on the operations or financial position of the Company.
Transfers of loans have not met the requirements of SFAS No. 140 for sales
treatment and are, therefore, treated as secured borrowings, with the
transferred loans remaining in investments and the related liability recorded
in borrowings.
                                 Risk Factors

We have a limited operating history as a business development company and no
operating history as a regulated investment company, which may impair your
ability to assess our prospects.

   Prior to our initial public offering in December 2001, we had not operated
as a business development company under the Investment Company Act of 1940 or
as a regulated investment company under Subchapter M of the Internal Revenue
Code. As a result, we have no operating results under either of these
regulatory frameworks that can demonstrate to you either their effect on our
business or our ability to manage our business under these frameworks. In
addition, our management has no prior experience managing a business
development company or regulated investment company. We cannot assure you that
we will be able to operate successfully as a business development company and a
regulated investment company.

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

   Under the 1940 Act, we are required to carry our portfolio investments at
market value or, if there is no readily ascertainable market value, at fair
value as determined by our board. We are not permitted to maintain a general
reserve for anticipated loan losses. Instead, we are required by the 1940 Act
to specifically value each individual investment and record an unrealized loss
for any asset that we believe has decreased in value. Because there is
typically no public market for the loans and equity securities of the companies
in which we invest, our board will determine the fair value of these loans and
equity securities pursuant to a written valuation policy. These determinations
of fair value necessarily will be somewhat subjective. Accordingly, these
values may differ from the values that would be determined by a third party or
placed on the portfolio if there existed a market for our loans and equity
securities.

We make loans to and invest in privately owned small- and medium-sized
companies, which may default on their loans, thereby reducing or eliminating
the return on our investments.

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

                                      38

<PAGE>

   Some of these companies may be unable to obtain financing from public
capital markets or from traditional credit sources, such as commercial banks.
Accordingly, advances made to these types of customers may entail a higher risk
of loss than advances made to customers who are able to utilize traditional
credit sources. These conditions may also make it difficult for us to obtain
repayment of our loans.

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

Economic recessions or downturns could impair our customers' ability to repay
our loans, harm our operating results and reduce our volume of new loans.

   Many of our customers may be susceptible to economic slowdowns or recessions
and may be unable to repay our loans during these periods. Therefore, our
non-performing assets are likely to increase and the value of our portfolio is
likely to decrease during these periods. Adverse economic conditions also may
decrease the value of collateral securing some of our loans and the value of
our equity investments. Economic slowdowns or recessions could lead to
financial losses in our portfolio and a decrease in revenues, net income and
assets.

   Our customers are primarily concentrated in the communications, information
services, media and technology industry sectors. Accordingly, downturn could
disproportionately impact these industry sectors causing us to be more
vulnerable to losses in our portfolio and experience diminished demand for
capital in these industry sectors and, consequently,our operating results may
be negatively impacted.

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

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

   We will elect, effective as of January 1, 2002, to be taxed for federal
income tax purposes as a regulated investment company under Subchapter M of the
Internal Revenue Code. If we can meet certain requirements, including source of
income, asset diversification and distribution requirements, as well as if we
continue to qualify as a business development company, we will qualify to be a
regulated investment company and will not have to pay corporate-level taxes on
any income we distribute to our stockholders as dividends, allowing us to
substantially reduce or eliminate our corporate-level tax liability. Covenants
and provisions in our credit facilities limit the ability of our subsidiaries
and our securitization trusts to make distributions to us, which could affect
our ability to make distributions to our stockholders and to maintain our
status as a regulated investment company. In addition, we may have difficulty
meeting the requirement to make distributions to our shareholders because in
certain cases we may recognize income before or without receiving cash
representing such income. If we fail to qualify as a regulated investment
company, we will have to pay corporate-level taxes on all of our income whether
or not we distribute it, which would substantially reduce the amount of income
available for distribution to our stockholders. Even if we qualify as a
regulated investment company, we generally will be subject to a corporate-level
income tax on the income we do not distribute. Moreover, if we do not
distribute at least 98% of our income, we generally will be subject to a 4%
excise tax.

Because we will distribute substantially all of our income to our stockholders,
we will continue to need additional capital to finance our growth.

   In order to satisfy the requirements applicable to a regulated investment
company, we intend to distribute to our stockholders all of our income except
for certain net capital gains. We expect to elect to make deemed distributions
to our stockholders of the retained net capital gains. In addition, as a
business development

                                      39

<PAGE>

company, we generally will be required to meet a coverage ratio of total assets
to total senior securities, which include all of our borrowings and any
preferred stock we may issue in the future, of at least 200%. This requirement
limits the amount that we may borrow. Because we will continue to need capital
to grow our loan and investment portfolio, this limitation may prevent us from
incurring debt and require us to raise additional equity at a time when it may
be disadvantageous to do so. Additional financing may not be available on
favorable terms, if at all, or may be restricted by the terms of our
securitization facilities. If additional funds are not available to us, we
could be forced to curtail or cease our new lending and investment activities,
and our net asset value could decrease.

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

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

We have substantial indebtedness and servicing our indebtedness could reduce
funds available to grow our business.

   We had $22.6 million of outstanding borrowings under our $200 million
variable series securitization facility and $265.2 million of outstanding
borrowings under our $265.2 million securitization facility as of December 31,
2001. As a result, our current financial structure has a high proportion of
debt and our debt service is substantial. As of December 31, 2001, the weighted
average annual interest rate on borrowings under our two securitization
facilities was 2.83%. In order for us to cover our annual interest payments on
indebtedness, we must achieve annual returns on our December 31, 2001 total
assets of at least 1.21%. Our ability to service our debt depends largely on
our financial performance and will be subject to prevailing economic conditions
and competitive pressures. Further, we may not be able to refinance any of our
indebtedness on commercially reasonable terms or at all.

   In addition, our subsidiaries have sold some of our loans to trusts that
serve as the vehicles for our securitization facilities, and we do not hold
legal title to these assets. However, we bear losses of principal and interest
from defaults on these loans held by the trusts up to the amount of our
interest in the trusts, which was approximately $137.5 million as of December
31, 2001.

   Our securitization facilities impose financial and operating covenants that
restrict our business activities, including limitations that could hinder our
ability to finance additional loans and investments or to make the cash
distributions required to maintain our status as a regulated investment company
under Subchapter M of the Internal Revenue Code.

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

   Our $200 million variable funding securitization facility is scheduled to
terminate on May 31, 2003 and our $265.2 million securitization facility is
scheduled to terminate on February 20, 2013 or sooner upon repayment of our
borrowings. We cannot assure you that we will be able to extend the terms of
these facilities or obtain sufficient funds to repay any amounts outstanding
under these facilities before they expire or terminate either from a
replacement facility or alternative debt or equity financing. If we are unable
to repay amounts outstanding under these facilities and are declared in default
or are unable to refinance these facilities, we would not be able to operate
our business in the regular course. Even if we are able to refinance our debt,
we may not be able to do so on favorable terms.

                                      40

<PAGE>

You may not receive distributions.

   We intend to make distributions on a quarterly basis to our stockholders. We
may not be able to achieve operating results that will allow us to make
distributions at a specific level or to increase the amount of these
distributions from time to time. In addition, due to the asset coverage test
applicable to us as a business development company, we may be limited in our
ability to make distributions. Also, restrictions and provisions in our
securitization facilities limit our ability to make distributions. If we do not
distribute a certain percentage of our income annually, we will suffer adverse
tax consequences, including possible loss of our status as a regulated
investment company. We cannot assure you that you will receive any
distributions or distributions at a particular level.

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

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

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

   To maintain our qualification as a business development company and as a
regulated investment company, we may have to dispose of investments if we do
not satisfy one or more of the applicable criteria under the respective
regulatory frameworks. Our investments are usually subject to contractual or
legal restrictions on resale or are otherwise illiquid because there is usually
no established trading market for such investments. The illiquidity of most of
our investments may make it difficult for us to dispose of them at a favorable
price, and, as a result, we may suffer losses.

Our business depends on our key personnel.

   Our future success depends to a significant extent on the continued services
of Bryan J. Mitchell, the Chairman of our board and our Chief Executive
Officer, Steven F. Tunney, our President and Chief Operating Officer, B. Hagen
Saville, one of our Executive Vice Presidents, and Robert J. Merrick, our Chief
Credit Officer, as well as other key personnel. Mr. Mitchell was diagnosed in
May 1999 with adenocarcinoma, a form of colon cancer, for which he was treated
through surgery and a series of post-operative treatments that ended in
December 1999. Mr. Mitchell's illness is in remission and has not significantly
impaired his ability to perform his duties. The loss of any of these key
employees would likely have a significant detrimental effect on our business.
In addition, if any two of Mr. Mitchell, Mr. Saville, Mr. Tunney or Mr. Merrick
cease to be actively involved in our management, the lender under one ofour
securitization facilities could, absent a waiver or cure, replace us as the
servicer of the loans and declare a default.

Fluctuations in interest rates could adversely affect our income.

   A significant increase in market interest rates could harm our ability to
attract new customers and originate new loans and investments, our
non-performing assets could increase and the value of our portfolio could
decrease because our floating-rate loan customers may be unable to meet higher
payment obligations. Conversely, a significant decrease in interest rates would
reduce our net income, all other things being equal. Approximately 99% of the
loans in our portfolio, based on amounts outstanding as of December 31, 2001,
were at variable rates determined on the basis of a benchmark LIBOR or prime
rate and approximately 1% were at fixed rates. From January 1, 2001 to December
31, 2001, three-month LIBOR has declined from 6.40% to

                                      41

<PAGE>

1.91%. A decrease in interest rates may reduce net income despite the increased
demand for our capital that the decrease in interest rates may produce.

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

   Interest rate sensitivity refers to the change in earnings that may result
from the changes in the level of interest rates. Our net interest income is
affected by changes in various interest rates, including the London InterBank
Offered Rate ("LIBOR"), prime rates and commercial paper rates. The majority of
our loan portfolio bears interest at a spread to LIBOR, with the remainder
bearing interest at a fixed rate or at a spread to a prime rate. Our interest
rates on our borrowings are based on LIBOR and commercial paper rates, with the
majority based on LIBOR.

   We regularly measure exposure to interest rate risk. We have interest rate
risk exposure mainly from the portion of the commercial loan portfolio funded
using equity. Our Board of Directors assesses interest rate risk and we manage
our interest rate exposure on an ongoing basis. The following table shows a
comparison of the interest rate base for our outstanding commercial loans and
our outstanding borrowings:

<TABLE>
<CAPTION>
                               December 31, 2001     December 31, 2000
                             --------------------- ---------------------
                             Commercial            Commercial
                               Loans    Borrowings   Loans    Borrowings
                             ---------- ---------- ---------- ----------
                             (Dollars in millions) (Dollars in millions)
       <S>                   <C>        <C>        <C>        <C>
       Prime Rate...........   $ 31.1     $   --     $ 28.4     $ 23.6
       30-Day LIBOR.........     19.2         --       27.2      266.5
       60-Day LIBOR.........      2.3         --        3.4         --
       90-Day LIBOR.........    539.6      265.2      442.0         --
       Commercial Paper Rate       --       22.6         --       66.7
       Fixed Rate...........      3.8         --        3.2         --
                               ------     ------     ------     ------
       Total................   $596.0     $287.8     $504.2     $356.8
                               ======     ======     ======     ======
</TABLE>

   Based on our December 31, 2001 balance sheet, for every 100 basis point
increase in interest rates, our interest income would increase by $5.9 million
and our interest expense would increase by $2.7 million resulting in an
increase in net income of $3.2 million, assuming no changes in our investments
or borrowing structure. For every 100 basis point decrease in interest rates,
our interest income would decrease by $5.9 million and our interest expense
would decrease by $2.7 million, resulting in a decrease in net income of $3.2
million, assuming no changes in our investment and borrowing structure. As a
business development company, we will use a greater portion of equity to fund
our business than we have in the past. Accordingly, other things being equal,
increases in interest rates will result in greater increases in our net
interest income and reductions in interest rates will result in greater
decreases in our net interest income compared with the effects of interest rate
changes on our results under the more highly leveraged capital structure we
have maintained in the past.

   Currently, we do not engage in hedging activities because we have determined
that the cost of hedging the risks associated with interest rate changes
outweighs the risk reduction benefit. We monitor this position on an ongoing
basis.

                                      42

<PAGE>

Item 8.  Consolidated Financial Statements and Supplementary Data

<TABLE>
  <S>                                                                                              <C>
                                   Index to Financial Statements
   Report of Independent Auditors...............................................................
   Consolidated Balance Sheets as of December 31, 2001 and 2000.................................
   Consolidated Statements of Operations for the one month ended December 31, 2001, eleven months
     ended November 30, 2001, and the years ended December 31, 2000 and 1999....................
   Consolidated Statements of Stockholders' Equity from December 31, 1998 through 2001..........
   Consolidated Statements of Cash Flows for the one month ended December 31, 2001, eleven months
     ended November 30, 2001, and the years ended December 31, 2000 and 1999....................
   Consolidated Schedules of Investments as of December 31, 2001 and 2000.......................
   Notes to Consolidated Financial Statements...................................................
</TABLE>

                                      43

<PAGE>

Report of Independent Auditors

Board of Directors and Shareholders
MCG Capital Corporation

   We have audited the accompanying consolidated balance sheets of MCG Capital
Corporation as of December 31, 2001 and 2000, including the consolidated
schedules of investments, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the one-month period ended
December 31, 2001, the eleven-month period ended November 30, 2001, and the
years ended December 31, 2000 and 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MCG Capital
Corporation at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for the one-month period ended December 31, 2001,
the eleven-month period ended November 30, 2001, and the years ended December
31, 2000 and 1999, in conformity with accounting principles generally accepted
in the United States.

   As discussed in Note A to the consolidated financial statements, accounting
principles used in the preparation of the consolidated financial statements
beginning December 1, 2001 (upon conversion to a business development company
under the Investment Company Act of 1940, as amended) are different than those
of prior periods and therefore are not directly comparable. Also as discussed
in Note A, effective January 1, 2001, the Company changed its method of
accounting for derivative financial instruments.

                                             /s/ Ernst & Young LLP

Richmond, Virginia
January 25, 2002

<PAGE>

                            MCG Capital Corporation
                          Consolidated Balance Sheets
                   (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                         ------------------
                                                                                           2001      2000
                                                                                         --------  --------
<S>                                                                                      <C>       <C>
Assets
Cash and cash equivalents............................................................... $ 48,148  $ 16,766
Investments:
 Commercial loans, at fair value at December 31, 2001 (cost of $604,232), at cost net of
   allowance of $10,084 at December 31, 2000............................................  596,002   494,130
 Investments in equity securities--at fair value at December 31, 2001(cost of $24,173),
   at cost plus unrealized gains of $641 at December 31, 2000...........................   21,201     6,697
 Unearned income on commercial loans....................................................  (12,134)   (9,935)
                                                                                         --------  --------
   Total investments....................................................................  605,069   490,892
Interest receivable.....................................................................    5,623     6,239
Other assets............................................................................   14,226    12,596
                                                                                         --------  --------
   Total assets......................................................................... $673,066  $526,493
                                                                                         ========  ========
Liabilities
Borrowings.............................................................................. $287,808  $356,833
Interest payable........................................................................      408     1,813
Dividends payable.......................................................................   24,327        --
Other liabilities.......................................................................    8,150     8,949
                                                                                         --------  --------
   Total liabilities....................................................................  320,693   367,595
                                                                                         --------  --------
Commitments and contingencies

Stockholders' Equity
Preferred stock, par value $.01, authorized 1 share, none issued and outstanding........       --        --
Common stock............................................................................
 Class A, par value $.01, authorized 0 shares in 2001 and 12,000 in 2000, issued and
   outstanding 0 in 2001 and 6,831 in 2000..............................................       --        68
 Class B, par value $.01, authorized 0 shares in 2001 and 500 in 2000, issued and
   outstanding 0 in 2001 and 463 in 2000................................................       --         5
 Common stock (formerly Class C), par value $.01, authorized 100,000 shares in 2001
   and 20,000 in 2000, 28,287 in 2001 and 0 in 2000 issued and outstanding..............      283        --
 Class D, par value $.01, authorized 0 shares in 2001 and 2,200 in 2000, issued and
   outstanding 0 in 2001and 678 in 2000.................................................       --         7
 Class E, par value $.01, authorized 0 shares in 2001 and 5,500 in 2000, issued and
   outstanding 0 in 2001and 4,700 in 2000...............................................       --        47
Paid-in capital.........................................................................  370,087   138,624
Stockholder loans.......................................................................   (6,510)     (747)
Unearned compensation--restricted stock.................................................  (13,077)       --
Earnings in excess of distributions.....................................................   12,792    20,513
Net unrealized depreciation on investments..............................................  (11,202)       --
Cumulative other comprehensive income...................................................       --       381
                                                                                         --------  --------
   Total stockholders' equity...........................................................  352,373   158,898
                                                                                         --------  --------
   Total liabilities and stockholders' equity........................................... $673,066  $526,493
                                                                                         ========  ========
</TABLE>

                See notes to consolidated financial statements.

                                      45

<PAGE>

                            MCG Capital Corporation
                     Consolidated Statements of Operations
                   (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                        Post-IPO as a
                                                          Business
                                                         Development            Pre-IPO prior to becoming a
                                                           Company             Business Development Company
                                                        ------------- -   --------------------------------------
                                                          One Month       Eleven Months
                                                            Ended             Ended      Year Ended   Year Ended
                                                        December 31,      November 30,  December 31, December 31,
                                                            2001              2001          2000         1999
                                                        ------------- -   ------------- ------------ ------------
<S>                                                     <C>           <C> <C>           <C>          <C>
Operating income
Interest and fees on commercial loans..................   $ 5,949          $ 64,032      $62,621      $28,256
Advisory fees and other income.........................        63             1,757        1,129          173
                                                           -------    -     --------      -------      -------
Total operating income.................................     6,012            65,789       63,750       28,429

Operating expenses
Interest expense.......................................     1,198            24,661       26,648       14,317

Employee compensation:
Salaries and benefits..................................       884             8,038        7,626        4,034
Long-term incentive compensation.......................     4,944                --           --           --
                                                           -------    -     --------      -------      -------
Total employee compensation............................     5,828             8,038        7,626        4,034

General and administrative expense.....................       594             4,619        2,413        2,348
                                                           -------    -     --------      -------      -------

Total operating expense................................     7,620            37,318       36,687       20,699
                                                           -------    -     --------      -------      -------

Net operating income (loss) before provision for loan
  losses and investment gains and losses...............    (1,608)           28,471       27,063        7,730

Provision for loan losses..............................        --           (10,275)      (5,421)      (2,058)
Investment gains (losses)--realized....................        --            (1,715)       2,099        3,765
Investment gains (losses)--unrealized..................    (1,295)           (1,588)          --          267
                                                           -------    -     --------      -------      -------
Income (loss) from operations before income taxes and
  cumulative effect of accounting changes..............    (2,903)           14,893       23,741        9,704
Income tax expense (benefit)...........................      (633)            6,114        9,670        3,921
                                                           -------    -     --------      -------      -------
Income (loss) before cumulative effect of accounting
  changes..............................................    (2,270)            8,779       14,071        5,783
Cumulative effect of accounting change, net of taxes of
  $1,223...............................................        --             1,777           --           --
Cumulative effect of conversion to business
  development company..................................    (4,472)               --           --           --
                                                           -------    -     --------      -------      -------
Net (decrease) increase in stockholders' equity
  resulting from earnings (loss) / net income (loss)...   $(6,742)         $ 10,556      $14,071      $ 5,783
                                                           =======    =     ========      =======      =======

Income (loss) per common share before cumulative
  effect of accounting change--basic and diluted.......   $ (0.08)         $   0.69      $  1.35      $  0.87
Net income (loss) per common share--basic and diluted..   $ (0.25)         $   0.83      $  1.35      $  0.87

Weighted average common shares outstanding.............    26,814            12,757       10,435        6,612
Weighted average common shares outstanding and
  dilutive common stock equivalents....................    26,814            12,775       10,453        6,614
</TABLE>

                See notes to consolidated financial statements.


                                      46

<PAGE>

                            MCG Capital Corporation
                Consolidated Statements of Stockholders' Equity
                                (in thousands)

<TABLE>
<CAPTION>
                                                                                              Unearned
                                                        Common Stock                        Compensation-  Earnings in
                                                       -------------  Paid-in   Stockholder  Restricted     excess of
                                                       Shares  Amount Capital      Loans        stock     Distributions
                                                       ------  ------ --------  ----------- ------------- -------------
<S>                                                    <C>     <C>    <C>       <C>         <C>           <C>
Balance December 31, 1998.............................  6,418   $ 64  $ 58,308    $  (600)                  $    659
Net income............................................                                                         5,783
Issuance of common stock..............................
  Capital call........................................  1,000     10     9,983
  Private stock placement.............................      4               50
                                                       ------   ----  --------    -------     --------      --------
Balance December 31, 1999.............................  7,422     74    68,341       (600)                     6,442
                                                       ======   ====  ========    =======     ========      ========
Net income............................................                                                        14,071
Issuance of common stock..............................
  Capital call (Class A and Class D)..................  1,550     16    15,484
  Private stock placement (Class E)...................  4,700     47    69,789
Repurchase of common stock (Class A and Class D)...... (1,000)   (10)  (14,990)
Unrealized gains on securities, net of income taxes of
 $260.................................................
Issuance of stockholder loans.........................                               (147)
                                                       ------   ----  --------    -------     --------      --------
Balance December 31, 2000............................. 12,672    127   138,624       (747)                    20,513
                                                       ======   ====  ========    =======     ========      ========
Net income............................................                                                        10,556
Unrealized loss on securities, net of income taxes of
 $518.................................................
                                                       ------   ----  --------    -------     --------      --------
Balance November 30, 2001............................. 12,672    127   138,624       (747)                    31,069
                                                       ------   ----  --------    -------     --------      --------
Issuance of restricted stock awards...................  1,615     16    14,811     (5,763)    $(14,580)
Issuance of shares in IPO, net of costs............... 14,000    140   216,652
Reclassification to net unrealized depreciation on
 investments upon conversion to business
 development company..................................                                                         9,907
Net (decrease) increase in stockholders' equity
 resulting from earnings (loss).......................                                                        (5,447)
Dividends declared....................................                                                       (22,737)
Amortization of restricted stock awards...............                                           1,503
                                                       ------   ----  --------    -------     --------      --------
Balance December 31, 2001............................. 28,287   $283  $370,087    $(6,510)    $(13,077)     $ 12,792
                                                       ======   ====  ========    =======     ========      ========
</TABLE>
<TABLE>
<CAPTION>
                                                           Net       Cumulative
                                                        Unrealized      Other
                                                       Depreciation Comprehensive Stockholders'
                                                            on         Income        Equity
                                                       Investments  ------------- -------------
<S>                                                    <C>          <C>           <C>
Balance December 31, 1998.............................                              $ 58,431
Net income............................................                                 5,783
Issuance of common stock..............................
  Capital call........................................                                 9,993
  Private stock placement.............................                                    50
                                                         --------       -----       --------
Balance December 31, 1999.............................                                74,257
                                                         ========       =====       ========
Net income............................................                                14,071
Issuance of common stock..............................
  Capital call (Class A and Class D)..................                                15,500
  Private stock placement (Class E)...................                                69,836
Repurchase of common stock (Class A and Class D)......                               (15,000)
Unrealized gains on securities, net of income taxes of
 $260.................................................                  $ 381            381
Issuance of stockholder loans.........................                                  (147)
                                                         --------       -----       --------
Balance December 31, 2000.............................                    381        158,898
                                                         ========       =====       ========
Net income............................................                                10,556
Unrealized loss on securities, net of income taxes of
 $518.................................................                   (761)          (761)
                                                         --------       -----       --------
Balance November 30, 2001.............................                   (380)       168,693
                                                         --------       -----       --------
Issuance of restricted stock awards...................                                (5,516)
Issuance of shares in IPO, net of costs...............                               216,792
Reclassification to net unrealized depreciation on
 investments upon conversion to business
 development company..................................   $ (9,907)        380            380
Net (decrease) increase in stockholders' equity
 resulting from earnings (loss).......................     (1,295)                    (6,742)
Dividends declared....................................                               (22,737)
Amortization of restricted stock awards...............                                 1,503
                                                         --------       -----       --------
Balance December 31, 2001.............................   $(11,202)      $  --       $352,373
                                                         ========       =====       ========
</TABLE>

                See notes to consolidated financial statements.


                                      47

<PAGE>

                            MCG Capital Corporation
                     Consolidated Statements of Cash Flows
                                (in thousands)


<TABLE>
<CAPTION>
                                                             Post-IPO as a
                                                               Business
                                                              Development        Pre-IPO prior to becoming a
                                                                Company         Business Development Company
                                                             ------------- --------------------------------------
                                                               One Month   Eleven Months
                                                                 Ended         Ended      Year Ended   Year Ended
                                                             December 31,  November 30,  December 31, December 31,
                                                                 2001          2001          2000         1999
                                                             ------------- ------------- ------------ ------------
<S>                                                          <C>           <C>           <C>          <C>
Operating activities
  Net (decrease) increase in stockholders' equity resulting
   from earnings (loss).....................................   $  (6,742)    $  10,556    $  14,071    $   5,783
  Adjustments to reconcile net income to net cash provided
   (used) by operating activities:
  Provision for loan losses.................................          --        10,275        5,421        2,058
  Cumulative effect of accounting change from conversion
   to business development company..........................       4,472            --           --           --
  Depreciation and amortization.............................          56           523          445          408
  Restricted stock awards...................................       1,751            --           --           --
  Amortization of debt issuance costs.......................         205         1,860        1,625        1,406
  Realized investment losses / (gains)......................          --         1,715       (2,099)      (3,765)
  Unrealized investment losses / (gains)....................       1,295        (1,412)          --         (267)
  (Increase) / decrease in interest receivable..............         628            23       (2,481)      (1,823)
  Increase in accrued payment-in-kind interest..............        (412)      (10,030)      (5,379)      (1,753)
  Increase / (decrease) in unearned income..................        (227)         (719)       2,211        3,051
  (Increase) / decrease in other assets.....................       3,502        (3,130)      (1,704)      (2,199)
  Increase / (decrease) in interest payable.................        (794)         (611)         416          438
  Increase / (decrease) in other liabilities................      (1,187)        3,122        6,245        1,186
                                                               ---------     ---------    ---------    ---------
    Net cash provided by operating activities...............       2,547        12,172       18,771        4,523
                                                               ---------     ---------    ---------    ---------
Investing activities
  Net increase in loans.....................................      (9,958)     (113,674)    (187,964)    (125,486)
  Net increase in equity investments........................          --          (506)      (2,576)      (1,201)
  Proceeds from sale of investment securities...............          --            --        2,099        3,765
  Sale of EEI Holding's Corporation, Inc. with tax benefit..          --            --           --        3,900
  Proceeds from the sale of foreclosed property.............          --         3,000           --           --
  Purchase of premises and equipment........................          (3)         (405)        (431)        (155)
                                                               ---------     ---------    ---------    ---------
  Net cash used in investing activities.....................      (9,961)     (111,585)    (188,872)    (119,177)
                                                               ---------     ---------    ---------    ---------
Financing activities
  Net proceeds / (payments) from borrowings.................    (180,753)      111,728      108,616      109,432
  Payment of financing costs................................      (3,513)         (282)      (1,957)         (96)
  Repurchase of common stock................................          --            --      (15,000)          --
  Issuance of common stock, net of costs....................     216,792            --       85,336       10,043
  Loans granted to officers/shareholders....................      (5,763)           --         (147)          --
                                                               ---------     ---------    ---------    ---------
    Net cash provided by financing activities...............      26,763       111,446      176,848      119,379
                                                               ---------     ---------    ---------    ---------
    Increase in cash and cash equivalents...................      19,349        12,033        6,747        4,725
    Cash and cash equivalents at beginning of period........      28,799        16,766       10,019        5,294
                                                               ---------     ---------    ---------    ---------
    Cash and cash equivalents at end of period..............   $  48,148     $  28,799    $  16,766    $  10,019
                                                               =========     =========    =========    =========
Supplemental disclosures
    Interest paid...........................................   $   1,786     $  23,413    $  24,607    $  12,473
    Income taxes paid.......................................         885         6,036        7,295        4,255
</TABLE>

                See notes to consolidated financial statements.

                                      48

<PAGE>

                            MCG Capital Corporation
                     Consolidated Schedules of Investments
                            (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                      December 31, 2001 December 31, 2000
                                                                                      ----------------- -----------------
                                                                         Percentage
                                                                        of Class Held
                                                                         on a Fully
                                                                           Diluted              Fair              Fair
       Portfolio Company        Principal Business Investments            Basis(5)      Cost    Value     Cost    Value
       -----------------        ------------------ -------------------- ------------- -------  -------  -------  -------
<S>                             <C>                <C>                  <C>           <C>      <C>      <C>      <C>
The Adrenaline Group, Inc.(1)   Technology         Senior Debt                 --     $   750  $   750  $ 1,500  $ 1,500

                                                   Warrants to purchase
                                                   Common Stock               4.6%         --       --       --       --

Alarm Management II LLC(1)      Security Alarms    Senior Debt                 --       1,800    1,800       --       --

Amalfi Coast                    Broadcasting       Senior Debt                 --      13,000   13,000       --       --

AMI Telecommunications
Corporation(1)                  Telecommunications Senior Debt                 --      10,715   10,715   10,233   10,233

                                                   Common Stock               5.1%        200       --      175       70

Badoud Enterprises, Inc.(1)     Newspaper          Senior Debt                 --      11,320   11,320   11,600   11,600

Barcom Inc., and US Alarm Inc.  Security Alarms    Senior Debt                 --       3,911    3,911       --       --

Belvoir Publications, Inc.      Publishing         Senior Debt                 --          --       --      950      950

Biznessonline.com, Inc.(1)      Telecommunications Senior Debt                 --      13,529   13,529   15,821   15,821

                                                   Common Stock               7.0%         18       27       --       14

                                                   Preferred Stock          100.0%      2,864      100       --       --

                                                   Warrants to purchase
                                                   Common Stock              48.3%        253      253       --       --

Boucher Communications, Inc.(1) Publishing         Senior Debt                 --       2,450    2,450    2,150    2,150

                                                   Stock Appreciation
                                                   Rights                      --          --      297       --      305

Bridgecom Holdings, Inc.(1)     Telecommunications Senior Debt                 --      17,969   17,969    5,054    5,054

                                                   Warrants to purchase
                                                   Common Stock              12.7%         --       --       --       --

Brill Media Holdings, L.P.(1)   Publishing         Senior Debt                 --          --       --   10,013   10,013

                                                   Stock Appreciation
                                                   Rights                      --          --       --       --       --

Brookings Newspapers, L.L.C.(1) Newspaper          Senior Debt                 --       3,500    3,500    3,900    3,900

BuyMedia Inc.(4)                Other              Warrants to purchase
                                                   Common Stock               1.5%         --       42       --      186

Cambridge Information Group,    Information
 Inc.(1)                        Services           Senior Debt                 --      19,334   19,334   11,934   11,934

CCG Consulting, LLC             Consulting         Senior Debt                 --       1,293    1,293    1,014    1,014

                                                   Warrants to purchase
                                                   membership interest
                                                   in LLC                    21.8%         --      294       --       48

                                                   Option to purchase
                                                   additional equity          5.6%         --       --       --       --
</TABLE>

                See notes to consolidated financial statements.

                                      49

<PAGE>

                            MCG Capital Corporation
              Consolidated Schedules of Investments--(Continued)
                            (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                       December 31, 2001 December 31, 2000
                                                                                       ----------------- -----------------
                                                                          Percentage
                                                                         of Class Held
                                                                          on a Fully
                                                                            Diluted              Fair              Fair
       Portfolio Company         Principal Business Investments            Basis(5)      Cost    Value     Cost    Value
       -----------------         ------------------ -------------------- -------------  ------   ------   ------   ------
<S>                              <C>                <C>                  <C>           <C>      <C>      <C>      <C>

Community Media Group, Inc.(1)   Newspaper          Senior Debt                --      13,505   13,505   14,400   14,400

Connective Corp.(4)              Publishing         Common Stock              1.2%         57       13       57      239
Corporate Legal Times L.L.C.     Publishing         Senior Debt                --       4,813    4,813    4,530    4,530
                                                    Warrants to purchase
                                                    membership interest
                                                    in LLC                   20.0%        153       86      153      148

Costa De Oro Television, Inc.    Broadcasting       Senior Debt                --       5,011    5,011    3,087    3,087

Country Media, Inc.              Newspaper          Senior Debt                --       8,448    8,448    6,633    6,633

                                                    Common Stock              6.3%        100      205      100      100

Creatas, L.L.C.(1)               Information
                                 Services           Senior Debt                --      13,664   13,664   11,000   11,000

                                                    LLC Interest             20.0%        100      465      100      100

Creative Loafing, Inc.(1)        Newspaper          Senior Debt                --      16,795   16,795   16,121   16,121

Crescent Publishing Company
 LLC                             Newspaper          Senior Debt                --      13,700   13,700       --       --

Dowden Health Media, Inc.        Publishing         Senior Debt                --       1,500    1,500    2,790    2,790

Edgell Communications, Inc.(1)   Publishing         Senior Debt                --         520      520      670      670

The e-Media Club, LLC            Media Investment
                                 Group              LLC Interest              0.8%         90       90       60       60

Executive Enterprise Institute,  Business
 LLC(1)                          Conferences        LLC Interest             15.0%        301      167      431      431

Fawcette Technical Publications
 Holdings(1)                     Publishing         Senior Debt                --      14,787   14,787   10,841   10,841

                                                    Warrants to purchase
                                                    Common Stock             13.0%        519      519       --       --

Financial Technologies Holdings,
 Inc.(1)                         Technology         Senior Debt                --      20,500   20,500   20,500   20,500

                                                    Warrants to purchase
                                                    Common Stock              4.2%         --       --       --    2,029

Halcyon Business Publications,
 Inc.                            Publishing         Senior Debt                --         275      275      550      550

I-55 Internet Services, Inc.     Telecommunications Senior Debt                --       3,623    3,623    3,764    3,764

                                                    Warrants to purchase
                                                    Common Stock              7.5%         --       --       --       --

IDS Telecom LLC                  Telecommunications Senior Debt                --      17,039   17,039   13,075   13,075

                                                    Warrants to purchase
                                                    membership interest
                                                    in LLC                   11.0%        376      637      279      209
</TABLE>

                See notes to consolidated financial statements.

                                      50

<PAGE>

                            MCG Capital Corporation
              Consolidated Schedules of Investments--(Continued)
                            (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                        December 31, 2001 December 31, 2000
                                                                                        ----------------- -----------------
                                                                           Percentage
                                                                          of Class Held
                                                                           on a Fully
                                                                             Diluted              Fair              Fair
        Portfolio Company         Principal Business Investments            Basis(5)      Cost    Value     Cost    Value
        -----------------         ------------------ -------------------- -------------  ------   ------   ------   ------
<S>                               <C>                <C>                  <C>           <C>      <C>      <C>      <C>

Images.com, Inc.                  Information        Senior Debt                --       2,775    2,775    2,775    2,775
                                  Services

Information Today, Incorporated   Information        Senior Debt                --       7,500    7,500       --       --
                                  Services

Intellisec Holdings, Inc.(1)      Security Alarms    Senior Debt                --      14,265   14,265   10,085   10,085

                                                     Warrants to purchase      5.2%         --       --       --       --
                                                     Common Stock

Interface Video Systems, Inc.     Technology         Senior Debt                --          --       --      426      426
JMP Media, L.L.C.                 Broadcasting       Senior Debt                --      15,781   15,781   15,491   15,491

Jeffrey A. Stern                  Publishing         Senior Debt                --         157      157      940      490

Joseph C. Millstone               Telecommunications Senior Debt                --         500      500      500      500

The Joseph F. Biddle Publishing   Newspaper          Senior Debt                --      14,207   14,207   15,125   15,125
 Company(1)

Kings III of America, Inc., North Security Alarms    Senior Debt                --       4,997    4,997    4,400    4,400
 America

The Korea Times Los Angeles,      Newspaper          Senior Debt                --      11,927   11,927   12,368   12,368
Inc.

MacDonald Communications          Publishing         Senior Debt                --          --       --    9,410    9,410
 Corporations (1)(2)

                                                     Preferred Stock           0.0%         --       --    1,000      328

Manhattan Telecommunications      Telecommunications Senior Debt                --      22,975   22,975   10,272   10,272
 Corporation

                                                     Warrants to purchase     17.5%        754      644       --      315
                                                     Common Stock

McGinnis-Johnson Consulting,      Newspaper          Subordinated Debt          --       7,828    7,828    7,107    7,107
 LLC

Michael Noshay                    Telecommunications Senior Debt                --          --       --      500      500

Media Central LLP/Primedia)       Publishing         Senior Debt                --      10,000   10,000       --       --

Midwest Towers Partners,          Telecommunications Senior Debt                --      16,307   16,307   15,694   15,694
 LLC(1)                           Towers

Miles Media Group, Inc.(1)        Publishing         Senior Debt                --       7,850    7,850    7,300    7,300

                                                     Warrants to purchase
                                                     Common Stock             14.6%         20      490       20      452

Minnesota Publishers, Inc.(1)     Newspaper          Senior Debt                --      14,250   14,250   14,250   14,250
</TABLE>

                See notes to consolidated financial statements.

                                      51

<PAGE>

                            MCG Capital Corporation
              Consolidated Schedules of Investments--(Continued)
                            (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                      December 31, 2001 December 31, 2000
                                                                                      ----------------- -----------------
                                                                         Percentage
                                                                        of Class Held
                                                                         on a Fully
                                                                           Diluted              Fair              Fair
       Portfolio Company        Principal Business Investments            Basis(5)      Cost    Value     Cost    Value
       -----------------        ------------------ -------------------- -------------  ------   ------   ------   ------
<S>                             <C>                <C>                  <C>           <C>      <C>      <C>      <C>

Murphy McGinnis Media, Inc.(1)  Newspaper          Senior Debt                --      14,000   14,000   14,000   14,000

NBG Radio Networks, Inc.        Broadcasting       Senior Debt                --       6,298    6,298       --       --

                                                   Warrants to purchase
                                                   Common Stock             25.2%         --       --       --       --

Netplexus Corporation           Technology         Senior Debt                --       3,500    2,500    3,500    3,500

                                                   Preferred Stock          51.0%        766       --      766      765

                                                   Warrants to purchase
                                                   Common Stock              8.3%         --       --       --       --

New Century Companies, Inc.(1)  Other              Common Stock              2.9%        157      294       --       --
 (4)

                                                   Preferred Stock          11.9%         --       42      300      119

                                                   Warrants to purchase
                                                   Common Stock              0.6%         --       33      169      148
nii communications, Inc.(1)     Telecommunications Senior Debt                --       5,565    5,565    1,834    1,834

                                                   Common Stock              3.1%        400      162      400      181

                                                   Warrants to purchase
                                                   Common Stock             35.4%        747      991       --      223

New Northwest Broadcasters,
 Inc.(1)                        Broadcasting       Senior Debt                --      10,853   10,853   10,751   10,751

Newsletter Holdings, LLC(1)     Publishing         Senior Debt                --       1,340    1,340    1,400    1,400

North American
 Telecommunications
 Corporation                    Telecommunications Senior Debt                --          --       --    6,131    6,131

                                                   Warrants to purchase
                                                   Preferred Stock           0.0%         --       --       --       --

NOW Communications, Inc.(1)     Telecommunications Senior Debt                --       4,367    4,367    4,170    4,170

                                                   Warrants to purchase
                                                   Common Stock             10.0%         --       --       --       --

Nurseweek Publishing            Publishing         Senior Debt                --          --       --    2,215    2,215

Pacific-Sierra Publishing, Inc. Newspaper          Senior Debt                --      24,160   24,160       --       --

Pfingsten Publishing, LLC(1)    Publishing         Senior Debt                --      10,250   10,250   15,966   15,966

Powercom Corporation(1)         Telecommunications Senior Debt                --       3,917    3,917    4,288    4,288

                                                   Warrants to purchase
                                                   Common Stock              9.6%        139      105      139       85
</TABLE>

                See notes to consolidated financial statements.

                                      52

<PAGE>

                            MCG Capital Corporation
              Consolidated Schedules of Investments--(Continued)
                            (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                     December 31, 2001 December 31, 2000
                                                                                     ----------------- -----------------
                                                                        Percentage
                                                                       of Class Held
                                                                        on a Fully
                                                                          Diluted              Fair              Fair
      Portfolio Company        Principal Business Investments            Basis(5)      Cost    Value     Cost    Value
      -----------------        ------------------ -------------------- -------------  ------   ------   ------   ------
<S>                            <C>                <C>                  <C>           <C>      <C>      <C>      <C>

R.R. Bowker LLC                Information
                               Services           Senior Debt                 --     15,000   15,000       --       --

                                                  Warrants to purchase
                                                  Common Stock              14.0%       882      882       --       --

Rising Tide Holdings LLC(1)    Publishing         Senior Debt                 --      3,097    1,597    3,000    3,000

                                                  Warrants to purchase
                                                  membership interest
                                                  in LLC                     6.5%        --       --       --       --

Robert N. Snyder               Information
                               Services           Senior Debt                 --      1,300    1,300    1,300    1,300

Sabot Publishing, Inc.(1)      Publishing         Senior Debt                 --      9,800    9,800   10,588   10,588

Stonebridge Press, Inc.(1)     Newspaper          Senior Debt                 --      5,473    5,473    5,300    5,300

Sunshine Media Corp.(1)        Publishing         Senior Debt                 --     13,094   13,094       --       --

                                                  LLC Interest Class A      12.8%       500      553       --       --

                                                  Warrants to purchase
                                                  membership interest
                                                  in LLC Class B           100.0%        --       --       --       --

Talk America Holdings, Inc.(1) Telecommunications Senior Debt                 --     17,500   17,500   20,000   20,000

                                                  Common Stock               1.5%     1,050      482    1,050    1,690

                                                  Warrants to purchase
                                                  Common Stock               0.8%        25       --       25       --
TGI Group, LLC                 Information
                               Services           Senior Debt                 --      7,920    7,920    8,250    8,250

                                                  Warrants to purchase
                                                  membership interest
                                                  in LLC                     5.0%       126       23      126       --

THE Journal, LLC               Publishing         Senior Debt                 --      3,196    2,100    3,119    3,119

Tower Resource Management,     Telecommunications
 Inc.(1)                       Towers             Senior Debt                 --      1,573    1,573    1,016    1,016

                                                  Warrants to purchase
                                                  Common Stock               7.1%        --       --       --       --

TVData Technologies L.P. (1)   Information
                               Services           Senior Debt                 --         --       --   13,900   13,900

Unifocus, Inc.(1)              Information
                               Services           Senior Debt                 --      3,300    3,300    3,350    3,350

                                                  Warrants to purchase
                                                  Equity                    15.0%       139      369      139       99

UMAC, Inc.(3) (4)              Publishing         Common Stock             100.0%     8,360    8,360       --       --
</TABLE>

                See notes to consolidated financial statements.

                                      53

<PAGE>

                            MCG Capital Corporation
              Consolidated Schedules of Investments--(Continued)
                            (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                    December 31, 2001 December 31, 2000
                                                                                    ----------------  ----------------
                                                                       Percentage
                                                                      of Class Held
                                                                       on a Fully
                                                                         Diluted              Fair              Fair
      Portfolio Company       Principal Business Investments            Basis(5)     Cost     Value    Cost     Value
      -----------------       ------------------ -------------------- ------------- -------  -------  -------  -------
<S>                           <C>                <C>                  <C>           <C>      <C>      <C>      <C>

Upside Media, Inc. (1)(3)     Publishing         Senior Debt                 --          --       --    7,952    7,952

ValuePage Holdings, Inc.(1)   Telecommunications Senior Debt                 --      13,105    8,472   19,249   16,749

VS&A-PBI Holding LLC(1)       Publishing         Senior Debt                 --      12,375   12,375   12,500   12,500

                                                 LLC Interest               0.8%        500       --      500      500

WirelessLines, Inc.(1)        Telecommunications Senior Debt                 --       6,150    6,150    6,150    6,150

                                                 Warrants to purchase
                                                 Common Stock               5.0%         --       --       --       --

Witter Publishing Corporation Publishing         Senior Debt                 --       2,747    2,747    2,600    2,600

                                                 Warrants to purchase
                                                 Common Stock               9.6%         78       76       66       11

Working Mother Media, Inc.(2) Publishing         Senior Debt                 --       6,718    6,718       --       --

                                                 Preferred Stock          100.0%      4,499    4,499       --       --

                                                 Common Stock              51.0%          1        1       --       --

Wyoming Newspapers, Inc.(1)   Newspaper          Senior Debt                 --      12,563   12,563   12,913   12,913
                                                                                    -------  -------  -------  -------
                                                                                    628,405  617,203  510,270  510,120
                                                                                    -------  -------  -------  -------
                                                 Allowance for loan
                                                 losses                                  --       --  (10,084)      --
                                                 Unrealized gain/
                                                 losses                                  --       --      641       --
                                                 Unearned income                    (12,134) (12,134)  (9,935)  (9,935)
                                                                                    -------  -------  -------  -------
                                                                                    616,271  605,069  490,892  500,185
                                                                                    =======  =======  =======  =======
</TABLE>
--------
(1) Securities are issued by affiliate(s) of the listed portfolio company.
(2) In August 2001, we foreclosed on the assets of MacDonald Communication
    Corporation and transferred them to Working Mother Media, Inc. (formerly
    WMAC, Inc.), a majority owned subsidiary of MCG Finance I, LLC (formerly
    MCG Finance Corporation).
(3) In September 2001, we foreclosed on the assets of Upside Media, Inc. and
    transferred them to UMAC, Inc., a wholly owned subsidiary of MCG Finance I,
    LLC (formerly MCG Finance Corporation).
(4) Non-income producing.
(5) The "percentage of class held on a fully diluted basis" represents the
    percentage of the class of security we may own assuming we exercise our
    warrants or options (whether or not they are in-the-money) and assuming
    that warrants, options or convertible securities held by others are not
    converted. We have not included any security which is subject to
    significant vesting contingencies. Common stock, preferred stock, warrants,
    options and equity interests are generally non-income producing and
    restricted. The percentage was calculated based on outstanding share
    information as of December 31, 2001(i) in the case of private companies,
    provided by that company, and (ii) in the case of public companies,
    provided by that company's most recent public filings with the Commission.

                See notes to consolidated financial statements.

                                      54

<PAGE>

                            MCG Capital Corporation

                  Notes to Consolidated Financial Statements

              (in thousands, except share and per share amounts)


Note A--Description of Business, Basis of Presentation, and Summary of
       Significant Accounting Policies

Description of Business and Basis of Presentation

   MCG Capital Corporation ("MCG" or the "Company" or "Parent" or "we") is a
solutions-focused financial services company that provides financing and
advisory services for companies throughout the United States in the
communications, information services, media, and technology industry sectors.
Prior to its name change effective June 14, 2001, the Company's legal name was
MCG Credit Corporation. On December 4, 2001, MCG completed an initial public
offering ("IPO") of 13,375,000 shares and a concurrent private offering of
625,000 shares. Upon completion of the offerings, the Company became a
non-diversified internally managed, closed-end investment company that elected
to be treated as a business development company under the Investment Company
Act of 1940, as amended. The Company will elect to be treated as a regulated
investment company under Internal Revenue Service regulations effective January
1, 2002.

   The accompanying financial statements reflect the consolidated accounts of
MCG, including our special purpose financing subsidiaries MCG Finance I, LLC,
MCG Finance II, LLC, and MCG Finance III, LLC, with all significant
intercompany balances eliminated and the related results of operations. In
accordance with Article 6 of Regulation S-X under the Securities Act of 1933
and Securities Exchange Act of 1934, the Company does not consolidate portfolio
company investments in which the Company has a controlling interest.

  Conversion to Business Development Company

   The results of operations for 2001 are divided into two periods. The
eleven-month period, representing the period January 1, 2001 through November
30, 2001, reflects the Company's results prior to operating as a business
development company under the Investment Company Act of 1940, as amended. The
one-month period ended December 31, 2001, reflects the Company's results as a
business development company under the Investment Company Act of 1940, as
amended. Accounting principles used in the preparation of the consolidated
financial statements beginning December 1, 2001 are different than those of
prior periods and, therefore, the financial position and results of operations
of these periods are not directly comparable. The primary differences in
accounting principles relate to the carrying value of investments and
accounting for income taxes--see corresponding sections below for further
discussion.

   The cumulative effect adjustment for the one-month period ended December 31,
2001 reflects the effects of conversion to a business development company as
follows:

<TABLE>
<CAPTION>
                         Cumulative Effect of Business
                         Development Company Conversion
         --------------------------------------------------------------
         <S>                                                  <C>
         Effect of recording loans at fair value............. $(10,048)
         Effect of recording equity investments at fair value   (1,013)
         Elimination of allowance for loan losses............    5,519
         Elimination of certain taxes........................    1,070
                                                              --------
                                                              $ (4,472)
                                                              ========
</TABLE>

  Use of estimates

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

                                      55

<PAGE>

                            MCG Capital Corporation

            Notes to Consolidated Financial Statements--(Continued)

              (in thousands, except share and per share amounts)


Summary of Significant Accounting Policies

  Income recognition

   Interest on commercial loans is computed by methods that generally result in
level rates of return on principal amounts outstanding. It is management's
practice to cease accruing interest on commercial loans when payments are 90
days delinquent. However, management may elect to continue the accrual of
interest when the estimated net realizable value of collateral is sufficient to
cover the principal balance and accrued interest, and the loan is in the
process of collection.

   Loan origination and commitment fees and certain direct loan origination
costs are deferred and amortized as adjustments of the related loan's yield
over the contractual life. The accounting for certain fees required to be paid
at the end of the term is determined based on the credit performance of the
related loan. For loans in which the related borrower is under-performing
relative to expectations, these fees are not recognized until realization is
probable. When significant collectibility concerns do not exist, the fees are
recognized over the term of the loan.

   In certain loan arrangements, warrants or other equity interests are
received from the borrower. The borrowers granting these interests are
typically non-publicly traded companies. The Company records the financial
instruments received at estimated fair value as determined by the Board of
Directors. Fair values are estimated using various valuation models which
attempt to estimate the underlying value of the associated entity. These models
are then applied to MCG's ownership share considering any discounts for
transfer restrictions or other terms which impact the value. Changes in these
values are recorded through our statement of operations. Any resulting discount
on the loan from recordation of warrant and other equity instruments are
accreted into income over the term of the loan.

   We include in income certain amounts that we have not yet received in cash,
such as contracted payment-in-kind (PIK) interest, which represents contractual
interest added to the loan balance and due at the end of the loan term. The
increases in loan balances as a result of contracted PIK arrangements are
included in income in advance of receiving cash payment, and are separately
identified on our consolidated statements of cash flows. PIK interest accrued
net of payments and other deductions for the one-month period ended December
31, 2001, the eleven month period ended November 30, 2001, and the years ended
December 31, 2000, and 1999 was $412, $10,030, $5,379, and $1,753, respectively.

   In certain investment transactions, we perform investment banking and other
advisory services. For services that are separately identifiable and external
evidence exists to substantiate fair value, income is recognized as earned
which is generally when the investment transaction closes.

  Valuation of Investments

   As a business development company under the Investment Company Act of 1940,
all of the Company's investments must be carried at market value or fair value
as determined by our Board of Directors for investments which do not have
readily determinable market values. Prior to this conversion, only marketable
debt and equity securities and certain derivative securities were required to
be carried at market value.

   Beginning December 1, 2001, portfolio assets for which market prices are
available are valued at those prices. However, most of our assets were acquired
in privately negotiated transactions and have no readily determinable market
values. These securities are carried at fair value as determined by our Board
of Directors under our valuation policy. The valuation committee of our Board
of Directors reviews our loans and investments and will make recommendations to
our Board of Directors.


                                      56

<PAGE>

                            MCG Capital Corporation

            Notes to Consolidated Financial Statements--(Continued)

              (in thousands, except share and per share amounts)

   The fair value of loans is estimated by discounting the future cash flows
using rates commensurate with the credit risk and term of the loans. That
technique is significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. The derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.

   Also, our valuation of our equity securities may increase if circumstances
warrant. With respect to private equity securities, each investment is valued
using industry valuation benchmarks, and then the value is assigned a discount
reflecting the illiquid nature of the investment, as well as our minority,
non-control position. When an external event such as a purchase transaction,
public offering, or subsequent equity sale occurs, the pricing indicated by the
external event will be used to corroborate our private equity valuation.
Securities that are traded in the over-the-counter market or on a stock
exchange are valued at the prevailing bid price on the valuation date. However,
restricted and unrestricted publicly traded securities may be valued at
discounts from the public market value due to restrictions on sale, the size of
our investment or market liquidity concerns.

   Substantially all of our assets consist of securities carried at fair value
as determined by our Board of Directors. Determination of fair value involves
subjective judgments and these values may not represent amounts at which
investments could be bought or sold in an independent third party transaction.

  Securitization Transactions

   Periodically, the Company transfers pools of loans to special purpose
entities (SPEs) for use in securitization transactions. Securitization
transactions comprise a significant source of our overall funding, with the
total face amount of the outstanding loans assumed by third parties equaling
$421,147 at December 31, 2001. On April 1, 2001, the Company adopted the
requirements of Financial Accounting Standards ("SFAS") No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", which applies prospectively to all securitization transactions
occurring after March 31, 2001. Adoption of SFAS No. 140 did not have a
material impact on the operations or financial position of the Company.
Transfers of loans have not met the requirements of SFAS No. 140 for sales
treatment and are, therefore, treated as secured borrowings, with the
transferred loans remaining in investments and the related liability recorded
in borrowings.

  Cash and cash equivalents

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

  Commercial loans

   Loan balances include the accretion of contracted PIK interest which
represents the portion of contractual interest added to the loan balance and
due at the end of the loan term. This PIK receivable totaled $14,245 and $6,640
at December 31, 2001 and 2000, respectively. Net unearned income includes
unearned fees net of direct loan origination costs totaling $12,134 and $9,935
at December 31, 2001 and 2000, respectively. Unearned fees net of direct loan
origination costs are amortized over the term of the related loan using the
effective interest method for amortizing term loans and the straight-line
method for revolving loans, which approximates the effective interest method.
In general, our commercial loans are collateralized by all of the tangible and
intangible property of our borrowers.

                                      57

<PAGE>

                            MCG Capital Corporation

            Notes to Consolidated Financial Statements--(Continued)

              (in thousands, except share and per share amounts)


  Allowance for loan losses

   Prior to conversion to a business development company, an allowance for loan
losses was maintained to absorb anticipated future losses, net of recoveries,
in the existing loan portfolio. The provision for loan losses is the periodic
cost of maintaining an adequate allowance. Management maintains a loan risk
management system whereby each lending relationship is assigned a credit risk
rating. These ratings are continuously evaluated and adjusted to reflect the
current credit risk of the borrower. In evaluating the adequacy of the
allowance for loan losses, management estimated, based on historical
experience, the probability of a default and the amount of loss in the event of
default. Management considered the following factors: the condition of the
industries and geographic areas experiencing or expected to experience
particular economic adversities; trends in delinquencies, bankruptcies and
non-performing loans; trends in loan volume and size of credit risks; the
degree of risk in the composition of the loan portfolio; current and
anticipated economic conditions; credit evaluations; and, underwriting policies.

  Investments in equity securities

   Investments in equity securities represent our ownership of warrants and
other equity interests received or purchased primarily as part of a loan
arrangements. Under business development company accounting, all equity
investments are carried at fair value with any adjustments recorded in the
statement of operations, combined with adjustments in the fair value of
investments in loans, as investment gains (losses)--unrealized.

   Prior to the business development company conversion, purchased equity
investments in non-publicly traded securities where the Company does not
exercise significant influence were carried at cost. Losses on these
investments were recorded if values were believed to be other than temporarily
impaired. Impairment losses of $1,715, $500, and $0 were recorded in the
periods ended November 30, 2001, and December 31, 2000 and 1999, respectively.
See discussion in the "Income recognition" section above for the accounting
policy for warrants and other equity interests received as part of loan
origination activities.

   Equity investments in publicly traded securities where the Company did not
exercise significant influence over the issuer of the securities were accounted
for as available for sale securities under Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS 115) and carried at market value. As of December 31,
2000, the Company held $1,690 of investments in marketable equity securities
classified as securities available for sale under SFAS 115. Under SFAS 115,
these securities were stated at their fair value, with unrealized gains and
losses, net of tax, reported as a component of cumulative other comprehensive
income. As of November 30, 2001 and December 31, 2000, the gross unrealized
gains on available for sale securities were $(638) and $641, respectively, with
the gains shown as a separate component of stockholders' equity, net of taxes.

   See discussion in the "Derivative Instruments" section below for the
accounting policy for certain warrants during the eleven month period ended
November 30, 2001.

  Debt issuance costs

   Debt issuance costs represent fees and other direct incremental costs
incurred in connection with the Company's borrowings. These amounts, $4,691 at
December 31, 2001 and $2,960 at December 31, 2000, net of accumulated
amortization, are included in other assets in the consolidated balance sheet
and are amortized into the consolidated statement of operations as interest
expense ratably over the contractual term of the borrowing on

                                      58

<PAGE>

                            MCG Capital Corporation

            Notes to Consolidated Financial Statements--(Continued)

              (in thousands, except share and per share amounts)

a method that approximates the effective interest method. Accumulated
amortization was $5,825 and $3,760 at December 31, 2001 and 2000, respectively.

  Stock-based compensation

   The Company follows Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," ("APB 25") and related Interpretations in
accounting for its employee stock options because the alternative fair value
accounting recommended by SFAS No. 123, "Accounting for Stock-Based
Compensation," requires use of option valuation models that were not developed
for valuing employee stock options. Under APB 25, no compensation expense is
recognized for the Company's stock option plan. The Company no longer has a
stock option plan.

  Income taxes

   We will elect to be taxed as a regulated investment company under Subchapter
M of the Internal Revenue Code effective January 1, 2002. Pursuant to this
election, if MCG qualifies to be a regulated investment company, MCG generally
will not have to pay corporate-level taxes on any income distributed to
stockholders as dividends, allowing the Company to substantially reduce or
eliminate corporate-level tax liability. MCG will be subject to U.S. federal
income taxes on sales of investments for which the fair value was in excess of
our tax basis, which approximated $2,788 at December 31, 2001. Prior to
conversion to a business development company, deferred tax assets and
liabilities were determined based on differences between the financial
statement carrying amounts and the tax basis of existing assets and liabilities
(i.e., temporary differences) and were measured at the enacted rates that will
be in effect when these differences reverse.

   Upon conversion to a business development company, all deferred tax assets
and liabilities were eliminated, except those related to built-in gains and
those that were expected to reverse during the one-month period ended December
31, 2001. As of December 31, 2001, tax assets of $3,089 represent estimated
refunds on current year payments and on prior year refunds and are included in
other assets in the consolidated financial statements. Deferred tax liabilities
of $1,085 at December 31, 2001 represent taxes on built-in gains on equity
investments and are included in other liabilities in the consolidated financial
statements.

  Earnings per share

   Basic earnings per share is computed by dividing net income applicable to
common stockholders by the weighted average number of shares of common stock
outstanding for the period. Diluted earnings per share is computed by dividing
such net income by the sum of the weighted average number of shares outstanding
for the period, the dilutive effect of potential shares that could occur upon
exercise of common stock options and the dilutive impact of restricted stock.

  Segments

   The Company lends to and invests in customers in various sectors of the
communications, information services, media, and technology industry sectors.
MCG separately evaluates the performance of each of its lending and investment
relationships. However, because each of these loan and investment relationships
have similar business and economic characteristics, they have been aggregated
into a single lending and investment

                                      59

<PAGE>

                            MCG Capital Corporation

            Notes to Consolidated Financial Statements--(Continued)

              (in thousands, except share and per share amounts)

segment. All segment disclosures are included in or can be derived from the
Company's consolidated financial statements.

  Derivative Instruments

   On January 1, 2001, the Company was required to adopt the provisions of
Financial Accounting Standards Board Statements No. 133 and 138, "Accounting
for Derivative Instruments and Hedging Activities" ("the Statements"). The
Statements require recognition of all derivatives on the balance sheet at fair
value. Derivatives that are not hedges, including derivatives embedded in other
financial instruments where the changes in the fair value of the derivative are
not closely related to changes in the fair value of the host instrument, must
be adjusted to fair value through earnings. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings.

   At January 1, 2001, the Company held financial instruments in the form of
equity warrants that qualified as derivatives under the Statements with an
estimated fair value of $3,825 and a book value of $825. The difference between
the two amounts, $3,000, was recognized as an asset on January 1, 2001 with the
related income reported as a cumulative effect of a change in accounting
principle, net of tax. Changes in the fair value of these financial
instruments, as well as any other financial instruments entered into which
qualify as derivatives under the Statements which do not qualify for hedge
accounting, were reflected in the statement of operations for 2001. During the
eleven months ended November 30, 2001, the fair value of financial instruments
that qualify as derivatives under the Statements decreased by $1,588 and is
reflected on the statement of operations under the caption "Investment gains
(losses) - unrealized."

   Upon conversion to a business development company, all investments,
including all derivative investments, are carried at fair value.

  Recent Accounting Pronouncements

   On June 30, 2001, the provisions of Financial Accounting Standards Board
Statements No. 141, "Business Combinations ("FAS 141") became effective. FAS
141 requires the use of the purchase method of accounting for any business
combinations for which the date of acquisition is July 1, 2001, or later. For
the period July 1, 2001 through December 31, 2001, the Company had no business
combinations.

   On January 1, 2002, the provisions of Financial Accounting Standards Board
Statements No. 142, "Goodwill and Other Intangible Assets ("FAS 142") became
effective. Under FAS 142, goodwill and intangibles with indefinite lives are no
longer amortized but are reviewed at least annually for impairment. Upon
adoption of FAS 142 in 2002, the Company will cease amortizing goodwill, which
is not expected to have a material impact on net operating income in 2002.
Goodwill of approximately $3,851 and $4,162 as of December 31, 2001 and 2000,
net of accumulated amortization, is included in other assets in the
consolidated balance sheets.

  Reclassifications

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


                                      60

<PAGE>

                            MCG Capital Corporation

            Notes to Consolidated Financial Statements--(Continued)

              (in thousands, except share and per share amounts)


Note B--Investments

   At December 31, 2001 and 2000, investments consisted of the following:

<TABLE>
<CAPTION>
                                        2001                2000
                                 ------------------  ------------------
                                   Cost     Value      Cost     Value
                                 --------  --------  --------  --------
<S>                              <C>       <C>       <C>       <C>
Commercial loans................ $604,232  $596,002  $504,214  $501,264
Investments in equity securities   24,173    21,201     6,056     8,856
Unearned income.................  (12,134)  (12,134)   (9,935)   (9,935)
                                 --------  --------  --------  --------
Total........................... $616,271  $605,069  $500,335  $500,185
                                 --------  --------  --------  --------
</TABLE>

   MCG's customer base includes primarily small- and medium-sized private
companies in the communications, information services, media, and technology
industry sectors. In addition, the company has occasionally made loans to
individuals who are principals in these companies where the proceeds are used
by or in connection with the operations or capitalization of such companies.
Debt instruments generally provide for a contractual variable interest rate
generally ranging from approximately 400 to 1400 basis points above LIBOR, in
some cases, a portion of which may be deferred. At December 31, 2001 and 2000,
approximately 99% of loans in the portfolio were at variable rates determined
on the basis of a benchmark LIBOR or prime rate and approximately 1% were at
fixed rates. The company's loans generally have stated maturities at
origination that range from 3 to 7 years. Customers typically pay an
origination fee based on a percentage of the commitment amount. They also often
pay a fee based on any undrawn commitments.

   At December 31, 2001, approximately 50% of MCG's loans had associated
detachable warrants or an option to purchase warrants, appreciation rights or
other equity interests or other provisions designed to provide the Company with
an enhanced internal rate of return. These equity and equity-like instruments
generally do not produce a current return, but are held for potential
investment appreciation and capital gains. The warrants and options to purchase
warrants typically are exercisable immediately and typically remain exercisable
for 10 years. The exercise prices on the warrants vary from nominal exercise
prices to exercise prices that are at or above the current fair market value of
the equity for which we are receiving warrants. In some cases, some or all of
the deferred interest may be exchanged as the exercise price for the option to
purchase warrants. The equity interests and warrants and options to purchase
warrants often include registration rights, which allow MCG to register the
securities after public offerings.

   The composition of MCG's portfolio of publicly and non-publicly traded
securities as of December 31, 2001 and 2000 at cost and fair value was as
follows:

<TABLE>
<CAPTION>
                                         December 31, December 31,
              Cost                           2001         2000
              ----                       ------------ ------------
              <S>                        <C>          <C>
              Senior Debt...............     94.9%        97.4%
              Subordinated Debt.........      1.2          1.4
              Equity....................      3.2          1.0
              Warrants to Acquire Equity      0.7          0.2
              Equity Appreciation Rights      0.0          0.0
                                            -----        -----
                                            100.0%       100.0%
                                            =====        =====
</TABLE>

                                      61

<PAGE>

                            MCG Capital Corporation

            Notes to Consolidated Financial Statements--(Continued)

              (in thousands, except share and per share amounts)


<TABLE>
<CAPTION>
                                         December 31, December 31,
              Fair Value                     2001         2000
              ----------                 ------------ ------------
              <S>                        <C>          <C>
              Senior Debt...............     95.3%        96.8%
              Subordinated Debt.........      1.2          1.4
              Equity....................      2.5          0.9
              Warrants to Acquire Equity      0.9          0.8
              Equity Appreciation Rights      0.1          0.1
                                            -----        -----
                                            100.0%       100.0%
                                            =====        =====
</TABLE>

   Set forth below is a table showing the composition of MCG's portfolio by
industry sector at cost and fair value for the years ended December 31, 2001
and 2000:

<TABLE>
<CAPTION>
                                      December 31, December 31,
                 Cost                     2001         2000
                 ----                 ------------ ------------
                 <S>                  <C>          <C>
                 Media...............     54.5%        54.0%
                 Communications......     29.7         30.2
                 Information Services     11.5         10.4
                 Technology..........      4.1          5.1
                 Other...............      0.2          0.3
                                         -----        -----
                                         100.0%       100.0%
                                         =====        =====

                                      December 31, December 31,
                 Fair Value               2001         2000
                 ----------           ------------ ------------
                 Media...............     55.2%        53.8%
                 Communications......     28.9         29.9
                 Information Services     11.8         10.3
                 Technology..........      3.8          5.6
                 Other...............      0.3          0.4
                                         -----        -----
                                         100.0%       100.0%
                                         =====        =====
</TABLE>

   MCG recorded charge-offs of $14,840 against the allowance for loan losses
prior to the conversion to a business development company. The following is a
summary of changes in the allowance for loan losses:

<TABLE>
<CAPTION>
                                    November 30, December 31, December 31,
     For periods ended                  2001         2000         1999
     -----------------              ------------ ------------ ------------
     <S>                            <C>          <C>          <C>
     Balance at beginning of period   $ 10,084     $ 4,663       $2,605
     Provision for loan losses.....     10,275       5,421        2,058
     Charge-offs...................    (14,840)         --           --
                                      --------     -------       ------
     Balance at end of period......   $  5,519     $10,084       $4,663
                                      ========     =======       ======
</TABLE>

   The Company had no charge-offs for the years ended December 31, 2000 and
1999. At December 31, 2001, there were $8,629 of loans greater than 60 days
past due and $157 of loans on non-accrual status. At December 31, 2000 there
were no loans greater than 60 days past due or on non-accrual status.

                                      62

<PAGE>

                            MCG Capital Corporation

            Notes to Consolidated Financial Statements--(Continued)

              (in thousands, except share and per share amounts)

Note C--Borrowings

   On June 24, 1998, MCG Finance Corporation ("MCG Finance", currently MCG
Finance I, LLC) entered into a $400,000 senior secured credit facility (the
"Heller Facility"). The arrangement was due to expire on January 2, 2002 but
was paid off on December 27, 2001. MCG Finance is a bankruptcy remote,
special-purpose, wholly owned subsidiary of MCG and, therefore, the assets of
MCG Finance may not be available to MCG creditors. The Heller Facility was
secured by all of MCG Finance's existing and thereafter acquired assets. In
addition, all shares of capital stock of MCG Finance Corporation were pledged
as collateral. The lead bank for the Heller Facility, Heller Financial, Inc.
("Heller"), held 334,566 Class A shares and 677,934 Class D shares at December
31, 2000. On October 25, 2001, Heller was acquired by G.E. Capital.

   The Heller Facility consisted of a $320,000 revolving credit line and
$80,000 term loan. The revolving credit line consisted of a base rate loan at
the bank prime rate as published by the Board of Governors of the Federal
Reserve System in the Federal Reserve statistical release H.15 (519) entitled
"Selected Interest Rates," and up to 7 tranches of loans with interest rates
based on the London Interbank Offered Rate ("LIBOR"). The base rate loan
revolved each day. MCG could obtain the LIBOR-rated loans for periods of one,
two, three or six months. The interest rate on the term loan was also based on
LIBOR and MCG could choose a repricing period of one, two, three or six months.
MCG was charged 25 basis points on any unused amounts.

   Interest payable on each individual loan or tranche was consolidated with
principal as part of the prime loan at the end of the term of the tranche loan.
Interest was payable quarterly on the prime loan. Interest on tranche loans was
payable quarterly for tranche loan terms greater than three months. Principal
payments were made based on the cash position of the Company within the
covenant parameters of the facility.

   During December 2001, the Company used proceeds from the initial public and
concurrent private offerings of common stock and the securitization of loans
under a term securitization facility through Wachovia Securities to pay off the
Facility.

   As of June 1, 2000, MCG Finance Corporation II ("MCG Finance II", currently
MCG Finance II, LLC) sponsored the creation of MCG Master Trust (the "Revolving
Credit Facility"), which entered into a variable funding securitization
facility by issuing Series 2000-1 Notes. MCG Finance II is a bankruptcy remote,
special-purpose, wholly owned subsidiary of MCG whose assets may not be
available to MCG creditors. The MCG Master Trust is a bankruptcy remote,
special-purpose, wholly owned subsidiary of MCG Finance II whose assets may not
be available to MCG or MCG Finance II creditors. The Revolving Credit Facility
is secured by all of the Trust's existing and hereinafter acquired assets
totaling $71,659 as of December 31, 2001. This Revolving Credit Facility is
scheduled to terminate on May 31, 2003.

   The Revolving Credit Facility may issue up to $200,000 of Class A Notes (the
"Notes"). Currently all of the Notes outstanding total $22,585 and are held by
one investor. The Notes bear interest based on the daily Commercial Paper Rate
for Wachovia's funding conduit ("CP Rate") plus 1.0% and interest is payable
monthly. The amount of Notes that can be issued is determined based on a
minimum subordination amount applied to eligible loans in the Revolving Credit
Facility including the requirement for a minimum of $30,000 of unleveraged
loans as collateral for the indebtedness. Eligible loans are determined based
on total loans in the Revolving Credit Facility less certain amounts related to
delinquencies and various other criteria such as weighted average remaining
life of the Revolving Credit Facility portfolio, weighted average risk rating
of the Revolving Credit Facility portfolio, and industry concentration limits.
The Revolving Credit Facility is charged 20 basis points on the difference
between the $200,000 limit and the amount of Notes outstanding.


                                      63

<PAGE>

                            MCG Capital Corporation

            Notes to Consolidated Financial Statements--(Continued)

              (in thousands, except share and per share amounts)

   On December 27, 2001, MCG Finance III, LLC ("MCG Finance III") sponsored the
creation of MCG Commercial Loan Trust (the "Trust"), which entered into a term
funding securitization agreement by issuing Series 2001-1 Notes. MCG Finance
III is a bankruptcy remote, special-purpose, wholly owned subsidiary of MCG
whose assets may not be available to MCG creditors. The Trust is a bankruptcy
remote, special-purpose, wholly owned subsidiary of MCG Finance III whose
assets may not be available to MCG or MCG Finance III creditors. The Series
2001-1 Notes are secured by all of the Trust's existing assets totaling
$349,488 as of December 31, 2001. This facility is scheduled to terminate on
February 20, 2013 or sooner upon full repayment of the Class A and Class B
Notes.

   The Trust issued $229,860 of Class A Notes, and $35,363 Class B Notes
(collectively the "Trust Notes"). The Class A Notes bear interest of LIBOR plus
0.60% and Class B Notes bear interest of LIBOR plus 1.75%, and interest is
payable quarterly.

   Outstandings under the Revolving Credit Facility, the Trust Notes, and the
Heller Facility as of December 31, 2001 and 2000 by interest rate benchmark
were as follows:

<TABLE>
<CAPTION>
                                                     December 31,
                                                   -----------------
                                                     2001     2000
                                                   -------- --------
           <S>                                     <C>      <C>
           Prime Rate............................. $     -- $ 23,672
           30-day LIBOR...........................       --  266,500
           60-day LIBOR...........................       --       --
           90-day LIBOR...........................  265,223       --
           CP Rate................................   22,585   66,661
                                                   -------- --------
                                                   $287,808 $356,833
                                                   -------- --------
</TABLE>

   The maximum outstandings under the Heller Facility during the years ended
December 31, 2001, 2000, and 1999 were $345,146, $321,198, and $250,618,
respectively, and the average outstandings were $308,576, $282,353, and
$172,349, respectively. The weighted average interest rates, excluding the
amortization of deferred financing costs, for the years ended December 31,
2001, 2000 and 1999 were 6.1%, 8.5% and 7.5%, respectively. The weighted
average interest rates were 8.7% and 8.4% at December 31, 2000 and 1999,
respectively. The Heller Facility was paid off prior to December 31, 2001.

   The maximum outstandings under the Notes issued by the Revolving Credit
Facility during the year ended December 31, 2001 and 2000 were $126,800 and
$66,661, respectively, and the average outstandings were $92,275, and 13,511,
respectively. The weighted average interest rates, excluding the amortization
of deferred financing costs, for the year ended December 31, 2001 and 2000 were
5.2% and 8.5%, respectively, and the interest rates at December 31, 2001 and
2000 were 4.9% and 8.1%, respectively.

   The maximum outstandings under the Notes issued by the Trust during the year
ended December 31, 2001 were $265,223 and the average outstandings were $3,633.
The weighted average interest rate, excluding the amortization of deferred
financing costs, for the year ended December 31, 2001 was 2.7% and the weighted
average interest rate at December 31, 2001 was 2.7%.

   Subject to certain minimum equity restrictions and other covenants, total
unused available commitments from the borrowing facilities totaled $177,415 and
$193,167 at December 31, 2001 and December 31, 2000, respectively.


                                      64

<PAGE>

                            MCG Capital Corporation

            Notes to Consolidated Financial Statements--(Continued)

              (in thousands, except share and per share amounts)

Note D--Capital Stock

   On December 4, 2001, the Company completed its IPO and sold 13,375,000
shares of its common stock at a price of $17.00 per share ($15.90 net of
underwriting discount). MCG also completed a concurrent private offering of
625,000 shares at a price of $15.90 per share. Prior to the completion of the
Company's IPO, all outstanding shares of the Company's Class A, B, D and E
common stock converted into 12,671,887 shares of one class of common stock
without preference on a one-for-one basis.

   Immediately prior to the IPO, the company issued 1,615,000 shares of
restricted stock in exchange for all outstanding stock options and warrants
held by employees and others.

   The Company declared an aggregate dividend of $.86 per share in December
2001 or $24,327, consisting of a dividend of $0.25 per share for the fourth
quarter of 2001 and an additional dividend of $0.61 per share representing the
distribution of substantially all of our earnings and profits since inception
payable to shareholders of record on January 22, 2002.

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

   At December 31, 2000, the Company had reserved 2,452,406 shares of common
stock for issuance in connection with its stock option plan and warrants
granted to First Union Corporation. In November 2001, all of the stock options
and warrants and the stock option plan were terminated.

Note E--Employee Benefit Plans

   MCG sponsors a contributory savings plan and profit-sharing plan. MCG's
savings plan allows all full-time and part-time employees who work at least one
thousand hours per year to participate beginning on the first day of the
calendar quarter following an employee's date of hire. MCG matches a portion of
the contribution made by employees, which is based upon a percent of defined
compensation, to the savings plan. The profit sharing plan allows participation
by eligible employees who are on the payroll on the last day of the fiscal year
for which the award is granted. Expenses related to the contributory savings
plan were $19, $133, $110, and $67 for the periods ended December 31, 2001,
November 30, 2001, and December 31, 2000 and 1999, respectively. Expenses
related to the profit sharing plan were $72, $222, $222 and $88 for the periods
ended December 31, 2001, November 30, 2001, and December 31, 2000 and 1999,
respectively.

   During 2000, MCG created a deferred compensation plan for key executives
that would allow eligible employees to defer a portion of their salary and
bonuses to an unfunded deferred compensation plan managed by MCG. Contributions
to the plan earn interest at a rate of 2.00% over MCG's internal cost of funds
rate, as defined by the plan. The plan was effective January 1, 2001. There was
$346 of contributions to the plan during the year ended December 31, 2001.

Note F--Income Taxes

   Through December 31, 2001 the Company was taxed as a "C" corporation.
Effective January 1, 2002, MCG will elect to be treated for federal income tax
purposes as a regulated investment company (RIC) under

                                      65

<PAGE>

                            MCG Capital Corporation

            Notes to Consolidated Financial Statements--(Continued)

              (in thousands, except share and per share amounts)

Subchapter M of the Internal Revenue Code. As a RIC, the Company generally will
not be subject to taxation of income to the extent such income is distributed
to stockholders and the Company meets certain minimum dividend and other
distribution requirements.

   Deferred income taxes prior to conversion to a business development company
reflected the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Deferred income taxes subsequent to
conversion to a business development company reflect taxes on built-in gains on
equity investments. Significant components of the Company's deferred tax assets
and liabilities were as follows:

<TABLE>
<CAPTION>
                                                            December 31
                                                          ---------------
                                                           2001     2000
                                                          -------  ------
      <S>                                                 <C>      <C>
      Deferred tax assets (liabilities)..................
         Allowance for loan losses....................... $    --  $4,106
         Loan fee recognition............................      --      --
         Built in gains on investments...................  (1,085)     --
         Other...........................................      --     155
                                                          -------  ------
             Total deferred tax assets (liabilities)..... $(1,085) $4,261
                                                          =======  ======
</TABLE>

   Differences between income tax expense (benefit) and the amount computed by
applying statutory income tax rates are summarized as follows:

<TABLE>
<CAPTION>
                                                           Eleven Months
                                           One Month Ended     Ended      Year Ended   Year Ended
                                            December 31,   November 30,  December 31, December 31,
                                                2001           2001          2000         1999
                                           --------------- ------------- ------------ ------------
<S>                                        <C>             <C>           <C>          <C>
Amounts at statutory federal rates........     $(1,016)       $5,213       $ 8,309      $ 3,396
Effect of:................................
State taxes, net of federal benefit.......        (176)          901         1,357          520
Book expenses not deductible as a business
  development company.....................         559
Other.....................................          --            --             4            5
                                               -------        ------       -------      -------
Income tax expense (benefit)..............     $  (633)       $6,114       $ 9,670      $ 3,921
                                               =======        ======       =======      =======

Taxes currently (receivable) payable......     $  (138)       $  158       $12,317      $ 5,025
Deferred income taxes.....................        (495)        5,956        (2,647)      (1,104)
                                               -------        ------       -------      -------
Income tax expense (benefit)..............     $  (633)       $6,114       $ 9,670      $ 3,921
                                               =======        ======       =======      =======
</TABLE>

   The components of income tax expense (benefit) are as follows:

<TABLE>
<CAPTION>
                          One Month Ended  Eleven Months Ended    Year Ended        Year Ended
                         December 31, 2001  November 30, 2001  December 31, 2000 December 31, 1999
                         ----------------  ------------------- ----------------  ----------------
                         Current  Deferred Current    Deferred Current  Deferred Current  Deferred
-                        -------  -------- -------    -------- -------  -------- -------  --------
<S>                      <C>      <C>      <C>        <C>      <C>      <C>      <C>      <C>
Federal.................  $(118)   $(422)   $135       $5,077  $ 9,660  $(2,047) $4,025   $  (884)
State...................    (20)     (73)     23          879    2,657     (600)  1,000      (220)
                          -----    -----    ----       ------  -------  -------  ------   -------
                          $(138)   $(495)   $158       $5,956  $12,317  $(2,647) $5,025   $(1,104)
                          =====    =====    ====       ======  =======  =======  ======   =======
</TABLE>

                                      66

<PAGE>

                            MCG Capital Corporation

            Notes to Consolidated Financial Statements--(Continued)

              (in thousands, except share and per share amounts)


Note G--Commitments and Contingencies

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

   The balance of unused commitments to extend credit was $29,352 and $42,803
at December 31, 2001 and 2000, respectively. The estimated fair value of
commitments reflects the amount MCG would have to pay a counterparty to assume
these obligations and was $147 and $214 at December 31, 2001 and 2000,
respectively. These amounts were estimated as the amount of fees currently
charged to enter into similar agreements, taking into account the present
creditworthiness of the counterparties.

   Commitments to extend credit include the unused portions of commitments that
obligate the Company to extend credit in the form of loans, participations in
loans or similar transactions. Commitments to extend credit would also include
loan proceeds the Company is obligated to advance, such as loan draws, rotating
or revolving credit arrangements, or similar transactions. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee by the counterparty. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements.

   Certain premises are leased under agreements which expire at various dates
through 2007. Total rent expense amounted to $61, $602, $505 and $292 during
the periods ended December 31, 2001, November 30, 2001, and December 31, 2000
and 1999, respectively.

   Future minimum rental commitments as of December 31, 2001 for all
non-cancelable operating leases with initial or remaining terms of one year or
more were as follows:

<TABLE>
                 <S>                                     <C>
                 2002................................... $  791
                 2003...................................    418
                 2004...................................    102
                 2005...................................     99
                 2006 and thereafter....................     83
                                                         ------
                 Total.................................. $1,493
                                                         ======
</TABLE>

   The Company has entered into an agreement with a third party for certain
data processing services. The cost of these services is determined by volume
considerations, in addition to an agreed base rate of $32 per year, for a
remaining term of approximately two years.

Note H--Concentrations of Credit Risk

   MCG's customers are primarily small- and medium-sized companies serving the
media, communications, technology and information services industry sectors.
These sectors are characterized by high margins, high growth rates,
consolidation and product and market extension opportunities. Value often is
vested in intangible assets and intellectual property.


                                      67

<PAGE>

                            MCG Capital Corporation

            Notes to Consolidated Financial Statements--(Continued)

              (in thousands, except share and per share amounts)

   The largest customers vary from year to year as new loans are recorded and
loans pay off. Loan revenue, consisting of interest, fees, and recognition of
gains on equity interests, can fluctuate dramatically when a loan is paid off
or a related equity interest is sold. Revenue recognition in any given year can
be highly concentrated among several customers.

Note I--Related Party Transactions

   Immediately prior to the IPO, MCG issued 68,930 shares of common stock for
the termination of all warrants held by Wachovia Corporation without regard to
exercise price. At that time, Wachovia Corporation was a shareholder. The
warrants consisted of warrants to purchase 226,000 shares of common stock at an
exercise price of $20 per share, 186,000 shares at an exercise price of $30 per
share and 104,000 shares at an exercise price of $40 per share. The total
number of shares issued for the termination of the warrants was based on the
Black-Scholes option-pricing model and assumptions negotiated with Wachovia
Corporation and approved by our Board of Directors.

   Heller Financial, Inc., a shareholder, provided our primary lending facility
prior to December 28, 2001. As of December 31, 2000, interest payable of $1,813
included $1,364 payable to the lenders under the facility with Heller
Financial, Inc., as agent, and $449 payable to an affiliate of Wachovia that
holds the Master Trust Class A Notes. During 2001 and 2000, interest paid to
Heller Financial, Inc., as agent, totaled $20,248 and $23,910, respectively and
interest paid to the affiliate of Wachovia holding the Master Trust Class A
Notes totaled $4,854 and $697, respectively. The facility was paid off on
December 28, 2001.

   See Note J for discussion of employee loans.

Note J--Employee Stock Plans

   In June 1998, MCG authorized a stock-based compensation plan (the "1998
Plan"). Since the exercise prices for the stock options were at least equal to
the fair value of the stock on the date of grant, no compensation expense has
been recognized for the 1998 Plan.If compensation expense for the 1998 Plan had
been determined based on the fair value at the grant date, consistent with the
method in SFAS No. 123, on a pro forma basis, MCG's net income would have been
reduced by $0, $357, and $52 for the years ended December 31, 2001, 2000 and
1999, respectively. Basic and diluted earnings per share would have been
unchanged at $0.27 for the year ended December 31, 2001, reduced to $1.31 per
share for the year ended December 31, 2000 and would have been unchanged at
$0.87 for the year ended December 31, 1999.

   The 1998 Plan authorized MCG to grant options or stock appreciation rights
to key personnel for up to 1,586,406 shares of Common Stock. During 2000, the
1998 Plan was amended to increase the number of authorized shares under the
plan to 1,936,406. Under this plan, the exercise price of each option is
determined by the committee appointed to administer the plan, an option's
maximum term is ten years, and the options vest over a 3-5 year period, either
straight-line or cliff vesting.

                                      68

<PAGE>

                            MCG Capital Corporation

            Notes to Consolidated Financial Statements--(Continued)

              (in thousands, except share and per share amounts)


   A summary of the Company's stock option activity and related information for
all stock option plans for the periods ended November 30, 2001, and December
31, 2000 and 1999, is as follows:

<TABLE>
<CAPTION>
                                         Eleven-month period        Year ended           Year ended
                                       ended November 30, 2001  December 31, 2000    December 31, 1999
                                       ----------------------- -------------------- --------------------
                                                     Weighted-            Weighted-            Weighted-
                                                      average              average              average
                                                     Exercise             Exercise             Exercise
                                         Shares        Price    Shares      Price    Shares      Price
                                       ----------    --------- ---------  --------- ---------  ---------
<S>                                    <C>           <C>       <C>        <C>       <C>        <C>
Outstanding, beginning of period......  1,894,406     $24.96   1,326,368   $27.26   1,140,868   $28.15
Granted...............................     51,500     $15.00     593,538    19.80     209,500    23.03
Exercised.............................         --         --          --       --          --       --
Expired/Cancelled..................... (1,945,906)    $24.70     (25,500)   24.41     (24,000)   32.57
Outstanding, end of period............         --         --   1,894,406    24.96   1,326,368    27.26
                                       ----------     ------   ---------   ------   ---------   ------
Options exercisable at period-end.....         --         --     483,505    27.66     223,374    28.05
                                       ----------     ------   ---------   ------   ---------   ------
Weighted-average fair value of options
  granted during the period...........                $ 5.56               $ 4.29               $ 1.95
                                                      ======               ======               ======
</TABLE>

   The fair value of the options granted was determined using a minimum value
calculation for non-public companies assuming an expected life of ten years, a
fair value of the stock equal to the exercise price, dividend yield of 0%, and
a weighted average risk-free rate of 4.63%, 4.99% and 6.44% for 2001, 2000 and
1999.

   Under the 1940 Act, business development companies may maintain either a
qualifying stock option plan or a qualifying profit-sharing plan, but not both.
Consequently, immediately prior to the Company's business development company
conversion, MCG terminated the stock option plan. In connection with the
termination of the plan, MCG issued 1,539,851 shares of restricted common stock
to employees and directors. The total number of shares to be issued for the
termination of the option plan was based upon the Black-Scholes option-pricing
model and assumptions approved by the Board of Directors.

   With respect to 303,660 of the total shares of restricted common stock, the
forfeiture provisions will lapse as to one-eleventh of such shares initially
granted to an employee at the end of each of the eleven consecutive calendar
year quarters beginning January 1, 2002 so long as that employee remains
employed by MCG on the applicable date.

   With respect to 468,750 of the total shares of restricted common stock, the
forfeiture provisions will lapse as to one-fifteenth of such shares initially
granted to an employee at the end of each of the fifteen consecutive calendar
year quarters beginning January 1, 2002 so long as that employee remains
employed by MCG on the applicable date.

   A total of 674,030 of the total shares of restricted common stock are
subject to two independent forfeiture conditions, one relating to employment
status (all shares will be forfeited unless employee is still employed by MCG
on September 30, 2005) and the other relating to total return to stockholders.
With respect to 25,970 of the total shares of restricted common stock, the
forfeiture provisions will lapse on September 30, 2005 so long as that employee
remains employed by MCG on that date.

   With respect to 67,441 of the total shares of restricted stock, all
forfeiture conditions lapsed as of the date of the initial public offering.

                                      69

<PAGE>

                            MCG Capital Corporation

            Notes to Consolidated Financial Statements--(Continued)

              (in thousands, except share and per share amounts)


   MCG made cash payments totaling $1,706 to employees for the taxes imposed on
them associated with the issuance of restricted common stock. The cash payments
assumed a combined federal and state tax rate of 48% for each employee.

   Additionally, in connection with the termination of the stock option plan,
certain executive officers and employees purchased a portion of the 1,539,851
shares of restricted common stock at a per share price of $17.00. Those
executive officers and employees issued partially non-recourse notes to MCG
with an aggregate face value of $5,763 to purchase these shares. The notes are
payable at the end of a four and a half-year term, subject to acceleration,
bear interest at 4.13% payable annually and are secured by all of the
restricted common stock held by such employee and for some employees, for a
specified time-period, additional shares of common stock the employee owns. The
notes are non-recourse as to the principal amount but recourse as to the
interest. Amounts due on these loans are reflected as a reduction of
stockholders' equity in the consolidated balance sheets.

   In connection with the formation of the Company in 1998, certain executive
officers of the Company were granted loans to purchase 60,000 shares of Common
Stock. These notes are payable at the end of a five year term and bear interest
at 8.2875% payable annually. In addition, during 2000 additional loans were
granted to certain additional executive officers in connection with the
purchase of 16,333 shares of Common Stock. These notes are payable at the end
of a five year term and bear interest at 8.25% payable annually. These notes
are non-recourse as to the principal amount but recourse as to the interest.
The loans are secured by the Company stock purchased with these loans as well
as other Company stock owned by the officers. Amounts due on these loans are
reflected as a reduction of stockholders' equity in the consolidated balance
sheets.

   For the restricted common stock for which no return-based criteria apply,
compensation expense, equal to the value of the shares at the grant date, is
being recorded over the term of the forfeiture provisions. In addition,
dividends on all shares that serve as collateral for the notes described above
will be recorded as compensation expense until such time as the loans are
repaid or the shares are released as collateral. For the one-month period ended
December 31, 2001, MCG recognized $3,340 in compensation expense for restricted
stock and dividends, including those shares granted to directors.

Note K--Earnings Per Share

   The following table sets forth the computation of basic and diluted earnings
per common share for the periods ended December 31, 2001, November 30, 2001,
and December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                              One Month       Eleven Months
                                                                Ended             Ended      Year Ended   Year Ended
                                                             December 31,     November 30,  December 31, December 31,
                                                                 2001             2001          2000         1999
(in thousands, except per share amounts)                     ------------     ------------- ------------ ------------
<S>                                                          <C>          <C> <C>           <C>          <C>
Basic
    Net income (loss).......................................   $(6,742)          $10,556      $14,071       $5,783
    Weighted average common shares outstanding..............    26,814            12,757       10,435        6,612
    Basic earnings (loss) per common share..................   $ (0.25)          $  0.83      $  1.35       $ 0.87
Diluted
    Net income (loss).......................................   $(6,742)          $10,556      $14,071       $5,783
    Weighted average common shares outstanding..............    26,814            12,757       10,435        6,612
    Dilutive effect of stock options and restricted stock...        --                18           18            2
    Weighted average common shares and Common stock
     equivalents............................................    26,814            12,775       10,453        6,614
    Diluted earnings (loss) per common share................   $ (0.25)          $  0.83      $  1.35       $ 0.87
</TABLE>


                                      70

<PAGE>

                            MCG Capital Corporation

            Notes to Consolidated Financial Statements--(Continued)

              (in thousands, except share and per share amounts)

   For purposes of calculating earnings per common share, restricted common
stock whose forfeiture provisions are solely based on passage of time, amounts
are included in diluted earnings per common share based on the treasury stock
method. No amounts were included in diluted earnings per common share for the
one-month period ended December 31, 2001. Restricted common stock whose
forfeiture provisions are based on performance criteria are included in diluted
earnings per common share when it becomes probable such criteria will be met
and is calculated using the treasury stock method. No amounts were included in
diluted earnings per common share during the one-month period ended December
31, 2001.

Note L--Selected Quarterly Data (Unaudited)

   The following tables set forth certain quarterly financial information for
each of the eight quarters ended with the quarter ended December 31, 2001. This
information was derived from our unaudited consolidated financial statements.
Results for any quarter are not necessarily indicative of results for the full
year or for any future quarter.

<TABLE>
<CAPTION>
                                                                           Two Months     One Month
                                                           2001              Ended          Ended
                                                 -----------------------  November 30,   December 31,
    (in thousands, except per share amounts)      Qtr 1   Qtr 2   Qtr 3       2001           2001
------------------------------------------------ ------- ------- -------  ------------   ------------
<S>                      <C>                     <C>     <C>     <C>      <C>            <C>
Operating income................................ $17,912 $17,689 $18,725    $11,463        $ 6,012
Net operating income (loss) before provision for
  loan losses and investment gains (losses).....   7,075   7,070   8,179      6,147         (1,608)
Income (loss) from continuing operations........   3,553   2,815  (1,074)     3,485         (2,270)
Net income (loss)...............................   5,330   2,815  (1,074)     3,485         (6,742)
Income (loss) from continuing operations per
  common share- basic........................... $  0.28 $  0.22 $ (0.08)   $  0.27        $ (0.08)
Income (loss) from continuing operations per
  common share -diluted......................... $  0.28 $  0.22 $ (0.08)   $  0.26        $ (0.25)
Net income (loss) per common share - basic...... $  0.42 $  0.22 $ (0.08)   $  0.27        $ (0.08)
Net income (loss) per common share - diluted.... $  0.42 $  0.22 $ (0.08)   $  0.26        $ (0.25)
</TABLE>

<TABLE>
<CAPTION>
                                                                       2000
                                                          -------------------------------
                                                           Qtr 1   Qtr 2   Qtr 3   Qtr 4
                                                          ------- ------- ------- -------
<S>                                                       <C>     <C>     <C>     <C>
Operating income......................................... $10,750 $13,265 $15,315 $24,420
Net operating income before provision for loan losses and
  investment gains (losses)..............................   3,071   4,468   6,068  13,456
Income (loss) from continuing operations.................   2,755   2,423   3,243   5,650
Net income (loss)........................................   2,755   2,423   3,243   5,650
Income (loss) from continuing operations per common share
  --basic and diluted.................................... $  0.37 $  0.27 $  0.26 $  0.45
Net income (loss) per common share--basic and diluted.... $  0.37 $  0.27 $  0.26 $  0.45
</TABLE>

                                      71

<PAGE>

                            MCG Capital Corporation

            Notes to Consolidated Financial Statements--(Continued)

              (in thousands, except share and per share amounts)


Note M--Financial Highlights

   Following is a schedule of financial highlights for the one-month period
ended December 31, 2001:

<TABLE>
<CAPTION>
(Dollars in thousands except per share data)
<S>                                                                   <C>
Per Share Data/(1)/:
Net asset value at beginning of period............................... $  13.31

Net operating loss before investment gains and losses................     (.05)
Increase in unrealized depreciation on investments...................     (.05)
Cumulative effect of conversions to a BDC............................     (.16)
Tax benefit..........................................................      .02
                                                                      --------
Net decrease in shareholders' equity resulting from operations.......     (.24)

Dividends/(2) /......................................................     (.86)
Antidilutive effect of dividends recorded as compensation expense....      .06
                                                                      --------
Net decrease in shareholders' equity resulting from distributions....     (.80)

Issuance of shares in IPO, net of costs..............................     2.18
Dilutive effect of IPO...............................................    (1.04)
Dilutive effect of issuance of restricted stock awards, net of
  amortization.......................................................     (.95)
                                                                      --------
Net increase in shareholder's equity resulting from IPO..............      .19

Net asset value at end of period..................................... $  12.46

Per share market value of end of period.............................. $  17.80
Total return/(3) /...................................................     4.71%
Shares outstanding at end of period..................................   28,287

Ratio/Supplemental Data:
Net assets at end of period.......................................... $352,373
Ratio of operating expenses to average net assets....................     2.13%
Ratio of net operating loss before investment gains and losses to
  average net assets.................................................    (0.45)%
</TABLE>

/(1)/ Basic and diluted per share data
/(2)/ Represents a distribution of the Company's accumulated earnings and
      profits from the period since inception through December 31, 2001. This
      dividend was required for the Company to qualify as a regulated
      investment company effective January 1, 2002.
/(3)/ Total return equals the increase of the ending market value over the
      initial public offering price, divided by the initial public offering
      price.

                                      72

<PAGE>

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

   Not applicable.

                                   PART III

Item 10.  Directors and Executive Officers of the Registrant

   The information with respect to our executive officers is contained under
the captions "Proposal I--Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in our definitive Proxy Statement for the 2002
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A under the Securities Exchange Act and is
incorporated in this Form 10-K by reference in response to this item.

Item 11.  Executive Compensation

   The information with respect to compensation of executives and directors is
contained under the caption "Proposal 1--Election of Directors--Compensation of
Executive Officers and Directors" in our definitive Proxy Statement for the
2002 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A under the Securities Exchange
Act and is incorporated in this Form 10-K by reference in response to this item.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

   The information with respect to security ownership of certain beneficial
owners and management is contained under the caption "Security Ownership of
Certain Beneficial Owners and Management" in our definitive Proxy Statement for
the 2002 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A under the Securities Exchange
Act and is incorporated in this Form 10-K by reference in response to this item.

Item 13.  Certain Relationships and Related Transactions

   The information with respect to certain relationships and related
transactions is contained under the caption "Certain Relationships and
Transactions" in our definitive Proxy Statement for the 2002 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A under the Securities Exchange Act and is incorporated in this
Form 10-K by reference in response to this item.

                                    PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

<TABLE>
<S> <C>                                                                                                         <C>
1.  The following financial statements are filed herewith
     Report of Independent Auditors...........................................................................   44
     Consolidated Balance Sheets as of December 31, 2001 and 2000.............................................   45
     Consolidated Statements of Operations for the one month ended December 31, 2001, eleven months
       ended November 30, 2001, and the years ended December 31, 2000 and 1999................................   46
     Consolidated Statements of Stockholders' Equity from December 31, 1998 through 2001......................   47
     Consolidated Statements of Cash Flows for the one month ended December 31, 2001, eleven months
       ended November 30, 2001, and the years ended December 31, 2000 and 1999................................   48
     Consolidated Schedules of Investments as of December 31, 2001 and 2000...................................   49
     Notes to Consolidated Financial Statements...............................................................   55
2.  No financial statement schedules are filed herewith because (i) such schedules are not required or (ii) the
      information required has been presented in the aforementioned financial statements.
3.  Exhibits required to be filed by Item 601 of Regulation S-K.
</TABLE>

                                      73

<PAGE>

   Listed below are the exhibits which are filed as part of this report
(according to the number assigned to them in Item 601 of Regulation S-K):

<TABLE>
<CAPTION>
Exhibit
Number                                        Description of Document
------- ---------------------------------------------------------------------------------------------------
<C>     <S>

3.1**   Restated Certificate of Incorporation.

3.2**   Amended and Restated Bylaws.

4.1*    Specimen Common Stock Certificate

10.1**  Third Amended and Restated Registration Rights Agreement by and among MCG Capital
          Corporation and certain stockholders.

10.2#   Sale and Servicing Agreement among MCG Master Trust, MCG Finance Corporation II and MCG
          Capital Corporation (formerly MCG Credit Corporation), dated as of June 1, 2000, as amended
          by a certain Amendment No. 1, dated as of September 1, 2000, and an Amendment No. 2, dated
          as of June 6, 2001.

10.3+   Note Purchase Agreement among MCG Master Trust, MCG Capital Corporation (formerly MCG
          Credit Corporation), Variable Funding Capital Corporation, and First Union Securities, Inc, dated
          as of June 1, 2000, as amended by a certain Amendment No. 1, dated as of June 6, 2001.

10.4#   Guaranty, dated as of June 16, 2000.

10.5#   Trust Agreement between MCG Finance Corporation II and Wilmington Trust Company, dated as
          of June 1, 2000.

10.6#   Trust Certificate, dated as of June 16, 2000.

10.7#   MCG Master Trust Class A Note issued to Variable Funding Capital Corporation, dated as of June 16,
          2000.

10.8#   MCG Master Trust Class B Note issued to MCG Finance Corporation II, dated as of June 16, 2000.

10.9#   Indenture by and between MCG Master Trust and Norwest Bank Minnesota, National Association,
          dated as of June 1, 2000.

10.10+  Series 2000-1 Terms Supplement to the Indenture dated as of June 1, 2000 between MCG Master
          Trust and Norwest Bank Minnesota, N.A, as amended by a certain Amendment No. 1, dated as of
          June 6, 2001, filed herein.

10.11#  Commercial Loan Sale Agreement between MCG Capital Corporation and MCG Finance
          Corporation II, dated as of June 1, 2000.

10.12#  Letter Agreement by and among MCG Master Trust, MCG Credit Corporation, (formerly MCG
          Credit Corporation), Variable Funding Capital Corporation and First Union Securities, Inc., dated
          as of June 6, 2001.

10.13** Sale and Servicing Agreement by and among MCG Commercial Loan Trust 2001-1, MCG Finance
          III, LLC, MCG Capital Corporation and Wells Fargo Bank Minnesota, National Association,
          dated as of December 1, 2001.

10.14** Note Purchase Agreement among MCG Commercial Loan Trust 2001-1, MCG Capital Corporation,
          MCG Finance III, LLC and First Union Securities, Inc., dated as of December 19, 2001.

10.15** Trust Agreement between MCG Finance III, LLC and Wilmington Trust Company, dated as of
          December 1, 2001.

10.16** MCG Commercial Loan Trust 2001-1 Trust Certificate, dated as of December 27, 2001.

10.17** MCG Commercial Loan Trust 2001-1 Class A Note, dated as of December 27, 2001.

10.18** MCG Commercial Loan Trust 2001-1 Class B Note, dated as of December 27, 2001.
</TABLE>

                                      74

<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number                                    Description of Document
------- --------------------------------------------------------------------------------------------
<C>     <S>

10.19** MCG Commercial Loan Trust 2001-1 Class C Note issued to MCG Finance III, LLC, dated as of
          December 27, 2001.

10.20** Indenture between MCG Commercial Loan Trust 2001-1 and Wells Fargo Bank Minnesota,
          National Association, dated as of December 1, 2001.

10.21** Commercial Loan Sale Agreement between MCG Capital Corporation and MCG Finance III, LLC,
          dated as of December 1, 2001.

10.22** Stock Purchase Agreement by and between MCG Capital Corporation and FBR Asset Investment
          Corporation.

10.23#  401(k) Plan.

10.24#  Deferred Compensation Plan.

10.25*  Dividend Reinvestment Plan.

10.26+  Form of Restricted Stock Agreement for administrative personnel.

10.27+  Form of Restricted Stock Agreement for staff professionals.

10.28+  Form of Restricted Stock Agreement for senior management.

10.29** Restricted Stock Agreement between the Company and Bryan J. Mitchell, dated November 28,
          2001.

10.30** Restricted Stock Agreement between the Company and Robert J. Merrick, dated November 28,
          2001.

10.31** Restricted Stock Agreement between the Company and B. Hagen Saville, dated November 28,
          2001.

10.32** Restricted Stock Agreement between the Company and Steven F. Tunney, dated November 28,
          2001.

10.33+  Form of Restricted Stock Agreement for directors.

10.34** Promissory Note issued to Bryan J. Mitchell, dated as of November 28, 2001.

10.35** Promissory Note issued to B. Hagen Saville, dated as of November 28, 2001.

10.36** Promissory Note issued to Steven F. Tunney, dated as of November 28, 2001.

10.37+  Form of Promissory Note issued to senior management.

10.38+  Form of Promissory Note issued to employees.

10.39** Pledge Agreement between the Company and Bryan J. Mitchell, dated as of November 28, 2001.

10.40** Pledge Agreement between the Company and B. Hagen Saville, dated as of November 28, 2001.

10.41** Pledge Agreement between the Company and Steven F. Tunney, dated as of November 28, 2001.

10.42+  Form of Pledge Agreement between the Company and employee.

10.43*  Form of Amended and Restated Promissory Note issued to senior management

10.44#  Form of Pledge Agreement between the Company and senior management, dated as of June 24,
          1998.

10.45** Custodial Agreement between the Company and Riggs Bank, N.A.

10.46** Employment Agreement between the Company and Bryan J. Mitchell, dated November 28, 2001.

10.47** Employment Agreement between the Company and Robert J. Merrick, dated November 28, 2001.

10.48** Employment Agreement between the Company and B. Hagen Saville, dated November 28, 2001.

10.49** Employment Agreement between the Company and Steven F. Tunney, dated November 28, 2001.

11      Statement regarding computation of per share earnings is included in Note K to the Company's
          Notes to the Consolidated Financial Statements.

21**    Subsidiaries of the Company and jurisdiction of incorporation/organization.
</TABLE>
--------
#  Incorporated by reference to the exhibit of the same name to the Company's
   registration statement on Form N-2 filed with the Commission on July 5, 2001
   (File No. 333-64596).

                                      75

<PAGE>

*  Incorporated by reference to the exhibit of the same name to Pre-Effective
   Amendment No. 2 to the Company's registration statement on Form N-2 filed
   with the Commission on November 1, 2001 (File No. 333-64596).
+  Incorporated by reference to the exhibit of the same name to Pre-Effective
   Amendment No. 3 to the Company's registration statement on Form N-2 filed
   with the Commission on November 6, 2001 (File No. 333-64596).
** Filed herewith

(b) Reports on Form 8-K.

   We have filed no reports on Form 8-K during the quarter ended December 31,
2001.

                                      76

<PAGE>

                                  SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 29, 2002.

                                          MCG CAPITAL CORPORATION


                                         By:    /s/  BRYAN J. MITCHELL
                                             -----------------------------
                                                    Bryan J. Mitchell
                                               Chairman of the Board and
                                                Chief Executive Officer

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

<TABLE>
<CAPTION>
          Signature                          Title                      Date
          ---------                          -----                      ----
<S>                           <C>                                  <C>

   /s/  BRYAN J. MITCHELL
----------------------------- Chairman and Chief Executive Officer
      Bryan J. Mitchell         (Principal Executive Officer)      March 29, 2002

    /s/  STEVEN F. TUNNEY
----------------------------- Director, President, Chief Operating
      Steven F. Tunney          Officer and Treasurer              March 29, 2002

   /s/  JANET C. PERLOWSKI
----------------------------- Chief Financial Officer (Principal
     Janet C. Perlowski         Financial and Accounting Officer)  March 29, 2002

   /s/  WALLACE B. MILLNER
-----------------------------
     Wallace B. Millner       Director                             March 29, 2002

    /s/  NORMAN W. ALPERT
-----------------------------
      Norman W. Alpert        Director                             March 29, 2002

  /s/  JOSEPH H. GLEBERMAN
-----------------------------
     Joseph H. Gleberman      Director                             March 29, 2002

   /s/  JEFFREY M. BUCHER
-----------------------------
      Jeffrey M. Bucher       Director                             March 29, 2002

   /s/  KENNETH J. O'KEEFE
-----------------------------
     Kenneth J. O'Keefe       Director                             March 29, 2002

   /s/  ROBERT J. MERRICK
-----------------------------
      Robert J. Merrick       Director                             March 29, 2002

   /s/  MICHAEL A. PRUZAN
-----------------------------
      Michael A. Pruzan       Director                             March 29, 2002
</TABLE>