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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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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, 2003



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                                       |  | 54-1889518                             
|(State of Incorporation)                       |  | (I.R.S. Employer Identification Number)
|1100 Wilson Boulevard Suite 3000 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.  x



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2)   Yes x    No ̈.



The aggregate market value of common stock held by non-affiliates of the Registrant as of June 30, 2003 was approximately $275,980,069 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 38,732,948 shares of the Registrants common stock outstanding as of March 10, 2004.



Documents Incorporated by Reference



Portions of the Registrants definitive Proxy Statement relating to the 2003 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.



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MCG CAPITAL CORPORATION



2003 FORM
10-K ANNUAL REPORT



TABLE OF CONTENTS



|           |  |                                                                                                              |  |     
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|           |  |                                                                                                              |  | PAGE
|           |  |                                                                                                              |  |     
|           |  | PART I                                                                                                       |  |     
|           |  |                                                                                                             
|Item 1.    |  | Business                                                                                                     |  | 1   
|Item 2.    |  | Properties                                                                                                   |  | 18  
|Item 3.    |  | Legal Proceedings                                                                                            |  | 18  
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                          |  | 18  
|           |  |                                                                                                             
|           |  | PART II                                                                                                      |  |     
|           |  |                                                                                                             
|Item 5.    |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 19  
|Item 6.    |  | Selected Financial Data                                                                                      |  | 21  
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 22  
|Item 7A.   |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 48  
|Item 8.    |  | Financial Statements and Supplementary Data                                                                  |  | 49  
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 90  
|Item 9A.   |  | Controls and Procedures                                                                                      |  | 90  
|           |  |                                                                                                             
|           |  | PART III                                                                                                     |  |     
|           |  |                                                                                                             
|Item 10.   |  | Directors and Executive Officers of the Registrant                                                           |  | 90  
|Item 11.   |  | Executive Compensation                                                                                       |  | 90  
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters                |  | 90  
|Item 13.   |  | Certain Relationships and Related Transactions                                                               |  | 91  
|Item 14.   |  | Principal Accountant Fees and Services                                                                       |  | 91  
|           |  |                                                                                                             
|           |  | PART IV                                                                                                      |  |     
|           |  |                                                                                                             
|Item 15.   |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                              |  | 92  
|           | 
|Signatures |  |                                                                                                             



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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 company providing financing and advisory services to a variety of small and medium-sized companies throughout the United States with a focus on growth oriented companies. Currently, our portfolio consists mostly
of companies in the communications, information services, media, and technology, including software and technology-enabled business services, industry sectors. Our capital is generally used by our portfolio companies to finance acquisitions,
recapitalizations, management buyouts, organic growth and working capital.



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 and
research services we also offer support our customers growth and risk management strategies.



We have built our portfolio through disciplined underwriting and investment approval processes and focused portfolio management. We typically lend to and
invest in companies with $10 million to $150 million in annual revenues that operate in our target industry sectors. As of December 31, 2003, we had outstanding commercial loans of approximately $605.6 million, and equity investments of
approximately $93.4 million. As of December 31, 2003, our geographically diverse customer base consisted of 81 companies with headquarters in 27 states and Washington, D.C. Many of our transactions are with existing customers. Through December 31,
2003, approximately 44% of the companies that have been our customers for one year or more had completed two or more transactions with us and approximately 23% had completed three or more transactions with us.



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 manage risk and maximize our return on investment.



CORPORATE HISTORY AND OFFICES



We were formed in 1998 by our management and affiliates of Goldman, Sachs
& Co. to purchase a loan portfolio and certain other assets from First Union National Bank (now Wachovia Bank, National Association) in a management buyout. Prior to this purchase, we had conducted our business since 1990 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.



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We are an internally managed, non-diversified, closed-end investment company that has elected to be
regulated as a business development company under the Investment Company Act of 1940 or the 1940 Act. As a business development company, 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%. See Regulation as a Business Development Company. In addition, we elected to be treated for federal income tax
purposes as a regulated investment company (RIC) under the Internal Revenue Code with the filing of our federal corporate income tax return for 2002, which election was effective as of January 1, 2002. See Certain U.S. Federal
Income Tax Considerations.



MCG was organized as a
Delaware corporation on March 18, 1998. In addition, on March 18, 1998, we changed our name from MCG, Inc. to MCG Credit Corporation and on June 14, 2001, we changed our name from MCG Credit Corporation to MCG Capital Corporation. Our executive
offices are located at 1100 Wilson Boulevard, Suite 3000, Arlington, Virginia 22209 and our telephone number is (703) 247-7500. In addition, we have an office in Richmond, Virginia. Our Internet site address is www.mcgcapital.com. Information
contained on our web site is not incorporated by reference into this Annual Report and you should not consider information contained on our web site to be part of this Annual Report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q
and our current reports on Form 8-K, as well as any amendments to those reports are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the Securities and Exchange Commission.



MARKET OPPORTUNITY



We believe that the small- and medium-sized business segment is becoming more
significant to the U.S. economy, and that it is attractively sized with good growth characteristics. We believe that many such businesses, including our target customers, have increasing demand for and less access to high-quality differentiated
corporate financial services. We also believe this trend is likely to continue given the broad-based and on-going 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 have organized our investment activities around a few clearly defined market opportunities leveraging our strong
credit culture and our expert-activist, knowledge based investment philosophy. We believe these market opportunities are large enough to provide continued growth. However, our focus is narrow enough to allow us to gain a special understanding of the
needs of our target customers. This allows us to provide innovative financing solutions to our customers.



We target only those market opportunities deemed attractive by our investment committee. Before we target a new market, industry sector or industry
sub-sector, our research team performs an opportunity analysis and identifies specific operational norms and risks of that market, sector or sub-sector. Management, working with our credit committee, then develops our lending and investment criteria
for that market, sector or sub-sector. We analyze new markets and industries in conjunction with refining and revalidating investment approaches for our existing markets and 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 market, asset class, geographic and industry sector concentration.



We currently focus on investments across the capital structure in the communications, information services, media and
technology, including software and technology-enabled business services, industry sectors. In connection with these investments we utilize, among other things, proprietary data, enhanced knowledge and substantial experience to create competitive
advantage. We also focus on buyout, growth and recapitalization financing opportunities in conjunction with private equity firms. In these circumstances our credit analysis skills, systematic underwriting processes and timely responses, among other
things, provide a competitive advantage to our targeted customers.



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We believe that traditional financial services providers typically lack infrastructure and dedicated
expertise to focus on small- and medium-sized companies within these markets. We believe that each of these markets has distinct characteristics in terms of risk, capital requirements, industry and general economic cycles, stage of development and
rates of return. Many of our industry sectors are characterized by ongoing consolidation and convergence and by new business formation. We also believe that these sectors have a number of common features, including private equity investing,
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.



| |  |  | 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. 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 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. Communication industry revenues are traditionally non-cyclical. Currently much of the difficulty facing the industry is a function of overcapacity and excess capital markets speculation
related to ongoing deregulation and overly optimistic assessments of future demand related to the internet and emerging broadband applications.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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, transactions processing and business-to-business transaction
enabling, as well as software applications, including component middleware and enterprise software. These businesses are generally moderately cyclical to non-cyclical.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



STRATEGY



We seek to achieve favorable risk-adjusted rates of return in the form of current yield and capital appreciation, while maintaining credit and investment
quality in our asset portfolio. We believe our 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
acquisition and risk management techniques. We make investments in the $1 to $50 million range and base our investment activity on fundamental analysis of growth oriented small- and medium- sized businesses. We apply well establish credit processes
to the assessment of risk and price our loans accordingly. We have developed proprietary analytics, data and knowledge to support our business activities.



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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 innovatively enhance our customers enterprise value;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | maintain sound credit and investment discipline and pricing practices regardless of market conditions;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | avoid adverse investment selection by applying our expert-activist philosophy to identify targeted prospects with pre-established selection criteria based on fundamental analysis;
and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | enhance effective risk management by utilizing an integrated team approach to customer acquisition, research, underwriting, compliance and loan and investment 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 funding needs of our targeted customers and 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 workflow management methodologies. We use this information to enhance the quality of our research and the effectiveness of our credit and investment analysis. We refine and revalidate our
investment approaches within particular markets, sectors and sub-sectors.



We work with our customers and targeted 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 some 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. We believe that 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 our cost of capital in order to achieve attractive risk-adjusted investment returns.



OPERATIONS



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



Identifying Prospective Customers



We identify and source new customers by actively engaging our network of private equity investors. We also acquire new customers by utilizing direct
marketing to prospects identified 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 prospective customer, 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 markets. We market on a national scale. We also participate in a variety of industry associations and our employees attend and give presentations at
numerous forums, conferences and meetings annually.



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Research



Our unique research capabilities create the foundation for our expert-activist philosophy of investing and give us a competitive advantage.
Our contact 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.



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;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | quarterly updates on our industry sectors which highlight recent operating statistics, emerging trends, public market sentiment, merger and acquisition activity and regulatory
outlook for each MCG targeted industry;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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
place primary emphasis on credit and risk analysis and have 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 200 transactions with an aggregate value of approximately $980 million in loan commitments. To ensure consistent underwriting, we use our sector-specific
due diligence methodologies, developed over the last 13 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



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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:



| |  |  | a business description;
| | - |  | -----------------------



| |  |  | a risk evaluation specific to the prospects business, considering the anticipated use of proceeds of our loan, and industry sector;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a collateral valuation to assess the underlying value of the enterprise, both as an ongoing operation and its value relative to comparable public and private companies; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a description of capital structure and the investment risk and return characteristics.
| | - |  | --------------------------------------------------------------------------------------



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. From this analysis, we have developed sector-specific risk
acceptance criteria to help us evaluate the financial risk of a prospect. 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. 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.



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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. 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. 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.



Collateral
Valuation.    To assess the credit exposure of the potential investment and to quantify the underlying value of the enterprise in which we are investing, we employ a series of standard valuation techniques. We prepare
comparative private market transactions analyses using our database of transactions in our target sectors. We also perform a valuation using discounted cash flow models based on our projections of the future free cash flows of the business and
industry derived capital costs. Finally, we look to comparable public companies to benchmark the enterprise using public market data to derive collateral value. Using these methods provides us with multiple views of the underlying value of the
investments collateral, giving us a key risk metric, which is loan-to-value.



Investment Structure.    In underwriting prospective customers, we also focus on investment structure, payment priority, collateral or asset value, management qualities, 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 debt to cash flow, 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 where appropriate. 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. For example, a loans
interest rate may increase or decrease based on certain risk measures such as the ratio of debt to cash flow. 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



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alternative to raising additional equity, which permits our customers to avoid the permanently dilutive effect on existing equity holders associated with
equity financing transactions.



Most of 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. We may, however, price certain loan transactions on a fixed basis.



Investment Approval Process



Our credit committee approves all of our investments, while the investment
committee of our board of directors also must approve certain investments. The four members of our credit committee are Bryan J. Mitchell, Chief Executive Officer; Steven F. Tunney, our President and Chief Operating Officer; Robert 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. The members of our investment committee are Messrs. Mitchell, Tunney, Alpert, Gleberman, Millner, Merrick and OKeefe.



Loan Servicing



After a loan is approved and funded, the underwriting team, along with the
loan administration group and the compliance administration 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;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | preparing annual reviews and quarterly collateral valuation updates for each customer; and
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | preparing quarterly customer and industry valuation data.
| | - |  | ---------------------------------------------------------



Loan Monitoring and Restructuring Procedures.    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 or more
frequent basis. Because we are a provider of long-term privately negotiated investment capital to growth-oriented companies and we actively manage our investments through our contract structure, we do not believe that contract exceptions such as
breaches of contractual covenants or late delivery of financial statements are necessarily an indication of deterioration in the 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,
among other items, 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 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 cease recognizing interest income on that loan until all principal has been paid. However, we may 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 are primarily senior secured commercial loans, subordinated debt and equity-based investments. Some of our loans include warrants,
options, success fees, equity co-investments and other equity-like features. Currently, our customer base includes primarily small- and medium-sized private companies in the communications, information services, media, and technology, including
software and technology-enabled business services, industry sectors. Our capital is generally used by our portfolio companies to finance acquisitions, recapitalizations, management buyouts, organic growth and working capital. 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. At December 31, 2003, our largest customer, Superior Publishing
Corporation, represented approximately 8.1% of the fair value of our investments and our ten largest customers represented approximately 40.1% of the total fair value of our investments.



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Our senior debt instruments generally provide for a contractual variable interest rate between 4% and
14%, a portion of which may be deferred or paid-in-kind (PIK). In addition, approximately 53% of the loan portfolio, based on amounts outstanding at fair value as of December 31, 2003, has floors of between 1.25% and 3% on the LIBOR base index.
Approximately 84% of the loans in our portfolio, based on amounts outstanding at fair value as of December 31, 2003, were at variable rates determined on the basis of a benchmark LIBOR or prime rate and approximately 16% were at fixed rates. The
weighted average rate spread over LIBOR on interest bearing investments at December 31, 2003 was 11.2%. Our subordinated secured debt instruments generally provide for a contractual rate of interest between 14% and 20%, a portion of which may be
deferred or paid-in-kind (PIK).



Our loans generally have
stated maturities at origination that range from 2 to 8 years. The weighted average maturity of our loan portfolio at December 31, 2003 was approximately 5.8 years. The weighted average maturity of our loan portfolio excluding our investments in the
newspaper sub-sector was 5.3 years. Our customers typically pay us an origination fee based on a percentage of the commitment amount, and in some 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, 2003,
approximately 54% of our loans had detachable warrants or an option to purchase warrants, stock 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 used to pay the exercise price on the warrants or 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 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.



While the majority of our
investment portfolio continues to be senior debt investments, we have increased our investment activity in subordinated debt investments and equity investments and have increased the percentage of our investment portfolio that is in majority-owned
and control companies. Our two largest transactions in 2003 were our control investments in Superior Publishing Corporation and Telecom North Corp. We invested across the capital structure in various debt and equity securities of Superior Publishing
Corporation. Our investment in Telecomm North Corp. is also part of a strategy to consolidate a number of UNE-P CLEC telecommunications companies into several larger CLECs. As we continue to make control investments, we intend to be selective about
the companies in which we acquire a controlling interest.



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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:



|                 |  |                                                                                                                                                                
|---------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|InvestmentRating |  | Summary Description                                                                                                                                            
|1                |  | Capital gain expected or realized                                                                                                                              
|2                |  | Full return of principal and interest or dividend expected with customer performing in accordance with plan                                                    
|3                |  | Full return of principal and interest or dividend expected but customer requires closer monitoring                                                             
|4                |  | Some loss of interest or dividend expected but still 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



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, 2003 and 2002:



|                     |  |                           |       |                               |       |   |                           |   |                               |  |       |  
|-------------------- |  | ------------------------- | ----- | ----------------------------- | ----- | - | ------------------------- | - | ----------------------------- |  | ----- | -
|(dollars inmillions) |  | 2003                      |       |                               | 2002  |  
|Investment Rating    |  | Investments at Fair Value |       | Percentage of Total Portfolio |       |   | Investments at Fair Value |   | Percentage of Total Portfolio | 
|1                    |  | $                         | 234.5 |                               | 33.5  | % |                           | $ | 109.3                         |  | 15.9  | %
|2                    |  |                           | 255.4 |                               | 36.5  |   |                           |   | 296.6                         |  | 43.1  |  
|3                    |  |                           | 161.9 |                               | 23.2  |   |                           |   | 225.0                         |  | 32.6  |  
|4                    |  |                           | 38.8  |                               | 5.6   |   |                           |   | 39.5                          |  | 5.7   |  
|5                    |  |                           | 8.3   |                               | 1.2   |   |                           |   | 18.5                          |  | 2.7   |  
|                     |  |                           |       |                               |       |   |                           |   |                               |  |       |  
|Total                |  | $                         | 698.9 |                               | 100.0 | % |                           | $ | 688.9                         |  | 100.0 | %
|                     |  |                           |       |                               |       |   |                           |   |                               |  |       |  



We monitor loan
concentrations in our portfolio, both on an individual investment basis and on a sector or industry basis, to manage overall portfolio performance due to specific customer issues or specific industry issues. At December 31, 2003, of the investments
with a 5 rating, $2.6 million were loans, all of which were on non-accrual. Of the investments with a 4 rating, $32.3 million were loans, of which $12.0 million were on non-accrual. At December 31, 2002, of the investments with a 5 rating, $18.0
million were loans, of which $16.9 million were on non-accrual. Of the investments with a 4 rating, $35.4 million were loans, of which $19.6 million were on non-accrual.



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, industry sectors and geographic regions, we compete with financial services companies that target some of our chosen



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industry sectors or geographic areas, or which 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 The CIT Group and CapitalSource,
Inc.; and finance subsidiaries of large industrial corporations such as General Electric Capital Corporation 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, MCG Finance III, LLC, MCG Finance IV, LLC and MCG Finance Corporation IH. From time to time, MCG Finance I, LLC and MCG Finance Corporation IH 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 to be eligible for sale. 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.



We also originate loans and sell them to MCG Finance IV, another wholly owned special purpose finance subsidiary. MCG Finance IV in turn sells the loans
to MCG Commercial Loan Trust 2003-1, a Delaware business trust we formed in connection with the securitization facility we established in January 2004. These transactions are structured as on-balance sheet securitizations for accounting purposes.



INVESTMENT POLICIES



Our investment policies provide that 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 Securities Act of 1933 before they may be offered or sold to the public, or (ii) in connection with offerings of securities by our portfolio companies;
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| |  |  | 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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



All of the above policies and the 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 as defined under the 1940 Act. 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 concentrate our investments in the
communications, information services, media, and technology, including software and technology-enabled business services, industry sectors. From time to time, we may add new sectors or subsectors.



EMPLOYEES



As of December 31, 2003, we employed 53 employees in our two offices, including investment and portfolio management
professionals, operations professionals, in-house legal counsel, and administrative staff. We believe that our relations with our employees are good.



CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS



Through December 31, 2001, we were subject to tax as an ordinary corporation under Subchapter C of the Internal Revenue Code. We elected to be treated as
a regulated investment company or RIC under Subchapter M of the Internal Revenue Code with the filing of our federal corporate income tax return for 2002, which election was effective as of January 1, 2002. 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 reduce or eliminate our corporate-level tax liability.



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One requirement to qualify as a RIC was that, by December 31, 2002, we were required to eliminate the
earnings and profits accumulated while we were taxable under Subchapter C. We accomplished this by paying cash dividends to our stockholders in 2002. The cash dividend of $0.86 per share declared in December 2001 and paid in the first quarter of
2002 represented the distribution of substantially all of our earnings and profits for the period from our inception through December 31, 2001. Of the $0.46 cash dividend declared in September 2002, $0.03 per share represented the remaining
distribution of our earnings and profits for the period from our inception through December 31, 2001.



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 due on those gains (collectively, the 90%
distribution requirement),
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



we will be entitled to deduct,
and therefore 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.



In general, distributions of our investment company taxable income will be
taxable to stockholders as ordinary income. Distributions of capital gain (including deemed distributions) generally will be taxable to stockholders as capital gain. We will be subject to U.S. federal income tax at the regular corporate rate on any
income not distributed (or deemed distributed).



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.



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 debt securities, 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 (known as the 90% Income Test); 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 (known as the Diversification Tests).
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We may be required to recognize taxable income in circumstances in which we do not receive cash. For
example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount, we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless
of whether cash representing such income is received by us in the same taxable year. We also may have to include in income other amounts that we have not yet received in cash, such as paid-in-kind interest, contractual interest on non-accrual loans
and deferred loan origination fees that are paid after origination of the loan or are paid as non-cash compensation such as warrants or stock. Additionally, we will have to include in income amounts previously deducted with respect to certain
restricted stock granted to our employees, if such stock is forfeited. Because any original issue discount or other amounts accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a
distribution to our stockholders in the amount of that non-cash income in order to satisfy the 90% Distribution Requirement, even though we will not have received any cash representing such income.



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 dividends (to the extent of our current and accumulated earnings and profits). Such dividends
will be subject to tax to U.S. Stockholders at a maximum rate of 15 percent.



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 (i.e., with a fair market value in excess of tax basis).
Under a special tax rule that applies to corporations that convert from taxation under Subchapter C of the Internal Revenue Code to taxation as a RIC, we are required to pay corporate level tax on the amount of any net built-in gains we recognize
within ten years after the effective date of our election to be treated as a RIC. Any such corporate level tax will be payable at the time those gains are recognized (which, generally, will be the years in which we sell or dispose of the built-in
gain assets in a taxable transaction). 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 ten-year period and applicable tax rates. Under Treasury Regulations, recognized built-in gains (or losses) will generally
retain their character as capital gain or ordinary income (or capital or ordinary losses). Recognized built-in gains that are ordinary in character 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 ten-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 ordinary income. Recognized built-in gains
within the ten-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. A business
development company must be organized in the United States for the purpose of investing in or lending to primarily private companies and making managerial assistance available to them. A business development company may use capital provided by
public shareholders and from other sources to invest in long-term, private investments in businesses. A business development company provides shareholders the ability to retain the liquidity of a publicly traded stock, while sharing in the possible
benefits, if any, of investing in primarily privately owned companies.



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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 knowingly participating in 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 Securities and Exchange Commission.



We are periodically examined by the SEC for compliance with the 1940 Act.



As with other companies regulated by the 1940 Act, a business development company must adhere to certain substantive
regulatory requirements. A majority of our directors must be persons who are not interested persons, as that term is defined in the 1940 Act. Additionally, we are required to provide and maintain a bond issued by a reputable fidelity insurance
company to protect the business development company. Furthermore, as a business development company, we are prohibited from protecting any director or officer against any liability to the company or our shareholders arising from willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such persons office.



As a business development company under the 1940 Act, we are entitled to provide loans to our employees in connection with the purchase of shares of our
common stock. However, as a result of certain provisions of the Sarbanes-Oxley Act of 2002, we are prohibited from making new loans to, or materially modifying existing loans with, our executive officers for that purpose.



As required by the 1940 Act, we maintain a code of ethics that establishes
procedures for personal investments and restricts certain transactions by our personnel. Our code of ethics generally does not permit investments by our employees in securities that may be purchased or held by us.



You may read and copy the code of ethics at the Securities and Exchange
Commissions Public Reference Room in Washington, D.C. You may obtain information on the operation of the Public Reference Room by



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calling the Securities and Exchange Commission at 1-202-942-8090. In addition, the code of ethics is available on the EDGAR Database on the Securities and
Exchange Commissions Internet site at http://www.sec.gov. You may obtain copies of the code of ethics, after paying a duplicating fee, by electronic request at the following Email address: publicinfo@sec.gov, or by writing the Securities and
Exchange Commissions Public Reference Section, Washington, D.C. 20549.



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. We do not anticipate any substantial change in the nature of our business.



On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act imposes a wide
variety of new regulatory requirements on publicly-held companies and their insiders. Many of these requirements will affect us. For example:



| |  |  | Our chief executive officer and chief financial officer must now certify the accuracy of the financial statements contained in our periodic reports;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our periodic reports must disclose our conclusions about the effectiveness of our disclosure controls and procedures;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | Our periodic reports must disclose whether there were significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We may not make any loan to any director or executive officer and we may not materially modify any existing loans.
| | - |  | ------------------------------------------------------------------------------------------------------------------



The Sarbanes-Oxley Act has required us to review our current policies and
procedures to determine whether we comply with the Sarbanes Oxley Act and the new regulations promulgated thereunder. We will continue to monitor our compliance with all future regulations that are adopted under the Sarbanes-Oxley Act and will
take actions necessary to ensure that we are in compliance therewith.



In addition, the NASDAQ Stock Market has adopted corporate governance changes to its listing standards. We have adopted certain policies and procedures intended to comply with the NASDAQ Stock Markets corporate governance rules. We
will continue to monitor our compliance with all future listing standards that are approved by the SEC and will take actions necessary to ensure that we are in compliance therewith.



DETERMINATION OF NET ASSET VALUE



We 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.



At December 31, 2003, approximately 88% of our total assets represented
investments recorded at fair value. Value, as defined in Section 2(a)(41) of 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as
determined in good faith by the board of directors. Since there is typically no readily ascertainable market value for the investments in our portfolio, we value substantially all of our investments at fair value as determined in good faith by the
board of directors pursuant to a valuation policy and a consistent valuation process. Because of the inherent uncertainty of determining the fair value of investments that do not have a readily ascertainable market value, the fair value of our
investments determined in good faith by the board of directors may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material. See further discussion in
Managements Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting Policies.



17



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##### Table of Contents

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. Currently, we lease approximately 30,008 square feet of office
space in Arlington, Virginia for our corporate headquarters. We also lease office space in Richmond, Virginia.



Item 3.Legal Proceedings



On January 29, 2003, a purported securities class action lawsuit was filed in the United States District Court for the Eastern District of Virginia
against us, certain of our officers and the underwriters of our initial public offering. The complaint alleged that the defendants made certain misstatements in violation of Sections 11, 12(a) (2) and 15 of the Securities Act of 1933 and Section
10(b), Rule 10b-5 and Section 20(a) of the Securities Exchange Act of 1934. Specifically, the complaint asserted that members of the plaintiff class purchased our common stock at purportedly inflated prices during the period from November 28, 2001
to November 1, 2002 as a result of certain misstatements regarding the academic degree of our chief executive officer. The complaint sought unspecified compensatory and other damages, along with costs and expenses. On June 16, 2003, a consolidated
amended class action complaint was filed in the proceedings captioned In re MCG Capital Corporation Securities Litigation, 1:03cv0114-A. The consolidated amended complaint named only us and certain of our officers and directors as defendants, and
alleged violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. We filed a motion to dismiss the consolidated amended class action complaint. On September 12, 2003, the
United States District Court for the Eastern District of Virginia dismissed the lawsuit in its entirety. The plaintiffs filed a notice of appeal to seek review of the district court decision by the United States Court of Appeals for the Fourth
Circuit, and on February 27, 2004, they filed a Plaintiffs-Appellants Opening Brief. The appeal is pending.



We are also a party to certain legal proceedings incidental to the normal course of our business including the enforcement of our rights under contracts
with our portfolio companies. While the outcome of these legal proceedings cannot at this time be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.



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



Not Applicable.



18



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##### Table of Contents

PART II



|Item 5. |  | Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|------- |  | ----------------------------------------------------------------------------------------------------------------



PRICE RANGE OF COMMON STOCK



Our common stock is traded on the Nasdaq National Market under the symbol
MCGC. The following table sets forth the range of high and low closing prices of our common stock as reported on the Nasdaq National Market.



|                   |  |             |       |     |   |      
|------------------ |  | ----------- | ----- | --- | - | -----
|                   |  | Price Range
|Quarter Ended      |  | High        |       | Low
|March 31, 2002     |  | $           | 19.55 |     | $ | 15.66
|June 30, 2002      |  |             | 19.70 |     |   | 15.82
|September 30, 2002 |  |             | 17.68 |     |   | 13.03
|December 31, 2002  |  |             | 14.00 |     |   | 8.40 
|March 31, 2003     |  |             | 11.85 |     |   | 9.09 
|June 30, 2003      |  |             | 15.99 |     |   | 9.95 
|September 30, 2003 |  |             | 17.10 |     |   | 15.30
|December 31, 2003  |  |             | 20.50 |     |   | 16.14



As of March 10, 2004,
we had approximately 113 shareholders of record. Such number of shareholders of record does not reflect shareholders who beneficially own common stock in nominee or street name.



SALES OF UNREGISTERED SECURITIES



During the three months ended December 31, 2003, we issued a total of 2,477 shares of common stock under our dividend
reinvestment plan pursuant to an exemption from the registration requirements of the Securities Act of 1933. The aggregate offering price for the shares of common stock sold under the dividend reinvestment plan was approximately $ 0.04 million.



ISSUER PURCHASES OF EQUITY SECURITIES



We did not repurchase any shares of our common stock during the three months
ended December 31, 2003.



19



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##### Table of Contents

DIVIDEND POLICY



Prior to becoming a business development company, we did not make distributions to our stockholders, but instead retained
all of our income. As a business development company that elected to be treated as a regulated investment company, we are required to (i) distribute at least 90% of our investment company taxable income and 90% of any ordinary pre-RIC built in gains
we recognize between January 1, 2002 and December 31, 2011, less any taxes due on those gains to avoid corporate level taxes on the amount distributed to stockholders (other than any built in gain recognized between January 1, 2002 and December 31,
2011) and (ii) distribute (actually or on a deemed basis) at least 98% of our income (both ordinary income and net capital gains) 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 intend to make deemed distributions to our stockholders of any retained net capital gains.



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 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.



The following table summarizes our dividends declared to date:



|                   |  |                   |  |                  |  |        |     
|------------------ |  | ----------------- |  | ---------------- |  | ------ | ----
|Date Declared      |  | Record Date       |  | Payment Date     |  | Amount
|December 16, 2003  |  | December 31, 2003 |  | January 29, 2004 |  | $      | 0.42
|August 6, 2003     |  | August 18, 2003   |  | October 30, 2003 |  |        | 0.42
|June 16, 2003      |  | June 23, 2003     |  | July 30, 2003    |  |        | 0.41
|March 28, 2003     |  | April 16, 2003    |  | April 29, 2003   |  |        | 0.40
|December 18, 2002  |  | December 30, 2002 |  | January 30, 2003 |  |        | 0.42
|September 30, 2002 |  | October 16, 2002  |  | October 30, 2002 |  |        | 0.46
|June 3, 2002       |  | June 11, 2002     |  | July 31, 2002    |  |        | 0.47
|March 28, 2002     |  | April 17, 2002    |  | April 30, 2002   |  |        | 0.41
|December 31, 2001  |  | January 22, 2002  |  | January 31, 2002 |  |        | 0.86
|                   |  |                   |  |                  |  |        |     
|Total Declared     |  |                   |  |                  |  | $      | 4.27
|                   |  |                   |  |                  |  |        |     



The aggregate dividend
of $0.86 per share in December 2001 consisted 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. The aggregate dividend of $0.46 declared in September 2002 consisted of a dividend of $0.43 per share for the third quarter of 2002 and an additional dividend of $0.03 per share which represented the remaining
distribution of our earnings and profits since inception through December 31, 2001. The aggregate dividend declared in December 2001 along with the $0.03 dividend declared in September, 2002 were required for us to qualify as a regulated investment
company. Dividends are paid on all shares including restricted stock.



20



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##### Table of Contents

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 our financial results in the future.



|                                                                                                     |      |                                            |         |                                   |                                                             |         |                                       |   |         |                         |  |   |        |   |  |   |         |  |   |        
|---------------------------------------------------------------------------------------------------- | ---- | ------------------------------------------ | ------- | --------------------------------- | ----------------------------------------------------------- | ------- | ------------------------------------- | - | ------- | ----------------------- |  | - | ------ | - |  | - | ------- |  | - | -------
|                                                                                                     |      | Post-IPO as a Business Development Company |         |                                   | Pre-IPO prior to becoming a Business Development Company(a)
|(dollars in thousands except per share and other data)                                               |      | Year Ended December 31,                    |         | One Month Ended December 31, 2001 |                                                             |         | Eleven Months Ended November 30, 2001 |   |         | Year Ended December 31,
|                                                                                                     | 2003 |                                            | 2002    |                                   |                                                             |         | 2000                                  |   | 1999   
|Income Statement Data:                                                                               |      |                                            |         |                                   |                                                             |         |                                       |   |         |                         |  |   |        |   |  |   |         |  |   |        
|Operating income                                                                                     |      | $                                          | 80,690  |                                   | $                                                           | 76,933  |                                       | $ | 6,012   |                         |  | $ | 65,789 |   |  | $ | 63,750  |  | $ | 28,429 
|Net operating income (loss) before investment gains and losses(b)                                    |      |                                            | 47,595  |                                   |                                                             | 44,751  |                                       |   | (1,608  | )                       |  |   | 28,471 |   |  |   | 27,063  |  |   | 7,730  
|Income (loss) before cumulative effect of accounting changes                                         |      |                                            | 41,975  |                                   |                                                             | 3,215   |                                       |   | (2,270  | )                       |  |   | 8,779  |   |  |   | 14,071  |  |   | 5,783  
|Net income (loss)/Net increase (decrease) in stockholders equity resulting from earnings (loss)     |      |                                            | 41,975  |                                   |                                                             | 3,215   |                                       |   | (6,742  | )                       |  |   | 10,556 |   |  |   | 14,071  |  |   | 5,783  
|                                                                                                     |      |                                            |         |                                   |                                                             |        
|Per Common Share Data:                                                                               |      |                                            |         |                                   |                                                             |         |                                       |   |         |                         |  |   |        |   |  |   |         |  |   |        
|                                                                                                     |      |                                            |         |                                   |                                                             |        
|Earnings (loss) per common sharebasic and diluted(c)                                                |      |                                            | 1.28    |                                   |                                                             | 0.11    |                                       |   | (0.25   | )                       |  |   | 0.83   |   |  |   | 1.35    |  |   | 0.87   
|Income (loss) before cumulative effect of accounting changes per common sharebasic and diluted      |      |                                            | 1.28    |                                   |                                                             | 0.11    |                                       |   | (0.08   | )                       |  |   | 0.69   |   |  |   | 1.35    |  |   | 0.87   
|Net operating income (loss) before investment gains and losses per common share basic and diluted(b) |      |                                            | 1.45    |                                   |                                                             | 1.57    |                                       |   | (0.06   | )                       |  |   | 2.23   |   |  |   | 2.59    |  |   | 1.17   
|Net asset value per common share(d)                                                                  |      |                                            | 11.98   |                                   |                                                             | 11.56   |                                       |   | 12.46   |                         |  |   | 13.31  |   |  |   | 12.54   |  |   | 10.01  
|Cash dividends declared per common share                                                             |      |                                            | 1.65    |                                   |                                                             | 1.76    |                                       |   | 0.86    |                         |  |   |       |   |  |   |        |  |   |       
|                                                                                                     |      |                                            |         |                                   |                                                             |        
|Selected Period-End Balances:                                                                        |      |                                            |         |                                   |                                                             |         |                                       |   |         |                         |  |   |        |   |  |   |         |  |   |        
|Total investment portfolio                                                                           |      | $                                          | 682,526 |                                   | $                                                           | 676,092 |                                       | $ | 605,069 |                         |  |   | (a     | ) |  | $ | 490,892 |  | $ | 301,963
|Total assets                                                                                         |      |                                            | 790,915 |                                   |                                                             | 744,993 |                                       |   | 673,066 |                         |  |   | (a     | ) |  |   | 526,493 |  |   | 326,314
|Borrowings                                                                                           |      |                                            | 304,131 |                                   |                                                             | 363,838 |                                       |   | 287,808 |                         |  |   | (a     | ) |  |   | 356,833 |  |   | 248,217
|                                                                                                     |      |                                            |         |                                   |                                                             |        
|Other data (at period-end):                                                                          |      |                                            |         |                                   |                                                             |         |                                       |   |         |                         |  |   |        |   |  |   |         |  |   |        
|Number of portfolio companies                                                                        |      |                                            | 81      |                                   |                                                             | 79      |                                       |   | 74      |                         |  |   | (a     | ) |  |   | 70      |  |   | 52     
|Number of employees                                                                                  |      |                                            | 53      |                                   |                                                             | 56      |                                       |   | 57      |                         |  |   | 57     |   |  |   | 46      |  |   | 33     

---

|(a) |  | Certain information in the Pre-IPO prior to becoming a Business Development Company periods is not meaningful for comparative purposes.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | Represents net operating income before investment gains and losses, and provision for loan losses for periods ending prior to December 1, 2001.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

|(c) |  | See Note J to our Consolidated Financial Statements.
|--- |  | ----------------------------------------------------

|(d) |  | Based on common shares outstanding at period-end.
|--- |  | -------------------------------------------------



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##### Table of Contents

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 Data and
Other Data, and our Consolidated Financial Statements and notes thereto appearing elsewhere in this Annual Report.



This 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:



 economic downturns or recessions may impair our customers ability to repay our loans and increase our non-performing assets,



 economic downturns or recessions may disproportionately impact
certain sectors in which we concentrate, and such conditions may cause us to suffer losses in our portfolio and experience diminished demand for capital in these industry sectors,



 a contraction of available credit and/or an inability to access the equity markets could impair our lending and
investment activities,



 interest rate volatility could
adversely affect our results,



 the risks associated
with the possible disruption in the Companys operations due to terrorism and



 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-Ks, Form 10-Qs and Form 8-Ks.



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. We undertake no obligation to update such statements to reflect subsequent events.



Overview



MCG Capital Corporation is a solutions-focused financial services company providing financing and advisory services to a variety of small and medium-sized
companies throughout the United States with a focus on growth oriented companies. Currently, our portfolio consists primarily of companies in the communications, information services, media, and technology, including software and technology-enabled
business services, industry sectors. Our capital is generally used by our portfolio companies to finance acquisitions, recapitalizations, management buyouts, organic growth and working capital. On December 4, 2001, we completed an initial public
offering and 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. MCG Capital Corporation elected to be treated for
federal income tax purposes as a regulated investment company under the Internal Revenue Code with the filing of its federal corporate income tax return for 2002, which election was effective as of January 1, 2002. 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.



22



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##### Table of Contents

The results of operations for the years ended December 31, 2003 and 2002, and the one-month period from
December 1, 2001 through December 31, 2001 reflect our results as a business development company under the Investment Company Act of 1940. The one-month period from December 1, 2001 through December 31, 2001 includes a one-time conversion
adjustment. 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 principal differences between these two
reporting 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.



Portfolio Composition and Asset Quality



Our primary business is lending to and investing in growth
oriented private businesses, through investments in senior debt, subordinated debt and equity-based investments, including warrants and equity appreciation rights.



The total portfolio value of our investments was $698.9 million, $688.9 million, and $617.2 million at December 31, 2003,
2002, and 2001, respectively (exclusive of unearned income). The increase in investments during 2003 was primarily due to newly originated debt and equity investments. During 2003, our originations of debt included $32.0 million of subordinated debt
to two new portfolio companies. In addition, during 2003 a higher proportion of our new origination activity was in the form of equity securities, which included new investments of $44.1 million to control companies. Our early pay-offs and sales of
securities also increased over prior years due mainly to pay-offs of $42.5 million from six companies in the publishing industry and $46.5 million from four companies in the broadcasting industry. The increase in investments during 2002 was
primarily attributable to originated debt securities, including $55.5 million of subordinated debt to four companies. 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, 2003, 2002, and 2001 was as follows:



|                                            |  |                   |        |   |                   |   |       |                      |  |   |       |     
|------------------------------------------- |  | ----------------- | ------ | - | ----------------- | - | ----- | -------------------- |  | - | ----- | ----
|(dollars in millions)                       |  | December 31, 2003 |        |   | December 31, 2002 |   |       | December 31, 2001(a) | 
|Beginning Portfolio                         |  | $                 | 688.9  |   |                   | $ | 617.2 |                      |  | $ | 510.9 |     
|Originations/Draws/Advances on Loans        |  |                   | 115.3  |   |                   |   | 185.0 |                      |  |   | 196.2 |     
|Originations/Warrants Received on Equity(c) |  |                   | 77.5   |   |                   |   | 12.8  |                      |  |   | 19.8  |     
|Gross Payments/Reductions(c)                |  |                   | (69.1  | ) |                   |   | (52.4 | )                    |  |   | (48.4 | )   
|Early Pay-offs/Sales of Securities          |  |                   | (108.1 | ) |                   |   | (32.2 | )                    |  |   | (33.0 | )   
|Charge-offs/Write-downs                     |  |                   |       |   |                   |   |      |                      |  |   | (14.8 | )(b)
|Realized Gains on Investments               |  |                   | 4.7    |   |                   |   |      |                      |  |   |      |     
|Realized Losses on Investments              |  |                   | (24.3  | ) |                   |   | (9.6  | )                    |  |   | (1.7  | )   
|Unrealized Appreciation in Investments      |  |                   | 35.1   |   |                   |   | 13.2  |                      |  |   | 1.5   |     
|Unrealized Depreciation in Investments      |  |                   | (21.1  | ) |                   |   | (45.1 | )                    |  |   | (13.3 | )   
|                                            |  |                   |        |   |                   |   |       |                      |  |   |       |     
|Ending Portfolio                            |  | $                 | 698.9  |   |                   | $ | 688.9 |                      |  | $ | 617.2 |     
|                                            |  |                   |        |   |                   |   |       |                      |  |   |       |     

---

|(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.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) |  | Included in these amounts is the conversion of $21.4 million, $5.4 million and $16.2 million of debt to equity in connection with certain restructurings for the years ended December
31, 2003, 2002 and 2001, respectively.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Business activity for the year ended December 31, 2003 included investments in eleven new companies
totalling $118.1 million and follow on investments in several of our existing companies. The two largest transactions were with Telecomm North Corp. and Superior Publishing Corporation. We invested approximately $32 million in a newly formed wholly
owned portfolio company, Telecomm North Corp., which entered into an agreement to merge with another of our portfolio companies, Bridgecom Holdings, Inc. This merger was completed in the first quarter of 2004 after regulatory approval was obtained.
We established and invested $36 million in the debt and equity of Superior Publishing Corporation. Superior purchased the stock of our longtime community newspaper customer Murphy McGinnis Media, Inc.



The business activity for 2003 includes a higher proportion of investing in
the debt and equity securities of majority-owned and other control companies. While the majority of our investment portfolio continues to be senior debt investments, our business strategy to diversify our investments to cover the entire capital
structure has resulted in an increase in subordinated debt investments and equity investments and has increased the percentage of our investment portfolio that is in majority-owned and control companies.



Our investment in Telecomm North Corp. is part of a strategy to make more
control investments with platform companies. We intend to consolidate a number of UNE-P CLEC telecommunications companies into several larger CLECs, which will provide more scale to their operations, which we believe will improve profitability,
leverage the overhead and network infrastructures, and provide more options with respect to capitalization alternatives.



The following table shows the fair value of our portfolio of investments by asset class as of December 31, 2003, 2002 and 2001 (excluding unearned
income):



|                           |  |                           |       |                               |                   |   |                           |                   |                               |  |       |                           |  |                               |       |  |       |  
|-------------------------- |  | ------------------------- | ----- | ----------------------------- | ----------------- | - | ------------------------- | ----------------- | ----------------------------- |  | ----- | ------------------------- |  | ----------------------------- | ----- |  | ----- | -
|                           |  | December 31, 2003         |       |                               | December 31, 2002 |   |                           | December 31, 2001 |                              
|(dollars in millions)      |  | Investments at Fair Value |       | Percentage of Total Portfolio |                   |   | Investments at Fair Value |                   | Percentage of Total Portfolio |  |       | Investments at Fair Value |  | Percentage of Total Portfolio |      
|Senior Debt                |  | $                         | 502.2 |                               | 71.9              | % |                           | $                 | 602.1                         |  | 87.4  | %                         |  | $                             | 588.2 |  | 95.3  | %
|Subordinated Debt          |  |                           | 103.4 |                               | 14.7              |   |                           |                   | 66.7                          |  | 9.7   |                           |  |                               | 7.8   |  | 1.2   |  
|Equity                     |  |                           | 73.4  |                               | 10.5              |   |                           |                   | 13.2                          |  | 1.9   |                           |  |                               | 15.5  |  | 2.5   |  
|Warrants to Acquire Equity |  |                           | 19.6  |                               | 2.8               |   |                           |                   | 6.6                           |  | 1.0   |                           |  |                               | 5.4   |  | 0.9   |  
|Equity Appreciation Rights |  |                           | 0.3   |                               | 0.1               |   |                           |                   | 0.3                           |  | 0.0   |                           |  |                               | 0.3   |  | 0.1   |  
|                           |  |                           |       |                               |                   |   |                           |                   |                               |  |       |                           |  |                               |       |  |       |  
|Total                      |  | $                         | 698.9 |                               | 100.0             | % |                           | $                 | 688.9                         |  | 100.0 | %                         |  | $                             | 617.2 |  | 100.0 | %
|                           |  |                           |       |                               |                   |   |                           |                   |                               |  |       |                           |  |                               |       |  |       |  



Set forth below is a
table showing the composition of MCGs portfolio by industry sector at fair value at December 31, 2003 and 2002 (excluding unearned income):



|                      |  |                           |       |                               |       |   |                           |   |                               |  |       |  
|--------------------- |  | ------------------------- | ----- | ----------------------------- | ----- | - | ------------------------- | - | ----------------------------- |  | ----- | -
|                      |  | 2003                      |       |                               | 2002  |  
|(dollars in millions) |  | Investments at Fair Value |       | Percentage of Total Portfolio |       |   | Investments at Fair Value |   | Percentage of Total Portfolio | 
|Media                 |  |                           |       |                               |       |   |                           |   |                               |  |       |  
|Newspaper             |  | $                         | 251.1 |                               | 35.9  | % |                           | $ | 212.5                         |  | 30.8  | %
|Publishing            |  |                           | 84.4  |                               | 12.1  |   |                           |   | 115.4                         |  | 16.7  |  
|Broadcasting          |  |                           | 44.5  |                               | 6.4   |   |                           |   | 94.2                          |  | 13.7  |  
|Communications        |  |                           | 192.9 |                               | 27.5  |   |                           |   | 152.2                         |  | 22.1  |  
|Information Services  |  |                           | 65.5  |                               | 9.4   |   |                           |   | 76.4                          |  | 11.1  |  
|Technology            |  |                           | 39.0  |                               | 5.6   |   |                           |   | 36.5                          |  | 5.3   |  
|Other                 |  |                           | 21.5  |                               | 3.1   |   |                           |   | 1.7                           |  | 0.3   |  
|                      |  |                           |       |                               |       |   |                           |   |                               |  |       |  
|Total                 |  | $                         | 698.9 |                               | 100.0 | % |                           | $ | 688.9                         |  | 100.0 | %
|                      |  |                           |       |                               |       |   |                           |   |                               |  |       |  



24



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##### Table of Contents

Set forth below is a table showing MCGs investment originations by industry for the years ended
December 31, 2003 and 2002:



|                      |  |                         |       |                     |       |   |        |   |                     |  |       |  
|--------------------- |  | ----------------------- | ----- | ------------------- | ----- | - | ------ | - | ------------------- |  | ----- | -
|                      |  | Year Ended December 31, |      
|                      |  | 2003                    |       |                     | 2002  |  
|(dollars in millions) |  | Amount                  |       | Percentage of Total |       |   | Amount |   | Percentage of Total | 
|Media                 |  |                         |       |                     |       |   |        |   |                     |  |       |  
|Newspaper             |  | $                       | 45.0  |                     | 36.6  | % |        | $ | 47.6                |  | 31.4  | %
|Publishing            |  |                         | 13.7  |                     | 11.1  |   |        |   | 31.8                |  | 21.0  |  
|Broadcasting          |  |                         | 8.8   |                     | 7.2   |   |        |   | 42.6                |  | 28.1  |  
|Communications        |  |                         | 35.3  |                     | 28.8  |   |        |   | 3.6                 |  | 2.3   |  
|Information Services  |  |                         |      |                     |      |   |        |   | 12.0                |  | 7.9   |  
|Technology            |  |                         |      |                     |      |   |        |   | 14.1                |  | 9.3   |  
|Other                 |  |                         | 20.0  |                     | 16.3  |   |        |   |                    |  |      |  
|                      |  |                         |       |                     |       |   |        |   |                     |  |       |  
|Total                 |  | $                       | 122.8 |                     | 100.0 | % |        | $ | 151.7               |  | 100.0 | %
|                      |  |                         |       |                     |       |   |        |   |                     |  |       |  



Asset Quality



Asset quality is generally a function of economic
conditions, 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 in good faith on a quarterly basis. As of December 31, 2003 and 2002, net unrealized depreciation on investments totaled $29.2 million and $43.1 million, respectively. For additional information on the decrease in unrealized
depreciation on investments, see the section entitled Net Investment Gains and Losses.



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:



|                  |  |                                                                                                                                                                
|----------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|Investment Rating |  | Summary Description                                                                                                                                            
|1                 |  | Capital gain expected or realized                                                                                                                              
|2                 |  | Full return of principal and interest or dividend expected with customer performing in accordance with plan                                                    
|3                 |  | Full return of principal and interest or dividend expected but customer requires closer monitoring                                                             
|4                 |  | Some loss of interest or dividend expected but still 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



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##### Table of Contents

The following table shows the distribution of our investments on the 1 to 5 investment rating scale at
fair value as of December 31, 2003 and 2002:



|                      |  |                           |       |                               |       |   |                           |   |                               |  |       |  
|--------------------- |  | ------------------------- | ----- | ----------------------------- | ----- | - | ------------------------- | - | ----------------------------- |  | ----- | -
|(dollars in millions) |  | 2003                      |       |                               | 2002  |  
|Investment Rating     |  | Investments at Fair Value |       | Percentage of Total Portfolio |       |   | Investments at Fair Value |   | Percentage of Total Portfolio | 
|1                     |  | $                         | 234.5 |                               | 33.5  | % |                           | $ | 109.3                         |  | 15.9  | %
|2                     |  |                           | 255.4 |                               | 36.5  |   |                           |   | 296.6                         |  | 43.1  |  
|3                     |  |                           | 161.9 |                               | 23.2  |   |                           |   | 225.0                         |  | 32.6  |  
|4                     |  |                           | 38.8  |                               | 5.6   |   |                           |   | 39.5                          |  | 5.7   |  
|5                     |  |                           | 8.3   |                               | 1.2   |   |                           |   | 18.5                          |  | 2.7   |  
|                      |  |                           |       |                               |       |   |                           |   |                               |  |       |  
|Total                 |  | $                         | 698.9 |                               | 100.0 | % |                           | $ | 688.9                         |  | 100.0 | %
|                      |  |                           |       |                               |       |   |                           |   |                               |  |       |  



The investment rating
1 balance increased from $109.3 million at December 31, 2002 to $234.5 million at December 31, 2003 primarily due to originations and upgrades of 2- and 3-rated investments. The origination of 1-rated investments included new equity and subordinated
debt in control companies and the rating upgrades included investments in the telecommunications and information services sectors. Early payoffs created most of the decrease in the 2-rated investments.



We monitor 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. At December 31, 2003, of the investments with a 5 rating, $2.6 million were loans, all of which were on
non-accrual. Of the investments with a 4 rating, $32.3 million were loans, of which $12.0 million were on non-accrual. At December 31, 2002, of the investments with a 5 rating, $18.0 million were loans, of which $16.9 million were on non-accrual. Of
the investments with a 4 rating, $35.4 million were loans, of which $19.6 million were on non-accrual.



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 or more frequent basis. Because we are a provider of long-term privately negotiated investment
capital to growth-oriented companies and we actively manage our investments through our contract structure and corporate governance rights, we do not believe that contract exceptions such as breaches of contractual covenants or late delivery of
financial statements are necessarily an indication of deterioration in the credit quality or the need to pursue remedies or an active workout of a portfolio investment.



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 cease recognizing interest income on that loan until all principal has been paid. However, we may make exceptions to this policy if the investment is well
secured and in the process of collection.



At December 31, 2003
and 2002, there were $4.2 million and $21.5 million, respectively, of loans, or approximately 0.6% and 3.1%, respectively, of the investment portfolio, greater than 60 days past due. At December 31, 2003, $14.6 million of loans, including $0.1
million of the loans greater than 60 days past due, were on non-accrual status representing 2.1% of the investment portfolio. At December 31, 2002, $42.7 million of loans, including all $21.5 million of the loans greater than 60 days past due, were
on non-accrual status, representing 6.2% of the investment portfolio. The non-accrual and past due loans at December 31, 2003 and 2002 primarily represented borrowers in the publishing, telecommunications and paging businesses. Portions of the trade
publishing industry which are dependent on financial, technology or telecommunications advertising, experienced sluggish advertising revenue. Certain companies in the telecommunications industry have suffered from competitive pressure from low cost
and prepaid cellular calling plans.



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##### Table of Contents

At December 31, 2003, of the $83.1 million of loans to our majority owned companies, $10.5 million were
on non-accrual status. At December 31, 2002, of the $26.1 million of loans to our majority owned companies, $10.2 million were on non-accrual status. As of December 31, 2003, of the $18.6 million of loans to controlled companies, $3.9 million were
on non-accrual status. At December 31, 2002, all $10.3 million of the loans to our controlled companies were on non-accrual status. As of December 31, 2003, of the $45.6 million of loans to other affiliates, $0.2 million were on non-accrual status.
At December 31, 2002, of the $34.3 million of loans to other affiliates, none were on non-accrual status.



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 if we have not already, we 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 additional compensation from the customer in
connection with a restructuring. During the process of monitoring a loan that 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.



Prior to our
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 had charged-off $14.8 million.



27



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##### Table of Contents

Comparison of the Years Ended December 31, 2003, 2002 and 2001



The following table shows our selected operating data for the years ended
December 31, 2003 and 2002, the one-month period ended December 31, 2001, the eleven-month period ended November 30, 2001, and the year ended December 31, 2001. 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 that were not affected by the change in accounting principles resulting from our conversion to a business development company.



|                                   |      |                        |        |                                |   |        |                                    |   |                        |   |  |   |        |  |   |       
|---------------------------------- | ---- | ---------------------- | ------ | ------------------------------ | - | ------ | ---------------------------------- | - | ---------------------- | - |  | - | ------ |  | - | ------
|(dollars in thousands)             |      | Year EndedDecember 31, |        | One MonthEndedDecember 31,2001 |   |        | Eleven MonthsEndedNovember 30,2001 |   | Year EndedDecember 31,
|                                   | 2003 |                        | 2002   |                                |   |        | 2001                              
|Operating income                   |      |                        |        |                                |   |        |                                    |   |                        |   |  |   |        |  |   |       
|Interest and dividend income       |      | $                      | 71,749 |                                | $ | 72,399 |                                    | $ | 5,949                  |   |  | $ | 64,032 |  | $ | 69,981
|Advisory fees and other income     |      |                        | 8,941  |                                |   | 4,534  |                                    |   | 63                     |   |  |   | 1,757  |  |   | 1,820 
|                                   |      |                        |        |                                |   |        |                                    |   |                        |   |  |   |        |  |   |       
|Total operating income             |      |                        | 80,690 |                                |   | 76,933 |                                    |   | 6,012                  |   |  |   | 65,789 |  |   | 71,801
|Operating expenses                 |      |                        |        |                                |   |        |                                    |   |                        |   |  |   |        |  |   |       
|Interest expense                   |      |                        | 10,053 |                                |   | 11,157 |                                    |   | 1,198                  |   |  |   | 24,661 |  |   | 25,859
|Employee compensation:             |      |                        |        |                                |   |        |                                    |   |                        |   |  |   |        |  |   |       
|Salaries and benefits              |      |                        | 9,210  |                                |   | 8,082  |                                    |   | 884                    |   |  |   | 8,038  |  |   | 8,922 
|Long-term incentive compensation   |      |                        | 6,347  |                                |   | 6,627  |                                    |   | 4,944                  |   |  |   |       |  |   | 4,944 
|                                   |      |                        |        |                                |   |        |                                    |   |                        |   |  |   |        |  |   |       
|Total employee compensation        |      |                        | 15,557 |                                |   | 14,709 |                                    |   | 5,828                  |   |  |   | 8,038  |  |   | 13,866
|General and administrative expense |      |                        | 7,485  |                                |   | 6,316  |                                    |   | 594                    |   |  |   | 4,619  |  |   | 5,213 
|                                   |      |                        |        |                                |   |        |                                    |   |                        |   |  |   |        |  |   |       
|Total operating expenses           |      |                        | 33,095 |                                |   | 32,182 |                                    |   | 7,620                  |   |  |   | 37,318 |  |   | 44,938
|                                   |      |                        |        |                                |   |        |                                    |   |                        |   |  |   |        |  |   |       
|Net operating income (loss)(a)     |      | $                      | 47,595 |                                | $ | 44,751 |                                    | $ | (1,608                 | ) |  | $ | 28,471 |  | $ | 26,863
|                                   |      |                        |        |                                |   |        |                                    |   |                        |   |  |   |        |  |   |       

---

|(a) |  | Represents net operating income (loss) before provision for loan losses for periods ending prior to December 1, 2001.
|--- |  | ---------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Operating Income



Operating income includes interest income on commercial loans, dividend income, 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.



The change in operating
income from 2002 to 2003 and 2001 to 2002 is attributable to the following items:



|                                             |  |               |      |   |               |   |       |  
|-------------------------------------------- |  | ------------- | ---- | - | ------------- | - | ----- | -
|(dollars in millions)                        |  | 2003 vs. 2002 |      |   | 2002 vs. 2001 |  
|Change due to:                               |  |               |      |   |               |   |       |  
|Asset growth (decline)(a)                    |  | $             | (5.1 | ) |               | $ | 10.9  |  
|Change in LIBOR(a)                           |  |               | (3.9 | ) |               |   | (12.0 | )
|Change in spread(a)                          |  |               | 8.2  |   |               |   | 2.8   |  
|Net increase in loan fee and dividend income |  |               | 0.2  |   |               |   | 0.7   |  
|Increase in advisory fees and other income   |  |               | 4.4  |   |               |   | 2.7   |  
|                                             |  |               |      |   |               |   |       |  
|Total change in operating income             |  | $             | 3.8  |   |               | $ | 5.1   |  
|                                             |  |               |      |   |               |   |       |  

---

|(a) |  | The change in interest income due to change in LIBOR, change in spread and asset growth has been allocated in proportion to the relationship of the absolute dollar amount of the
change in each.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Total operating income for the
year ended December 31, 2003 increased $3.8 million, or 4.9%, to $80.7 million from $76.9 million for the year ended December 31, 2002. Loan interest decreased by $0.8 million for the year ended December 31, 2003 as compared to the year ended
December 31, 2002. Average three month LIBOR decreased 58 basis points over these periods from 1.80% to 1.22%, decreasing income by $3.9 million. Average commercial loans decreased 7.6% for the year ended December 31, 2003 when compared to the year
ended December 31, 2002, contributing a $5.1 million decrease in income. The coupon spread increased 125 basis points in the year ended December 31, 2003, resulting in a $8.2 million increase in income. LIBOR floors, which are included in
approximately 53% of our loans, have had the effect of increasing our spread because such floors have generally been above current LIBOR rates. Loan fees and dividend income increased $0.2 million for the year ended December 31, 2003 to the same
period in 2002. Advisory fees and other income increased $4.4 million as compared to 2002 due to an increase in business activity in 2003 and due to fees received in conjunction with credit facility waivers. Advisory fees and other income from
non-affiliate investments was $4.5 million for both 2002 and 2003 while advisory fees and other income from control and other affiliate investments increased from $0.0 million in 2002 to $4.4 million in 2003. The increase in weighted average spreads
and advisory fees and other income more than offset the affects of the decrease in LIBOR rates and decline in average commercial loans for the year ended December 31, 2003 to the same period in 2002.



Total operating income for the year ended December 31, 2002 increased $5.1
million, or 7.1%, to $76.9 million from $71.8 million for the year ended December 31, 2001. Loan interest increased by $1.7 million for the year ended December 31, 2002 as compared to the year ended December 31, 2001. Average three month LIBOR
decreased 201 basis points over these periods from 3.81% to 1.80%, decreasing income by $12.0 million. Average commercial loans increased 18% for the year ended December 31, 2002 when compared to the year ended December 31, 2001, contributing a
$10.9 million increase in income. The coupon spread increased 53 basis points in the year ended December 31, 2002, resulting in a $2.8 million increase in income. Loan fees increased $0.7 million primarily from origination fees. Due to a number of
analytical modeling and other financial advisory projects completed during 2002 for new and existing customers, advisory and other income increased $2.7 million as compared to 2001. The loan growth, increase in weighted average spreads and rise in
advisory and other income more than offset the affects of the decreases in LIBOR rates from the year ended December 31, 2001 to the same period in 2002.



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##### Table of Contents

Operating Expenses



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



The change in operating expense from
2002 to 2003 and 2001 to 2002 is attributable to the following items:



|                                     |  |               |      |   |               |   |       |  
|------------------------------------ |  | ------------- | ---- | - | ------------- | - | ----- | -
|(dollars in millions)                |  | 2003 vs. 2002 |      |   | 2002 vs. 2001 |  
|Change due to:                       |  |               |      |   |               |   |       |  
|Increase (decrease) in borrowings(a) |  | $             | 0.1  |   |               | $ | (4.1  | )
|Change in LIBOR(a)                   |  |               | (1.9 | ) |               |   | (7.4  | )
|Change in spread(a)                  |  |               | 1.4  |   |               |   | (3.2  | )
|Debt cost amortization               |  |               | (0.7 | ) |               |   | (0.1  | )
|Salaries and benefits                |  |               | 1.1  |   |               |   | (0.8  | )
|Long-term incentive compensation     |  |               | (0.3 | ) |               |   | 1.7   |  
|General and administrative expense   |  |               | 1.2  |   |               |   | 1.1   |  
|                                     |  |               |      |   |               |   |       |  
|Total change in operating expense    |  | $             | 0.9  |   |               | $ | (12.8 | )
|                                     |  |               |      |   |               |   |       |  

---

|(a) |  | The change in interest expense due to increase (decrease) in borrowings, change in LIBOR and change in spread has been allocated in proportion to the relationship of the absolute
dollar amount of the changes in each.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Total
operating expenses for the year ended December 31, 2003 increased $0.9 million, or 2.8%, to $33.1 million from $32.2 million for the year ended December 31, 2002. The increase was primarily due to an increase in salaries and benefits and general and
administrative expense partially offset by a decline in interest expense. Average three month LIBOR decreased 58 basis points over these periods from 1.80% to 1.22%, which caused interest expense to decline by $1.9 million. Borrowing costs decreased
from $11.2 million for the year ended December 31, 2002 to $10.1 million for the year ended December 31, 2003. Average borrowings increased 1.1%, increasing interest expense by $0.1 million. The increase in spreads caused interest expense to rise by
$1.4 million. Salaries and benefits increased $1.1 million primarily due to higher variable annual incentive compensation. Long-term incentive compensation relates to the termination of our stock option plan upon conversion to a business development
company in 2001. This expense consists of non-cash amortization of restricted stock awards and the treatment of dividends on all shares of common stock securing employee loans as compensation. Long-term incentive compensation decreased $0.3 million
over these periods. See Recent Developments and Note I to Consolidated Financial Statements. General and administrative expenses increased $1.2 million for the year ended December 31, 2003 as compared to the same period in 2002
primarily due to higher expenses related to increased professional fees from servicing and restructuring certain loans as well as an increase in certain general and administrative expenses associated with MCGs expanded office facilities.



Total operating expenses for the year ended December 31, 2002
decreased $12.8 million, or 28.4%, to $32.2 million from $44.9 million for the year ended December 31, 2001. The decrease was primarily due to a decline in interest expense as average borrowings and rates both declined. Average three month LIBOR
decreased 201 basis points over these periods from 3.81% to 1.80%, which caused interest expense to decline by $7.4 million. Borrowing costs decreased from $25.9 million for the year ended December 31, 2001 to $11.2 million for the year ended
December 31, 2002. Average borrowings decreased 20%, decreasing interest expense by $4.1 million. On December 27, 2001, we issued investment grade asset backed bonds with a blended coupon spread of 75 basis points over LIBOR and, along with a
portion of the proceeds from our initial public offering, replaced a debt facility priced at LIBOR plus 175 basis points. The decrease in spreads lowered interest expense by $3.2 million. Salaries and benefits declined $0.8 million. Partially
offsetting the decline in interest expense and salaries and benefits was an increase of $1.7 million in long-term incentive compensation in 2002 from $4.9 million in 2001. The increase in long-term incentive compensation is related to the non-cash
amortization of restricted stock awards and the treatment of dividends on all shares of common stock securing employee loans as compensation.



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##### Table of Contents

See Recent Developments and Note I to Consolidated Financial Statements. General and administrative expenses increased $1.1 million for the
year ended December 31, 2002 as compared to the same period in 2001 primarily due to expenses related to operating as a public company and professional fees associated with problem credits.



Net operating income before investment gains and losses/provision for loan losses



Net operating income before investment gains and losses
for the year ended December 31, 2003 totaled $47.6 million compared with net operating income before investment gains and losses of $44.8 million for the year ended December 31, 2002 and net operating income before investment gains and
losses/provision for loan losses of $26.9 million for the year ended December 31, 2001. Because we are a business development company and our investments are carried at fair value, we no longer record a provision for loan losses. See discussion in
Overview. For the period prior to conversion to a business development company, the provision for loan losses amounted to $10.3 million for the eleven-month period ended November 30, 2001.



Net Investment Gains (Losses)



For the years ended December 31, 2003, 2002 and 2001 net investment gains
(losses) totaled ($5.6) million, ($41.5) million and ($4.6) million, respectively. These amounts represent the total of net realized gains and losses, net unrealized appreciation and depreciation and reversals of unrealized appreciation and
depreciation as summarized in the following tables. Reversals of unrealized appreciation and depreciation occur when a gain or loss becomes realized.



For 2003, net realized losses on loans totaled $23.8 million and occurred primarily in the publishing and communications sectors. These losses were
triggered by foreclosures on loan collateral, debt to equity conversions, and the sale of a distressed loan. We generated a net realized gain totaling $4.2 million through sales of communications and technology common stock and warrants. Unrealized
appreciation totaled $10.8 million consisting primarily of gains in equity investments in the communication sector. Unrealized depreciation totaled $18.7 million and consisted of depreciation on debt and equity investments in the communications and
publishing sectors. The reversal of net unrealized depreciation associated with the realization of gains and losses totaled $21.9 million.



For 2002, net realized losses totaled $41.5 and were comprised of $9.6 million in realized losses and $31.9 million of net unrealized depreciation on
investments. More than 80% of the decrease in the value of our investments can be attributed to pressure on the operations of nine portfolio companies. Six of these portfolio companies, that derive substantial advertising revenues from
telecommunications, technology and financial services companies, have experienced a disproportionately negative impact from the current advertising recession. The other three portfolio companies have suffered from significant competitive pressure
from low cost and prepaid cellular calling plans.



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



Net
unrealized depreciation on investments 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. Net unrealized depreciation on investments 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.







31



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##### Table of Contents

The following table summarizes our realized gains and losses on investments for the years ended
December 31, 2003, 2002 and 2001:



MCG Capital
Corporation



Summary of Realized Gains and Losses on
Investments



|                                              |  |                        |         |                                            |                                 |                                      |        |   |                              |   |   |   |   |        |   |        |   |        |   |        |  
|--------------------------------------------- |  | ---------------------- | ------- | ------------------------------------------ | ------------------------------- | ------------------------------------ | ------ | - | ---------------------------- | - | - | - | - | ------ | - | ------ | - | ------ | - | ------ | -
|(dollars in thousands)                        |  | Sector                 |         | Post-IPO as a Business Development Company |                                 | Eleven MonthsEnded November 30, 2001 |        |   | Year Ended December 31, 2001 |  
|                                              |  | Year EndedDecember 31, |         |                                            | One Month EndedDecember 31,2001 |                                      |       
|                                              |  |                        |         |                                           
|Portfolio Company                             |  |                        | 2003    |                                            |                                 | 2002                                 |        |   |                              |  
|Realized gains (losses) on loans              |  |                        |         |                                            |                                 |                                      |        |   |                              |   |   |   |   |        |   |        |   |        |  
|VS&A-PBI Holding LLC                          |  | Publishing             |         | $                                          | (7,901                          | )                                    |        | $ |                             |   |   | $ |  |        | $ |       |   |        | $ |       |  
|National Systems Integration                  |  | Security Alarm         |         |                                            | (5,812                          | )                                    |        |   |                             |   |   |   |  |        |   |       |   |        |   |       |  
|AMI Telecommunications Corporation            |  | Telecommunications     |         |                                            | (5,585                          | )                                    |        |   |                             |   |   |   |  |        |   |       |   |        |   |       |  
|Rising Tide Holdings, Inc.                    |  | Publishing             |         |                                            | (2,675                          | )                                    |        |   |                             |   |   |   |  |        |   |       |   |        |   |       |  
|THE Journal, LLC                              |  | Publishing             |         |                                            | (959                            | )                                    |        |   |                             |   |   |   |  |        |   |       |   |        |   |       |  
|Sabot Publishing, Inc.                        |  | Publishing             |         |                                            | (405                            | )                                    |        |   |                             |   |   |   |  |        |   |       |   |        |   |       |  
|NBG Radio Network, Inc.                       |  | Broadcasting           |         |                                            | (398                            | )                                    |        |   |                             |   |   |   |  |        |   |       |   |        |   |       |  
|Netplexus Corporation                         |  | Technology             |         |                                            | (48                             | )                                    |        |   |                             |   |   |   |  |        |   |       |   |        |   |       |  
|ValuePage Holdings, Inc.                      |  | Telecommunications     |         |                                            |                                |                                      |        |   | (9,617                       | ) |   |   |  |        |   |       |   |        |   |       |  
|                                              |  |                        |         |                                            |                                 |                                      |        |   |                              |   |   |   |   |        |   |        |   |        |   |        |  
|                                              |  |                        |         | $                                          | (23,783                         | )                                    |        | $ | (9,617                       | ) |   | $ |  |        | $ |       |   |        | $ |       |  
|                                              |  |                        |         |                                            |                                 |                                      |        |   |                              |   |   |   |   |        |   |        |   |        |   |        |  
|Realized gains (losses) on equity investments |  |                        |         |                                            |                                 |                                      |        |   |                              |   |   |   |   |        |   |        |   |        |  
|Talk America Holdings, Inc.                   |  | Telecommunications     |         |                                            | 2,690                           |                                      |        |   |                             |   |   |   |  |        |   |       |   |        |   |       |  
|Systems Xcellence USA, Inc.                   |  | Technology             |         |                                            | 1,679                           |                                      |        |   |                             |   |   |   |  |        |   |       |   |        |   |       |  
|Fawcette Technical Holding                    |  | Publishing             |         |                                            | (519                            | )                                    |        |   |                             |   |   |   |  |        |   |       |   |        |   |       |  
|Eli Research, Inc.                            |  | InformationServices    |         |                                            | 300                             |                                      |        |   |                             |   |   |   |  |        |   |       |   |        |   |       |  
|MacDonald Communications Corporation          |  | Publishing             |         |                                            |                                |                                      |        |   |                             |   |   |   |  |        |   | (1,000 | ) |        |   | (1,000 | )
|Other                                         |  |                        |         |                                            | 53                              |                                      |        |   |                             |   |   |   |  |        |   | (715   | ) |        |   | (715   | )
|                                              |  |                        |         |                                            |                                 |                                      |        |   |                              |   |   |   |   |        |   |        |   |        |   |        |  
|                                              |  |                        |         |                                            | 4,203                           |                                      |        |   |                             |   |   |   |  |        |   | (1,715 | ) |        |   | (1,715 | )
|                                              |  |                        |         |                                            |                                 |                                      |        |   |                              |   |   |   |   |        |   |        |   |        |   |        |  
|Net realized gains (losses) on investments    |  | $                      | (19,580 | )                                          |                                 | $                                    | (9,617 | ) |                              | $ |  |   | $ | (1,715 | ) |        | $ | (1,715 | )
|                                              |  |                        |         |                                            |                                 |                                      |        |   |                              |   |   |   |   |        |   |        |   |        |   |        |  



32



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##### Table of Contents

The following table summarizes the net change in our unrealized appreciation and depreciation on
investments for the years ended December 31, 2003, 2002 and 2001.



MCG Capital Corporation



Summary of Net
Change in Unrealized Appreciation and Depreciation on Investments



|                                                         |  |                      |                         |                                            |         |                                   |                                       |   |         |                              |  |   |        |   |  |   |        |   |  |   |        |  
|-------------------------------------------------------- |  | -------------------- | ----------------------- | ------------------------------------------ | ------- | --------------------------------- | ------------------------------------- | - | ------- | ---------------------------- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                         |  | Sector               |                         | Post-IPO as a Business Development Company |         |                                   | Eleven Months Ended November 30, 2001 |   |         | Year Ended December 31, 2001 | 
|(dollars in thousands)                                   |  |                      | Year Ended December 31, |                                            |         | One Month Ended December 31, 2001 |                                       |   |        
|                                                         |  |                      |                         |                                            |        
|Portfolio Company                                        |  |                      | 2003                    |                                            |         | 2002                              |                                       |   |         |                             
|Unrealized appreciation on loans                         |  |                      |                         |                                            |         |                                   |                                       |   |         |                              |  |   |        |   |  |   |        |   |  |   |        |  
|Other                                                    |  |                      |                         | $                                          | 145     |                                   |                                       | $ |        |                              |  | $ |       |   |  | $ |       |   |  | $ |       |  
|                                                         |  |                      |                         |                                            |         |                                   |                                       |   |         |                              |  |   |        |   |  |   |        |   |  |   |        |  
|                                                         |  |                      |                         |                                            | 145     |                                   |                                       |   |        |                              |  |   |       |   |  |   |       |   |  |   |       |  
|Unrealized appreciation on equity investments            |  |                      |                         |                                            |         |                                   |                                       |   |         |                              |  |   |        |   |  |   |        |   |  |   |        |  
|Talk America Holdings, Inc.                              |  | Telecommunications   |                         |                                            | 2,608   |                                   |                                       |   | 2,164   |                              |  |   | 70     |   |  |   |       |   |  |   | 70     |  
|Creatas, L.L.C.                                          |  | Information Services |                         |                                            | 1,771   |                                   |                                       |   |        |                              |  |   | 365    |   |  |   |       |   |  |   | 365    |  
|Bridgecom Holdings, Inc.                                 |  | Telecommunications   |                         |                                            | 2,014   |                                   |                                       |   | 227     |                              |  |   |       |   |  |   |       |   |  |   |       |  
|Copperstate Technologies, Inc.                           |  | Security Alarm       |                         |                                            | 1,504   |                                   |                                       |   |        |                              |  |   |       |   |  |   |       |   |  |   |       |  
|Systems Xcellence USA, Inc.                              |  | Technology           |                         |                                            | 631     |                                   |                                       |   |        |                              |  |   |       |   |  |   |       |   |  |   |       |  
|Manhattan Telecommunications Corporation                 |  | Telecommunications   |                         |                                            | 869     |                                   |                                       |   | 511     |                              |  |   |       |   |  |   |       |   |  |   |       |  
|Other                                                    |  |                      |                         |                                            | 1,235   |                                   |                                       |   | 667     |                              |  |   | 246    |   |  |   | 857    |   |  |   | 1,103  |  
|                                                         |  |                      |                         |                                            |         |                                   |                                       |   |         |                              |  |   |        |   |  |   |        |   |  |   |        |  
|                                                         |  |                      |                         |                                            | 10,632  |                                   |                                       |   | 3,569   |                              |  |   | 681    |   |  |   | 857    |   |  |   | 1,538  |  
|                                                         |  |                      |                         |                                            |         |                                   |                                       |   |         |                              |  |   |        |   |  |   |        |   |  |   |        |  
|Total unrealized appreciation                            |  |                      |                         |                                            | 10,777  |                                   |                                       |   | 3,569   |                              |  |   | 681    |   |  |   | 857    |   |  |   | 1,538  |  
|                                                         |  |                      |                         |                                            |         |                                  
|Unrealized depreciation on loans                         |  |                      |                         |                                            |         |                                   |                                       |   |         |                              |  |   |        |   |  |   |        |   |  |   |        |  
|VS&A-PBI Holding LLC                                     |  | Publishing           |                         |                                            |        |                                   |                                       |   | (7,901  | )                            |  |   |       |   |  |   |       |   |  |   |       |  
|National Systems Integration                             |  | Security Alarm       |                         |                                            |        |                                   |                                       |   | (5,276  | )                            |  |   |       |   |  |   |       |   |  |   |       |  
|AMI Telecommunications Corporation                       |  | Telecommunications   |                         |                                            | (2,863  | )                                 |                                       |   | (5,143  | )                            |  |   |       |   |  |   |       |   |  |   |       |  
|ValuePage Holdings, Inc.                                 |  | Telecommunications   |                         |                                            |        |                                   |                                       |   | (4,984  | )                            |  |   |       |   |  |   |       |   |  |   |       |  
|Rising Tide Holdings LLC                                 |  | Publishing           |                         |                                            |        |                                   |                                       |   | (1,235  | )                            |  |   |       |   |  |   |       |   |  |   |       |  
|Corporate Legal Times                                    |  | Publishing           |                         |                                            | (883    | )                                 |                                       |   | (780    | )                            |  |   |       |   |  |   |       |   |  |   |       |  
|Netplexus Corporation                                    |  | Technology           |                         |                                            | (676    | )                                 |                                       |   | (19     | )                            |  |   |       |   |  |   |       |   |  |   |       |  
|Telecomm South, LLC                                      |  | Telecommunications   |                         |                                            | (643    | )                                 |                                       |   | (439    | )                            |  |   |       |   |  |   |       |   |  |   |       |  
|NBG Radio Network, Inc.                                  |  | Broadcasting         |                         |                                            |        |                                   |                                       |   | (574    | )                            |  |   |       |   |  |   |       |   |  |   |       |  
|NOW Communications, Inc.                                 |  | Telecommunications   |                         |                                            | (658    | )                                 |                                       |   |        |                              |  |   |       |   |  |   |       |   |  |   |       |  
|THE Journal, LLC                                         |  | Publishing           |                         |                                            | (117    | )                                 |                                       |   | (539    | )                            |  |   | (1,096 | ) |  |   |       |   |  |   | (1,096 | )
|Images.com, Inc.                                         |  | Information Services |                         |                                            | (939    | )                                 |                                       |   | (527    | )                            |  |   |       |   |  |   |       |   |  |   |       |  
|Other                                                    |  |                      |                         |                                            | (707    | )                                 |                                       |   | (145    | )                            |  |   |       |   |  |   |       |   |  |   |       |  
|                                                         |  |                      |                         |                                            |         |                                   |                                       |   |         |                              |  |   |        |   |  |   |        |   |  |   |        |  
|                                                         |  |                      |                         |                                            | (7,486  | )                                 |                                       |   | (27,562 | )                            |  |   | (1,096 | ) |  |   |       |   |  |   | (1,096 | )
|Unrealized depreciation on equity investments            |  |                      |                         |                                            |         |                                   |                                       |   |         |                              |  |   |        |   |  |   |        |   |  |   |        |  
|UMAC, Inc.                                               |  | Publishing           |                         |                                            |        |                                   |                                       |   | (10,107 | )                            |  |   |       |   |  |   |       |   |  |   |       |  
|Working Mother Media, Inc.                               |  | Publishing           |                         |                                            | (152    | )                                 |                                       |   | (2,540  | )                            |  |   |       |   |  |   |       |   |  |   |       |  
|AMI Telecommunications Corporation                       |  | Telecommunications   |                         |                                            | (2,695  | )                                 |                                       |   | (1,100  | )                            |  |   |       |   |  |   |       |   |  |   |       |  
|Biznessonline.com, Inc.                                  |  | Telecommunications   |                         |                                            | (2,270  | )                                 |                                       |   | (379    | )                            |  |   |       |   |  |   | (15    | ) |  |   | (15    | )
|Fawcette Technical Holding                               |  | Publishing           |                         |                                            | (1,960  | )                                 |                                       |   | (410    | )                            |  |   |       |   |  |   |       |   |  |   |       |  
|Crystal Media Network, LLC                               |  | Broadcasting         |                         |                                            | (983    | )                                 |                                       |   |        |                              |  |   |       |   |  |   |       |   |  |   |       |  
|Interactive Business Solutions, Inc.                     |  | Security Alarm       |                         |                                            | (1,324  | )                                 |                                       |   |        |                              |  |   |       |   |  |   |       |   |  |   |       |  
|National Systems Integration                             |  | Security Alarm       |                         |                                            | (576    | )                                 |                                       |   |        |                              |  |   |       |   |  |   |       |   |  |   |       |  
|FTI Technologies Holdings, Inc.                          |  | Technology           |                         |                                            |        |                                   |                                       |   |        |                              |  |   |       |   |  |   | (2,029 | ) |  |   | (2,029 | )
|Manhattan Telecommunications Corporation                 |  | Telecommunications   |                         |                                            |        |                                   |                                       |   |        |                              |  |   | (71    | ) |  |   | (354   | ) |  |   | (425   | )
|Other                                                    |  |                      |                         |                                            | (1,273  | )                                 |                                       |   | (3,007  | )                            |  |   | (809   | ) |  |   | (47    | ) |  |   | (856   | )
|                                                         |  |                      |                         |                                            |         |                                   |                                       |   |         |                              |  |   |        |   |  |   |        |   |  |   |        |  
|                                                         |  |                      |                         |                                            | (11,233 | )                                 |                                       |   | (17,543 | )                            |  |   | (880   | ) |  |   | (2,445 | ) |  |   | (3,325 | )
|                                                         |  |                      |                         |                                            |         |                                   |                                       |   |         |                              |  |   |        |   |  |   |        |   |  |   |        |  
|Unrealized depreciation on investments                   |  |                      |                         |                                            | (18,719 | )                                 |                                       |   | (45,105 | )                            |  |   | (1,976 | ) |  |   | (2,445 | ) |  |   | (4,421 | )
|                                                         |  |                      |                         |                                            |         |                                  
|Reversal of unrealized depreciation (appreciation)*      |  |                      |                         |                                            |         |                                   |                                       |   |         |                              |  |   |        |   |  |   |        |   |  |   |        |  
|ValuePage Holdings, Inc.                                 |  | Telecommunications   |                         |                                            |        |                                   |                                       |   | 9,617   |                              |  |   |       |   |  |   |       |   |  |   |       |  
|VS&A-PBI Holding LLC                                     |  | Publishing           |                         |                                            | 7,901   |                                   |                                       |   |        |                              |  |   |       |   |  |   |       |   |  |   |       |  
|National Systems Integration                             |  | Security Alarm       |                         |                                            | 5,276   |                                   |                                       |   |        |                              |  |   |       |   |  |   |       |   |  |   |       |  
|AMI Telecommunications Corporation                       |  | Telecommunications   |                         |                                            | 5,143   |                                   |                                       |   |        |                              |  |   |       |   |  |   |       |   |  |   |       |  
|Rising Tide Holdings, Inc.                               |  | Publishing           |                         |                                            | 2,735   |                                   |                                       |   |        |                              |  |   |       |   |  |   |       |   |  |   |       |  
|THE Journal, LLC                                         |  | Publishing           |                         |                                            | 1,752   |                                   |                                       |   |        |                              |  |   |       |   |  |   |       |   |  |   |       |  
|Talk America Holdings, Inc.                              |  | Telecommunications   |                         |                                            | (1,746  | )                                 |                                       |   |        |                              |  |   |       |   |  |   |       |   |  |   |       |  
|Systems Xcellence USA, Inc.                              |  | Technology           |                         |                                            | (631    | )                                 |                                       |   |        |                              |  |   |       |   |  |   |       |   |  |   |       |  
|NBG Radio Network, Inc.                                  |  | Broadcasting         |                         |                                            | 574     |                                   |                                       |   |        |                              |  |   |       |   |  |   |       |   |  |   |       |  
|Fawcette Technical Holding                               |  | Publishing           |                         |                                            | 519     |                                   |                                       |   |        |                              |  |   |       |   |  |   |       |   |  |   |       |  
|Other                                                    |  |                      |                         |                                            | 379     |                                   |                                       |   |        |                              |  |   |       |   |  |   |       |   |  |   |       |  
|                                                         |  |                      |                         |                                            |         |                                   |                                       |   |         |                              |  |   |        |   |  |   |        |   |  |   |        |  
|Total reversal of unrealized depreciation (appreciation) |  |                      |                         |                                            | 21,902  |                                   |                                       |   | 9,617   |                              |  |   |       |   |  |   |       |   |  |   |       |  
|                                                         |  |                      |                         |                                            |         |                                   |                                       |   |         |                              |  |   |        |   |  |   |        |   |  |   |        |  
|Net change in unrealized depreciation on investments     |  |                      |                         | $                                          | 13,960  |                                   |                                       | $ | (31,919 | )                            |  | $ | (1,295 | ) |  | $ | (1,588 | ) |  | $ | (2,883 | )
|                                                         |  |                      |                         |                                            |         |                                   |                                       |   |         |                              |  |   |        |   |  |   |        |   |  |   |        |  

---

|* |  | When a gain or loss becomes realized, the prior unrealized appreciation or depreciation is reversed.
|- |  | ----------------------------------------------------------------------------------------------------



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Income Taxes



Through December 31, 2001, we were taxed under Subchapter C of the Internal Revenue Code. We elected to be a regulated investment company under Subchapter
M of the Internal Revenue Code with the filing of our federal corporate income tax return for 2002, which election was effective as of January 1, 2002, 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 and November 30, 2001 were 21.8% and 41.0% 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.



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:



|                                                             |  |                       |       |  
|------------------------------------------------------------ |  | --------------------- | ----- | -
|Cumulative Effect of Business Development Company Conversion |  | (Dollars in millions) |      
|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  | )
|                                                             |  |                       |       |  



Net Income



MCG recognized a net increase in stockholders equity from earnings of
$42.0 million for the year ended December 31, 2003 compared with $3.2 million for the year ended December 31, 2002 and net income of $3.8 million for the year ended December 31, 2001.



Financial Condition, Liquidity and Capital Resources



Cash, Cash Equivalents and Cash, Securitization Accounts



At December 31, 2003 and December 31, 2002, we had $60.1 million and $9.4 million, respectively, in cash and cash
equivalents. In addition, at December 31, 2003 and December 31, 2002, we had $33.4 million and $43.2 million, respectively, in cash, securitization accounts. We invest cash on hand in interest bearing deposit accounts with daily sweep features. We
have maintained sizable cash balances to support ongoing origination activity and follow-on investments in portfolio companies. Cash, securitization accounts includes amounts held in designated bank accounts representing payments received on
securitized loans. We are required to use a portion of these amounts to pay interest expense, reduce borrowings, or pay other amounts in accordance with the related securitization agreements. Our objective is to maintain sufficient cash on hand to
cover current funding requirements, operations and to maintain flexibility as we manage our debt facilities.



For 2003, net cash provided by operating activities totaled $39.5 million, an increase of $8.4 million over the prior years amount. This increase
was due primarily to higher overall operating income and lower non-cash



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interest. Cash provided by investing and financing activities totaled $11.1 million compared with a net use of cash in 2002 of $65.0 million. This changes
was principally due to higher loan payoffs in 2003 and higher investment originations in 2002.



Liquidity and Capital Resources



We expect our cash on hand and cash generated from operations, including the portion of the cash in securitization accounts that will be released to us, 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, advances under our credit facilities and equity financings.



On December 4, 2001, we completed an initial public offering of 13,375,000 shares of our common stock and a concurrent private offering of 625,000 shares
of our common stock with gross proceeds totaling $237.3 million. On June 17, 2002, MCG raised $54.0 million of gross proceeds in an additional public offering by selling 3,000,000 shares of common stock at an offering price of $18 per share. On
August 21, 2003, MCG raised $100.8 million of gross proceeds by selling 6,500,000 shares of common stock at an offering price of $15.50 per share. On September 16, 2003, the underwriters in the August 21, 2003 offering exercised their over-allotment
and purchased an additional 975,000 shares of common stock at an offering price of $15.50 per share. As a result of the underwriters exercising their over-allotment, MCG raised an additional $15.1 million of gross proceeds. On March 3, 2004, we
filed a registration statement on Form N-2 with the Securities and Exchange Commission (SEC) which would allow us or certain selling shareholders to offer, from time to time, up to 18,000,000 shares of common stock in one or more
offerings.



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%. As of December 31, 2003, this ratio was 259%.
This requirement limits the amount that we may borrow. To fund growth in our investment portfolio in the future, we anticipate needing to raise additional capital from various sources, including the equity markets and the securitization or other
debt-related markets.



Off-Balance Sheet Arrangements



We are party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financial needs of our 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. We attempt to limit our credit risk by conducting extensive due diligence and obtaining collateral where appropriate.



As of December 31, 2003, we had unused commitments to extend credit to our customers of $24.4 million, which are not reflected on our balance sheet. At
the same time, subject to certain minimum equity restrictions and other covenants and limitations which include restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life, collateral
interests and investment ratings as well as regulatory restrictions on leverage which may affect the amount of Series 2000-1 Notes we may issue from time to time, the unused portion of our borrowing facility totaled $69.0 million. See
Borrowings section below for discussion of our borrowing facilities.



Contractual Obligations



The following table shows our contractual obligations as of December 31, 2003:



|                                                 |  |                        |       |                  |   |           |  |           |       |               |   |      |  |   |    
|------------------------------------------------ |  | ---------------------- | ----- | ---------------- | - | --------- |  | --------- | ----- | ------------- | - | ---- |  | - | ---
|                                                 |  | Payments Due by Period
|(dollars in millions) Contractual
Obligations(a) |  | Total                  |       | Less than 1 year |   | 1-3 years |  | 4-5 years |       | After 5 years
|Borrowings(b)                                    |  | $                      | 304.1 |                  | $ | 100.6     |  | $         | 155.2 |               | $ | 48.3 |  | $ |   
|Future minimum rental obligations                |  |                        | 12.4  |                  |   | 1.3       |  |           | 2.6   |               |   | 2.6  |  |   | 5.9
|                                                 |  |                        |       |                  |   |           |  |           |       |               |   |      |  |   |    
|Total contractual obligations                    |  | $                      | 316.5 |                  | $ | 101.9     |  | $         | 157.8 |               | $ | 50.9 |  | $ | 5.9
|                                                 |  |                        |       |                  |   |           |  |           |       |               |   |      |  |   |    



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|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                               
|(a)    This excludes the unused commitments to extend credit to our customers of $24.4 million as discussed
above.                                                                                                                                                                                                             
|(b)    Borrowings under the Revolving Credit Facility and the Series 2001-1 Notes are based on the contractual principal
collections of the loans which comprise the collateral. Actual repayments could differ significantly due to prepayments by our borrowers and modifications of our borrowers existing loan agreements.



Borrowings



Term Securitization



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 which were contributed by us and totaled $247.5 million as of
December 31, 2003 and $295.5 million as of December 31, 2002. This facility is scheduled to terminate on February 20, 2013 or sooner upon full repayment of the Class A and Class B Notes. The Class A and Class B Notes are scheduled to be repaid as we
receive principal collections on the underlying collateral.



The Trust issued $229.8 million of Class A Notes rated AAA/Aaa/AAA, and $35.4 million of Class B Notes rated A/A2/A (the Series 20011 Class A Asset Backed Bonds and Series 20011 Class B Asset Backed
Bonds) as rated by Standard & Poors, Moodys and Fitch, respectively. As of December 31, 2003, $173.1 million of the Series 20011 Notes were outstanding and $240.1 million were outstanding as of December 31, 2002. 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.



Revolving Credit Facility



As of June 1, 2000, we, through MCG Master Trust, 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, 2003, $131.0 million of the Series 2000-1 Notes were outstanding with one investor and, as of December 31, 2002, $123.7 million were outstanding with one investor. As of December 31, 2003 and December 31, 2002, we had no notes
outstanding under a swingline credit facility (the Swingline Notes), which is part of the Revolving Credit Facility, that allows us to borrow up to $25.0 million as part of the $200.0 million total facility limit for a period of up to
four days. The Swingline Notes are repaid through the issuance of Series 2000-1 Notes. The Revolving Credit Facility was secured by $194.3 million of commercial loans as of December 31, 2003 and $224.6 million of commercial loans as of December 31,
2002. 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 amount of unleveraged loans that serve as collateral for the indebtedness. Such amount was a
minimum of $30.0 million (subject to increase upon occurrence of an event of default) prior to July 8, 2002 and $75.0 million as of July 8, 2002 and thereafter. We are also subject to limitations including restrictions on geographic concentrations,
sector concentrations, loan size, payment frequency and status, average life, collateral interests and investment ratings as well as regulatory restrictions on leverage which may affect the amount of Series 2000-1 notes we may issue from time to
time. There are also certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in the early amortization of the facility, and
limit further advances under the facility, and in some cases could be an event of default. Such limitations, requirements, and associated defined terms are as provided for in the documents governing the facility. The Series 2000-1 Notes bear
interest based on a commercial paper rate plus 3.0% and interest is payable monthly.



As discussed above, there are certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in the
early amortization of the facility and limit further advances under the facility, and in some cases could be an event of default. In February 2003, we amended the Revolving Credit Facility agreements. Prior to the February



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2003 amendment, the Revolving Credit Facility required us among other things to maintain an average trailing twelve-month portfolio charged-off (as defined
in the Revolving Credit Facility agreements) ratio of 3% or less. The amendment increased this ratio to 7% for any date prior to and including June 30, 2003 and decreased this ratio to 3% thereafter. This amendment also included a waiver with
respect to the applicability of the charge-off ratio for periods prior to February 2003. Additionally, this amendment required us to increase the amount of collateral held by the noteholders by pledging the MCG Commercial Loan Trust 2001-1 Class C
Notes, which we own. As noted below, on February 12, 2004, the requirement relating to loan charge-offs was eliminated.



On February 12, 2004, we entered into an agreement with Wachovia Bank, National Association to amend the Revolving Credit Facility that we had established
through MCG Master Trust. The amendment to the Revolving Credit Facility, among other things, provides for the following:



| |  |  | a decrease in our borrowing capacity from $200.0 million to $130.0 million, which will further be reduced to $115.0 million on June 30, 2004 and to $100.0 million by September 30,
2004;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an extension of the revolving period to September 30, 2004;
| | - |  | -----------------------------------------------------------



| |  |  | permits recourse to MCG Capital itself in the event that the interest and principal payments from the loans we transferred to MCG Master Trust in connection with the revolving
credit facility are insufficient to repay the outstanding amount due under the Revolving Credit Facility;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | eliminates a requirement relating to loan charge-offs at the servicer level that we were previously required to seek a waiver from in February 2003;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes the date on which the holder of the notes issued by MCG Master Trust receives final payment on such notes from June 2020 to September 2009; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reduces the interest rate payable under the Revolving Credit Facility from the commercial paper rate plus 3.0% to LIBOR plus 1.5%.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



Warehouse Facility



On January 29, 2004, our wholly owned, bankruptcy remote, special purpose
indirect subsidiary, MCG Commercial Loan Trust 2003-1 entered into a $200 million secured warehouse credit facility with an affiliate of UBS AG. We will use the warehouse credit facility to fund our origination and purchase of a diverse pool of
loans, including broadly syndicated rated loans, that we intend to securitize using an affiliate of the lender as the exclusive structurer and underwriter or placement agent. Advances under the credit facility will bear interest at LIBOR plus 0.50%.
The warehouse credit facility operates much like a revolving credit facility that is primarily secured by the loans acquired with the advances under the credit facility. In addition, the lender will have recourse to MCG Capital Corporation itself in
a maximum aggregate amount of $72 million in the event that the principal and interest payments from the loans transferred to MCG Commercial Loan Trust 2003-1 are insufficient to repay the outstanding amount due to the lender. The warehouse credit
facility is cancelable by the lender for cause at any time and has an expiration term of September 24, 2004.



Outstanding Borrowings



Our $130 million revolving credit facility sponsored by Wachovia Bank, National Association is scheduled to terminate on September 30, 2009, or sooner
upon repayment of our borrowings thereunder after September 30, 2004. Our $265.2 million securitization facility is scheduled to terminate on February 20, 2013 or sooner upon repayment of our borrowings. Our $200 million secured warehouse facility
with an affiliate of UBS AG is scheduled to terminate on September 24, 2004.



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At December 31, 2003, we had aggregate outstanding borrowings of $304.1 million. The following table
shows the facility amounts and outstanding borrowings at December 31, 2003:



|                                                                     |  |                 |       |                    |   |                  |  |      |  
|-------------------------------------------------------------------- |  | --------------- | ----- | ------------------ | - | ---------------- |  | ---- | -
|(dollars in millions)                                                |  | Facility amount |       | Amount outstanding |   | Interest Rate(a) | 
|Term Securitization                                                  |  |                 |       |                    |   |                  |  |      |  
|2001-1 Class A Asset Backed Bonds                                    |  | $               | 137.7 |                    | $ | 137.7            |  | 1.77 | %
|2001-1 Class B Asset Backed Bonds                                    |  |                 | 35.4  |                    |   | 35.4             |  | 2.92 |  
|                                                                     |  |                 |      
|Revolving Credit Facility                                            |  |                 |       |                    |   |                  |  |      |  
|2000-1 Class A Asset Backed Securities                               |  |                 | 200.0 |                    |   | 131.0            |  | 4.12 |  
|                                                                     |  |                 |       |                    |   |                  |  |      |  
|Total borrowings                                                     |  | $               | 373.1 |                    | $ | 304.1            |  | 2.91 | %
|                                                                     |  |                 |       |                    |   |                  |  |      |  
|(a)    Excludes the cost of commitment fees and other facility fees. | 



At December 31, 2002,
we had aggregate outstanding borrowings of $363.8 million. The following table shows the facility amounts and outstanding borrowings at December 31, 2002:



|                                                                     |  |                 |       |                    |   |                  |  |      |  
|-------------------------------------------------------------------- |  | --------------- | ----- | ------------------ | - | ---------------- |  | ---- | -
|(dollars in millions)                                                |  | Facility amount |       | Amount outstanding |   | Interest Rate(a) | 
|Term Securitization                                                  |  |                 |       |                    |   |                  |  |      |  
|2001-1 Class A Asset Backed Bonds                                    |  | $               | 204.7 |                    | $ | 204.7            |  | 2.43 | %
|2001-1 Class B Asset Backed Bonds                                    |  |                 | 35.4  |                    |   | 35.4             |  | 3.58 |  
|                                                                     |  |                 |      
|Revolving Credit Facility                                            |  |                 |       |                    |   |                  |  |      |  
|2000-1 Class A Asset Backed Securities                               |  |                 | 200.0 |                    |   | 123.7            |  | 2.61 |  
|                                                                     |  |                 |       |                    |   |                  |  |      |  
|Total borrowings                                                     |  | $               | 440.1 |                    | $ | 363.8            |  | 2.60 | %
|                                                                     |  |                 |       |                    |   |                  |  |      |  
|(a)    Excludes the cost of commitment fees and other facility fees. | 



Each of our borrowing
facilities is funded through bankruptcy remote, special purpose, wholly-owned subsidiaries of ours and, therefore, their assets may not be available to our creditors. See Note C to the Consolidated Financial Statements for further discussion of our
borrowings.



Dividends



We have elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code. In order to maintain our status as a regulated investment company, we are required to (i) distribute at least 90% of our investment company taxable income and 90% of any ordinary pre-RIC built in gains we
recognize between January 1, 2002 and December 31, 2011, less any taxes due on those gains to avoid corporate level taxes on the amount distributed to stockholders (other than any built in gain recognized between January 1, 2002 and December 31,
2011) and (ii) distribute (actually or on a deemed basis) at least 98% of our income (both ordinary income and net capital gains) 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 intend to make deemed distributions to our stockholders of any retained net capital gains.



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 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.



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The following table summarizes our dividends declared and paid on all shares, including restricted stock,
to date:



|                   |  |                   |  |                  |  |        |     
|------------------ |  | ----------------- |  | ---------------- |  | ------ | ----
|Date Declared      |  | Record Date       |  | Payment Date     |  | Amount
|December 16, 2003  |  | December 31, 2003 |  | January 29, 2004 |  | $      | 0.42
|August 6, 2003     |  | August 18, 2003   |  | October 30, 2003 |  |        | 0.42
|June 16, 2003      |  | June 23, 2003     |  | July 30, 2003    |  |        | 0.41
|March 28, 2003     |  | April 16, 2003    |  | April 29, 2003   |  |        | 0.40
|December 18, 2002  |  | December 30, 2002 |  | January 30, 2003 |  |        | 0.42
|September 30, 2002 |  | October 16, 2002  |  | October 30, 2002 |  |        | 0.46
|June 3, 2002       |  | June 11, 2002     |  | July 31, 2002    |  |        | 0.47
|March 28, 2002     |  | April 17, 2002    |  | April 30, 2002   |  |        | 0.41
|December 31, 2001  |  | January 22, 2002  |  | January 31, 2002 |  |        | 0.86
|                   |  |                   |  |                  |  |        |     
|Total Declared     |  |                   |  |                  |  | $      | 4.27
|                   |  |                   |  |                  |  |        |     



The aggregate dividend
of $0.86 per share in December 2001 consisted 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. The aggregate dividend of $0.46 declared in September 2002 consisted of a dividend of $0.43 per share for the third quarter of 2002 and an additional dividend of $0.03 per share which represented the remaining
distribution of our earnings and profits since inception through December 31, 2001. The aggregate dividend declared in December 2001 along with the $0.03 dividend declared in September, 2002 were required for us to qualify as a regulated investment
company.



Related Party Transactions



Prior to election to be regulated as a business development company, 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 Recent Developments and Note I to Consolidated Financial Statements.





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.



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.



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Income Recognition



Interest on commercial loans is computed by methods that generally result in level rates of return on principal amounts outstanding. 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 cease recognizing interest income on that loan until
all principal has been paid. However, we may make exceptions to this policy if the investment is well secured and in the process of collection.



Paid-in-Kind Interest



In accordance with GAAP, we include in income certain amounts that we have not yet received in cash, such as contractual paid-in-kind (PIK) interest,
which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term. However, in certain cases, a customer makes principal payments on its loan prior to making payments to reduce the PIK loan
balances and, therefore, the PIK portion of a customers loan can increase while the total outstanding amount of the loan to that customer may stay the same or decrease. PIK loans represented $27.3 million or 3.9% of our portfolio of
investments as of December 31, 2003 and $27.2 million or 4.0% of our portfolio of investments as of December 31, 2002.



PIK related activity for the years ended December 31, 2003 and 2002 was as follows:



|                                           |  |                         |       |   |      |   |      |  
|------------------------------------------ |  | ----------------------- | ----- | - | ---- | - | ---- | -
|                                           |  | Year Ended December 31, |      
|(in millions)                              |  | 2003                    |       |   | 2002 |  
|Beginning PIK loan balance                 |  | $                       | 27.2  |   |      | $ | 14.2 |  
|PIK interest earned during the period      |  |                         | 18.3  |   |      |   | 16.2 |  
|Change in interest receivable on PIK loans |  |                         | 0.1   |   |      |   | (0.1 | )
|Principal payments of cash on PIK loans    |  |                         | (7.0  | ) |      |   | (3.1 | )
|PIK loans converted to other securities    |  |                         | (10.9 | ) |      |   |     |  
|Realized loss                              |  |                         | (0.4  | ) |      |   |     |  
|                                           |  |                         |       |   |      |   |      |  
|Ending PIK loan balance                    |  | $                       | 27.3  |   |      | $ | 27.2 |  
|                                           |  |                         |       |   |      |   |      |  



As noted above, in
certain cases, a customer may make principal payments on its loan that are contractually applied first to the non-PIK loan balance instead of the PIK loan balance. If all principal payments from these customers had been applied first to any PIK loan
balance outstanding at the time of the payment, and any remainder applied to the non-PIK loan balance, an additional $6.6 million of payments would have been applied against the December 31, 2003 PIK loan balance of $27.3 million and an additional
$6.3 million of payments would have been applied against the December 31, 2002 PIK loan balance of $27.2 million.



As of December 31, 2003, 92.9% of the $27.3 million of PIK loans outstanding have an investment rating of 3 or better and as of December 31, 2002, 87.8%
of the $27.2 million of PIK loans outstanding had an investment rating of 3 or better. The net increase in loan balances as a result of contracted PIK arrangements are separately identified on our consolidated statements of cash flows.



Loan Origination Fees



Loan origination fees are deferred and amortized as adjustments to the
related loans yield over the contractual life of the loan. 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 fair value as determined by our board of directors. Fair values are determined 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. We had $16.4 million and $12.8 million of unearned income as of December 31, 2003 and December 31, 2002,
respectively.



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Unearned income activity for the years ended December 31, 2003 and 2002 was as follows:



|                                              |  |                         |      |   |                                        |   |      |       |  |   |               |   |  |                                        |      |   |       |   |      |   |  |   |      |  
|--------------------------------------------- |  | ----------------------- | ---- | - | -------------------------------------- | - | ---- | ----- |  | - | ------------- | - |  | -------------------------------------- | ---- | - | ----- | - | ---- | - |  | - | ---- | -
|                                              |  | Year Ended December 31, |     
|                                              |  | 2003                    |      |   | 2002                                   |  
|(in millions)                                 |  | Cash Received           |      |   | Equity Interest and Future Receivables |   |      | Total |  |   | Cash Received |   |  | Equity Interest and Future Receivables |      |   | Total |  
|Beginning unearned income balance             |  | $                       | 8.3  |   |                                        | $ | 4.5  |       |  | $ | 12.8          |   |  | $                                      | 9.0  |   |       | $ | 3.1  |   |  | $ | 12.1 |  
|Additional fees                               |  |                         | 1.8  |   |                                        |   | 10.6 |       |  |   | 12.4          |   |  |                                        | 4.1  |   |       |   | 3.8  |   |  |   | 7.9  |  
|Unearned income recognized                    |  |                         | (2.9 | ) |                                        |   | (4.1 | )     |  |   | (7.0          | ) |  |                                        | (4.8 | ) |       |   | (2.4 | ) |  |   | (7.2 | )
|Unearned fees applied against loan balance(a) |  |                         | (1.6 | ) |                                        |   | (0.2 | )     |  |   | (1.8          | ) |  |                                        |     |   |       |   |     |   |  |   |     |  
|                                              |  |                         |      |   |                                        |   |      |       |  |   |               |   |  |                                        |      |   |       |   |      |   |  |   |      |  
|Ending unearned income balance                |  | $                       | 5.6  |   |                                        | $ | 10.8 |       |  | $ | 16.4          |   |  | $                                      | 8.3  |   |       | $ | 4.5  |   |  | $ | 12.8 |  
|                                              |  |                         |      |   |                                        |   |      |       |  |   |               |   |  |                                        |      |   |       |   |      |   |  |   |      |  

---

|(a) |  | When a loan is paid off at an amount below our cost basis, we apply any fees received that have not been recognized as income against the outstanding loan amount to reduce the cost
basis, which has the effect of reducing any realized loss.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Other Fees



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



At December 31, 2003, approximately 88% of our total assets represented
investments recorded at fair value. Value, as defined in Section 2(a) (41) of 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as
determined in good faith by the board of directors. Since there is typically no readily available market value for the investments in our portfolio, we value substantially all of our investments at fair value as determined in good faith by the board
of directors pursuant to a valuation policy and a consistent valuation process. Because of the inherent uncertainty of determining the fair value of investments that do not have a readily ascertainable market value, the fair value of our investments
determined in good faith by the board of directors may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.



There is no single standard for determining fair value in good faith. As a
result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment. Unlike banks, we are not permitted to provide a general reserve for anticipated loan losses. Instead, we must
determine the fair value of each individual investment on a quarterly basis. We will record unrealized depreciation on investments when we believe that an investment has decreased in value, including where collection of a loan or realization of an
equity security is doubtful. Conversely, we will record unrealized appreciation if we believe that the underlying portfolio company has appreciated in value and, therefore, our investment has also appreciated in value, where appropriate.



As a business development company, we invest primarily in illiquid
securities including debt and equity securities of private companies. The structure of each debt and equity security is specifically negotiated to enable us to protect our investment and maximize our returns. We generally include many terms
governing interest rate, repayment terms, prepayment penalties, financial covenants, operating covenants, ownership and corporate governance parameters, dilution parameters, liquidation preferences, voting rights, and put or call rights. In many
cases, our loan agreements also 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. Our investments are generally subject to some restrictions on resale and generally



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have no established trading market. Because of the type of investments that we make and the nature of our business, our valuation process requires an
analysis of various factors. Our fair value methodology includes the examination of, among other things, the underlying investment performance, financial condition and market changing events that impact valuation.



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, and, where appropriate, 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 or thinly traded public securities may be valued at discounts from the public market value due to the restrictions on sale.



Securitization Transactions



Periodically, we transfer pools of loans to special purpose entities (SPEs)
for use in securitization transactions. These on-balance sheet securitization transactions comprise a significant source of our overall funding, with the total face amount of the outstanding loans and equity investments assumed by third parties
equaled $441.8 million at December 31, 2003 and $520.1 million at December 31, 2002. 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 our operations or financial position. 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.



Recent Developments



In January of 2004, we entered into a credit and warehouse agreement with UBS
AG. This agreement allows us to borrow up to $200 million subject to partial recourse and other covenants and restrictions. This facility provides financing for loans that will collateralize a potential future term securitization. In February of
2004, we amended our revolving credit facility, established through MCG Master Trust. The amendment reduces the total availability under the facility to $130 million, extends the facilitys revolving period to September 2004 with required
payments down to $100 million by that date, adds recourse to MCG for payments, and revises certain other provisions of the agreement including reducing the interest rate and adjusting final maturity from June of 2020 to September of 2009.



In the first quarter of 2004; as part of a review of our
executive compensation, the compensation committee of our Board of Directors agreed with certain of our executive officers to allow the forfeiture restrictions to lapse with respect to their Tier I and Tier II shares immediately upon full repayment
of the partially nonrecourse promissory notes that are secured by the restricted stock. In addition, the compensation committee waived the performance-based forfeiture restrictions and modified the time-based forfeiture provisions associated with
the Tier III shares through their respective amended and restated restricted stock agreements. The impact of these changes on long-term incentive compensation expense, assuming a market price of our common stock of $20.04 and assuming that all of
the executives repay their promissory notes in the first quarter of 2004, would be an increase of up to approximately $6.2 million for the first quarter of 2004 and $5.4 million for the year ending December 31, 2004.



In March of 2004, we acquired the assets of Kagan World Media, a media,
communications and entertainment research firm based in Carmel, CA. Kagan publishes analytics in the form of newsletters and databooks and covers valuation, M&A deals, revenue forecasts, cash flow, and subscriber trends in cable, broadcast, home
video, motion picture, newspaper and wireless industries. Kagan sponsors conferences, provides appraisals and offers litigation support and expert testimony on valuations to the industries it serves.



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RISK FACTORS



Investing in our common stock involves a high degree of risk. You should consider carefully the risks described below and
all other information contained in this Annual Report, including our financial statements and the related notes and the schedules and exhibits to this Annual Report.



Risks Related to Our Business and Financial Results



We have a limited operating history as a business development company and 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 limited
operating results under 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, prior to our initial public offering, our management had
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 the value of our investments 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 available 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 to record any unrealized depreciation 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 our valuation policy. These determinations of fair value necessarily will be somewhat subjective. Accordingly, these values may differ materially 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.



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.



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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.



If the industry sectors in which our portfolio
is concentrated experience adverse economic or business conditions, our operating results may be negatively impacted.



Our customer base is primarily in the communications, information services, media and technology, including software and technology-enabled business
services, industry sectors. These customers can experience adverse business conditions or risks related to their industries. See BusinessMarket Opportunity for a discussion of the types of businesses in each sector that we target.



Accordingly, if our customers suffer (as some customers
currently are) due to these adverse business conditions or risks or due to economic slowdowns or downturns in these industry sectors, we will be more vulnerable to losses in our portfolio and our operating results may be negatively impacted.
Furthermore, if demand for financing by existing and new customers in these industries declines, we may not be able to increase our lending and investment volume and our operating results will be adversely affected.



Economic downturns or recessions may 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 the economic downturns 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. Economic downturns or recessions also may decrease the value of collateral securing some of our loans and the value of our equity investments. Economic downturns or recessions could lead to
financial losses in our portfolio and a decrease in net income. Unfavorable economic conditions could also lead to a decrease in revenues and assets.



An economic downturn could disproportionately impact the industry sectors in which we concentrate, 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.



At December 31, 2003 and 2002, there were $4.2 million and $21.5 million, respectively, of loans, or approximately 0.6% and 3.1%, respectively, of the
investment portfolio, greater than 60 days past due. At December 31, 2003, including $0.1 million of the loans greater than 60 days past due, there were $14.6 million of loans, or approximately 2.1% of the investment portfolio, on non-accrual
status. At December 31, 2002, including all $21.5 million of the loans greater than 60 days past due, there were $42.7 million of loans, or approximately 6.2% of the investment portfolio, on non-accrual status. The non-accrual and past due loans
primarily represented borrowers in the publishing, telecommunications and paging businesses. Portions of the trade publishing industry which are dependent on financial, technology or telecommunications advertising, experienced sluggish advertising
revenue. Certain companies in the telecommunications industry have suffered from competitive pressure from low cost and prepaid cellular calling plans At December 31, 2003, of the $83.1 million of loans to our majority owned companies, $10.5 million
were on non-accrual status. At December 31, 2002, of the $26.1 million of loans to our majority owned companies, $10.2 million were on non-accrual status. As of December 31, 2003, of the $18.6 million of loans to controlled companies, $3.9 million
were on non-accrual status. At December 31, 2002, all $10.3 million of the loans to our controlled companies were on non-accrual status. As of December 31, 2003, of the $45.6 million of loans to other affiliates, $0.2 million were on non-accrual
status. At December 31, 2002, of the $34.3 million of loans to other affiliates, none were on non-accrual status.



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.



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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 elected to be taxed for federal income tax purposes as a regulated investment company under Subchapter M of the Internal Revenue Code with the filing of our federal corporate income tax return for 2002, which election was effective as of
January 1, 2002. 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. See
Regulation as a Business Development Company and Certain U.S. Federal Income Tax ConsiderationsTaxation as a Regulated Investment Company.



Because we will distribute substantially all of our income to our stockholders, we will continue to need additional capital to finance
our growth. If additional capital is unavailable or not available on favorable terms, our ability to grow will be impaired.



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 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.



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



As of December 31,
2003, we had $304.1 million of outstanding borrowings under our securitization facilities. As a result, our current financial structure has a high proportion of debt and our debt service is substantial. As of December 31, 2003, the weighted average
annual interest rate on all of our outstanding borrowings was 2.91%. In order for us to cover our annual interest payments on indebtedness, we must achieve annual returns on our December 31, 2003 total assets of at least 1.12%. Our ability to
service our debt depends largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures.



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 retained interest in the trusts, which was approximately $152.0 million as of December 31, 2003.



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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 distributions required to maintain our status as a regulated investment company under Subchapter M of the Internal Revenue
Code.



Borrowings, also known as leverage, magnify the
potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. Leverage is generally considered a speculative investment technique. If the value of our consolidated assets increases,
then leveraging would cause the net asset value attributable to our common stock to increase more than it otherwise would have had we not leveraged. Conversely, if the value of our consolidated assets decreases, leveraging would cause net asset
value attributable to our common stock to decline more than it otherwise would have had we not leveraged. Similarly, any increase in our consolidated revenue in excess of consolidated interest expense on our borrowed funds would cause our net income
to increase more than it would without the leverage. Any decrease in our consolidated revenue would cause net income to decline more than it would have had we not borrowed funds and could negatively affect our ability to make distributions on our
common stock.



As a business development company, we generally
are required to meet a coverage ratio of total assets to total borrowings and other senior securities, which include all of our borrowings and any preferred stock we may issue in the future, of at least 200%. If this ratio declines below 200%, we
may not be able to incur additional debt and may need to sell a portion of our investments to repay some debt when it is disadvantageous to do so, and we may not be able to make distributions. At December 31, 2003, this ratio was approximately 259%.



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 $130 million revolving credit facility sponsored by Wachovia Bank, National Association is scheduled to terminate on September 30, 2009, or sooner upon repayment of our borrowings thereunder after September 30,
2004. Our $265.2 million securitization facility is scheduled to terminate on February 20, 2013 or sooner upon repayment of our borrowings. Our $200 million secured warehouse facility with an affiliate of UBS AG is scheduled to terminate on
September 24, 2004.



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.



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. See Regulation as a Business Development Company. 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. See Certain U.S. Federal
Income Tax ConsiderationsTaxation as a Regulated Investment Company. We cannot assure you that you will receive any distributions or distributions at a particular level.



We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such
income.



In accordance with generally accepted
accounting principles and tax regulations, we include in income certain amounts that we have not yet received in cash, such as contracted payment-in-kind interest, which



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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
payment-in-kind arrangements are included in income in advance of receiving cash payment, and are separately identified on our consolidated statements of cash flows. Since we may recognize income before or without receiving cash representing such
income, we may have difficulty meeting the requirement to distribute at least 90% of our investment company taxable income to maintain our status as a regulated investment company. See Managements Discussion and Analysis of Financial
Condition and Results of OperationsCritical Accounting Policies and Certain U.S. Federal Income Tax ConsiderationsTaxation as a Regulated Investment Company.



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.



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. In addition, if we were forced to immediately liquidate some or all of the investments in our portfolio, the proceeds of such liquidation could be significantly less than the current value of such investments. We
may be required to liquidate some or all of our portfolio to meet our debt service obligations or to maintain our qualification as a business development company and as a regulated investment company if we do not satisfy one or more of the
applicable criteria under the respective regulatory frameworks.



Our
business depends on our key personnel.



Our future
success depends to a significant extent on the continued services of Bryan J. Mitchell, 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 of our 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 84% of the loans in our portfolio, based on amounts outstanding at fair value as
of December 31, 2003, were at variable rates determined on the basis of a benchmark LIBOR or prime rate and approximately 16% were at fixed rates. From July 1, 2002 to December 31, 2003, three-month LIBOR has declined from 1.86% to 1.15%. A decrease
in interest rates may reduce net income despite the increased demand for our capital that the decrease in interest rates may produce.



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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.



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 LIBOR, prime rates and commercial paper rates. Over 84% 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. Approximately 53% of our loan portfolio has a LIBOR floor, at various levels. 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 stockholders 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 interest bearing cash, outstanding commercial loans and our outstanding borrowings at December 31, 2003 and 2002:



|                          |  |                                            |       |            |   |                                            |  |            |       |  |   |      
|------------------------- |  | ------------------------------------------ | ----- | ---------- | - | ------------------------------------------ |  | ---------- | ----- |  | - | -----
|                          |  | December 31,                              
|                          |  | 2003                                       |       | 2002      
|(dollars in millions)     |  | Interest Bearing Cash and Commercial Loans |       | Borrowings |   | Interest Bearing Cash and Commercial Loans |  | Borrowings
|Repurchase Agreement Rate |  | $                                          | 93.0  |            | $ |                                           |  | $          | 50.2  |  | $ |     
|Prime Rate                |  |                                            | 1.3   |            |   |                                           |  |            | 28.8  |  |   |     
|30-Day LIBOR              |  |                                            | 20.9  |            |   |                                           |  |            | 39.6  |  |   |     
|60-Day LIBOR              |  |                                            | 7.4   |            |   |                                           |  |            |      |  |   |     
|90-Day LIBOR              |  |                                            | 481.6 |            |   | 173.1                                      |  |            | 518.9 |  |   | 240.1
|Commercial Paper Rate     |  |                                            |      |            |   | 131.0                                      |  |            |      |  |   | 123.7
|Fixed Rate                |  |                                            | 94.4  |            |   |                                           |  |            | 81.5  |  |   |     
|                          |  |                                            |       |            |   |                                            |  |            |       |  |   |      
|Total                     |  | $                                          | 698.6 |            | $ | 304.1                                      |  | $          | 719.0 |  | $ | 363.8
|                          |  |                                            |       |            |   |                                            |  |            |       |  |   |      



Based on our December
31, 2003 balance sheet, the following table shows the impact of base rate changes in interest rates assuming no changes in our investment and borrowing structure. The impact of an additional 100 basis point increase is different from the first 100
basis point increase due to the imposition of LIBOR floors.



|                                         |  |                |      |   |                 |   |      |           |  |   |    
|---------------------------------------- |  | -------------- | ---- | - | --------------- | - | ---- | --------- |  | - | ---
|(dollars in millions) Basis Point
Change |  | InterestIncome |      |   | InterestExpense |   |      | NetIncome
|(100)                                    |  | $              | (2.8 | ) |                 | $ | (3.0 | )         |  | $ | 0.2
|100                                      |  | $              | 3.1  |   |                 | $ | 3.0  |           |  | $ | 0.1
|200                                      |  | $              | 7.8  |   |                 | $ | 6.1  |           |  | $ | 1.7
|300                                      |  | $              | 13.9 |   |                 | $ | 9.1  |           |  | $ | 4.8



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 strategy on an ongoing basis.



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Item 8.Financial Statements and Supplementary Data



Index to Financial Statements



|                                                                                                                                                                           |  |   
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|Report of Independent Auditors                                                                                                                                             |  | 50
|Consolidated Balance Sheets as of December 31, 2003 and 2002                                                                                                               |  | 51
|Consolidated Statements of Operations for the years ended December 31, 2003 and 2002, the one month ended December 31, 2001, and the eleven months ended November 30, 2001 |  | 52
|Consolidated Statements of Stockholders Equity from December 31, 2000 through 2003                                                                                        |  | 53
|Consolidated Statements of Cash Flows for the years ended December 31, 2003 and 2002, the one month ended December 31, 2001, and the eleven months ended November 30, 2001 |  | 54
|Consolidated Schedules of Investments as of December 31, 2003                                                                                                              |  | 55
|Consolidated Schedules of Investments as of December 31, 2002                                                                                                              |  | 60
|Notes to Consolidated Financial Statements                                                                                                                                 |  | 66



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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, 2003 and 2002, including the consolidated
schedules of investments, and the related consolidated statements of operations, stockholders equity, and cash flows for the years ended December 31, 2003 and 2002, the one-month period ended December 31, 2001, and the eleven-month period
ended November 30, 2001. 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, 2003 and 2002, and the consolidated results of its
operations and its cash flows for the years ended December 31, 2003 and 2002, the one-month period ended December 31, 2001, and the eleven-month period ended November 30, 2001, in conformity with accounting principles generally accepted in the
United States.



As discussed in Note A, 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.



/s/
Ernst & Young LLP



McLean, Virginia

March 10, 2004



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MCG Capital Corporation

Consolidated Balance Sheets

(in thousands, except per share data)



|                                                                                                                                                                   |  |              |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                                                                                                                                   |  | December 31, |        
|                                                                                                                                                                   |  | 2003         |         |   | 2002 |  
|Assets                                                                                                                                                             |  |              |         |   |      |   |         |  
|Cash and cash equivalents                                                                                                                                          |  | $            | 60,072  |   |      | $ | 9,389   |  
|Cash, securitization accounts                                                                                                                                      |  |              | 33,434  |   |      |   | 43,170  |  
|Investments at fair value                                                                                                                                          |  |              |         |   |      |   |         |  
|Commercial loans, (cost of $615,253 and $694,977, respectively)                                                                                                    |  |              | 605,551 |   |      |   | 668,803 |  
|Investments in equity securities, (cost of $112,850 and $37,014, respectively)                                                                                     |  |              | 93,391  |   |      |   | 20,067  |  
|Unearned income on commercial loans                                                                                                                                |  |              | (16,416 | ) |      |   | (12,778 | )
|                                                                                                                                                                   |  |              |         |   |      |   |         |  
|Total investments                                                                                                                                                  |  |              | 682,526 |   |      |   | 676,092 |  
|Interest receivable                                                                                                                                                |  |              | 5,717   |   |      |   | 5,866   |  
|Other assets                                                                                                                                                       |  |              | 9,166   |   |      |   | 10,476  |  
|                                                                                                                                                                   |  |              |         |   |      |   |         |  
|Total assets                                                                                                                                                       |  | $            | 790,915 |   |      | $ | 744,993 |  
|                                                                                                                                                                   |  |              |         |   |      |   |         |  
|Liabilities                                                                                                                                                        |  |              |         |   |      |   |         |  
|Borrowings                                                                                                                                                         |  | $            | 304,131 |   |      | $ | 363,838 |  
|Interest payable                                                                                                                                                   |  |              | 1,185   |   |      |   | 1,527   |  
|Dividends payable                                                                                                                                                  |  |              | 16,267  |   |      |   | 13,129  |  
|Other liabilities                                                                                                                                                  |  |              | 5,382   |   |      |   | 5,249   |  
|                                                                                                                                                                   |  |              |         |   |      |   |         |  
|Total liabilities                                                                                                                                                  |  |              | 326,965 |   |      |   | 383,743 |  
|                                                                                                                                                                   |  |              |         |   |      |   |         |  
|Commitments and contingencies                                                                                                                                      |  |              |         |   |      |   |         |  
|                                                                                                                                                                   |  |             
|Stockholders Equity                                                                                                                                               |  |              |         |   |      |   |         |  
|Preferred stock, par value $.01, authorized 1 share, none issued and outstanding                                                                                   |  |              |        |   |      |   |        |  
|Common stock, par value $.01, authorized 100,000 shares, 38,732 issued and outstanding on December 31, 2003 and 31,259 issued and outstanding
on December 31, 2002 |  |              | 387     |   |      |   | 313     |  
|Paid-in capital                                                                                                                                                    |  |              | 529,168 |   |      |   | 419,961 |  
|Stockholder loans                                                                                                                                                  |  |              | (5,293  | ) |      |   | (5,513  | )
|Unearned compensationrestricted stock                                                                                                                             |  |              | (4,911  | ) |      |   | (8,566  | )
|Distributions in excess of earnings                                                                                                                                |  |              | (26,240 | ) |      |   | (1,824  | )
|Net unrealized depreciation on investments                                                                                                                         |  |              | (29,161 | ) |      |   | (43,121 | )
|                                                                                                                                                                   |  |              |         |   |      |   |         |  
|Total stockholders equity                                                                                                                                         |  |              | 463,950 |   |      |   | 361,250 |  
|                                                                                                                                                                   |  |              |         |   |      |   |         |  
|Total liabilities and stockholders equity                                                                                                                         |  | $            | 790,915 |   |      | $ | 744,993 |  
|                                                                                                                                                                   |  |              |         |   |      |   |         |  



See notes to
consolidated financial statements.



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MCG Capital Corporation

Consolidated Statements of Operations

(in thousands, except per share amounts)



|                                                                                                 |  |                                            |         |   |                                                          |   |         |                                       |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------ |  | ------------------------------------------ | ------- | - | -------------------------------------------------------- | - | ------- | ------------------------------------- |  | - | ------ | - |  | - | ------- | -
|                                                                                                 |  | Post IPO as a Business Development Company |         |   | Pre IPO prior to becoming a Business Development Company |  
|                                                                                                 |  | Year Ended December 31,                    |         |   | One Month Ended December 31, 2001                        |   |         | Eleven Months Ended November 30, 2001 | 
|                                                                                                 |  | 2003                                       |         |   | 2002                                                     |   |         |                                      
|Operating income                                                                                 |  |                                            |         |   |                                                          |   |         |                                       |  |   |        |   |  |   |         |  
|Interest and dividend income                                                                     |  |                                            |         |   |                                                          |   |         |                                       |  |   |        |   |  |   |         |  
|Non-affiliate investments (less than 5% owned)                                                   |  | $                                          | 63,624  |   |                                                          | $ | 65,774  |                                       |  | $ | 5,397  |   |  | $ | 54,662  |  
|Affiliate investments (5% to 25% owned)                                                          |  |                                            | 4,894   |   |                                                          |   | 3,974   |                                       |  |   | 432    |   |  |   | 5,183   |  
|Control investments (more than 25% owned)                                                        |  |                                            | 3,231   |   |                                                          |   | 2,651   |                                       |  |   | 120    |   |  |   | 4,187   |  
|                                                                                                 |  |                                            |         |   |                                                          |   |         |                                       |  |   |        |   |  |   |         |  
|Total interest and dividend income                                                               |  |                                            | 71,749  |   |                                                          |   | 72,399  |                                       |  |   | 5,949  |   |  |   | 64,032  |  
|Advisory fees and other income                                                                   |  |                                            |         |   |                                                          |   |         |                                       |  |   |        |   |  |   |         |  
|Non-affiliate investments (less than 5% owned)                                                   |  |                                            | 4,508   |   |                                                          |   | 4,534   |                                       |  |   | 63     |   |  |   | 1,757   |  
|Affiliate investments (5% to 25% owned)                                                          |  |                                            | 2,098   |   |                                                          |   |        |                                       |  |   |       |   |  |   |        |  
|Control investments (more than 25% owned)                                                        |  |                                            | 2,335   |   |                                                          |   |        |                                       |  |   |       |   |  |   |        |  
|                                                                                                 |  |                                            |         |   |                                                          |   |         |                                       |  |   |        |   |  |   |         |  
|Total advisory fees and other income                                                             |  |                                            | 8,941   |   |                                                          |   | 4,534   |                                       |  |   | 63     |   |  |   | 1,757   |  
|                                                                                                 |  |                                            |         |   |                                                          |   |         |                                       |  |   |        |   |  |   |         |  
|Total operating income                                                                           |  |                                            | 80,690  |   |                                                          |   | 76,933  |                                       |  |   | 6,012  |   |  |   | 65,789  |  
|                                                                                                 |  |                                            |         |   |                                                          |   |         |                                       |  |   |        |   |  |   |         |  
|Operating expenses                                                                               |  |                                            |         |   |                                                          |   |         |                                       |  |   |        |   |  |   |         |  
|Interest expense                                                                                 |  |                                            | 10,053  |   |                                                          |   | 11,157  |                                       |  |   | 1,198  |   |  |   | 24,661  |  
|Employee compensation:                                                                           |  |                                            |         |   |                                                          |   |         |                                       |  |   |        |   |  |   |         |  
|Salaries and benefits                                                                            |  |                                            | 9,210   |   |                                                          |   | 8,082   |                                       |  |   | 884    |   |  |   | 8,038   |  
|Long-term incentive compensation                                                                 |  |                                            | 6,347   |   |                                                          |   | 6,627   |                                       |  |   | 4,944  |   |  |   |        |  
|                                                                                                 |  |                                            |         |   |                                                          |   |         |                                       |  |   |        |   |  |   |         |  
|Total employee compensation                                                                      |  |                                            | 15,557  |   |                                                          |   | 14,709  |                                       |  |   | 5,828  |   |  |   | 8,038   |  
|General and administrative expense                                                               |  |                                            | 7,485   |   |                                                          |   | 6,316   |                                       |  |   | 594    |   |  |   | 4,619   |  
|                                                                                                 |  |                                            |         |   |                                                          |   |         |                                       |  |   |        |   |  |   |         |  
|Total operating expenses                                                                         |  |                                            | 33,095  |   |                                                          |   | 32,182  |                                       |  |   | 7,620  |   |  |   | 37,318  |  
|                                                                                                 |  |                                            |         |   |                                                          |   |         |                                       |  |   |        |   |  |   |         |  
|Net operating income (loss) before investment gains and losses/provision for loan losses         |  |                                            | 47,595  |   |                                                          |   | 44,751  |                                       |  |   | (1,608 | ) |  |   | 28,471  |  
|                                                                                                 |  |                                            |         |   |                                                          |   |         |                                       |  |   |        |   |  |   |         |  
|Provision for loan losses                                                                        |  |                                            |        |   |                                                          |   |        |                                       |  |   |       |   |  |   | (10,275 | )
|Net realized gains (losses) on investments                                                       |  |                                            |         |   |                                                          |   |         |                                       |  |   |        |   |  |   |         |  
|Non-affiliate investments (less than 5% owned)                                                   |  |                                            | (7,616  | ) |                                                          |   | (9,617  | )                                     |  |   |       |   |  |   | (635    | )
|Affiliate investments (5% to 25% owned)                                                          |  |                                            | (48     | ) |                                                          |   |        |                                       |  |   |       |   |  |   | (1,080  | )
|Control investments (more than 25% owned)                                                        |  |                                            | (11,916 | ) |                                                          |   |        |                                       |  |   |       |   |  |   |        |  
|                                                                                                 |  |                                            |         |   |                                                          |   |         |                                       |  |   |        |   |  |   |         |  
|Total net realized gains (losses) on investments                                                 |  |                                            | (19,580 | ) |                                                          |   | (9,617  | )                                     |  |   |       |   |  |   | (1,715  | )
|Net change in unrealized appreciation (depreciation) on investments                              |  |                                            |         |   |                                                          |   |         |                                       |  |   |        |   |  |   |         |  
|Non-affiliate investments (less than 5% owned)                                                   |  |                                            | 15,444  |   |                                                          |   | (9,946  | )                                     |  |   | (1,614 | ) |  |   | (1,573  | )
|Affiliate investments (5% to 25% owned)                                                          |  |                                            | 576     |   |                                                          |   | (1,089  | )                                     |  |   | 284    |   |  |   |        |  
|Control investments (more than 25% owned)                                                        |  |                                            | (2,060  | ) |                                                          |   | (20,884 | )                                     |  |   | 35     |   |  |   | (15     | )
|                                                                                                 |  |                                            |         |   |                                                          |   |         |                                       |  |   |        |   |  |   |         |  
|Total net change in unrealized appreciation (depreciation) on investments                        |  |                                            | 13,960  |   |                                                          |   | (31,919 | )                                     |  |   | (1,295 | ) |  |   | (1,588  | )
|                                                                                                 |  |                                            |         |   |                                                          |   |         |                                       |  |   |        |   |  |   |         |  
|Net investment losses                                                                            |  |                                            | (5,620  | ) |                                                          |   | (41,536 | )                                     |  |   | (1,295 | ) |  |   | (3,303  | )
|                                                                                                 |  |                                            |         |   |                                                          |   |         |                                       |  |   |        |   |  |   |         |  
|Income (loss) from operations before income taxes and cumulative effect of accounting change     |  |                                            | 41,975  |   |                                                          |   | 3,215   |                                       |  |   | (2,903 | ) |  |   | 14,893  |  
|Income tax expense (benefit)                                                                     |  |                                            |        |   |                                                          |   |        |                                       |  |   | (633   | ) |  |   | 6,114   |  
|                                                                                                 |  |                                            |         |   |                                                          |   |         |                                       |  |   |        |   |  |   |         |  
|Income (loss) before cumulative effect of accounting change                                      |  |                                            | 41,975  |   |                                                          |   | 3,215   |                                       |  |   | (2,270 | ) |  |   | 8,779   |  
|Cumulative effect of accounting change, net of taxes of $1,223                                   |  |                                            |        |   |                                                          |   |        |                                       |  |   |       |   |  |   | 1,777   |  
|Cumulative effect of conversion to business development company                                  |  |                                            |        |   |                                                          |   |        |                                       |  |   | (4,472 | ) |  |   |        |  
|                                                                                                 |  |                                            |         |   |                                                          |   |         |                                       |  |   |        |   |  |   |         |  
|Net income (loss)/Net increase (decrease) in stockholders equity resulting from earnings (loss) |  | $                                          | 41,975  |   |                                                          | $ | 3,215   |                                       |  | $ | (6,742 | ) |  | $ | 10,556  |  
|                                                                                                 |  |                                            |         |   |                                                          |   |         |                                       |  |   |        |   |  |   |         |  
|Income (loss) per common share before cumulative effect of accounting change basic and diluted   |  | $                                          | 1.28    |   |                                                          | $ | 0.11    |                                       |  | $ | (0.08  | ) |  | $ | 0.69    |  
|Earnings (loss) per common share basic and diluted                                               |  | $                                          | 1.28    |   |                                                          | $ | 0.11    |                                       |  | $ | (0.25  | ) |  | $ | 0.83    |  
|Cash dividends declared per common share                                                         |  | $                                          | 1.65    |   |                                                          | $ | 1.76    |                                       |  | $ | 0.86   |   |  | $ |        |  
|Weighted average common shares outstanding                                                       |  |                                            | 32,715  |   |                                                          |   | 28,539  |                                       |  |   | 26,814 |   |  |   | 12,757  |  
|Weighted average common shares outstanding and dilutive common stock equivalents                 |  |                                            | 32,739  |   |                                                          |   | 28,570  |                                       |  |   | 26,814 |   |  |   | 12,775  |  



See notes to
consolidated financial statements.



52



---

##### Table of Contents

MCG Capital Corporation

Consolidated Statements of Stockholders Equity (unaudited)

(in thousands, except per share amounts)



|                                                                                                               |  |              |   |                 |        |     |                   |   |         |                                        |  |   |                                                 |   |  |                                          |         |   |                                       |   |         |                            |  |   |         |   |  |   |      |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------- |  | ------------ | - | --------------- | ------ | --- | ----------------- | - | ------- | -------------------------------------- |  | - | ----------------------------------------------- | - |  | ---------------------------------------- | ------- | - | ------------------------------------- | - | ------- | -------------------------- |  | - | ------- | - |  | - | ---- | - |  | - | ------- | -
|                                                                                                               |  | Common stock |   | Paid-in Capital |        |     | Stockholder Loans |   |         | Unearned Compensation- Restrictedstock |  |   | Distributions (in excess of) less than Earnings |   |  | NetUnrealized Depreciation onInvestments |         |   | Cumulative Other Comprehensive Income |   |         | Total Stockholders Equity | 
|                                                                                                               |  | Shares       |   |                 | Amount |     |                   |   |         |                                        |  |  
|Balance December 31, 2000                                                                                      |  | 12,672       |   |                 | $      | 127 |                   | $ | 138,624 |                                        |  | $ | (747                                            | ) |  | $                                        |        |   |                                       | $ | 20,513  |                            |  | $ |        |   |  | $ | 381  |   |  | $ | 158,898 |  
|Net income (loss)/Net increase (decrease) in stockholders equity resulting from earnings (loss)               |  |              |   |                 |        |     |                   |   |         |                                        |  |   |                                                 |   |  |                                          |         |   |                                       |   | 10,556  |                            |  |   |         |   |  |   |      |   |  |   | 10,556  |  
|Net change in unrealized appreciation (depreciation) on investments, net of income taxes of $518               |  |              |   |                 |        |     |                   |   |         |                                        |  |   |                                                 |   |  |                                          |         |   |                                       |   |         |                            |  |   |         |   |  |   | (761 | ) |  |   | (761    | )
|                                                                                                               |  |              |   |                 |        |     |                   |   |         |                                        |  |   |                                                 |   |  |                                          |         |   |                                       |   |         |                            |  |   |         |   |  |   |      |   |  |   |         |  
|Balance November 30, 2001                                                                                      |  | 12,672       |   |                 |        | 127 |                   |   | 138,624 |                                        |  |   | (747                                            | ) |  |                                          |        |   |                                       |   | 31,069  |                            |  |   |        |   |  |   | (380 | ) |  |   | 168,693 |  
|Issuance of restricted stock awards                                                                            |  | 1,615        |   |                 |        | 16  |                   |   | 14,811  |                                        |  |   | (5,763                                          | ) |  |                                          | (14,580 | ) |                                       |   |         |                            |  |   |         |   |  |   |      |   |  |   | (5,516  | )
|Issuance of common shares in IPO, net of costs                                                                 |  | 14,000       |   |                 |        | 140 |                   |   | 216,652 |                                        |  |   |                                                 |   |  |                                          |         |   |                                       |   |         |                            |  |   |         |   |  |   |      |   |  |   | 216,792 |  
|Reclassification to net unrealized depreciation on investments upon conversion to business development company |  |              |   |                 |        |     |                   |   |         |                                        |  |   |                                                 |   |  |                                          |         |   |                                       |   | 9,907   |                            |  |   | (9,907  | ) |  |   | 380  |   |  |   | 380     |  
|Net income (loss)/Net increase (decrease) in stockholders equity resulting from earnings (loss)               |  |              |   |                 |        |     |                   |   |         |                                        |  |   |                                                 |   |  |                                          |         |   |                                       |   | (5,447  | )                          |  |   | (1,295  | ) |  |   |      |   |  |   | (6,742  | )
|Dividends declared, $0.86 per share                                                                            |  |              |   |                 |        |     |                   |   |         |                                        |  |   |                                                 |   |  |                                          |         |   |                                       |   | (22,737 | )                          |  |   |         |   |  |   |      |   |  |   | (22,737 | )
|Amortization/vesting of restricted stock awards                                                                |  |              |   |                 |        |     |                   |   |         |                                        |  |   |                                                 |   |  |                                          | 1,503   |   |                                       |   |         |                            |  |   |         |   |  |   |      |   |  |   | 1,503   |  
|                                                                                                               |  |              |   |                 |        |     |                   |   |         |                                        |  |   |                                                 |   |  |                                          |         |   |                                       |   |         |                            |  |   |         |   |  |   |      |   |  |   |         |  
|Balance December 31, 2001                                                                                      |  | 28,287       |   |                 |        | 283 |                   |   | 370,087 |                                        |  |   | (6,510                                          | ) |  |                                          | (13,077 | ) |                                       |   | 12,792  |                            |  |   | (11,202 | ) |  |   |     |   |  |   | 352,373 |  
|Net income (loss)/Net increase (decrease) in stockholders equity resulting from earnings (loss)               |  |              |   |                 |        |     |                   |   |         |                                        |  |   |                                                 |   |  |                                          |         |   |                                       |   | 35,134  |                            |  |   | (31,919 | ) |  |   |      |   |  |   | 3,215   |  
|Issuance of common shares, net of costs                                                                        |  | 3,000        |   |                 |        | 30  |                   |   | 50,220  |                                        |  |   |                                                 |   |  |                                          |         |   |                                       |   |         |                            |  |   |         |   |  |   |      |   |  |   | 50,250  |  
|Dividends declared, $1.76 per share                                                                            |  |              |   |                 |        |     |                   |   |         |                                        |  |   |                                                 |   |  |                                          |         |   |                                       |   | (49,750 | )                          |  |   |         |   |  |   |      |   |  |   | (49,750 | )
|Dividend reinvestment                                                                                          |  | 20           |   |                 |        |    |                   |   | 313     |                                        |  |   |                                                 |   |  |                                          |         |   |                                       |   |         |                            |  |   |         |   |  |   |      |   |  |   | 313     |  
|Amortization of restricted stock awards                                                                        |  |              |   |                 |        |     |                   |   |         |                                        |  |   |                                                 |   |  |                                          | 3,988   |   |                                       |   |         |                            |  |   |         |   |  |   |      |   |  |   | 3,988   |  
|Reduction in employee loans                                                                                    |  | (48          | ) |                 |        |    |                   |   | (659    | )                                      |  |   | 997                                             |   |  |                                          | 523     |   |                                       |   |         |                            |  |   |         |   |  |   |      |   |  |   | 861     |  
|                                                                                                               |  |              |   |                 |        |     |                   |   |         |                                        |  |   |                                                 |   |  |                                          |         |   |                                       |   |         |                            |  |   |         |   |  |   |      |   |  |   |         |  
|Balance December 31, 2002                                                                                      |  | 31,259       |   |                 |        | 313 |                   |   | 419,961 |                                        |  |   | (5,513                                          | ) |  |                                          | (8,566  | ) |                                       |   | (1,824  | )                          |  |   | (43,121 | ) |  |   |     |   |  |   | 361,250 |  
|Net income (loss)/Net increase (decrease) in stockholders equity resulting from earnings (loss)               |  |              |   |                 |        |     |                   |   |         |                                        |  |   |                                                 |   |  |                                          |         |   |                                       |   | 28,015  |                            |  |   | 13,960  |   |  |   |      |   |  |   | 41,975  |  
|Issuance of common shares, net of costs                                                                        |  | 7,475        |   |                 |        | 74  |                   |   | 108,759 |                                        |  |   |                                                 |   |  |                                          |         |   |                                       |   |         |                            |  |   |         |   |  |   |      |   |  |   | 108,833 |  
|Dividends declared, $1.65 per share                                                                            |  |              |   |                 |        |     |                   |   |         |                                        |  |   |                                                 |   |  |                                          |         |   |                                       |   | (52,431 | )                          |  |   |         |   |  |   |      |   |  |   | (52,431 | )
|Dividend reinvestment                                                                                          |  | 5            |   |                 |        |    |                   |   | 77      |                                        |  |   |                                                 |   |  |                                          |         |   |                                       |   |         |                            |  |   |         |   |  |   |      |   |  |   | 77      |  
|Amortization/vesting of restricted stock awards                                                                |  |              |   |                 |        |     |                   |   | 506     |                                        |  |   |                                                 |   |  |                                          | 3,566   |   |                                       |   |         |                            |  |   |         |   |  |   |      |   |  |   | 4,072   |  
|Reduction in employee loans                                                                                    |  | (7           | ) |                 |        |    |                   |   | (135    | )                                      |  |   | 220                                             |   |  |                                          | 89      |   |                                       |   |         |                            |  |   |         |   |  |   |      |   |  |   | 174     |  
|                                                                                                               |  |              |   |                 |        |     |                   |   |         |                                        |  |   |                                                 |   |  |                                          |         |   |                                       |   |         |                            |  |   |         |   |  |   |      |   |  |   |         |  
|Balance December 31, 2003                                                                                      |  | 38,732       |   |                 | $      | 387 |                   | $ | 529,168 |                                        |  | $ | (5,293                                          | ) |  | $                                        | (4,911  | ) |                                       | $ | (26,240 | )                          |  | $ | (29,161 | ) |  | $ |     |   |  | $ | 463,950 |  
|                                                                                                               |  |              |   |                 |        |     |                   |   |         |                                        |  |   |                                                 |   |  |                                          |         |   |                                       |   |         |                            |  |   |         |   |  |   |      |   |  |   |         |  



See notes to
consolidated financial statements



53



---

##### Table of Contents

MCG Capital Corporation

Consolidated Statements of Cash Flows

(in thousands)



|                                                                                                                                                          |  |                                            |         |   |                                                          |   |          |                                       |  |   |          |   |  |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | ------- | - | -------------------------------------------------------- | - | -------- | ------------------------------------- |  | - | -------- | - |  | - | -------- | -
|                                                                                                                                                          |  | Post IPO as a Business Development Company |         |   | Pre IPO prior to becoming a Business Development Company |  
|                                                                                                                                                          |  | Year Ended December 31,                    |         |   | One Month Ended December 31, 2001                        |   |          | Eleven Months Ended November 30, 2001 | 
|                                                                                                                                                          |  | 2003                                       |         |   | 2002                                                     |   |          |                                      
|Operating activities                                                                                                                                      |  |                                            |         |   |                                                          |   |          |                                       |  |   |          |   |  |   |          |  
|Net income/ Net increase (decrease) in stockholders equity resulting from earnings                                                                       |  | $                                          | 41,975  |   |                                                          | $ | 3,215    |                                       |  | $ | (6,742   | ) |  | $ | 10,556   |  
|Adjustments to reconcile net income/net increase (decrease) in stockholders equity resulting from earnings to net cash provided by
operating activities: |  |                                            |         |   |                                                          |   |          |                                       |  |   |          |   |  |   |          |  
|Provision for loan losses                                                                                                                                 |  |                                            |        |   |                                                          |   |         |                                       |  |   |         |   |  |   | 10,275   |  
|Cumulative effect of accounting change from conversion to business development company                                                                    |  |                                            |        |   |                                                          |   |         |                                       |  |   | 4,472    |   |  |   |         |  
|Depreciation and amortization                                                                                                                             |  |                                            | 584     |   |                                                          |   | 411      |                                       |  |   | 56       |   |  |   | 523      |  
|Amortization of restricted stock awards                                                                                                                   |  |                                            | 4,072   |   |                                                          |   | 3,988    |                                       |  |   | 1,751    |   |  |   |         |  
|Amortization of deferred debt issuance costs                                                                                                              |  |                                            | 1,246   |   |                                                          |   | 1,984    |                                       |  |   | 205      |   |  |   | 1,860    |  
|Net realized losses on investments                                                                                                                        |  |                                            | 19,580  |   |                                                          |   | 9,617    |                                       |  |   |         |   |  |   | 1,715    |  
|Net change in unrealized depreciation (appreciation) on investments                                                                                       |  |                                            | (13,960 | ) |                                                          |   | 31,919   |                                       |  |   | 1,295    |   |  |   | (1,412   | )
|(Increase) decrease in cashsecuritization accounts from interest collections                                                                             |  |                                            | 2,229   |   |                                                          |   | (8,214   | )                                     |  |   | (623     | ) |  |   | (151     | )
|(Increase) decrease in interest receivable                                                                                                                |  |                                            | (1,504  | ) |                                                          |   | (167     | )                                     |  |   | 628      |   |  |   | 23       |  
|Increase in accrued payment-in-kind interest                                                                                                              |  |                                            | (11,296 | ) |                                                          |   | (13,001  | )                                     |  |   | (412     | ) |  |   | (10,030  | )
|Increase (decrease) in unearned income                                                                                                                    |  |                                            | (6,317  | ) |                                                          |   | (1,725   | )                                     |  |   | (227     | ) |  |   | (719     | )
|(Increase) decrease in other assets                                                                                                                       |  |                                            | 847     |   |                                                          |   | 2,234    |                                       |  |   | 3,502    |   |  |   | (3,130   | )
|Increase (decrease) in interest payable                                                                                                                   |  |                                            | (342    | ) |                                                          |   | 1,119    |                                       |  |   | (794     | ) |  |   | (611     | )
|Increase (decrease) in other liabilities                                                                                                                  |  |                                            | 2,413   |   |                                                          |   | (256     | )                                     |  |   | (1,187   | ) |  |   | 3,122    |  
|                                                                                                                                                          |  |                                            |         |   |                                                          |   |          |                                       |  |   |          |   |  |   |          |  
|Net cash provided by operating activities                                                                                                                 |  |                                            | 39,527  |   |                                                          |   | 31,124   |                                       |  |   | 1,924    |   |  |   | 12,021   |  
|                                                                                                                                                          |  |                                            |         |   |                                                          |   |          |                                       |  |   |          |   |  |   |          |  
|Investing activities                                                                                                                                      |  |                                            |         |   |                                                          |   |          |                                       |  |   |          |   |  |   |          |  
|Originations, draws and advances on loans                                                                                                                 |  |                                            | (96,602 | ) |                                                          |   | (168,277 | )                                     |  |   | (30,149  | ) |  |   | (151,420 | )
|Principal payments on loans                                                                                                                               |  |                                            | 142,839 |   |                                                          |   | 75,478   |                                       |  |   | 20,191   |   |  |   | 37,746   |  
|Purchase of equity investments                                                                                                                            |  |                                            | (45,106 | ) |                                                          |   | (5,111   | )                                     |  |   |         |   |  |   | (506     | )
|Proceeds from sales of equity investments                                                                                                                 |  |                                            | 5,870   |   |                                                          |   |         |                                       |  |   |          |   |  |   |         |  
|Proceeds from the sale of foreclosed property                                                                                                             |  |                                            |        |   |                                                          |   |         |                                       |  |   |         |   |  |   | 3,000    |  
|Purchase of premises, equipment and software                                                                                                              |  |                                            | (1,159  | ) |                                                          |   | (780     | )                                     |  |   | (3       | ) |  |   | (405     | )
|                                                                                                                                                          |  |                                            |         |   |                                                          |   |          |                                       |  |   |          |   |  |   |          |  
|Net cash provided by (used in) investing activities                                                                                                       |  |                                            | 5,842   |   |                                                          |   | (98,690  | )                                     |  |   | (9,961   | ) |  |   | (111,585 | )
|                                                                                                                                                          |  |                                            |         |   |                                                          |   |          |                                       |  |   |          |   |  |   |          |  
|Financing activities                                                                                                                                      |  |                                            |         |   |                                                          |   |          |                                       |  |   |          |   |  |   |          |  
|Net proceeds (payments) from borrowings                                                                                                                   |  |                                            | (58,950 | ) |                                                          |   | 76,176   |                                       |  |   | (182,515 | ) |  |   | 111,728  |  
|(Increase) decrease in cashsecuritization accounts for paydown of principal on debt                                                                      |  |                                            | 6,751   |   |                                                          |   | (30,217  | )                                     |  |   | (1,104   | ) |  |   | (533     | )
|Payment of financing costs                                                                                                                                |  |                                            | (3      | ) |                                                          |   | (28      | )                                     |  |   | (3,513   | ) |  |   | (282     | )
|Issuance of common stock, net of costs                                                                                                                    |  |                                            | 108,910 |   |                                                          |   | 50,563   |                                       |  |   | 216,792  |   |  |   |         |  
|Dividends paid                                                                                                                                            |  |                                            | (51,573 | ) |                                                          |   | (63,593  | )                                     |  |   |         |   |  |   |         |  
|Repayment (issuance) of loans granted to officers/shareholders                                                                                            |  |                                            | 179     |   |                                                          |   | 790      |                                       |  |   | (5,763   | ) |  |   |         |  
|                                                                                                                                                          |  |                                            |         |   |                                                          |   |          |                                       |  |   |          |   |  |   |          |  
|Net cash provided by financing activities                                                                                                                 |  |                                            | 5,314   |   |                                                          |   | 33,691   |                                       |  |   | 23,897   |   |  |   | 110,913  |  
|                                                                                                                                                          |  |                                            |         |   |                                                          |   |          |                                       |  |   |          |   |  |   |          |  
|Increase (decrease) in cash and cash equivalents                                                                                                          |  |                                            | 50,683  |   |                                                          |   | (33,875  | )                                     |  |   | 15,860   |   |  |   | 11,349   |  
|Cash and cash equivalents at beginning of period                                                                                                          |  |                                            | 9,389   |   |                                                          |   | 43,264   |                                       |  |   | 27,404   |   |  |   | 16,055   |  
|                                                                                                                                                          |  |                                            |         |   |                                                          |   |          |                                       |  |   |          |   |  |   |          |  
|Cash and cash equivalents at end of period                                                                                                                |  | $                                          | 60,072  |   |                                                          | $ | 9,389    |                                       |  | $ | 43,264   |   |  | $ | 27,404   |  
|                                                                                                                                                          |  |                                            |         |   |                                                          |   |          |                                       |  |   |          |   |  |   |          |  
|Supplemental disclosures                                                                                                                                  |  |                                            |         |   |                                                          |   |          |                                       |  |   |          |   |  |   |          |  
|Interest paid                                                                                                                                             |  | $                                          | 9,149   |   |                                                          | $ | 8,055    |                                       |  | $ | 1,786    |   |  | $ | 23,413   |  
|Income taxes paid (received)                                                                                                                              |  |                                            | (876    | ) |                                                          |   | (2,907   | )                                     |  |   | 885      |   |  |   | 6,036    |  



See notes to
consolidated financial statements.



54



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2003

(Dollars in
thousands)



|                                                |  |                      |  |                                                |  |                                                   |   |  |                  |             |  |   |            
|----------------------------------------------- |  | -------------------- |  | ---------------------------------------------- |  | ------------------------------------------------- | - |  | ---------------- | ----------- |  | - | -----------
|Portfolio Company                               |  | Industry             |  | Title of Securities Held by theCompany         |  | Percentageof Class Heldon a FullyDiluted Basis(9) |   |  | December 31,2003
|                                                |  |                      |  | Cost                                           |  | FairValue                                        
|Non-affiliate investments (less than 5% owned): |  |                      |  |                                                |  |                                                   |   |  |                  |             | 
|                                               
|21st Century Newspapers, Inc.                   |  | Newspaper            |  | Subordinated Debt                              |  |                                                   |   |  | $                | 22,266      |  | $ | 22,266     
|                                                |  |                      |  | Common Stock                                   |  | 1.0                                               | % |  |                  | 453         |  |   | 667        
|                                               
|aaiPharma Inc.                                  |  | Drugs                |  | Senior Debt                                    |  |                                                   |   |  |                  | 4,875       |  |   | 4,875      
|                                               
|The Adrenaline Group, Inc.(8)                   |  | Technology           |  | Common Stock                                   |  | 2.7                                               | % |  |                  |            |  |   | 4          
|                                               
|American Consolidated Media Inc.(1)             |  | Newspaper            |  | Senior Debt                                    |  |                                                   |   |  |                  | 19,300      |  |   | 19,300     
|                                               
|Auto Europe, LLC                                |  | Equipment Leasing    |  | Senior Debt                                    |  |                                                   |   |  |                  | 10,000      |  |   | 10,000     
|                                               
|Badoud Enterprises, Inc.(1)                     |  | Newspaper            |  | Senior Debt                                    |  |                                                   |   |  |                  | 7,675       |  |   | 7,675      
|                                               
|Barcom Electronic Inc.                          |  | Security Alarm       |  | Senior Debt                                    |  |                                                   |   |  |                  | 3,393       |  |   | 3,393      
|                                               
|Boucher Communications, Inc.(1)                 |  | Publishing           |  | Senior Debt Stock Appreciation
Rights          |  |                                                   |   |  |                  | 1,400      |  |   | 1,400340   
|                                               
|Bridgecom Holdings, Inc.(1)(14)                 |  | Telecommunications   |  | Senior Debt Warrants to purchaseCommon
Stock   |  | 13.0                                              | % |  |                  | 22,1142,122 |  |   | 22,1144,364
|                                               
|Brookings Newspapers, L.L.C.(1)                 |  | Newspaper            |  | Senior Debt                                    |  |                                                   |   |  |                  | 2,700       |  |   | 2,700      
|                                               
|Cambridge Information Group, Inc.(1)            |  | Information Services |  | Senior Debt                                    |  |                                                   |   |  |                  | 15,450      |  |   | 15,450     
|                                               
|CCG Consulting, LLC                             |  | Business Services    |  | Senior Debt                                    |  |                                                   |   |  |                  | 1,451       |  |   | 1,451      
|                                                |  |                      |  | Warrants to purchasemembership interest in LLC |  | 21.5                                              | % |  |                  |            |  |   |           
|                                               
|Community Media Group, Inc.(1)                  |  | Newspaper            |  | Senior Debt                                    |  |                                                   |   |  |                  | 10,345      |  |   | 10,345     
|                                               
|Connective Corp.(8)                             |  | Leisure Goods        |  | Common Stock                                   |  | 0.2                                               | % |  |                  | 57          |  |   | 25         
|                                               
|Creative Loafing, Inc.(1)                       |  | Newspaper            |  | Senior Debt                                    |  |                                                   |   |  |                  | 14,050      |  |   | 14,050     
|                                               
|Crescent Publishing Company LLC(1)              |  | Newspaper            |  | Senior Debt                                    |  |                                                   |   |  |                  | 14,304      |  |   | 14,304     
|                                               
|Cruz Bay Publishing, Inc.(1)                    |  | Publishing           |  | Senior Debt                                    |  |                                                   |   |  |                  | 6,200       |  |   | 6,200      
|                                                |  |                      |  | Subordinated Debt                              |  |                                                   |   |  |                  | 4,035       |  |   | 4,035      
|                                               
|Dakota Imaging, Inc.                            |  | Technology           |  | Senior Debt                                    |  |                                                   |   |  |                  | 7,062       |  |   | 7,062      
|                                                |  |                      |  | Warrants to purchaseCommon Stock               |  | 9.4                                               | % |  |                  | 1,586       |  |   | 1,671      
|                                               
|dick clark productions, inc.                    |  | Broadcasting         |  | Subordinated Debt                              |  |                                                   |   |  |                  | 16,479      |  |   | 16,479     
|                                                |  |                      |  | Warrants to purchaseCommon Stock               |  | 5.6                                               | % |  |                  | 858         |  |   | 639        
|                                                |  |                      |  | Common Stock                                   |  | 0.4                                               | % |  |                  | 150         |  |   | 49         
|                                               
|Dowden Health Media, Inc.                       |  | Publishing           |  | Senior Debt                                    |  |                                                   |   |  |                  | 700         |  |   | 700        
|                                               
|The e-Media Club, LLC(8)                        |  | Investment Fund      |  | LLC Interest                                   |  | 0.8                                               | % |  |                  | 88          |  |   | 27         
|                                               







See notes to consolidated financial statements.



55



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments(Continued)

December 31, 2003

(Dollars in thousands)



|                                            |  |                     |  |                                                                                |  |                                                      |    |  |                   |                        |  |   |                       
|------------------------------------------- |  | ------------------- |  | ------------------------------------------------------------------------------ |  | ---------------------------------------------------- | -- |  | ----------------- | ---------------------- |  | - | ----------------------
|Portfolio Company                           |  | Industry            |  | Title of Securities Held by the Company                                        |  | Percentage of Class Held on a Fully Diluted Basis(9) |    |  | December 31, 2003
|                                            |  |                     |  | Cost                                                                           |  | FairValue                                           
|FTI Technologies Holdings, Inc.(1)          |  | Technology          |  | Senior Debt Warrants to purchaseCommon
Stock                                   |  | 4.2                                                  | %  |  | $                 | 22,450                |  | $ | 22,450               
|                                           
|Graycom, LLC(8)                             |  | Telecommunications  |  | Warrants to purchasemembership interest in LLC                                 |  | 27.8                                                 | %  |  |                   | 71                     |  |   | 74                    
|                                           
|Hometown Telephone, LLC(8)                  |  | Telecommunications  |  | Warrants to purchasemembership interest in LLC                                 |  | 27.8                                                 | %  |  |                   |                       |  |   |                      
|                                           
|I-55 Internet Services, Inc.                |  | Telecommunications  |  | Senior Debt                                                                    |  |                                                      |    |  |                   | 2,301                  |  |   | 2,301                 
|                                            |  |                     |  | Warrants to purchaseCommon Stock                                               |  | 7.5                                                  | %  |  |                   | 103                    |  |   | 156                   
|                                           
|IDS Telcom LLC                              |  | Telecommunications  |  | Senior Debt                                                                    |  |                                                      |    |  |                   | 18,823                 |  |   | 18,823                
|                                            |  |                     |  | Warrants to purchasemembership interest in LLC                                 |  | 27.8                                                 | %  |  |                   | 2,693                  |  |   | 3,101                 
|                                           
|Images.com, Inc.                            |  | InformationServices |  | Senior Debt                                                                    |  |                                                      |    |  |                   | 3,188                  |  |   | 1,722                 
|                                           
|Information Today, Inc.(1)                  |  | InformationServices |  | Senior Debt                                                                    |  |                                                      |    |  |                   | 9,192                  |  |   | 9,192                 
|                                           
|Jeffrey A. Stern(8)                         |  | Other               |  | Senior Debt                                                                    |  |                                                      |    |  |                   | 50                     |  |   | 50                    
|                                           
|The Joseph F. Biddle Publishing Company(1)  |  | Newspaper           |  | Senior Debt                                                                    |  |                                                      |    |  |                   | 10,305                 |  |   | 10,305                
|                                           
|Joseph C. Millstone                         |  | Telecommunications  |  | Senior Debt                                                                    |  |                                                      |    |  |                   | 500                    |  |   | 500                   
|                                           
|The Korea Times Los Angeles, Inc.           |  | Newspaper           |  | Senior Debt                                                                    |  |                                                      |    |  |                   | 10,602                 |  |   | 10,602                
|                                           
|Manhattan Telecommunications Corporation(1) |  | Telecommunications  |  | Senior Debt Subordinated
Debt Preferred Stock Warrants to purchaseCommon
Stock |  | 100.028.0                                            | %% |  |                   | 13,92512,3281,8002,805 |  |   | 13,92512,3281,8544,021
|                                           
|Marketron International, Inc.(6)(8)         |  | Business Services   |  | Warrants to purchaseCommon Stock                                               |  | 1.5                                                  | %  |  |                   |                       |  |   |                      
|                                           
|McGinnis-Johnson Consulting, LLC(1)         |  | Newspaper           |  | Subordinated Debt                                                              |  |                                                      |    |  |                   | 10,531                 |  |   | 10,531                
|                                           
|The Meow Mix Company                        |  | Food Products       |  | Senior Debt                                                                    |  |                                                      |    |  |                   | 4,969                  |  |   | 4,969                 
|                                           
|Midwest Towers Partners, LLC(1)             |  | Telecommunications  |  | Senior Debt                                                                    |  |                                                      |    |  |                   | 17,009                 |  |   | 17,009                
|                                           
|Miles Media Group, Inc.(1)                  |  | Publishing          |  | Senior Debt                                                                    |  |                                                      |    |  |                   | 7,906                  |  |   | 7,906                 
|                                            |  |                     |  | Warrants to purchaseCommon Stock                                               |  | 12.4                                                 | %  |  |                   | 21                     |  |   | 21                    
|                                           
|Minnesota Publishers, Inc.(1)               |  | Newspaper           |  | Senior Debt                                                                    |  |                                                      |    |  |                   | 14,250                 |  |   | 14,250                
|                                           
|New Century Companies, Inc.(8)              |  | IndustrialEquipment |  | Common Stock Warrants to
purchaseCommon Stock                                  |  | 2.30.4                                               | %% |  |                   | 157                   |  |   | 144                  
|                                           



See notes to
consolidated financial statements.



56



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments(Continued)

December 31, 2003

(Dollars in thousands)



|                                   |  |                     |  |                                                                              |  |                                                      |   |  |                   |               |  |   |              
|---------------------------------- |  | ------------------- |  | ---------------------------------------------------------------------------- |  | ---------------------------------------------------- | - |  | ----------------- | ------------- |  | - | -------------
|Portfolio Company                  |  | Industry            |  | Title of Securities Held by the Company                                      |  | Percentage of Class Held on a Fully Diluted Basis(9) |   |  | December 31, 2003
|                                   |  |                     |  | Cost                                                                         |  | FairValue                                           
|New Vision Broadcasting, LLC(1)    |  | Broadcasting        |  | Senior Debt                                                                  |  |                                                      |   |  | $                 | 13,367        |  | $ | 13,367       
|                                  
|New Wave Communications, LLC(1)    |  | Cable               |  | Senior Debt                                                                  |  |                                                      |   |  |                   | 8,804         |  |   | 8,804        
|                                  
|nii communications, inc.(1)        |  | Telecommunications  |  | Senior Debt                                                                  |  |                                                      |   |  |                   | 7,353         |  |   | 7,353        
|                                   |  |                     |  | Common Stock                                                                 |  | 3.0                                                  | % |  |                   | 400           |  |   | 137          
|                                   |  |                     |  | Warrants to purchaseCommon Stock                                             |  | 38.5                                                 | % |  |                   | 1,218         |  |   | 1,501        
|                                  
|NOW Communications, Inc.(1)        |  | Telecommunications  |  | Senior Debt Warrants to purchaseCommon
Stock                                 |  | 10.0                                                 | % |  |                   | 4,783        |  |   | 4,125       
|                                  
|Pacific-Sierra Publishing, Inc.    |  | Newspaper           |  | Senior Debt                                                                  |  |                                                      |   |  |                   | 25,734        |  |   | 25,734       
|                                  
|Powercom Corporation(1)            |  | Telecommunications  |  | Senior Debt                                                                  |  |                                                      |   |  |                   | 2,160         |  |   | 2,160        
|                                   |  |                     |  | Warrants to purchase Class ACommon Stock                                     |  | 18.6                                                 | % |  |                   | 263           |  |   | 211          
|                                  
|R.R. Bowker LLC(1)                 |  | InformationServices |  | Senior Debt Warrants to
purchasemembership interest in LLC                   |  | 14.0                                                 | % |  |                   | 9,500882      |  |   | 9,5001,434   
|                                  
|Robert N. Snyder                   |  | InformationServices |  | Senior Debt                                                                  |  |                                                      |   |  |                   | 1,300         |  |   | 1,300        
|                                  
|Stonebridge Press, Inc.(1)         |  | Newspaper           |  | Senior Debt                                                                  |  |                                                      |   |  |                   | 5,466         |  |   | 5,466        
|                                  
|SXC Health Solutions, Inc.(1)(16)  |  | Technology          |  | Senior Debt                                                                  |  |                                                      |   |  |                   | 7,600         |  |   | 7,600        
|                                  
|Talk America Holdings, Inc.(8)     |  | Telecommunications  |  | Common Stock                                                                 |  | 0.8                                                  | % |  |                   | 499           |  |   | 2,484        
|                                   |  |                     |  | Warrants to purchaseCommon Stock                                             |  | 0.8                                                  | % |  |                   | 25            |  |   | 474          
|                                  
|TGI Group, LLC                     |  | InformationServices |  | Senior Debt Warrants to
purchasemembership interest in LLC                   |  | 5.0                                                  | % |  |                   | 6,225126      |  |   | 6,225       
|                                  
|Tower Resource Management, Inc.    |  | Telecommunications  |  | Senior Debt Warrants to purchaseCommon
Stock                                 |  | 8.9                                                  | % |  |                   | 1,503        |  |   | 1,503       
|                                  
|VS&A-PBI Holding LLC(8)            |  | Publishing          |  | LLC Interest                                                                 |  | 0.8                                                  | % |  |                   | 500           |  |   |             
|                                  
|Wicks Business Information, LLC    |  | Publishing          |  | Unsecured Note                                                               |  |                                                      |   |  |                   | 200           |  |   | 200          
|                                  
|Wiesner Publishing Company, LLC(1) |  | Publishing          |  | Senior Debt Subordinated
Debt Warrants to purchasemembership interest in LLC |  | 15.0                                                 | % |  |                   | 5,4615,623406 |  |   | 5,4615,623398
|                                  



See notes to
consolidated financial statements.



57



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments(Continued)

December 31, 2003

(Dollars in thousands)



|                                              |  |                     |  |                                                                     |  |                                                      |    |         |                   |                   |         |   |                
|--------------------------------------------- |  | ------------------- |  | ------------------------------------------------------------------- |  | ---------------------------------------------------- | -- | ------- | ----------------- | ----------------- | ------- | - | ---------------
|Portfolio Company                             |  | Industry            |  | Title of Securities Held by the Company                             |  | Percentage of Class Held on a Fully Diluted Basis(9) |    |         | December 31, 2003
|                                              |  |                     |  | Cost                                                                |  | FairValue                                           
|WirelessLines II, Inc.                        |  | Telecommunications  |  | Senior Debt                                                         |  |                                                      |    |         | $                 | 437               |         | $ | 437            
|                                             
|Witter Publishing Co., Inc.                   |  | Publishing          |  | Senior Debt                                                         |  |                                                      |    |         |                   | 2,340             |         |   | 2,340          
|                                              |  |                     |  | Warrants to purchase Common Stock                                   |  | 10.5                                                 | %  |         |                   | 87                |         |   | 78             
|                                             
|Wyoming Newspapers, Inc.(1)                   |  | Newspaper           |  | Senior Debt                                                         |  |                                                      |    |         |                   | 10,378            |         |   | 10,378         
|                                             
|Total Non-affiliate investments               |  |                     |  |                                                                     |  |                                                      |    | 477,732 |                   |                   | 482,112
|                                             
|Affiliate investments(12):                    |  |                     |  |                                                                     |  |                                                      |    |         |                   |                   |         |   |                
|                                             
|All Island Media, Inc.                        |  | Newspaper           |  | Senior Debt                                                         |  |                                                      |    |         |                   | 8,000             |         |   | 8,000          
|                                              |  |                     |  | Common Stock                                                        |  | 9.1                                                  | %  |         |                   | 500               |         |   | 500            
|                                             
|Country Media, Inc.                           |  | Newspaper           |  | Senior Debt                                                         |  |                                                      |    |         |                   | 7,176             |         |   | 7,176          
|                                              |  |                     |  | Common Stock                                                        |  | 6.3                                                  | %  |         |                   | 100               |         |   | 134            
|                                             
|Creatas, L.L.C.(1)                            |  | InformationServices |  | Senior Debt Investor Class LLC Interest Guaranty ($501)             |  | 100.0                                                | %  |         |                   | 17,7351,273       |         |   | 17,7352,951    
|                                             
|Executive Enterprise Institute, LLC(8)        |  | Business Services   |  | LLC Interest                                                        |  | 10.0                                                 | %  |         |                   | 301               |         |   |               
|                                             
|Netplexus Corporation(1)(8)                   |  | Technology          |  | Senior Debt                                                         |  |                                                      |    |         |                   | 1,817             |         |   | 170            
|                                              |  |                     |  | Preferred Stock                                                     |  | 51.0                                                 | %  |         |                   | 766               |         |   |               
|                                              |  |                     |  | Warrants to purchase Class A Common Stock                           |  | 4.8                                                  | %  |         |                   |                  |         |   |               
|                                             
|Sunshine Media Delaware, LLC(1)               |  | Publishing          |  | Senior Debt Class A LLC Interest                                    |  | 12.8                                                 | %  |         |                   | 12,839564         |         |   | 12,516        
|                                              |  |                     |  | Warrants to purchase Class                                          |  |                                                      |    |         |                   |                   |         |   |                
|                                              |  |                     |  | B LLC interest                                                      |  | 100.0                                                | %  |         |                   |                  |         |   |               
|                                             
|ViewTrust Technology(8)                       |  | Technology          |  | Common Stock                                                        |  | 7.5                                                  | %  |         |                   | 1                 |         |   | 1              
|                                             
|Total Affiliate investments                   |  |                     |  |                                                                     |  |                                                      |    |         |                   | 51,072            |         |   | 49,183         
|                                             
|Control investments: Non-majority-owned(11):  |  |                     |  |                                                                     |  |                                                      |    |         |                   |                   |        
|                                             
|ETC Group, LLC(13)                            |  | Publishing          |  | Senior Debt                                                         |  |                                                      |    |         |                   | 1,200             |         |   | 1,200          
|                                              |  |                     |  | Series A LLC Interest                                               |  | 100.0                                                | %  |         |                   | 650               |         |   | 650            
|                                              |  |                     |  | Series C LLC Interest                                               |  | 100.0                                                | %  |         |                   | 100               |         |   | 100            
|                                             
|Fawcette Technical Publications Holding(1)    |  | Publishing          |  | Senior Debt Subordinated Debt Series A Preferred Stock Common Stock |  | 100.036.0                                            | %% |         |                   | 12,1603,9062,569 |         |   | 12,1603,906718
|                                             
|National Systems Integration, Inc.(3)(4)(7)   |  | Security Alarm      |  | Senior Debt Class B-2 Preferred Stock Common Stock                  |  | 100.046.0                                            | %% |         |                   | 5004,409         |         |   | 5003,833      
|                                             
|Platinum Wireless, Inc.                       |  | Telecommunications  |  | Senior Debt                                                         |  |                                                      |    |         |                   | 875               |         |   | 875            
|                                              |  |                     |  | Common Stock                                                        |  | 37.0                                                 | %  |         |                   | 4,640             |         |   | 4,519          
|                                              |  |                     |  | Options to purchase Common Stock                                    |  | 1.5                                                  | %  |         |                   | 272               |         |   | 98             
|                                             
|Total Control investments: Non-majority-owned |  |                     |  |                                                                     |  | 31,281                                               |    |         | 28,559           
|                                             



See notes to
consolidated financial statements.



58



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments(Continued)

December 31, 2003

(Dollars in thousands)



|                                          |  |                    |  |                                                                                                           |  |                                                      |           |         |                   |                       |   |         |   |                    |  
|----------------------------------------- |  | ------------------ |  | --------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------- | --------- | ------- | ----------------- | --------------------- | - | ------- | - | ------------------ | -
|Portfolio Company                         |  | Industry           |  | Title of Securities Held by the Company                                                                   |  | Percentage of Class Held on a Fully Diluted Basis(9) |           |         | December 31, 2003 |                      
|                                          |  |                    |  | Cost                                                                                                      |  |                                                      | FairValue |        
|Control investments: Majority-owned(10):  |  |                    |  |                                                                                                           |  |                                                      |           |         |                   |                       |  
|                                          | 
|AMI Telecommunications Corporation(1)(8)  |  | Telecommunications |  | Senior Debt Series A-1 Preferred
Stock Series A-2 Preferred Stock Series A-3 Preferred
Stock Common Stock |  | 82.3100.037.55.1                                     | %%%%      |         | $                 | 3,1007001,9951,100200 |   |         | $ | 237            |  
|                                          | 
|Biznessonline.com, Inc.(1)                |  | Telecommunications |  | Senior Debt                                                                                               |  |                                                      |           |         |                   | 18,556                |   |         |   | 18,556             |  
|                                          |  |                    |  | Preferred Stock                                                                                           |  | 100.0                                                | %         |         |                   | 4,864                 |   |         |   |                   |  
|                                          |  |                    |  | Common Stock                                                                                              |  | 73.2                                                 | %         |         |                   | 540                   |   |         |   |                   |  
|                                          | 
|Copperstate Technologies, Inc.(3)         |  | Security Alarm     |  | Senior Debt Class A Common Stock Class B Common Stock Warrants to purchase Class                          |  | 93.00.1                                              | %%        |         |                   | 9102,000             |   |         |   | 9102,1601          |  
|                                          |  |                    |  | B Common Stock                                                                                            |  | 99.9                                                 | %         |         |                   |                      |   |         |   | 1,343              |  
|                                          | 
|Corporate Legal Times L.L.C.              |  | Publishing         |  | Senior Debt                                                                                               |  |                                                      |           |         |                   | 4,624                 |   |         |   | 4,302              |  
|                                          |  |                    |  | Subordinated Debt                                                                                         |  |                                                      |           |         |                   | 1,340                 |   |         |   |                   |  
|                                          |  |                    |  | LLC Interest                                                                                              |  | 90.6                                                 | %         |         |                   | 313                   |   |         |   |                   |  
|                                          | 
|Crystal Media Network, LLC(5)             |  | Broadcasting       |  | LLC Interest                                                                                              |  | 100.0                                                | %         |         |                   | 6,132                 |   |         |   | 5,149              |  
|                                          | 
|Interactive Business Solutions, Inc.(4)   |  | Security Alarm     |  | Senior Debt Common Stock                                                                                  |  | 100.0                                                | %         |         |                   | 752,750               |   |         |   | 751,351            |  
|                                          | 
|Superior Publishing Corporation.(1)(15)   |  | Newspaper          |  | Senior Debt Subordinated Debt Preferred Stock Common Stock                                                |  | 100.0100.0                                           | %%        |         |                   | 20,76028,0007,9991    |   |         |   | 20,76028,0007,9991 |  
|                                          | 
|Telecomm North Corp.(14)                  |  | Telecommunications |  | Preferred Stock                                                                                           |  | 100.0                                                | %         |         |                   | 31,856                |   |         |   | 31,856             |  
|                                          |  |                    |  | Common Stock                                                                                              |  | 100.0                                                | %         |         |                   |                      |   |         |   |                   |  
|                                          | 
|Telecomm South, LLC(2)(8)                 |  | Telecommunications |  | Senior Debt                                                                                               |  |                                                      |           |         |                   | 3,292                 |   |         |   | 2,210              |  
|                                          |  |                    |  | LLC Interest                                                                                              |  | 100.0                                                | %         |         |                   | 10                    |   |         |   |                   |  
|                                          | 
|UMAC, Inc.(8)                             |  | Publishing         |  | Common Stock                                                                                              |  | 100.0                                                | %         |         |                   | 10,375                |   |         |   | 344                |  
|                                          | 
|Working Mother Media, Inc.(8)             |  | Publishing         |  | Senior Debt Class A Preferred Stock Class B Preferred Stock Class C Preferred Stock Common Stock          |  | 98.8100.0100.051.0                                   | %%%%      |         |                   | 8,0268,497111         |   |         |   | 8,0265,808      |  
|                                          | 
|Total Control investments: Majority-owned |  |                    |  |                                                                                                           |  | 168,018                                              |           |         |                   | 139,088               |  
|                                          | 
|                                          |  |                    |  |                                                                                                           |  |                                                      |           |         |                   |                       |   |         |   |                    |  
|Total Investments                         |  |                    |  |                                                                                                           |  |                                                      |           |         |                   | 728,103               |   |         |   | 698,942            |  
|                                          |  |                    |  |                                                                                                           | 
|Unearned income                           |  |                    |  |                                                                                                           |  |                                                      |           |         |                   | (16,416               | ) |         |   | (16,416            | )
|                                          |  |                    |  |                                                                                                           |  |                                                      |           |         |                   |                       |   |         |   |                    |  
|Total Investments net of unearned income  |  |                    |  |                                                                                                           |  |                                                      | $         | 711,687 |                   |                       | $ | 682,526 |  
|                                          |  |                    |  |                                                                                                           |  |                                                      |           |         |                   |                       |   |         |   |                    |  



See notes to
consolidated financial statements.



59



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2002

(Dollars in
thousands)



|                                                |  |                      |  |                                               |  |                                                   |   |  |                   |        |  |   |       
|----------------------------------------------- |  | -------------------- |  | --------------------------------------------- |  | ------------------------------------------------- | - |  | ----------------- | ------ |  | - | ------
|Portfolio Company                               |  | Industry             |  | Title of SecuritiesHeld by the Company        |  | Percentage ofClass Held ona Fully DilutedBasis(9) |   |  | December 31, 2002
|                                                |  |                      |  | Cost                                          |  | FairValue                                        
|Non-affiliate investments (less than 5% owned): |  |                      |  |                                               |  |                                                   |   |  |                   |        | 
|                                               
|21st Century Newspapers, Inc.                   |  | Newspaper            |  | Subordinated Debt                             |  |                                                   |   |  | $                 | 20,962 |  | $ | 20,962
|                                                |  |                      |  | Common Stock                                  |  | 1.0                                               | % |  |                   | 452    |  |   | 659   
|                                               
|The Adrenaline Group, Inc.(8)                   |  | Technology           |  | Common Stock                                  |  | 2.7                                               | % |  |                   |       |  |   | 12    
|                                               
|Amalfi Coast, L.L.C.(1)                         |  | Broadcasting         |  | Senior Debt                                   |  |                                                   |   |  |                   | 13,000 |  |   | 13,000
|                                               
|American Consolidated Media Inc.(1)             |  | Newspaper            |  | Senior Debt                                   |  |                                                   |   |  |                   | 20,000 |  |   | 20,000
|                                               
|Badoud Enterprises, Inc.(1)                     |  | Newspaper            |  | Senior Debt                                   |  |                                                   |   |  |                   | 9,569  |  |   | 9,569 
|                                               
|Barcom Electronic Inc.                          |  | Security Alarm       |  | Senior Debt                                   |  |                                                   |   |  |                   | 3,727  |  |   | 3,727 
|                                               
|Boucher Communications, Inc.(1)                 |  | Publishing           |  | Senior Debt                                   |  |                                                   |   |  |                   | 2,150  |  |   | 2,150 
|                                                |  |                      |  | Stock AppreciationRights                      |  |                                                   |   |  |                   |       |  |   | 317   
|                                               
|Bridgecom Holdings, Inc.(1)                     |  | Telecommunications   |  | Senior Debt                                   |  |                                                   |   |  |                   | 21,656 |  |   | 21,656
|                                                |  |                      |  | Warrants to purchaseCommon Stock              |  | 13.2                                              | % |  |                   |       |  |   | 228   
|                                               
|Brookings Newspapers, L.L.C.(1)                 |  | Newspaper            |  | Senior Debt                                   |  |                                                   |   |  |                   | 3,100  |  |   | 3,100 
|                                               
|BuyMedia Inc.(6)(8)                             |  | Business Services    |  | Warrants to purchaseCommon Stock              |  | 1.5                                               | % |  |                   |       |  |   |      
|                                               
|Cambridge Information Group, Inc.(1)            |  | Information Services |  | Senior Debt                                   |  |                                                   |   |  |                   | 17,971 |  |   | 17,971
|                                               
|Canon Communications LLC and                    |  | Publishing           |  | Subordinated Debt                             |  |                                                   |   |  |                   | 15,551 |  |   | 15,551
|Chemical Week Publishing L.LC.(1)               |  |                      |  |                                               |  |                                                   |   |  |                   |        |  |   |       
|                                               
|CCG Consulting, LLC                             |  | Business Services    |  | Senior Debt                                   |  |                                                   |   |  |                   | 1,416  |  |   | 1,416 
|                                                |  |                      |  | Warrants to purchasemembership interestin LLC |  | 13.8                                              | % |  |                   |       |  |   |      
|                                                |  |                      |  | Option to purchaseLLC interest                |  | 5.5                                               | % |  |                   |       |  |   |      
|                                               
|Community Media Group, Inc.(1)                  |  | Newspaper            |  | Senior Debt                                   |  |                                                   |   |  |                   | 11,653 |  |   | 11,653
|                                               
|Connective Corp.(8)                             |  | Leisure Goods        |  | Common Stock                                  |  | 0.2                                               | % |  |                   | 57     |  |   | 5     
|                                               
|Costa De Oro Television, Inc.                   |  | Broadcasting         |  | Senior Debt                                   |  |                                                   |   |  |                   | 6,500  |  |   | 6,500 
|                                               
|Creative Loafing, Inc.(1)                       |  | Newspaper            |  | Senior Debt                                   |  |                                                   |   |  |                   | 15,150 |  |   | 15,150
|                                               
|Crescent Publishing Company LLC(1)              |  | Newspaper            |  | Senior Debt                                   |  |                                                   |   |  |                   | 14,223 |  |   | 14,223
|                                               
|Dakota Imaging, Inc.                            |  | Technology           |  | Senior Debt                                   |  |                                                   |   |  |                   | 6,639  |  |   | 6,639 
|                                                |  |                      |  | Warrants to purchaseCommon Stock              |  | 9.4                                               | % |  |                   | 188    |  |   | 78    
|                                               
|dick clark productions, inc.                    |  | Broadcasting         |  | Subordinated Debt                             |  |                                                   |   |  |                   | 15,507 |  |   | 15,507
|                                                |  |                      |  | Warrants to purchaseCommon Stock              |  | 5.8                                               | % |  |                   | 858    |  |   | 823   
|                                                |  |                      |  | Common Stock                                  |  | 0.3                                               | % |  |                   | 113    |  |   | 76    
|                                               



See notes to
consolidated financial statements.



60



---

##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments(Continued)

December 31, 2002

(Dollars in thousands)



|                                            |  |                      |  |                                               |  |                                                   |   |  |                  |         |  |   |        
|------------------------------------------- |  | -------------------- |  | --------------------------------------------- |  | ------------------------------------------------- | - |  | ---------------- | ------- |  | - | -------
|Portfolio Company                           |  | Industry             |  | Title of SecuritiesHeld by the Company        |  | Percentage ofClass Held ona Fully DilutedBasis(9) |   |  | December 31,2002
|                                            |  |                      |  | Cost                                          |  | FairValue                                        
|Dowden Health Media, Inc.                   |  | Publishing           |  | Senior Debt                                   |  |                                                   |   |  | $                | 1,100   |  | $ | 1,100  
|                                           
|The e-Media Club, LLC(8)                    |  | Investment Fund      |  | LLC Interest                                  |  | 0.8                                               | % |  |                  | 90      |  |   | 22     
|                                           
|Eli Research, Inc.(1)                       |  | Information Services |  | Senior DebtWarrants to purchase               |  |                                                   |   |  |                  | 10,013  |  |   | 10,013 
|                                            |  |                      |  | Common Stock                                  |  | 3.0                                               | % |  |                  |        |  |   |       
|                                           
|Fawcette Technical Publications Holding(1)  |  | Publishing           |  | Senior Debt                                   |  |                                                   |   |  |                  | 18,700  |  |   | 18,700 
|                                            |  |                      |  | Warrants to purchaseCommon Stock              |  | 38.9                                              | % |  |                  | 519     |  |   | 109    
|                                           
|FTI Technologies Holdings, Inc.(1)          |  | Technology           |  | Senior Debt                                   |  |                                                   |   |  |                  | 21,150  |  |   | 21,150 
|                                            |  |                      |  | Warrants to purchaseCommon Stock              |  | 4.2                                               | % |  |                  |        |  |   |       
|                                           
|I-55 Internet Services, Inc.                |  | Telecommunications   |  | Senior Debt                                   |  |                                                   |   |  |                  | 3,023   |  |   | 3,023  
|                                            |  |                      |  | Warrants to purchaseCommon Stock              |  | 7.5                                               | % |  |                  |        |  |   |       
|                                           
|IDS Telcom LLC                              |  | Telecommunications   |  | Senior Debt                                   |  |                                                   |   |  |                  | 18,247  |  |   | 18,247 
|                                            |  |                      |  | Warrants to purchasemembership interestin LLC |  | 11.0                                              | % |  |                  | 375     |  |   | 633    
|                                           
|Images.com, Inc.                            |  | Information Services |  | Senior Debt                                   |  |                                                   |   |  |                  | 3,000   |  |   | 2,473  
|                                           
|Information Today, Inc.(1)                  |  | Information Services |  | Senior Debt                                   |  |                                                   |   |  |                  | 9,600   |  |   | 9,600  
|                                           
|Jeffrey A. Stern(8)                         |  | Other                |  | Senior Debt                                   |  |                                                   |   |  |                  | 73      |  |   | 73     
|                                           
|JMP Media, L.L.C.(1)                        |  | Broadcasting         |  | Senior Debt                                   |  |                                                   |   |  |                  | 13,566  |  |   | 13,566 
|                                           
|The Joseph F. Biddle Publishing Company(1)  |  | Newspaper            |  | Senior Debt                                   |  |                                                   |   |  |                  | 11,905  |  |   | 11,905 
|                                           
|Joseph C. Millstone                         |  | Telecommunications   |  | Senior Debt                                   |  |                                                   |   |  |                  | 500     |  |   | 500    
|                                           
|The Korea Times Los Angeles, Inc.           |  | Newspaper            |  | Senior Debt                                   |  |                                                   |   |  |                  | 11,327  |  |   | 11,327 
|                                           
|Manhattan Telecommunications Corporation(1) |  | Telecommunications   |  | Senior DebtSubordinated Debt                  |  |                                                   |   |  |                  | 24,890 |  |   | 24,890
|                                            |  |                      |  | Warrants to purchaseCommon Stock              |  | 17.5                                              | % |  |                  | 754     |  |   | 1,155  
|                                           
|McGinnis-Johnson Consulting, LLC(1)         |  | Newspaper            |  | Subordinated Debt                             |  |                                                   |   |  |                  | 9,105   |  |   | 9,105  
|                                           
|Midwest Towers Partners, LLC(1)             |  | Telecommunications   |  | Senior Debt                                   |  |                                                   |   |  |                  | 16,962  |  |   | 16,962 
|                                           
|Miles Media Group, Inc.(1)                  |  | Publishing           |  | Senior Debt                                   |  |                                                   |   |  |                  | 7,821   |  |   | 7,821  
|                                            |  |                      |  | Warrants to purchaseCommon Stock              |  | 12.4                                              | % |  |                  | 20      |  |   | 169    
|                                           
|Minnesota Publishers, Inc.(1)               |  | Newspaper            |  | Senior Debt                                   |  |                                                   |   |  |                  | 14,250  |  |   | 14,250 
|                                           
|Murphy McGinnis Media, Inc.(1)              |  | Newspaper            |  | Senior Debt                                   |  |                                                   |   |  |                  | 20,817  |  |   | 20,817 
|                                           



See notes to
consolidated financial statements.



61



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments(Continued)

December 31, 2002

(Dollars in thousands)



|                                            |  |                      |  |                                               |  |                                                   |   |  |                   |        |  |   |       
|------------------------------------------- |  | -------------------- |  | --------------------------------------------- |  | ------------------------------------------------- | - |  | ----------------- | ------ |  | - | ------
|Portfolio Company                           |  | Industry             |  | Title of SecuritiesHeld by the Company        |  | Percentage ofClass Held ona Fully DilutedBasis(9) |   |  | December 31, 2002
|                                            |  |                      |  | Cost                                          |  | FairValue                                        
|National Systems Integration, Inc.(3)(4)(7) |  | Security Alarm       |  | Debtor in PossessionFinancing                 |  |                                                   |   |  | $                 | 1,067  |  | $ | 1,067 
|                                            |  |                      |  | Senior Debt                                   |  |                                                   |   |  |                   | 8,631  |  |   | 3,355 
|                                            |  |                      |  | Warrants to purchaseCommon Stock              |  | 5.2                                               | % |  |                   |       |  |   |      
|                                           
|NBG Radio Network, Inc.(1)(5)               |  | Broadcasting         |  | Senior Debt                                   |  |                                                   |   |  |                   | 6,706  |  |   | 6,131 
|                                            |  |                      |  | Warrants to purchaseCommon Stock              |  | 25.0                                              | % |  |                   |       |  |   |      
|                                           
|New Century Companies, Inc.(8)              |  | Industrial Equipment |  | Common Stock                                  |  | 2.5                                               | % |  |                   | 157    |  |   | 175   
|                                            |  |                      |  | Preferred Stock                               |  | 26.0                                              | % |  |                   |        |  |   | 25    
|                                            |  |                      |  | Warrants to purchaseCommon Stock              |  | 0.5                                               | % |  |                   |       |  |   | 8     
|                                           
|New Northwest Broadcasters LLC(1)           |  | Broadcasting         |  | Senior Debt                                   |  |                                                   |   |  |                   | 11,139 |  |   | 11,139
|                                           
|New Vision Broadcasting, LLC(1)             |  | Broadcasting         |  | Senior Debt                                   |  |                                                   |   |  |                   | 27,500 |  |   | 27,500
|                                           
|nii communications, inc.(1)                 |  | Telecommunications   |  | Senior Debt                                   |  |                                                   |   |  |                   | 7,007  |  |   | 7,007 
|                                            |  |                      |  | Common Stock                                  |  | 3.1                                               | % |  |                   | 400    |  |   | 111   
|                                            |  |                      |  | Warrants to purchaseCommon Stock              |  | 35.3                                              | % |  |                   | 1,095  |  |   | 1,068 
|                                           
|NOW Communications, Inc.(1)                 |  | Telecommunications   |  | Senior Debt                                   |  |                                                   |   |  |                   | 4,446  |  |   | 4,446 
|                                            |  |                      |  | Warrants to purchaseCommon Stock              |  | 10.0                                              | % |  |                   |       |  |   |      
|                                           
|Pacific-Sierra Publishing, Inc.             |  | Newspaper            |  | Senior Debt                                   |  |                                                   |   |  |                   | 24,003 |  |   | 24,003
|                                           
|Pfingsten Publishing, LLC(1)                |  | Publishing           |  | Senior Debt                                   |  |                                                   |   |  |                   | 9,400  |  |   | 9,400 
|                                           
|Powercom Corporation(1)                     |  | Telecommunications   |  | Senior Debt                                   |  |                                                   |   |  |                   | 3,166  |  |   | 3,166 
|                                            |  |                      |  | Warrants to purchaseClass A Common Stock      |  | 9.6                                               | % |  |                   | 139    |  |   | 59    
|                                           
|R.R. Bowker LLC(1)                          |  | Information Services |  | Senior Debt                                   |  |                                                   |   |  |                   | 10,625 |  |   | 10,625
|                                            |  |                      |  | Warrants to purchasemembership interest inLLC |  | 14.0                                              | % |  |                   | 882    |  |   | 1,138 
|                                           
|Rising Tide Holdings LLC(1)(8)              |  | Publishing           |  | Senior Debt                                   |  |                                                   |   |  |                   | 3,085  |  |   | 350   
|                                            |  |                      |  | Warrants to purchasemembership interest inLLC |  | 6.5                                               | % |  |                   |       |  |   |      
|                                           
|Robert N. Snyder                            |  | Information Services |  | Senior Debt                                   |  |                                                   |   |  |                   | 1,300  |  |   | 1,300 
|                                           
|Sabot Publishing, Inc.(1)                   |  | Publishing           |  | Senior Debt                                   |  |                                                   |   |  |                   | 10,169 |  |   | 10,169
|                                            |  |                      |  | Warrants to purchaseCommon Stock              |  | 1.8                                               | % |  |                   |       |  |   | 34    
|                                           
|Stonebridge Press, Inc.(1)                  |  | Newspaper            |  | Senior Debt                                   |  |                                                   |   |  |                   | 6,010  |  |   | 6,010 
|                                           
|Systems Xcellence USA, Inc.(1)(16)          |  | Technology           |  | Senior Debt                                   |  |                                                   |   |  |                   | 7,600  |  |   | 7,600 
|                                            |  |                      |  | Warrants to purchaseCommon Stock              |  | 3.1                                               | % |  |                   |       |  |   |      
|                                           



See notes to
consolidated financial statements



62



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments(Continued)

December 31, 2002

(Dollars in thousands)



|                                       |  |                      |  |                                                                   |  |                                                      |   |  |                   |            |  |   |           
|-------------------------------------- |  | -------------------- |  | ----------------------------------------------------------------- |  | ---------------------------------------------------- | - |  | ----------------- | ---------- |  | - | ----------
|Portfolio Company                      |  | Industry             |  | Title of SecuritiesHeld by the Company                            |  | Percentage of Class Held on a Fully Diluted Basic(9) |   |  | December 31, 2002
|                                       |  |                      |  | Cost                                                              |  | FairValue                                           
|Talk America Holdings, Inc.(8)         |  | Telecommunications   |  | Common Stock                                                      |  | 1.7                                                  | % |  | $                 | 1,150      |  | $ | 2,568     
|                                       |  |                      |  | Warrants to purchaseCommon Stock                                  |  | 0.7                                                  | % |  |                   | 25         |  |   | 178       
|                                      
|TGI Group, LLC                         |  | Information Services |  | Senior Debt                                                       |  |                                                      |   |  |                   | 6,295      |  |   | 6,295     
|                                       |  |                      |  | Warrants to purchasemembership interestin LLC                     |  | 5.0                                                  | % |  |                   | 126        |  |   |          
|                                      
|THE Journal, LLC(8)                    |  | Publishing           |  | Senior Debt                                                       |  |                                                      |   |  |                   | 3,266      |  |   | 1,631     
|                                      
|Tower Resource Management, Inc.        |  | Telecommunications   |  | Senior Debt                                                       |  |                                                      |   |  |                   | 2,668      |  |   | 2,668     
|                                       |  |                      |  | Warrants to purchaseCommon Stock                                  |  | 8.9                                                  | % |  |                   |           |  |   |          
|                                      
|Unifocus, Inc. and Unifocus LLC(1)     |  | Information Services |  | Senior Debt                                                       |  |                                                      |   |  |                   | 3,605      |  |   | 3,605     
|                                       |  |                      |  | Warrants to purchaseCommon Stock andLLC interests                 |  | 20.0                                                 | % |  |                   | 247        |  |   | 260       
|                                      
|VS&A-PBI Holding LLC(1)(8)             |  | Publishing           |  | Senior Debt                                                       |  |                                                      |   |  |                   | 12,375     |  |   | 4,474     
|                                       |  |                      |  | LLC Interest                                                      |  | 0.8                                                  | % |  |                   | 500        |  |   |          
|                                      
|Wiesner Publishing Company, LLC (1)    |  | Publishing           |  | Senior DebtSubordinated DebtWarrants topurchasemembershipinterest |  |                                                      |   |  |                   | 5,5005,559 |  |   | 5,5005,559
|                                       |  |                      |  | in LLC                                                            |  | 15.0                                                 | % |  |                   | 406        |  |   | 468       
|                                      
|WirelessLines, Inc.(1)(8)              |  | Telecommunications   |  | Senior Debt                                                       |  |                                                      |   |  |                   | 6,150      |  |   | 6,150     
|                                       |  |                      |  | Warrants to purchaseCommon Stock                                  |  | 5.0                                                  | % |  |                   |           |  |   |          
|                                      
|Witter Publishing Co., Inc.            |  | Publishing           |  | Senior Debt                                                       |  |                                                      |   |  |                   | 2,724      |  |   | 2,724     
|                                       |  |                      |  | Warrants to purchaseCommon Stock                                  |  | 9.5                                                  | % |  |                   | 87         |  |   | 160       
|                                      
|Wyoming Newspapers, Inc.(1)            |  | Newspaper            |  | Senior Debt                                                       |  |                                                      |   |  |                   | 11,916     |  |   | 11,916    
|                                      
|Total Non-affiliate investments        |  |                      |  |                                                                   |  |                                                      |   |  |                   | 625,375    |  |   | 608,624   
|                                      
|Affiliate investments(12):             |  |                      |  |                                                                   |  |                                                      |   |  |                   |            |  |   |           
|                                      
|Country Media, Inc.                    |  | Newspaper            |  | Senior Debt                                                       |  |                                                      |   |  |                   | 7,669      |  |   | 7,669     
|                                       |  |                      |  | Common Stock                                                      |  | 6.3                                                  | % |  |                   | 100        |  |   | 171       
|                                      
|Creatas, L.L.C.(1)                     |  | Information          |  | Senior Debt                                                       |  |                                                      |   |  |                   | 13,120     |  |   | 13,120    
|                                       |  | Services             |  | Investor Class LLCInterest                                        |  | 20.0                                                 | % |  |                   | 100        |  |   | 7         
|                                      
|Executive Enterprise Institute, LLC(8) |  | Business Services    |  | LLC Interest                                                      |  | 10.0                                                 | % |  |                   | 301        |  |   |          
|                                      
|Netplexus Corporation(1)               |  | Technology           |  | Senior Debt                                                       |  |                                                      |   |  |                   | 2,014      |  |   | 995       
|                                       |  |                      |  | Preferred Stock                                                   |  | 51.0                                                 | % |  |                   | 766        |  |   |          
|                                       |  |                      |  | Warrants to purchaseClass A CommonStock                           |  | 4.8                                                  | % |  |                   |           |  |   |          
|                                      
|Sunshine Media Delaware, LLC(1)        |  | Publishing           |  | Senior Debt                                                       |  |                                                      |   |  |                   | 12,520     |  |   | 12,520    
|                                       |  |                      |  | Class A LLCInterest                                               |  | 12.8                                                 | % |  |                   | 500        |  |   | 143       
|                                       |  |                      |  | Warrants to purchaseClass B LLC interest                          |  | 100.0                                                | % |  |                   |           |  |   |          
|                                      
|Total Affiliate investments            |  |                      |  |                                                                   |  |                                                      |   |  |                   | 37,090     |  |   | 34,625    
|                                      



See notes to
consolidated financial statements





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MCG Capital Corporation

Consolidated Schedule of Investments(Continued)

December 31, 2002

(Dollars in thousands)



|                                              |  |                    |  |                                              |  |                                                      |           |         |                   |         |   |         |   |         |  
|--------------------------------------------- |  | ------------------ |  | -------------------------------------------- |  | ---------------------------------------------------- | --------- | ------- | ----------------- | ------- | - | ------- | - | ------- | -
|Portfolio Company                             |  | Industry           |  | Title of SecuritiesHeld by the Company       |  | Percentage of Class Held on a Fully Diluted Basic(9) |           |         | December 31, 2002 |        
|                                              |  |                    |  | Cost                                         |  |                                                      | FairValue |        
|Control investments: Non-majority-owned(11):  |  |                    |  |                                              |  |                                                      |           |         |                   |         |   |         |  
|                                              | 
|AMI Telecommunications                        |  | Telecommunications |  | Senior Debt                                  |  |                                                      |           |         | $                 | 10,637  |   |         | $ | 5,494   |  
|Corporation(1)(8)                             |  |                    |  | Common Stock                                 |  | 5.1                                                  | %         |         |                   | 200     |   |         |   |        |  
|                                              |  |                    |  | Preferred Stock                              |  | 37.5                                                 | %         |         |                   | 1,100   |   |         |   |         |  
|                                              | 
|Corporate Legal Times L.L.C.(8)               |  | Publishing         |  | Senior Debt                                  |  |                                                      |           |         |                   | 5,578   |   |         |   | 4,798   |  
|                                              |  |                    |  | LLC Interest                                 |  | 51.7                                                 | %         |         |                   | 233     |   |         |   |        |  
|                                              |  |                    |  | Warrants topurchasemembershipinterest in LLC |  | 0.0                                                  | %         |         |                   |        |   |         |   |        |  
|                                              | 
|Total Control investments: Non-majority-owned |  |                    |  |                                              |  |                                                      |           | 17,748  |                   |         |   | 10,292  |  
|                                              | 
|Control investments: Majority-owned (10):     |  |                    |  |                                              |  |                                                      |           |         |                   |         |   |         |  
|                                              | 
|Biznessonline.com, Inc.(1)                    |  | Telecommunications |  | Senior Debt                                  |  |                                                      |           |         |                   | 14,928  |   |         |   | 14,784  |  
|                                              |  |                    |  | Common Stock                                 |  | 3.6                                                  | %         |         |                   | 18      |   |         |   | 1       |  
|                                              |  |                    |  | Preferred Stock                              |  | 100.0                                                | %         |         |                   | 2,864   |   |         |   |        |  
|                                              |  |                    |  | Warrants topurchaseCommon Stock              |  | 48.2                                                 | %         |         |                   | 253     |   |         |   |        |  
|                                              | 
|Copperstate Technologies, Inc.(3)             |  | Security Alarm     |  | Senior Debt                                  |  |                                                      |           |         |                   | 1,015   |   |         |   | 1,015   |  
|                                              |  |                    |  | Class A CommonStock                          |  | 93.0                                                 | %         |         |                   | 2,000   |   |         |   | 2,000   |  
|                                              |  |                    |  | Class B CommonStock                          |  | 100.0                                                | %         |         |                   |        |   |         |   |        |  
|                                              |  |                    |  | Warrants topurchase Class BCommon Stock      |  | 100.0                                                | %         |         |                   |        |   |         |   |        |  
|                                              | 
|Interactive Business Solutions, Inc.(4)       |  | Security Alarm     |  | Senior Debt                                  |  |                                                      |           |         |                   | 75      |   |         |   | 75      |  
|                                              |  |                    |  | Common Stock                                 |  | 100.0                                                | %         |         |                   | 2,750   |   |         |   | 2,675   |  
|                                              | 
|Telecomm South, LLC(2)(8)                     |  | Telecommunications |  | Senior Debt                                  |  |                                                      |           |         |                   | 3,695   |   |         |   | 3,256   |  
|                                              |  |                    |  | LLC Interest                                 |  | 100.0                                                | %         |         |                   | 10      |   |         |   |        |  
|                                              | 
|UMAC, Inc.(8)                                 |  | Publishing         |  | Common Stock                                 |  | 100.0                                                | %         |         |                   | 10,611  |   |         |   | 504     |  
|                                              | 
|Working Mother Media, Inc.(8)                 |  | Publishing         |  | Senior Debt                                  |  |                                                      |           |         |                   | 6,991   |   |         |   | 6,991   |  
|                                              |  |                    |  | Class A PreferredStock                       |  | 98.5                                                 | %         |         |                   | 6,565   |   |         |   | 4,028   |  
|                                              |  |                    |  | Class B PreferredStock                       |  | 100.0                                                | %         |         |                   | 1       |   |         |   |        |  
|                                              |  |                    |  | Class C PreferredStock                       |  | 100.0                                                | %         |         |                   | 1       |   |         |   |        |  
|                                              |  |                    |  | Common Stock                                 |  | 51.0                                                 | %         |         |                   | 1       |   |         |   |        |  
|                                              | 
|Total Control investments: Majority-owned     |  |                    |  |                                              |  |                                                      |           | 51,778  |                   |         |   | 35,329  |  
|                                              | 
|Total Investments                             |  |                    |  |                                              |  |                                                      |           |         |                   | 731,991 |   |         |   | 688,870 |  
|Unearned income                               |  |                    |  |                                              |  |                                                      |           |         |                   | (12,778 | ) |         |   | (12,778 | )
|                                              |  |                    |  |                                              |  |                                                      |           |         |                   |         |   |         |   |         |  
|Total Investments net of unearned income      |  |                    |  |                                              |  |                                                      | $         | 719,213 |                   |         | $ | 676,092 |  
|                                              |  |                    |  |                                              |  |                                                      |           |         |                   |         |   |         |   |         |  



See notes to
consolidated financial statements



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##### Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments(Continued)

December 31, 2003 and
2002

(Dollars in thousands)



---

|(1) |  | Some of the securities listed are issued by affiliate(s) of the listed portfolio company.
|--- |  | -----------------------------------------------------------------------------------------

|(2) |  | In July 2002, we acquired the assets of ValuePage Holdings, Inc. in satisfaction of debt and transferred them to Telecomm South, LLC, which at the time was a wholly owned subsidiary
of MCG Finance I, LLC.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | In August 2002, we acquired the Arizona division of Intellisec Holdings, Inc. in partial satisfaction of debt and transferred it to Copperstate Technologies, Inc., which at the time
was a wholly owned subsidiary of MCG Finance I, LLC.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | In October 2002, we acquired the North Carolina division of Intellisec Holdings, Inc. in partial satisfaction of debt and transferred it to Interactive Business Solutions, Inc.,
which at the time was a wholly owned subsidiary of MCG Finance I, LLC.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | In February 2003, we acquired the assets of NBG Radio Networks, Inc. in satisfaction of debt. The assets are held and operated through a separate portfolio company, Crystal Media
Network, LLC, which is a wholly owned indirect subsidiary of MCG Capital Corporation.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | In February 2003, BuyMedia Inc. changed its name to Marketron International, Inc.
|--- |  | ---------------------------------------------------------------------------------

|(7) |  | In March 2003, we converted $8,631 of senior debt and $1,262 of debtor in possession financing in Intellisec Holdings, Inc., into preferred and common stock in connection with a
plan of reorganization. In March 2003, Intellisec Holdings, Inc. changed its name to National Systems Integration, Inc.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Non-income producing at the relevant period end.
|--- |  | ------------------------------------------------

|(9) |  | 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 exercised or 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 the most current outstanding share information available to us (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 SEC.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) |  | Majority owned investments are generally defined under the Investment Company Act of 1940 as companies in which MCG owns more than 50% of the voting securities of the company.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) |  | Non-majority owned control investments are generally defined under the Investment Company Act of 1940 as companies in which MCG owns more than 25% but not more than 50% of the
voting securities of the company.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) |  | Affiliate investments are generally defined under the Investment Company Act of 1940 as companies in which MCG owns at least 5% but not more than 25% of the voting securities of the
company.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) |  | In July 2003, we acquired the assets of THE Journal LLC in satisfaction of debt and transferred those assets to a wholly owned subsidiary, ETC Group, LLC. In August 2003, we sold
50% of the equity in ETC Group, LLC to third party investors.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) |  | In December 2003, Telecomm North Corp., a wholly-owned subsidiary and portfolio company, entered into an agreement to merge with another of our portfolio companies, Bridgecom
Holdings, Inc.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(15) |  | In December 2003, Superior Publishing Inc., a wholly-owned subsidiary and portfolio company, purchased the stock of one of our portfolio companies, Murphy McGinnis Media, Inc.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(16) |  | In July 2003, Systems Xcellence USA, Inc. changed its name to SXC Health Solutions, Inc.
|---- |  | ----------------------------------------------------------------------------------------



See notes to consolidated financial statements



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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 or us or our) is a solutions-focused financial services company that provides financing and advisory
services to a variety of companies throughout the United States with a focus on growth oriented companies. Currently, our portfolio consists primarily of companies in the communications, information services, media and technology, including software
and technology-enabled business services, industry sectors. Prior to its name change effective June 14, 2001, the Companys legal name was MCG Credit Corporation. The Company is 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 (1940 Act).



On December 4, 2001, MCG completed an initial public offering (IPO) of 13,375,000 shares of common stock and a concurrent private offering of
625,000 shares of common stock. The Company elected to be treated for federal income tax purposes as a regulated investment company under the Internal Revenue Code with the filing of our corporate income tax return for 2002 which election was
effective January 1, 2002. On June 17, 2002, MCG raised $54,000 of gross proceeds in an additional public offering by selling 3,000,000 shares of common stock at an offering price of $18 per share.



On July 3, 2003, MCG filed a Form N-2 Registration Statement with the
Securities and Exchange Commission (SEC) which would allow MCG to offer, from time to time, up to 12,500,000 shares of common stock in one or more offerings. In connection with this Registration Statement, on August 21, 2003, MCG raised
$100,750 of gross proceeds by selling 6,500,000 shares of common stock at an offering price of $15.50 per share. On September 16, 2003, the underwriters in the August 21, 2003 offering exercised their over-allotment and purchased an additional
975,000 shares of common stock at an offering price of $15.50 per share. As a result of the underwriters exercising their over-allotment, MCG raised an additional $15,113 of gross proceeds.



On March 3, 2004, MCG filed a Form N-2 Registration Statement with the
Securities and Exchange Commission (SEC) which would allow MCG or certain selling shareholders to offer, from time to time, up to 18,000,000 shares of common stock in one or more offerings.



The accompanying financial statements reflect the consolidated accounts of
MCG, including its special purpose financing subsidiaries MCG Finance I, LLC, MCG Finance II, LLC, MCG Finance III, LLC, and MCG Finance IV, LLC with all significant intercompany balances eliminated, and the related consolidated 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.



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MCG Capital Corporation



Notes to Consolidated Financial Statements(Continued)



(in thousands, except share and per share amounts)



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:



|                                                             |  |   |         |  
|------------------------------------------------------------ |  | - | ------- | -
|Cumulative Effect of Business Development Company Conversion |  |   |        
|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  | )
|                                                             |  |   |         |  



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.



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. 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 cease recognizing interest income on that loan until all principal has been paid. However, we may make exceptions to this policy if the investment is well secured and in the process of collection.



In accordance with Generally Accepted Accounting Principles (GAAP), we
include in income certain amounts that we have not yet received in cash, such as contractual paid-in-kind (PIK) interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term.
However, in certain cases, a customer makes principal payments on its loan prior to making payments to reduce the PIK loan balances and, therefore, the PIK portion of a customers loan can increase while the total outstanding amount of the loan
to that customer may stay the same or decrease. PIK loans represented $27,280 million or 3.9% of our portfolio of investments as of December 31, 2003 and $27,246 million or 4.0% of our portfolio of investments as of December 31, 2002.



PIK related activity for the years ended December 31, 2003 and 2002 was as
follows:



|                                           |  |                         |         |   |      |   |        |  
|------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------ | -
|                                           |  | Year Ended December 31, |        
|(in millions)                              |  | 2003                    |         |   | 2002 |  
|Beginning PIK loan balance                 |  | $                       | 27,246  |   |      | $ | 14,245 |  
|PIK interest earned during the period      |  |                         | 18,340  |   |      |   | 16,241 |  
|Change in interest receivable on PIK loans |  |                         | 67      |   |      |   | (96    | )
|Principal payments of cash on PIK loans    |  |                         | (7,044  | ) |      |   | (3,144 | )
|PIK loans converted to other securities    |  |                         | (10,924 | ) |      |   |       |  
|Realized loss                              |  |                         | (405    | ) |      |   |       |  
|                                           |  |                         |         |   |      |   |        |  
|Ending PIK loan balance                    |  | $                       | 27,280  |   |      | $ | 27,246 |  
|                                           |  |                         |         |   |      |   |        |  



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MCG Capital Corporation



Notes to Consolidated Financial Statements(Continued)



(in thousands, except share and per share amounts)



Loan origination fees are deferred and amortized as adjustments to the related loans yield over
the contractual life of the loan. 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 determined using various valuation models which 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 the fair value of these financial instruments are recorded through our statement of operations in unrealized
appreciation (depreciation) on investments. 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 had $16,416 and $12,778 of unearned fees as of December
31, 2003 and December 31, 2002, respectively. We recognized $5,656 of these fees in income during 2003 and $5,746 of these fees in income during 2002.



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.



In connection with providing capital to our portfolio companies, we often provide investment banking and other advisory services concurrently with
funding. In November 2002, the Emerging Issues Task Force (the EITF) reached a consensus on Issue 00-21, Revenue Arrangements with Multiple Deliverables. The guidance in this issue was effective for revenue arrangements
entered into after June 30, 2003. The EITF requires that deliverables be divided into separate units of accounting when the individual deliverables have value to the customer on a stand-alone basis, when there is objective and reliable evidence of
the fair value of the undelivered elements, and if the arrangement includes a general right to return the delivered element, delivery or performance of the undelivered element is considered probable. The relative fair value of each unit should be
determined and the total consideration of the arrangement should be allocated amongst the individual units based on their relative fair values. Our accounting policy with respect to revenue recognition for services performed in connection with
capital funding activities was consistent with the EITF consensus, therefore, adoption of this EITF consensus did not have an impact on our statement of operations or financial condition.



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 makes recommendations to our Board of Directors.



At December 31, 2003, approximately 88% of our total assets
represented investments recorded at fair value. Value, as defined in Section 2(a)(41) of 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair
value is as determined in good faith by the Board of Directors. Since there is typically no readily available market value for the investments in



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MCG Capital Corporation



Notes to Consolidated Financial Statements(Continued)



(in thousands, except share and per share amounts)



our portfolio, we value substantially all of our investments at fair value as determined in good faith by the Board of Directors pursuant to a valuation
policy and a consistent valuation process. Because of the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments determined in good faith by the Board of
Directors may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.



There is no single standard for determining fair value in good faith. As a result, determining fair value requires that
judgment be applied to the specific facts and circumstances of each portfolio investment. Unlike banks, we are not permitted to provide a general reserve for anticipated loan losses. Instead, we must determine the fair value of each individual
investment on a quarterly basis. We will record unrealized depreciation on investments when we believe that an investment has decreased in value, including where collection of a loan or realization of an equity security is doubtful. Conversely, we
will record unrealized appreciation if we believe that the underlying portfolio company has appreciated in value and, therefore, our investment has also appreciated in value, where appropriate.



As a business development company, we invest primarily in illiquid securities
including debt and equity securities of private companies. The structure of each debt and equity security is specifically negotiated to enable us to protect our investment and maximize our returns. We generally include many terms governing interest
rate, repayment terms, prepayment penalties, financial covenants, operating covenants, ownership parameters, dilution parameters, liquidation preferences, voting rights, and put or call rights. 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. Our investments are generally subject to some restrictions on resale and generally have no established trading market. Because of the type of investments that we make and the
nature of our business, our valuation process requires an analysis of various factors. Our valuation methodology includes the examination of, among other things, the underlying portfolio company performance, financial condition and market changing
events that impact valuation.



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 and, where appropriate, 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 or thinly traded public securities may be valued at discounts from the public market value due to the restrictions on sale.



Securitization Transactions



Periodically, we transfer pools of loans to special purpose entities (SPEs)
for use in securitization transactions. These on-balance sheet securitization transactions comprise a significant source of our overall funding, with the total face amount of the outstanding loans and equity investments assumed by third parties of
$441,798 at December 31, 2003 and $520,090 at December 31, 2002. Transfers of loans have not met the requirements of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, for
sales treatment and are, therefore, treated as secured borrowings, with the transferred loans remaining in investments and the related liability recorded in borrowings.



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MCG Capital Corporation



Notes to Consolidated Financial Statements(Continued)



(in thousands, except share and per share amounts)



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.



Cash, securitization accounts



Cash, securitization accounts includes amounts held in designated bank
accounts representing payments received on securitized loans. The Company is required to use a portion these amounts to pay interest expense, reduce borrowings, or pay other amounts in accordance with the related securitization agreements.



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 $27,280 and $27,246 at December 31, 2003 and 2002, respectively. Net unearned income includes unearned fees net
of loan origination costs totaling $16,416 and $12,778 at December 31, 2003 and 2002, respectively. Unearned income net of 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.



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. Beginning December 31, 2001, when MCG converted to a business development company, anticipated future loan losses are recognized by recording unrealized depreciation on such asset when such
asset is determined to decrease in value. See discussion in the Valuation of Investments section above for more detail on the valuation process for loans.



Investments in equity securities



Investments in equity securities represent our ownership of warrants and other equity interests received or purchased
primarily as part of 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.



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MCG Capital Corporation



Notes to Consolidated Financial Statements(Continued)



(in thousands, except share and per share amounts)



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. An impairment loss of $1,715 was recorded in
the period ended November 30, 2001. 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.



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. 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. 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, the gross unrealized gains on
available for sale securities was $(638), 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, $1,492 at December 31, 2003 and $2,735 at December 31, 2002, 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 a method that approximates the effective interest method. Accumulated amortization was $9,056 and $7,809
at December 31, 2002 and 2001, 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 was recognized for the Companys stock
option plan. The Company no longer has a stock option plan.



Income taxes



Through December 31, 2001
we were taxed under Subchapter C of the Internal Revenue Code. We elected to be a regulated investment company under Subchapter M of the Internal Revenue Code with the filing of our federal corporate income tax return for 2002, which election was
effective as of January 1, 2002, and provided we continue to qualify as a RIC, our income generally will not be subject to Federal taxation to the extent such income is distributed to stockholders. The Company will be subject to U.S. federal income
taxes on pre-January 1, 2012 sales of investments for which the fair value was in excess of our tax basis as of January 1, 2002, which



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##### Table of Contents

MCG Capital Corporation



Notes to Consolidated Financial Statements(Continued)



(in thousands, except share and per share amounts)



approximated $2,788. 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, 2003, tax assets of $98 represent estimated refunds on prior year
payments and on prior year refunds and are included in other assets in the consolidated financial statements. Deferred tax liabilities of $1,049 at December 31, 2003 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 unvested restricted stock.



Segments



The Company lends to and invests in customers in various sectors of the
communications, information services, media, and technology, including software and technology-enabled business services, industry sectors. The Company 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 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



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MCG Capital Corporation



Notes to Consolidated Financial Statements(Continued)



(in thousands, except share and per share amounts)



financial instruments, as well as any other financial instruments entered into which qualify as derivatives under the Statements but 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.



Goodwill



In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (FAS 142), which requires goodwill and intangible assets with indefinite useful lives to no longer be amortized but to be tested for impairment at
least annually. Intangible assets that have finite lives will continue to be amortized over their estimated useful lives. The amortization and non-amortization provisions of FAS 142 will be applied to all goodwill and intangible assets acquired
after June 30, 2001. Amortization of goodwill totaled $27 and $284 for the one-month ended December 31, 2001 and the eleven months ended November 30, 2001, respectively. If goodwill amortization expense had not been recorded, MCGs net income
would have increased by $16 and $167 for the one-month period ended December 31, 2001 and the eleven-month period ended November 30, 2001, respectively. Basic and diluted earnings (loss) per share would have remained at $(0.25) for the one-month
period ended December 31, 2001 and increased to $0.84 for the eleven-month period ended November 30, 2001. Effective January 1, 2002, the Company adopted the provisions of FAS 142 and ceased amortization of goodwill. The adoption of FAS 142 did not
have a material impact on the Companys financial position or results of operations. In accordance with FAS 142, the Company has tested its intangible assets with indefinite lives for impairment and determined that there was no impairment. As
of December 31, 2003, the balance of goodwill was $3,850 and is included in Other assets on the Consolidated Balance Sheets. The amount of amortization that would have been recorded had we not adopted FAS 142 would have been $323 for each of the
years ended December 31, 2003 and 2002.



Reclassifications



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



Note BInvestments



At December 31, 2003
and 2002, investments consisted of the following:



|                                 |  |      |         |   |            |   |         |      |  |   |            |   |  |   |         |  
|-------------------------------- |  | ---- | ------- | - | ---------- | - | ------- | ---- |  | - | ---------- | - |  | - | ------- | -
|                                 |  | 2003 |         |   | 2002       |  
|                                 |  | Cost |         |   | Fair Value |   |         | Cost |  |   | Fair Value |  
|Commercial loans                 |  | $    | 615,253 |   |            | $ | 605,551 |      |  | $ | 694,977    |   |  | $ | 668,803 |  
|Investments in equity securities |  |      | 112,850 |   |            |   | 93,391  |      |  |   | 37,014     |   |  |   | 20,067  |  
|Unearned income                  |  |      | (16,416 | ) |            |   | (16,416 | )    |  |   | (12,778    | ) |  |   | (12,778 | )
|                                 |  |      |         |   |            |   |         |      |  |   |            |   |  |   |         |  
|Total                            |  | $    | 711,687 |   |            | $ | 682,526 |      |  | $ | 719,213    |   |  | $ | 676,092 |  
|                                 |  |      |         |   |            |   |         |      |  |   |            |   |  |   |         |  



MCGs customer
base includes primarily small- and medium-sized private companies in the communications, information services, media and technology, including software and technology-enabled business services, industry sectors. The proceeds of the loans to these
companies are generally used for buyouts,



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##### Table of Contents

MCG Capital Corporation



Notes to Consolidated Financial Statements(Continued)



(in thousands, except share and per share amounts)



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 for 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 4% to 14%, a
portion of which may be deferred. At December 31, 2003, approximately 84% of loans in the portfolio, based on amounts outstanding at fair value, were at variable rates determined on the basis of a benchmark LIBOR or prime rate and approximately 16%
were at fixed rates. In addition, approximately 53% of the loan portfolio has floors of between 1.25% and 3% on the LIBOR base index. The Companys loans generally have stated maturities at origination that range from 2 to 8 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, 2003, approximately 54% of MCGs loans had detachable warrants or an option to purchase warrants, stock appreciation rights or other
equity interests or other provisions designed to provide the Company with an enhanced internal rate of return. In lieu of cash for loan origination fees, MCG received warrants valued at $11,283 and $2,369 for the year ended December 31, 2003 and
2002, respectively. 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 on loans may be used to pay the exercise price on the warrants or option to purchase warrants. The equity interests and warrants and options to purchase warrants often include registration rights,
which allow us, under certain circumstances, to require the portfolio company to register the underlying securities with the SEC after the portfolio companys initial public offering. Realized gains and losses on sales of investments, as
determined on a specific identification basis, are included in the Consolidated Statements of Operations.



The composition of MCGs investments as of December 31, 2003 and 2002 at cost and fair value was as follows excluding unearned income:



|                           |  |                     |         |                               |       |   |                     |   |                               |  |       |  
|-------------------------- |  | ------------------- | ------- | ----------------------------- | ----- | - | ------------------- | - | ----------------------------- |  | ----- | -
|                           |  | 2003                |         |                               | 2002  |  
|                           |  | Investments at Cost |         | Percentage of Total Portfolio |       |   | Investments at Cost |   | Percentage of Total Portfolio | 
|Senior Debt                |  | $                   | 510,545 |                               | 70.1  | % |                     | $ | 628,293                       |  | 85.8  | %
|Subordinated Debt          |  |                     | 104,708 |                               | 14.4  | % |                     |   | 66,684                        |  | 9.1   | %
|Equity                     |  |                     | 99,312  |                               | 13.6  | % |                     |   | 31,040                        |  | 4.3   | %
|Warrants to Acquire Equity |  |                     | 13,538  |                               | 1.9   | % |                     |   | 5,974                         |  | 0.8   | %
|Equity Appreciation Rights |  |                     |        |                               | 0.0   | % |                     |   |                              |  | 0.0   | %
|                           |  |                     |         |                               |       |   |                     |   |                               |  |       |  
|Total                      |  | $                   | 728,103 |                               | 100.0 | % |                     | $ | 731,991                       |  | 100.0 | %
|                           |  |                     |         |                               |       |   |                     |   |                               |  |       |  



|                           |  |                           |         |                               |       |   |                           |   |                               |  |       |  
|-------------------------- |  | ------------------------- | ------- | ----------------------------- | ----- | - | ------------------------- | - | ----------------------------- |  | ----- | -
|                           |  | 2003                      |         |                               | 2002  |  
|                           |  | Investments at Fair Value |         | Percentage of Total Portfolio |       |   | Investments at Fair Value |   | Percentage of Total Portfolio | 
|Senior Debt                |  | $                         | 502,183 |                               | 71.9  | % |                           | $ | 602,119                       |  | 87.4  | %
|Subordinated Debt          |  |                           | 103,368 |                               | 14.7  | % |                           |   | 66,684                        |  | 9.7   | %
|Equity                     |  |                           | 73,467  |                               | 10.5  | % |                           |   | 13,182                        |  | 1.9   | %
|Warrants to Acquire Equity |  |                           | 19,584  |                               | 2.8   | % |                           |   | 6,568                         |  | 1.0   | %
|Equity Appreciation Rights |  |                           | 340     |                               | 0.1   | % |                           |   | 317                           |  | 0.0   | %
|                           |  |                           |         |                               |       |   |                           |   |                               |  |       |  
|Total                      |  | $                         | 698,942 |                               | 100.0 | % |                           | $ | 688,870                       |  | 100.0 | %
|                           |  |                           |         |                               |       |   |                           |   |                               |  |       |  



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MCG Capital Corporation



Notes to Consolidated Financial Statements(Continued)



(in thousands, except share and per share amounts)



Set forth below are tables showing the composition of MCGs portfolio by industry sector
(excluding unearned income) at cost and fair value as of December 31, 2003 and 2002:



|                     |  |                     |         |                               |       |   |                     |   |                               |  |       |  
|-------------------- |  | ------------------- | ------- | ----------------------------- | ----- | - | ------------------- | - | ----------------------------- |  | ----- | -
|                     |  | 2003                |         |                               | 2002  |  
|                     |  | Investments at Cost |         | Percentage of Total Portfolio |       |   | Investments at Cost |   | Percentage of Total Portfolio | 
|Media                |  |                     |         |                               |       |   |                     |   |                               |  |       |  
|Newspaper            |  | $                   | 250,895 |                               | 34.5  | % |                     | $ | 212,211                       |  | 29.0  | %
|Publishing           |  |                     | 102,045 |                               | 14.0  |   |                     |   | 141,933                       |  | 19.4  |  
|Broadcasting         |  |                     | 45,790  |                               | 6.3   |   |                     |   | 94,889                        |  | 13.0  |  
|Communications       |  |                     | 201,272 |                               | 27.6  |   |                     |   | 165,623                       |  | 22.6  |  
|Information Services |  |                     | 64,871  |                               | 8.9   |   |                     |   | 76,884                        |  | 10.5  |  
|Technology           |  |                     | 41,282  |                               | 5.7   |   |                     |   | 38,357                        |  | 5.2   |  
|Other                |  |                     | 21,948  |                               | 3.0   |   |                     |   | 2,094                         |  | 0.3   |  
|                     |  |                     |         |                               |       |   |                     |   |                               |  |       |  
|Total                |  | $                   | 728,103 |                               | 100.0 | % |                     | $ | 731,991                       |  | 100.0 | %
|                     |  |                     |         |                               |       |   |                     |   |                               |  |       |  



|                     |  |                           |         |                               |       |   |                           |   |                               |  |       |  
|-------------------- |  | ------------------------- | ------- | ----------------------------- | ----- | - | ------------------------- | - | ----------------------------- |  | ----- | -
|                     |  | 2003                      |         |                               | 2002  |  
|                     |  | Investments at Fair Value |         | Percentage of Total Portfolio |       |   | Investments at Fair Value |   | Percentage of Total Portfolio | 
|Media                |  |                           |         |                               |       |   |                           |   |                               |  |       |  
|Newspaper            |  | $                         | 251,143 |                               | 35.9  | % |                           | $ | 212,489                       |  | 30.8  | %
|Publishing           |  |                           | 84,432  |                               | 12.1  |   |                           |   | 115,370                       |  | 16.7  |  
|Broadcasting         |  |                           | 44,487  |                               | 6.4   |   |                           |   | 94,242                        |  | 13.7  |  
|Communications       |  |                           | 192,872 |                               | 27.5  |   |                           |   | 152,164                       |  | 22.1  |  
|Information Services |  |                           | 65,509  |                               | 9.4   |   |                           |   | 76,407                        |  | 11.1  |  
|Technology           |  |                           | 38,958  |                               | 5.6   |   |                           |   | 36,474                        |  | 5.3   |  
|Other                |  |                           | 21,541  |                               | 3.1   |   |                           |   | 1,724                         |  | 0.3   |  
|                     |  |                           |         |                               |       |   |                           |   |                               |  |       |  
|Total                |  | $                         | 698,942 |                               | 100.0 | % |                           | $ | 688,870                       |  | 100.0 | %
|                     |  |                           |         |                               |       |   |                           |   |                               |  |       |  



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:



|                             |  |                   |         |  
|---------------------------- |  | ----------------- | ------- | -
|For periods ended            |  | November 30, 2001 |        
|Balance at December 31, 2000 |  | $                 | 10,084  |  
|Provision for loan losses    |  |                   | 10,275  |  
|Charge-offs                  |  |                   | (14,840 | )
|                             |  |                   |         |  
|Balance at November 30, 2001 |  | $                 | 5,519   |  
|                             |  |                   |         |  



At December 31, 2003,
there were $4,175 of loans greater than 60 days past due and $14,617 of loans on non-accrual status. At December 31, 2002, there were $21,527 of loans greater than 60 days past due and $42,703 of loans on non-accrual status. At December 31, 2001,
there were $8,630 of loans greater than 60 days past due and $157 of loans on non-accrual status.



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MCG Capital Corporation



Notes to Consolidated Financial Statements(Continued)



(in thousands, except share and per share amounts)



Note CBorrowings



As of June 1, 2000, we, through MCG Master Trust, established a revolving credit facility (the Revolving Credit
Facility), which allows us to issue up to $200,000 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, 2003, $130,991 of the Series 2000-1 Notes
were outstanding with one investor and as of December 31, 2002, $123,718 were outstanding with one investor. As of December 31, 2003 and December 31, 2002, we had no notes outstanding under a swingline credit facility (the Swingline
Notes), which is part of the Revolving Credit Facility, that allows us to borrow up to $25,000 as part of the $200,000 total facility limit for a period of up to four days. The Swingline Notes are repaid through the issuance of Series 2000-1
Notes. The Revolving Credit Facility was secured by $194,308 of commercial loans as of December 31, 2003 and $224,620 of commercial loans as of December 31, 2002. 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 amount of unleveraged loans that serve as collateral for the indebtedness. Such amount was a minimum of $30,000 (subject to increase upon occurrence of an event of default) prior to
July 8, 2002 and $75,000 as of July 8, 2002 and thereafter. We are also subject to limitations including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life, collateral interests
and investment ratings as well as regulatory restrictions on leverage which may affect the amount of Series 2000-1 notes we may issue from time to time. There are also certain requirements relating to portfolio performance, including required
minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in the early amortization of the facility and limit further advances under the facility, and in some cases could be an event of default. Such
limitations, requirements, and associated defined terms are as provided for in the documents governing the facility. The Series 2000-1 Notes bear interest based on a commercial paper rate plus 3.0% and interest is payable monthly.



On February 12, 2004, we entered into an agreement with Wachovia to amend the
revolving credit facility that we had established through MCG Master Trust. The amendment to the revolving credit facility, among other things, provides for the following:



| |  |  | a decrease in our borrowing capacity from $200.0 million to $130.0 million, which will further be reduced to $115.0 million on June 30, 2004 and to $100.0 million by September 30,
2004;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an extension of the revolving period to September 30, 2004;
| | - |  | -----------------------------------------------------------



| |  |  | permits recourse to MCG Capital Corporation itself in the event that the interest and principal payments from the loans we transferred to MCG Master Trust in connection with the
revolving credit facility are insufficient to repay the outstanding amount due under the revolving credit facility;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | eliminates a requirement relating to loan charge-offs at the servicer level that we were previously required to seek a waiver from in February 2003;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes the date on which the holder of the notes issued by MCG Master Trust receives final payment on such notes from June 2020 to September 2009; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reduces the interest rate payable under the revolving credit facility from the commercial paper rate plus 3.0% to LIBOR plus 1.5%.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



As discussed above, there are certain requirements relating to portfolio
performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in the early amortization of the facility and limit further advances under the facility, and in some cases
could be an



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MCG Capital Corporation



Notes to Consolidated Financial Statements(Continued)



(in thousands, except share and per share amounts)



event of default. In February 2003, we amended the Revolving Credit Facility agreements. Prior to the February 2003 amendment, the Revolving Credit Facility
required us among other things to maintain an average trailing twelve-month portfolio charged-off ratio (as defined in the Revolving Credit Facility agreements) of 3% or less. The amendment increased this ratio to 7% for any date prior to and
including June 30, 2003 and decreased this ratio to 3% thereafter. This amendment also included a waiver with respect to the applicability of the charged-off ratio for periods prior to February 2003. Additionally, this amendment required us to
increase the amount of collateral held by the noteholders by pledging the MCG Commercial Loan Trust 2001-1 Class C Notes, which we own. As noted above, on February 12, 2004, the requirement relating to loan charge-offs was eliminated.



On January 29, 2004, we entered into a secured warehouse credit facility with
an affiliate of UBS AG. We will use the warehouse credit facility to fund our originations of loans to and investments in medium-sized private companies. The warehouse credit facility operates much like a revolving credit facility that is secured by
the loans and investments. The warehouse credit facility has a borrowing capacity of $200.0 million, and loans and investments may be sold into the credit facility on a daily basis. When we have generated $200.0 million loans and investments under
the warehouse credit facility, we will use a special purpose entity to securitize such loans and investments. The lender has agreed to act as the exclusive structurer and underwriter or placement agent in connection with any such securitization
transaction. The warehouse credit facility is cancelable by the lender for cause at any time and has an expiration term of September 24, 2004. The warehouse credit facility is a short-term commitment of capital. If we are unable to consummate the
securitization transaction or otherwise arrange for new financing on terms acceptable to us, we will have to curtail our loan origination activities.



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 $247,490 as of December 31, 2003 and $295,470 as of December 31, 2002. This facility is scheduled to terminate on February 20, 2013 or sooner upon
full repayment of the Class A and Class B Notes. The Class A and Class B Notes are scheduled to be repaid as we receive principal collections on the underlying collateral.



Our $130 million revolving credit facility sponsored by Wachovia is scheduled to terminate on September 30, 2004. Our
$265.2 million securitization facility is scheduled to terminate on February 20, 2013 or sooner upon repayment of our borrowings. Our $200 million secured warehouse facility with an affiliate of UBS AG is scheduled to terminate on September 24, 2004



Borrowing repayments based on the contractual principal
collections of the loans which comprise the collateral would be:



|      |  |   |        
|----- |  | - | -------
|2004  |  | $ | 100,587
|2005  |  |   | 68,471 
|2006  |  |   | 86,812 
|2007  |  |   | 34,449 
|2008  |  |   | 13,812 
|      |  |   |        
|Total |  | $ | 304,131
|      |  |   |        



Actual repayments
could differ significantly due to prepayments by our borrowers and modifications of our borrowers existing loan agreements.



The Trust issued $229,860 of Class A Notes rated AAA/Aaa/AAA, and $35,363 of Class B Notes rated A/A2/A (the Series 2001-1 Class A Asset Backed
Bonds and Series 2001-1 Class B Asset Backed Bonds) as rated by Standard & Poors, Moodys and Fitch, respectively. As of December 31, 2003, $173,140 of the Series



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##### Table of Contents

MCG Capital Corporation



Notes to Consolidated Financial Statements(Continued)



(in thousands, except share and per share amounts)



2001-1 Notes were outstanding, of which $137,777 were Class A Notes and $35,363 were Class B Notes. As of December 31, 2002, $240,120 of the Series 2001-1
Notes were outstanding, of which $204,757 were Class A Notes and $35,363 were Class B Notes. 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.



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



Outstandings under the Revolving Credit Facility and the Trust Notes as of
December 31, 2003 and 2002 by interest rate benchmark were as follows:



|                                                  |  |      |         |      |   |        
|------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                  |  | 2003 |         | 2002
|90-day LIBOR (Trust Notes)                        |  | $    | 173,140 |      | $ | 240,120
|Commercial Paper Rate (Revolving Credit Facility) |  |      | 130,991 |      |   | 123,718
|                                                  |  |      |         |      |   |        
|                                                  |  | $    | 304,131 |      | $ | 363,838
|                                                  |  |      |         |      |   |        



The following is a
summary of the borrowings for the years ended December 31, 2003, 2002 and 2001:



|                                              |  |                     |         |                     |   |                                |  |     |                             |  |     |  
|--------------------------------------------- |  | ------------------- | ------- | ------------------- | - | ------------------------------ |  | --- | --------------------------- |  | --- | -
|(dollars in thousands)                        |  | Maximum Outstanding |         | Average Outstanding |   | Weighted Average Interest Rate |  |     | Interest Rate at Period-End | 
|For December 31, 2003 and the year then ended |  |                     |         |                     |   |                                |  |     |                             |  |     |  
|Trust Notes                                   |  | $                   | 240,120 |                     | $ | 192,616                        |  | 2.1 | %                           |  | 2.0 | %
|Revolving Credit Facility                     |  |                     | 148,325 |                     |   | 137,182                        |  | 3.4 |                             |  | 4.3 |  
|Swingline Notes                               |  |                     |        |                     |   |                               |  |    |                             |  |    |  
|                                              |  |                     |         |                    
|For December 31, 2002 and the year then ended |  |                     |         |                     |   |                                |  |     |                             |  |     |  
|Trust Notes                                   |  |                     | 265,223 |                     |   | 251,957                        |  | 2.6 |                             |  | 2.6 |  
|Revolving Credit Facility                     |  |                     | 124,126 |                     |   | 73,539                         |  | 3.3 |                             |  | 2.8 |  
|Swingline Notes                               |  |                     | 22,900  |                     |   | 773                            |  | 2.8 |                             |  |    |  
|                                              |  |                     |         |                    
|For December 31, 2001 and the year then ended |  |                     |         |                     |   |                                |  |     |                             |  |     |  
|Trust Notes                                   |  |                     | 265,223 |                     |   | 3,633                          |  | 2.7 |                             |  | 2.7 |  
|Revolving Credit Facility                     |  |                     | 126,800 |                     |   | 92,275                         |  | 5.2 |                             |  | 4.9 |  
|Swingline Notes                               |  |                     | 21,200  |                     |   | 480                            |  | 4.5 |                             |  |    |  



Subject to certain
minimum equity restrictions and other covenants, including restrictions on which loans the Company may leverage as collateral, the unused amount under the Revolving Credit Facility totaled $69,009 and $76,282 at December 31, 2003 and December 31,
2002, respectively.



For the above borrowings, the fair value
of the borrowings approximates cost.



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. On June 17, 2002, the Company raised
$54,000 of gross proceeds in an additional public offering by selling 3,000,000 shares of its common stock at a price of $18.00 per share ($17.06 net of underwriting discount). Prior to the completion of the Companys IPO, all outstanding



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##### Table of Contents

MCG Capital Corporation



Notes to Consolidated Financial Statements(Continued)



(in thousands, except share and per share amounts)



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 1,614,781 shares of restricted stock in exchange for all outstanding stock options and warrants held by employees and others.



On July 3, 2003, MCG filed a Form N-2 Registration Statement with the Securities and Exchange Commission (SEC) which would allow MCG to offer,
from time to time, up to 12,500,000 shares of common stock in one or more offerings. In connection with this Registration Statement, on August 21, 2003, MCG raised $100,750 of gross proceeds by selling 6,500,000 shares of common stock at an offering
price of $15.50 per share. On September 16, 2003, the underwriters in the August 21, 2003 offering exercised their over-allotment and purchased an additional 975,000 shares of common stock at an offering price of $15.50 per share. As a result of the
underwriters exercising their over-allotment, MCG raised an additional $15,113 of gross proceeds.



The following table summarizes our dividends declared to date:



|                   |  |                   |  |                  |  |        |     
|------------------ |  | ----------------- |  | ---------------- |  | ------ | ----
|Date Declared      |  | Record Date       |  | Payment Date     |  | Amount
|December 16, 2003  |  | December 31, 2003 |  | January 29, 2004 |  | $      | 0.42
|August 6, 2003     |  | August 18, 2003   |  | October 30, 2003 |  |        | 0.42
|June 16, 2003      |  | June 23, 2003     |  | July 30, 2003    |  |        | 0.41
|March 28, 2003     |  | April 16, 2003    |  | April 29, 2003   |  |        | 0.40
|December 18, 2002  |  | December 30, 2002 |  | January 30, 2003 |  |        | 0.42
|September 30, 2002 |  | October 16, 2002  |  | October 30, 2002 |  |        | 0.46
|June 3, 2002       |  | June 11, 2002     |  | July 31, 2002    |  |        | 0.47
|March 28, 2002     |  | April 17, 2002    |  | April 30, 2002   |  |        | 0.41
|December 31, 2001  |  | January 22, 2002  |  | January 31, 2002 |  |        | 0.86
|                   |  |                   |  |                  |  |        |     
|Total Declared     |  |                   |  |                  |  | $      | 4.27
|                   |  |                   |  |                  |  |        |     



The aggregate dividend
of $0.86 per share declared in December 2001 and paid in the first quarter of 2002 consisted 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. The aggregate dividend of $0.46 declared in September 2002 consisted of a dividend of $0.43 per share for the third quarter of 2002 and an additional dividend of $0.03 per
share which was the remaining distribution of our earnings and profits since inception through December 31, 2001. The aggregate dividend declared in December 2001 along with the $0.03 dividend declared in September 2002 were required for us to
qualify as a regulated investment company.



MCG has one class
of common stock and one class of preferred stock authorized. 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 subject to the 1940 Act.



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



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##### Table of Contents

MCG Capital Corporation



Notes to Consolidated Financial Statements(Continued)



(in thousands, except share and per share amounts)



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 $138, $140, $19, and $133 for the periods ended December 31, 2003, 2002 and 2001, and November 30, 2001, respectively. Expenses related to the profit sharing plan were $330, $327, $72, and $222 for the periods ended December 31, 2003, 2002
and 2001, and November 30, 2001, 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 were $97, $98 and $346 of contributions to the plan during the years ended December 31, 2003, 2002 and 2001,
respectively.



Note FIncome Taxes



Through December 31, 2001 the Company was taxed under Subchapter C of the
Internal Revenue Code. Effective January 1, 2002 the Company elected to be treated as a regulated investment company under Subchapter M of the Internal Revenue Code. Our taxable income therefore generally will not be subject to Federal taxation to
the extent such taxable income is distributed to stockholders and we meet certain minimum dividend distribution and other 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,
which amounted to $1,049 and $1,085 at December 31, 2003 and 2002, respectively.



The following reconciles net income to taxable income for periods after January 1, 2002:



|                                                                                |  |                         |   |  |        |  
|------------------------------------------------------------------------------- |  | ----------------------- | - |  | ------ | -
|                                                                                |  | Year ended December 31, |  
|                                                                                |  | 2003                    |   |  | 2002   |  
|Net Income                                                                      |  | 41,975                  |   |  | 3,215  |  
|Net change in unrealized (appreciation) depreciation on investments not taxable |  | (13,960                 | ) |  | 31,919 |  
|Long term incentive compensation not deductible for tax                         |  | 6,347                   |   |  | 6,627  |  
|Interest income on nonaccrual loans that is taxable                             |  | 2,262                   |   |  | 4,371  |  
|Dividends to employees treated as compensation                                  |  | (1,131                  | ) |  | (1,233 | )
|Amortization of Goodwill not allowed by GAAP                                    |  | (361                    | ) |  | (361   | )
|Other, net                                                                      |  | (3                      | ) |  | 29     |  
|                                                                                |  |                         |   |  |        |  
|Taxable Income before deductions for distributions                              |  | 35,129                  |   |  | 44,567 |  
|                                                                                |  |                         |   |  |        |  



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MCG Capital Corporation



Notes to Consolidated Financial Statements(Continued)



(in thousands, except share and per share amounts)



For income tax purposes, distributions paid to shareholders are reported as ordinary income,
non-taxable, capital gains, or a combination thereof. Dividends paid per common share for the years ended December 31, 2003 and 2002 were taxable as follows (unaudited):



|                                                                                                   |  |      |       |   |      |       |   |  |   |       |   |  |       |  
|-------------------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | ----- | - |  | - | ----- | - |  | ----- | -
|                                                                                                   |  | 2003 |       |   | 2002 |      
|Dividends declared during the year                                                                 |  | $    | 1.65  |   |      |       |   |  | $ | 1.76  |   |  |       |  
|Dividends declared in 2002 but treated as taxable in 2003 as required by the Internal Revenue Code |  | $    | 0.18  |   |      |       |   |  | $ | (0.18 | ) |  |       |  
|Dividends declared in 2003 but treated as taxable in 2004 as required by the Internal Revenue Code |  | $    | (0.42 | ) |      |       |   |  |   |      |   |  |       |  
|Dividends declared in 2001 to distribute E&P that were paid and taxable in 2002                    |  |      |      |   |      |       |   |  | $ | 0.86  |   |  |       |  
|                                                                                                   |  |      |       |   |      |       |   |  |   |       |   |  |       |  
|Dividends paid for tax purposes                                                                    |  | $    | 1.41  |   |      |       |   |  | $ | 2.44  |   |  |       |  
|                                                                                                   |  |      |       |   |      |       |   |  |   |       |   |  |       |  
|                                                                                                   |  |      |       |   |      |       |   |  |   |       |   |  |       |  
|Ordinary income (a)                                                                                |  | $    | 1.03  |   |      | 72.8  | % |  | $ | 2.44  |   |  | 100.0 | %
|Capital gains (a)                                                                                  |  | $    | 0.13  |   |      | 9.5   | % |  |   |      |   |  |      |  
|Non-taxable (b)                                                                                    |  | $    | 0.25  |   |      | 17.7  | % |  |   |      |   |  |      |  
|                                                                                                   |  |      |       |   |      |       |   |  |   |       |   |  |       |  
|Total reported on tax form 1099-DIV(c)                                                             |  | $    | 1.41  |   |      | 100.0 | % |  | $ | 2.44  |   |  | 100.0 | %
|                                                                                                   |  |      |       |   |      |       |   |  |   |       |   |  |       |  

---

|(a) |  | For 2003, ordinary income is reported on Form 1099-DIV as either qualified or non-qualified and capital gains are reported on Form 1099-DIV in various sub-categories which have
differing tax treatments to shareholders. Those subcategories have not been shown here.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | Non-taxable refers to those amounts reported as nontaxable distributions on Form 1099-DIV.
|--- |  | ------------------------------------------------------------------------------------------

|(c) |  | Distributions for 2002 include both the distribution of our taxable earnings and profits as required for companies who convert from subchapter C corporations to subchapter M
corporations as well as the distribution of our taxable income for 2002. In addition, the 2002 distributions include $0.24 per share of the $0.42 per share paid on January 30, 2003 as required by the Internal Revenue Code.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Differences between income tax expense (benefit) and the amount computed
by applying statutory income tax rates for periods prior to January 1, 2002 are summarized as follows:



|                                                               |  |                                   |        |   |                                       |   |      
|-------------------------------------------------------------- |  | --------------------------------- | ------ | - | ------------------------------------- | - | -----
|                                                               |  | One Month Ended December 31, 2001 |        |   | Eleven Months Ended November 30, 2001
|Amounts at statutory federal rates                             |  | $                                 | (1,016 | ) |                                       | $ | 5,213
|Effect of:                                                     |  |                                   |        |   |                                       |   |      
|State taxes, net of federal benefit                            |  |                                   | (176   | ) |                                       |   | 901  
|Book expenses not deductible as a business development company |  |                                   | 559    |   |                                       |   |     
|                                                               |  |                                   |        |   |                                       |   |      
|Income tax expense (benefit)                                   |  | $                                 | (633   | ) |                                       | $ | 6,114
|                                                               |  |                                   |        |   |                                       |   |      
|Taxes currently (receivable) payable                           |  | $                                 | (138   | ) |                                       | $ | 158  
|Deferred income taxes                                          |  |                                   | (495   | ) |                                       |   | 5,956
|                                                               |  |                                   |        |   |                                       |   |      
|Income tax expense (benefit)                                   |  | $                                 | (633   | ) |                                       | $ | 6,114
|                                                               |  |                                   |        |   |                                       |   |      



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MCG Capital Corporation



Notes to Consolidated Financial Statements(Continued)



(in thousands, except share and per share amounts)



The components of income tax expense (benefit) for periods prior to January 1, 2002 are as follows:



|        |  |                                   |      |   |                                       |   |      |         |  |          |     |  |   |      
|------- |  | --------------------------------- | ---- | - | ------------------------------------- | - | ---- | ------- |  | -------- | --- |  | - | -----
|        |  | One Month Ended December 31, 2001 |      |   | Eleven Months Ended November 30, 2001
|        |  | Current                           |      |   | Deferred                              |   |      | Current |  | Deferred
|Federal |  | $                                 | (118 | ) |                                       | $ | (422 | )       |  | $        | 135 |  | $ | 5,077
|State   |  |                                   | (20  | ) |                                       |   | (73  | )       |  |          | 23  |  |   | 879  
|        |  |                                   |      |   |                                       |   |      |         |  |          |     |  |   |      
|        |  | $                                 | (138 | ) |                                       | $ | (495 | )       |  | $        | 158 |  | $ | 5,956
|        |  |                                   |      |   |                                       |   |      |         |  |          |     |  |   |      



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 $24,385 and $14,764 at December 31, 2003 and 2002, respectively. The estimated fair value of these
commitments reflects the amount MCG would have to pay a counterparty to assume these obligations and was $122 and $74 at December 31, 2003 and 2002, 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 2013. Total rent expense amounted to $1,414, $756, $61, and $602 during the year ended December 31, 2003 and 2002, one month ended December 31, 2001, and eleven months ended November 30, 2001, respectively.



Future minimum rental commitments as of December 31, 2003 for all
non-cancelable operating leases with initial or remaining terms of one year or more were as follows:



|                    |  |   |       
|------------------- |  | - | ------
|2004                |  | $ | 1,256 
|2005                |  |   | 1,294 
|2006                |  |   | 1,327 
|2007                |  |   | 1,280 
|2008 and thereafter |  |   | 7,236 
|                    |  |   |       
|Total               |  | $ | 12,393
|                    |  |   |       



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MCG Capital Corporation



Notes to Consolidated Financial Statements(Continued)



(in thousands, except share and per share amounts)



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.



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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 unchanged for the years ended December 31, 2003, 2002
and 2001. Basic and diluted earnings per share would have been unchanged at $1.28 for the year ended December 31, 2003, unchanged at $0.11 for the year ended December 31, 2002 and unchanged at $0.27 for the year ended December 31, 2001.



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.



A summary of the Companys stock option activity and related information for all stock option plans for the
eleven-month period ended November 30, 2001 is as follows:



|                                                                 |  |                                             |   |  |                                 |      
|---------------------------------------------------------------- |  | ------------------------------------------- | - |  | ------------------------------- | -----
|                                                                 |  | Eleven-month period ended November 30, 2001
|                                                                 |  | Shares                                      |   |  | Weighted-average Exercise Price
|Outstanding, beginning of period                                 |  | 1,894,406                                   |   |  | $                               | 24.96
|Granted                                                          |  | 51,500                                      |   |  | $                               | 15.00
|Exercised                                                        |  |                                            |   |  |                                 |     
|Expired/Cancelled                                                |  | (1,945,906                                  | ) |  | $                               | 24.70
|Outstanding, end of period                                       |  |                                            |   |  |                                 |     
|                                                                 |  |                                             |   |  |                                 |      
|Options exercisable at period-end                                |  |                                            |   |  |                                 |     
|                                                                 |  |                                             |   |  |                                 |      
|Weighted-average fair value of options granted during the period |  |                                             |   |  | $                               | 5.56 
|                                                                 |  |                                             |   |  |                                 |      



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% for 2001.



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##### Table of Contents

MCG Capital Corporation



Notes to Consolidated Financial Statements(Continued)



(in thousands, except share and per share amounts)



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.



With respect to the 1,539,851 shares of restricted common stock granted to employees and directors in 2001, the following table sets forth the shares
subject to forfeiture provisions, shares for which forfeiture provisions have lapsed and shares that have been forfeited:



|                                            |  |           |  |          
|------------------------------------------- |  | --------- |  | ---------
|                                            |  | 2003      |  | 2002     
|Shares subject to forfeiture provisions     |  | 970,145   |  | 1,192,689
|Shares not subject to forfeiture provisions |  | 528,804   |  | 311,514  
|Shares forfeited                            |  | 40,902    |  | 35,648   
|                                            |  |           |  |          
|                                            |  | 1,539,851 |  | 1,539,851
|                                            |  |           |  |          



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.



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MCG Capital Corporation



Notes to Consolidated Financial Statements(Continued)



(in thousands, except share and per share amounts)



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 years ended December 31, 2003
and 2002 and the one-month period ended December 31, 2001, MCG recognized $6,347, $6,627 and $3,340, respectively, in compensation expense for restricted stock and dividends, including those shares granted to directors. Compensation expense of $275
was recognized in 2003 on restricted common stock with forfeiture conditions related to total return to stockholders. No such compensation expense was recognized in 2002 or 2001.



Subsequent to December 31, 2003, we revised the restricted stock awards for certain of our executives. See Note M 
Subsequent Events for a discussion of this matter.



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MCG Capital Corporation



Notes to Consolidated Financial Statements(Continued)



(in thousands, except share and per share amounts)



Note JEarnings (Loss) Per Share



The following table sets forth the computation of basic and diluted earnings per common share for the periods ended December
31, 2002, December 31, 2001, November 30, 2001, and December 31, 2000:



|                                                                                                     |  |                                            |        |                                  |                                                          |        |                                       |   |        |   |  |   |       
|---------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | ------ | -------------------------------- | -------------------------------------------------------- | ------ | ------------------------------------- | - | ------ | - |  | - | ------
|                                                                                                     |  | Post IPO as a Business Development Company |        |                                  | Pre IPO prior to becoming a Business Development Company
|                                                                                                     |  | Year EndedDecember 31,                     |        | One Month EndedDecember 31, 2001 |                                                          |        | Eleven Months Ended November 30, 2001
|(in thousands, except per share amounts)                                                             |  | 2003                                       |        | 2002                             |                                                          |       
|Basic                                                                                                |  |                                            |        |                                  |                                                          |        |                                       |   |        |   |  |   |       
|Net increase (decrease) in stockholders equity resulting from earnings/ net income (loss)           |  | $                                          | 41,975 |                                  | $                                                        | 3,215  |                                       | $ | (6,742 | ) |  | $ | 10,556
|Weighted average common shares outstanding                                                           |  |                                            | 32,715 |                                  |                                                          | 28,539 |                                       |   | 26,814 |   |  |   | 12,757
|Earnings (loss) per common share-basic                                                               |  | $                                          | 1.28   |                                  | $                                                        | 0.11   |                                       | $ | (0.25  | ) |  | $ | 0.83  
|Diluted                                                                                              |  |                                            |        |                                  |                                                          |        |                                       |   |        |   |  |   |       
|Net increase (decrease) in stockholders equity resulting from earnings/ net income (loss)           |  | $                                          | 41,975 |                                  | $                                                        | 3,215  |                                       | $ | (6,742 | ) |  | $ | 10,556
|Weighted average common shares outstanding                                                           |  |                                            | 32,715 |                                  |                                                          | 28,539 |                                       |   | 26,814 |   |  |   | 12,757
|Dilutive effect of stock options and restricted stock on which forfeiture provisions have not lapsed |  |                                            | 24     |                                  |                                                          | 31     |                                       |   |       |   |  |   | 18    
|                                                                                                     |  |                                            |        |                                  |                                                          |        |                                       |   |        |   |  |   |       
|Weighted average common shares and common stock equivalents                                          |  |                                            | 32,739 |                                  |                                                          | 28,570 |                                       |   | 26,814 |   |  |   | 12,775
|Earnings (loss) per common share-diluted                                                             |  | $                                          | 1.28   |                                  | $                                                        | 0.11   |                                       | $ | (0.25  | ) |  | $ | 0.83  



For purposes of
calculating earnings per common share, unvested restricted common stock whose forfeiture provisions are solely based on passage of time 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. Unvested 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.



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MCG Capital Corporation



Notes to Consolidated Financial Statements(Continued)



(in thousands, except share and per share amounts)



Note KSelected Quarterly Data (Unaudited)



The following tables set forth certain quarterly financial information for each of the twelve quarters ended with the
quarter ended December 31, 2003. 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.



|                                                                                  |  |       |        |       |   |        |  |       |        |  |   |       
|--------------------------------------------------------------------------------- |  | ----- | ------ | ----- | - | ------ |  | ----- | ------ |  | - | ------
|                                                                                  |  | 2003 
|                                                                                  |  | Qtr 1 |        | Qtr 2 |   | Qtr 3  |  | Qtr 4
|Operating income                                                                  |  | $     | 18,539 |       | $ | 19,636 |  | $     | 19,904 |  | $ | 22,611
|Net operating income before investment gains and losses/provision for loan losses |  |       | 10,946 |       |   | 11,684 |  |       | 11,740 |  |   | 13,225
|Income from operations                                                            |  |       | 8,897  |       |   | 8,989  |  |       | 9,913  |  |   | 14,176
|Net increase in stockholders equity resulting from earnings                      |  |       | 8,897  |       |   | 8,989  |  |       | 9,913  |  |   | 14,176
|Income from operations per common sharebasic and diluted                         |  | $     | 0.30   |       | $ | 0.30   |  | $     | 0.30   |  | $ | 0.38  
|Earnings per common sharebasic and diluted                                       |  | $     | 0.30   |       | $ | 0.30   |  | $     | 0.30   |  | $ | 0.38  



|                                                                                  |  |       |        |       |   |        |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------------- |  | ----- | ------ | ----- | - | ------ |  | - | ------ | - |  | - | ------ | -
|                                                                                  |  | 2002  |       
|                                                                                  |  | Qtr 1 |        | Qtr 2 |   | Qtr 3  |  |   | Qtr 4  |  
|Operating income                                                                  |  | $     | 17,054 |       | $ | 19,433 |  | $ | 20,138 |   |  | $ | 20,308 |  
|Net operating income before investment gains and losses/provision for loan losses |  |       | 9,955  |       |   | 11,450 |  |   | 11,653 |   |  |   | 11,693 |  
|Income (loss) from operations                                                     |  |       | 3,721  |       |   | 9,426  |  |   | (3,461 | ) |  |   | (6,471 | )
|Net increase (decrease) in stockholders equity resulting from earnings (loss)    |  |       | 3,721  |       |   | 9,426  |  |   | (3,461 | ) |  |   | (6,471 | )
|Income (loss) from operations per common sharebasic and diluted                  |  | $     | 0.14   |       | $ | 0.34   |  | $ | (0.12  | ) |  | $ | (0.22  | )
|Earnings (loss) per common sharebasic and diluted                                |  | $     | 0.14   |       | $ | 0.34   |  | $ | (0.12  | ) |  | $ | (0.22  | )



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MCG Capital Corporation



Notes to Consolidated Financial Statements(Continued)



(in thousands, except share and per share amounts)



Note LFinancial Highlights



Following is a schedule of financial highlights for the years ended December 31, 2003, 2002 and one month ended December 31,
2001:



|                                                                                |  |                         |         |   |                                   |   |         |   |  |   |         |  
|------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | --------------------------------- | - | ------- | - |  | - | ------- | -
|                                                                                |  | Year Ended December 31, |         |   | One Month Ended December 31, 2001 |  
|                                                                                |  | 2003                    |         |   | 2002                              |   |        
|Per Share Data:                                                                 |  |                         |         |   |                                   |   |         |   |  |   |         |  
|Net asset value at beginning of period(1)                                       |  | $                       | 11.56   |   |                                   | $ | 12.46   |   |  | $ | 13.31   |  
|Net operating income before investment gains and losses(2)                      |  |                         | 1.45    |   |                                   |   | 1.57    |   |  |   | (0.06   | )
|Realized losses on investments(2)                                               |  |                         | (0.60   | ) |                                   |   | (0.34   | ) |  |   |        |  
|Increase in unrealized appreciation (depreciation) on investments(2)            |  |                         | 0.43    |   |                                   |   | (1.12   | ) |  |   | (0.05   | )
|Cumulative effect of conversions to a BDC                                       |  |                         |        |   |                                   |   |        |   |  |   | (0.16   | )
|Tax benefit                                                                     |  |                         |        |   |                                   |   |        |   |  |   | 0.02    |  
|                                                                                |  |                         |         |   |                                   |   |         |   |  |   |         |  
|Net increase in stockholders equity resulting from earnings                    |  |                         | 1.28    |   |                                   |   | 0.11    |   |  |   | (0.25   | )
|                                                                                |  |                         |        
|Dividends declared                                                              |  |                         | (1.65   | ) |                                   |   | (1.76   | ) |  |   | (0.86   | )
|Antidilutive effect of stock offering on distributions                          |  |                         | 0.23    |   |                                   |   | 0.08    |   |  |   |        |  
|Antidilutive effect of distributions recorded as compensation expense(2)        |  |                         | 0.06    |   |                                   |   | 0.09    |   |  |   | 0.06    |  
|                                                                                |  |                         |         |   |                                   |   |         |   |  |   |         |  
|Net decrease in stockholders equity resulting from distributions               |  |                         | (1.36   | ) |                                   |   | (1.59   | ) |  |   | (0.80   | )
|                                                                                |  |                         |        
|Net increase in shareholders equity resulting from reduction in employee loans |  |                         | 0.01    |   |                                   |   | 0.03    |   |  |   |        |  
|Issuance of shares                                                              |  |                         | 3.06    |   |                                   |   | 4.29    |   |  |   | 2.18    |  
|Dilutive effect of share issuance and unvested restricted stock                 |  |                         | (2.68   | ) |                                   |   | (3.88   | ) |  |   | (1.04   | )
|Dilutive effect of issuance of restricted stock awards                          |  |                         |        |   |                                   |   |        |   |  |   | (1.00   | )
|Net increase in shareholders equity from restricted stock amortization(2)      |  |                         | 0.11    |   |                                   |   | 0.14    |   |  |   | 0.06    |  
|                                                                                |  |                         |         |   |                                   |   |         |   |  |   |         |  
|Net increase in stockholders equity relating to share issuances                |  |                         | 0.50    |   |                                   |   | 0.58    |   |  |   | 0.20    |  
|                                                                                |  |                         |         |   |                                   |   |         |   |  |   |         |  
|Net asset value at end of period(1)                                             |  | $                       | 11.98   |   |                                   | $ | 11.56   |   |  | $ | 12.46   |  
|                                                                                |  |                         |         |   |                                   |   |         |   |  |   |         |  
|Per share market value at end of period                                         |  | $                       | 19.59   |   |                                   | $ | 10.77   |   |  | $ | 17.80   |  
|Total return(3)                                                                 |  |                         | 97.21   | % |                                   |   | -27.13  | % |  |   | 4.71    | %
|Shares outstanding at end of period                                             |  |                         | 38,732  |   |                                   |   | 31,259  |   |  |   | 28,287  |  
|Ratio/Supplemental Data:                                                        |  |                         |         |   |                                   |   |         |   |  |   |         |  
|Net assets at end of period                                                     |  | $                       | 463,950 |   |                                   | $ | 361,250 |   |  | $ | 352,373 |  
|Ratio of operating expenses to average net assets (annualized)                  |  |                         | 8.31    | % |                                   |   | 8.56    | % |  |   | 2.13    | %
|Ratio of net operating income to average net assets (annualized)                |  |                         | 11.95   | % |                                   |   | 11.91   | % |  |   | -0.45   | %

---

|(1) |  | Based on total shares outstanding.
|--- |  | ----------------------------------

|(2) |  | Based on average shares outstanding.
|--- |  | ------------------------------------

|(3) |  | The 2001 dividend 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) |  | For 2003, total return equals the increase of the ending market value over the December 31, 2002 price of $10.77 per share plus dividends paid ($1.65 per share), divided by the
beginning price. For 2002, total return equals the decrease of the ending market value over the December 31, 2001 price of $17.80 per share plus dividends paid ($2.20 per share), divided by the beginning price. For 2001, total return equals the
increase of the ending market value over the initial public offering price, divided by the initial offering price. Total return is not annualized.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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MCG Capital Corporation



Notes to Consolidated Financial Statements(Continued)



(in thousands, except share and per share amounts)



Note MSubsequent Events



In January of 2004, we entered into a credit and warehouse agreement with UBS AG. This agreement allows us to borrow up to
$200 million subject to partial recourse and other covenants and restrictions. This facility provides financing for loans that will collateralize a potential future term securitization. In February of 2004, we agreed to amend our revolving credit
facility, established through MCG Master Trust. The amendment reduces the total availability under the facility to $130 million, extends the facilitys revolving period to September 2004 with required payments down to $100 million by that date,
adds recourse to MCG for payments, and revises certain other provisions of the agreement including reducing the interest rate and adjusting final maturity from June of 2020 to September of 2009.



On February 12, 2004, we entered into an agreement with Wachovia to amend the
revolving credit facility that we had established through MCG Master Trust. The amendment to the revolving credit facility, among other things, provides for the following:



| |  |  | a decrease in our borrowing capacity from $200.0 million to $130.0 million, which will further be reduced to $115.0 million on June 30, 2004 and to $100.0 million by September 30,
2004;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an extension of the revolving period to September 30, 2004;
| | - |  | -----------------------------------------------------------



| |  |  | permits recourse to MCG Capital Corporation itself in the event that the interest and principal payments from the loans we transferred to MCG Master Trust in connection with the
revolving credit facility are insufficient to repay the outstanding amount due under the revolving credit facility;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | eliminates a requirement relating to loan charge-offs at the servicer level that we were previously required to seek a waiver from in February 2003;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes the date on which the holder of the notes issued by MCG Master Trust receives final payment on such notes from June 2020 to September 2009; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reduces the interest rate payable under the revolving credit facility from the commercial paper rate plus 3.0% to LIBOR plus 1.5%.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



In the first quarter of 2004, as part of a review of our executive
compensation, the compensation committee of our Board of Directors agreed with certain of our executive officers to allow the forfeiture restrictions to lapse with respect to their Tier I and Tier II shares immediately upon full repayment of the
partially nonrecourse promissory notes that are secured by the restricted stock. In addition, the compensation committee waived the performance-based forfeiture restrictions and modified the time-based forfeiture provisions associated with the Tier
III shares through their respective amended and restated restricted stock agreements. The impact of these changes on long-term incentive compensation expense, assuming a market price of our common stock of $20.04 and assuming that all of the
executives repay their promissory notes in the first quarter of 2004, would be an increase of up to approximately $6.2 million for the first quarter of 2004 and $5.4 million for the year ending December 31, 2004.



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



Not applicable.



Item 9a.Controls and Procedures



| | (a) |  | As of the end of the year covered by this Annual Report on Form 10-K, MCG carried out an evaluation, under the supervision and with the participation of MCGs management,
including MCGs Chief Executive Officer, President and Chief Operating Officer and Chief Financial Officer, of the effectiveness of the design and operation of MCGs disclosure controls and procedures (as defined in Rule 13a-15(c) of the
Securities Exchange Act of 1934). Based on that evaluation, the Chief Executive Officer, the President and Chief Operating Officer and the Chief Financial Officer have concluded that MCGs current disclosure controls and procedures are
effective in timely alerting them of material information relating to MCG that is required to be disclosed in MCGs SEC filings.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | There have not been any significant changes in the internal controls of MCG or other factors that could significantly affect these internal controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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,
Section 16(a) Beneficial Ownership Reporting Compliance Committees of the Boards of Directors in our definitive Proxy Statement for the 2004 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.



We have adopted a code of business conduct and ethics that applies to directors, officers and employees. The code of business conduct and ethics is
available on our website at http://www.mcgcapital.com. We will report any amendments to or waivers of a required provision of the code of business conduct and ethics in a Form 8-K.



Item 11.Executive Compensation



The information with respect to compensation of executives and directors is contained under the caption Proposal I : Election of
DirectorsCompensation of Executive Officers and Directors in our definitive Proxy Statement for the 2004 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 and Related Stockholder Matters



Upon our election to be regulated as a business development company, the Company terminated its stock option plan and the
option grants made thereunder and issued 1,539,851 shares of its common stock, which are restricted, to its employees and directors under its restricted stock plan. 339,144 shares of the restricted stock were purchased by certain executive officers
and employees at a per share price of $17.00. As of December 31, 2003, 970,144 shares of the restricted stock were subject to various time and performance based forfeiture provisions. There are no additional shares available for issuance under our
restricted stock plan. See Note I to our Notes to Consolidated Financial Statements for a further discussion of our restricted stock plan. For purposes of calculating earnings per common share, certain shares of restricted common stock are not
included. See Note J to our Notes to Consolidated Financial Statements for a further discussion.



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The information with respect to security ownership of certain beneficial owners and management is
contained under the captions Security Ownership of Certain Beneficial Owners and Management and Equity Compensation Plans in our definitive Proxy Statement for the 2004 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 Proposal I : Election of
DirectorsCertain Relationships and Transactions in our definitive Proxy Statement for the 2004 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 14.    Principal Accountant Fees and Services



The information with respect to principal accountant fees and services is contained under the captions Audit Committee Report and
Proposal II : Ratification of Selection of Independent Auditors in our definitive Proxy Statement for the 2004 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 to this item.



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PART IV



Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K



|    |  |    |  |                                                                                                                                                                                                 |  |   
|--- |  | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|(a) |  | 1. |  | The following financial statements are filed herewith                                                                                                                                           |  |   
|    |  |    |  | Report of Independent Auditors                                                                                                                                                                  |  | 48
|    |  |    |  | Consolidated Balance Sheets as of December 31, 2003 and 2002                                                                                                                                    |  | 49
|    |  |    |  | Consolidated Statements of Operations for the years ended December 31, 2003 and 2002, one month ended December 31, 2001, and eleven months ended November 30, 2001                              |  | 50
|    |  |    |  | Consolidated Statements of Stockholders Equity from December 31, 2000 through 2003                                                                                                             |  | 51
|    |  |    |  | Consolidated Statements of Cash Flows for the years ended December 31, 2003 and 2002, one month ended December 31, 2001, and eleven months ended November 30, 2001                              |  | 52
|    |  |    |  | Consolidated Schedule of Investments as of December 31, 2003                                                                                                                                    |  | 53
|    |  |    |  | Consolidated Schedule of Investments as of December 31, 2002                                                                                                                                    |  |   
|    |  |    |  | Notes to Consolidated Financial Statements                                                                                                                                                      |  | 61
|    |  | 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.                                                                                                                                    |  |   



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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):



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|3.1           |  | Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 filed with MCG Capitals Form 10-K for year ended
December 31, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|              | 
|3.2           |  | Amended and Restated Bylaws                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|              | 
|4.1           |  | Specimen Common Stock Certificate (Incorporated by reference to Exhibit D.1 to Pre-effective Amendment No.2 to MCG Capitals
registration statement on Form N-2 filed with the Commission on November 1, 2001 [File No. 333-64596]).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|              | 
|10.1          |  | Third Amended and Restated Registration Rights Agreement by and among MCG Capital Corporation and certain stockholders (Incorporated by
reference to Exhibit 10.1 filed with MCG Capitals Form 10-K for year ended December 31, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|              | 
|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 Amendment No. 1, dated as of September 1, 2000, Amendment No. 2, dated as of June 6, 2001 (Incorporated by reference to Exhibit 99.f.1 filed with MCG Capitals registration statement on Form
N-2 filed with the Commission on July 5, 2001 [File No. 333-64596]), Amendment No. 3, dated as of May 20, 2002 (Incorporated by reference to Exhibit 99.f.1 to Pre-Effective Amendment No. 2 to MCG Capitals registration statement on Form N-2
filed with the Commission on May 21, 2002 [File No. 333-86286]), and Amendment No. 4, dated as of July 8, 2002 (Incorporated by reference to Exhibit 10.2 filed with MCG Capitals Form 10-Q for quarter ended June 30, 2002).                   
|              | 
|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 Amendment No. 1, effective as of June 6, 2001 (Incorporated by reference to Exhibit 99.f.2 to Pre-effective Amendment No.3 to MCG Capitals registration
statement on Form N-2 filed with the Commission on November 6, 2001 [File No. 333-64596]), Amendment No. 2, dated as of May 20, 2002 (Incorporated by reference to Exhibit 99.f.2 to Pre-Effective Amendment No. 2 to MCG Capitals registration
statement on Form N-2 filed with the Commission on May 21, 2002 [File No. 333-86286]), and Amendment No. 3, dated as of July 8, 2002 (Incorporated by reference to Exhibit 10.3 filed with MCG Capitals Form 10-Q for quarter ended June 30,
2002).
|              | 
|10.4          |  | Guaranty, dated as of June 16, 2000 (Incorporated by reference to Exhibit 99.f.3 filed with MCG Capitals registration statement on
Form N-2 filed with the Commission on July 5, 2001 [File No. 333-64596]).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|              | 
|10.5          |  | Trust Agreement between MCG Finance Corporation II and Wilmington Trust Company, dated as of June 1, 2000 (Incorporated by reference to
Exhibit 99.f.4 filed with MCG Capitals registration statement on Form N-2 filed with the Commission on July 5, 2001 [File No. 333-64596]).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|              | 
|10.6          |  | Trust Certificate, dated as of June 16, 2000 (Incorporated by reference to Exhibit 99.f.5 filed with MCG Capitals registration
statement on Form N-2 filed with the Commission on July 5, 2001 [File No. 333-64596]).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|              | 
|10.7          |  | MCG Master Trust Class A Note issued to Variable Funding Capital Corporation, dated as of June 16, 2000 (Incorporated by reference to
Exhibit 99.f.6 filed with MCG Capitals registration statement on Form N-2 filed with the Commission on July 5, 2001 [File No. 333-64596]).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|              | 
|10.8          |  | MCG Master Trust Class B Note issued to MCG Finance Corporation II, dated as of June 16, 2000 (Incorporated by reference to Exhibit 99.f.7
filed with MCG Capitals registration statement on Form N-2 filed with the Commission on July 5, 2001 [File No. 333-64596]).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.9          |  | Indenture by and between MCG Master Trust and Norwest Bank Minnesota, National Association, dated as of June 1, 2000 (Incorporated by
reference to Exhibit 99.f.8 filed with MCG Capitals registration statement on Form N-2 filed with the Commission on July 5, 2001 [File No. 333-64596]).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|              | 
|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 Amendment No. 1, dated as of June 6, 2001, filed herein (Incorporated by reference to Exhibit 99.f.9 to Pre-effective Amendment No.3 to MCG Capitals registration statement on Form N-2 filed with the Commission on November 6, 2001
[File No. 333-64596]), Amendment No. 2, dated as of May 20, 2002 (Incorporated by reference to Exhibit 99.f.9 to Pre-Effective Amendment No. 2 to MCG Capitals registration statement on Form N-2 filed with the Commission on May 21, 2002 [File
No. 333-86286]), and Amendment No. 3, dated as of July 8, 2002 (Incorporated by reference to Exhibit 10.10 filed with MCG Capitals Form 10-Q for quarter ended June 30, 2002).
|              | 
|10.11         |  | Commercial Loan Sale Agreement between MCG Capital Corporation and MCG Finance Corporation II, dated as of June 1, 2000 (Incorporated by
reference to Exhibit 99.f.10 filed with MCG Capitals registration statement on Form N-2 filed with the Commission on July 5, 2001 [File No. 333-64596]).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              | 
|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 (Incorporated by reference to Exhibit 99.f.11 filed with MCG Capitals registration statement on Form N-2 filed with the Commission on July 5, 2001[File No.
333-64596]).                                                                                                                                                                                                                                                                                                                                                                                                                                      
|              | 
|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 (Incorporated by reference to Exhibit 10.13 filed with MCG Capitals Form 10-K for year ended December 31, 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 (Incorporated by reference to Exhibit 10.14 filed with MCG Capitals Form 10-K for year ended December 31, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|              | 
|10.15         |  | Trust Agreement between MCG Finance III, LLC and Wilmington Trust Company, dated as of December 1, 2001 (Incorporated by reference to
Exhibit 10.15 filed with MCG CapitalsForm 10-K for year ended December 31, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|              | 
|10.16         |  | MCG Commercial Loan Trust 2001-1 Trust Certificate, dated as of December 27, 2001 (Incorporated by reference to Exhibit 10.16 filed with
MCG Capitals Form 10-K for year ended December 31, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|              | 
|10.17         |  | MCG Commercial Loan Trust 2001-1 Class A Note, dated as of December 27, 2001 (Incorporated by reference to Exhibit 10.17 filed with MCG
Capitals Form 10-K for year ended December 31, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|              | 
|10.18         |  | MCG Commercial Loan Trust 2001-1 Class B Note, dated as of December 27, 2001 (Incorporated by reference to Exhibit 10.18 filed with MCG
Capitals Form 10-K for year ended December 31, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|              | 
|10.19         |  | MCG Commercial Loan Trust 2001-1 Class C Note issued to MCG Finance III, LLC, dated as of December 27, 2001 (Incorporated by reference to
Exhibit 10.19 filed with MCG CapitalsForm 10-K for year ended December 31, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              | 
|10.20         |  | Indenture between MCG Commercial Loan Trust 2001-1 and Wells Fargo Bank Minnesota, National Association, dated as of December 1, 2001
(Incorporated by reference to Exhibit 10.20 filed with MCG Capitals Form 10-K for year ended December 31, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



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|              |  |                                                                                                                                                                                                                                                                                   
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                           
|10.21         |  | Commercial Loan Sale Agreement between MCG Capital Corporation and MCG Finance III, LLC, dated as of December 1, 2001 (Incorporated by
reference to Exhibit 10.21 filed with MCG Capitals Form 10-K for year ended December 31, 2001).                                           
|              | 
|10.22         |  | Stock Purchase Agreement by and between MCG Capital Corporation and FBR Asset Investment Corporation (Incorporated by reference to Exhibit
10.22 filed with MCG Capitals Form 10-K for year ended December 31, 2001).                                                            
|              | 
|10.23         |  | 401(k) Plan (Incorporated by reference to Exhibit 99.i.1 filed with MCG Capitals registration statement on Form N-2 filed with the
Commission on July 5, 2001 [File No. 333-64596]).                                                                                             
|              | 
|10.24         |  | Deferred Compensation Plan (Incorporated by reference to Exhibit 99.i.2 filed with MCG Capitals registration statement on Form N-2
filed with the Commission on July 5, 2001 [File No. 333-64596]).                                                                              
|              | 
|10.25         |  | Dividend Reinvestment Plan (Incorporated by reference to Exhibit E to Pre-effective Amendment No.2 to MCG Capitals registration
statement on Form N-2 filed with the Commission on November 1, 2001 [File No. 333-64596]).                                                       
|              | 
|10.26         |  | Form of Restricted Stock Agreement for administrative personnel (Incorporated by reference to Exhibit 99.i.3 to Pre-effective Amendment
No.3 to MCG Capitals registration statement on Form N-2 filed with the Commission on November 6, 2001 [File No. 333-64596]).             
|              | 
|10.27         |  | Form of Restricted Stock Agreement for staff professionals (Incorporated by reference to Exhibit 99.i.4 to Pre-effective Amendment
No.3 to MCG Capitals registration statement on Form N-2 filed with the Commission on November 6, 2001 [File No. 333-64596]).                  
|              | 
|10.28         |  | Form of Restricted Stock Agreement for senior management (Incorporated by reference to Exhibit 99.i.6 to Pre-effective Amendment No.3 to
MCG Capitals registration statement on Form N-2 filed with the Commission on November 6, 2001 [File No. 333-64596]).                    
|              | 
|10.29         |  | Amended and Restated Restricted Stock Agreement between the Company and Bryan J. Mitchell, dated March 1, 2004 (Incorporated by reference
to Exhibit 99.i.27 to MCG Capitals registration statement on Form N-2 filed with the Commission on March 3, 2004 [File No. 333-113236] 
|              | 
|10.30         |  | Restricted Stock Agreement between the Company and Robert J. Merrick, dated November 28, 2001 (Incorporated by reference to Exhibit 10.30
filed with MCG Capitals Form 10-K for year ended December 31, 2001).                                                                   
|              | 
|10.31         |  | Amended and Restated Restricted Stock Agreement between the Company and B. Hagen Saville, dated March 1, 2004 (Incorporated by reference to
Exhibit 99.i.29 to MCG Capitals registration statement on Form N-2 filed with the Commission on March 3, 2004 [File No. 333-113236]).
|              | 
|10.32         |  | Amended and Restated Restricted Stock Agreement between the Company and Steven F. Tunney, dated March 1, 2004 (Incorporated by reference to
Exhibit 99.i.28 to MCG Capitals registration statement on Form N-2 filed with the Commission on March 3, 2004 [File No. 333-113236]).
|              | 
|10.33         |  | Form of Restricted Stock Agreement for directors (Incorporated by reference to Exhibit 99.i.7 to Pre-effective Amendment No.3 to MCG
Capitals registration statement on Form N-2 filed with the Commission on November 6, 2001 [File No. 333-64596]).                            
|              | 
|10.34         |  | Promissory Note issued to Bryan J. Mitchell, dated as of November 28, 2001 (Incorporated by reference to Exhibit 10.34 filed with MCG
Capitals Form 10-K for year ended December 31, 2001).                                                                                      
|              | 
|10.35         |  | Promissory Note issued to B. Hagen Saville, dated as of November 28, 2001 (Incorporated by reference to Exhibit 10.35 filed with MCG
Capitals Form 10-K for year ended December 31, 2001).                                                                                       
|              | 
|10.36         |  | Promissory Note issued to Steven F. Tunney, dated as of November 28, 2001 (Incorporated by reference to Exhibit 10.36 filed with MCG
Capitals Form 10-K for year ended December 31, 2001).                                                                                       



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|              | 
|10.37         |  | Form of Promissory Note issued to senior management (Incorporated by reference to Exhibit 99.i.8 to Pre-effective Amendment No.3 to MCG
Capitals registration statement on Form N-2 filed with the Commission on November 6, 2001 [File No. 333-64596]).                                                                                                                                                                                                                                                                                                                                                                        
|              | 
|10.38         |  | Form of Promissory Note issued to employees (Incorporated by reference to Exhibit 99.i.9 to Pre-effective Amendment No.3 to MCG
Capitals registration statement on Form N-2 filed with the Commission on November 6, 2001 [File No. 333-64596]).                                                                                                                                                                                                                                                                                                                                                                                
|              | 
|10.39         |  | Pledge Agreement between the Company and Bryan J. Mitchell, dated as of November 28, 2001 (Incorporated by reference to Exhibit 10.39 filed
with MCG Capitals Form 10-K for year ended December 31, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                      
|              | 
|10.40         |  | Pledge Agreement between the Company and B. Hagen Saville, dated as of November 28, 2001 (Incorporated by reference to Exhibit 10.40 filed
with MCG Capitals Form 10-K for year ended December 31, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                       
|              | 
|10.41         |  | Pledge Agreement between the Company and Steven F. Tunney, dated as of November 28, 2001 (Incorporated by reference to Exhibit 10.41 filed
with MCG Capitals Form 10-K for year ended December 31, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                       
|              | 
|10.42         |  | Form of Pledge Agreement between the Company and employee (Incorporated by reference to Exhibit 99.i.10 to Pre-effective Amendment No.3 to
MCG Capitals registration statement on Form N-2 filed with the Commission on November 6, 2001 [File No. 333-64596]).                                                                                                                                                                                                                                                                                                                                                                 
|              | 
|10.43         |  | Form of Amended and Restated Promissory Note issued to senior management (Incorporated by reference to Exhibit I.10 to Pre-effective
Amendment No.2 to MCG Capitals registration statement on Form N-2 filed with the Commission on November 1, 2001 [File No. 333-64596]).                                                                                                                                                                                                                                                                                                                                                     
|              | 
|10.44         |  | Form of Pledge Agreement between the Company and senior management, dated as of June 24, 1998 (Incorporated by reference to Exhibit 99.i.7
filed with MCG Capitals registration statement on Form N-2 filed with the Commission on July 5, 2001 [File No. 333-64596]).                                                                                                                                                                                                                                                                                                                                                          
|              | 
|10.45         |  | Custodial Agreement between the Company and Riggs Bank, N.A. (Incorporated by reference to Exhibit 10.45 filed with MCG Capitals Form
10-K for year ended December 31, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|              | 
|10.47         |  | Employment Agreement between the Company and Robert J. Merrick, dated November 28, 2001 (Incorporated by reference to Exhibit 10.47 filed
with MCG Capitals Form 10-K for year ended December 31, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                        
|              | 
|10.48         |  | Employment Agreement between the Company and B. Hagen Saville, dated November 28, 2001 (Incorporated by reference to Exhibit 10.48 filed
with MCG Capitals Form 10-K for year ended December 31, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                         
|              | 
|10.49         |  | Employment Agreement between the Company and Steven F. Tunney, dated November 28, 2001 (Incorporated by reference to Exhibit 10.49 filed
with MCG Capitals Form 10-K for year ended December 31, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                         
|              | 
|10.50         |  | Deed of Lease by and between Twin Towers II Associates Limited Partnership, as landlord, and MCG Capital Corporation, as tenant, dated as
of September 24, 2002 (Incorporated by reference to Exhibit 10.50 filed with MCG Capitals Form 10-Q for quarter ended September 30, 2002).                                                                                                                                                                                                                                                                                                                                            
|10.51         |  | Amended and Restated Employment Agreement between MCG Capital Corporation and Bryan J. Mitchell dated November 3, 2002 (Incorporated by
reference to Exhibit 10.51 filed with MCG Capitals Form 10-Q for quarter ended September 30, 2002).                                                                                                                                                                                                                                                                                                                                                                                     
|              | 
|10.52         |  | Omnibus Amendment dated as of December 27, 2001 between MCG Capital Corporation, MCG Finance Corporation II, MCG Master Trust, Wells Fargo
Bank, Wilmington Trust Company, Variable Funding Capital Corp., and First Union Securities, Inc, to amend certain basic documents in connection with converting MCG Finance Corporation II, a Delaware corporation, to MCG Finance II, LLC, a Delaware
Limited Liability Company (Incorporated by reference to Exhibit 99.f.11.1 to Pre-Effective Amendment No. 2 to MCG Capitals registration statement on Form N-2 filed with the Commission on May 21, 2002 [File No. 333-86286]).



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|              | 
|10.53         |  | Letter Agreement, dated as of January 27, 2003, by and among MCG Master Trust, MCG Capital Corporation, Variable Funding Capital
Corporation and Wachovia Securities, Inc. regarding waiver of covenant under Note Purchase Agreement, dated June 1, 2000 (as amended), by and among MCG Master Trust, MCG Capital Corporation, Variable Funding Capital Corporation and Wachovia
Securities, Inc.                                                                                                                                                     
|              | 
|10.54         |  | Letter Agreement, dated as of February 14, 2003, by and among MCG Master Trust, MCG Capital Corporation, Variable Funding Capital
Corporation and Wachovia Securities, Inc. regarding waiver of covenant under Note Purchase Agreement, dated June 1, 2000 (as amended), by and among MCG Master Trust, MCG Capital Corporation, Variable Funding Capital Corporation and Wachovia
Securities, Inc.                                                                                                                                                    
|              | 
|10.55         |  | Amendment No. 4 to Series 2000-1 Term Supplement, dated February 14, 2003, between MCG Master Trust and Wells Fargo Bank Minnesota,
National Association.                                                                                                                                                                                                                                                                                                                                                                                              
|              | 
|10.56         |  | Omnibus Amendment No. 2, dated as of February 12, 2004, among MCG Capital Corporation, MCG Finance II, LLC, MCG Master Trust, Wells Fargo
Bank, National Association (successor by merger to Norwest Bank Minnesota, National Association), Wilmington Trust Company, Variable Funding Capital Corporation, Wachovia Capital Markets, LLC, and Wachovia Bank, National Association (Incorporated by
reference to Exhibit 99.f.26 to MCG Capitals registration statement on Form N-2 filed with the Commission on March 3, 2004 [File No. 333-113236]).
|              | 
|10.57         |  | MCG Capital Corporation Swingline Note issued to Wachovia Bank, National Association (formerly First Union National Bank), dated as of
February 12, 2004 (Incorporated by reference to Exhibit 99.f.27 to MCG Capitals registration statement on Form N-2 filed with the Commission on March 3, 2004 [File No. 333-113236]).                                                                                                                                                                                                                          
|              | 
|10.58         |  | MCG Master Trust Class A Note issued to Wachovia Bank, National Association, dated as of February 12, 2004 (Incorporated by reference to
Exhibit 99.f.28 to MCG Capitals registration statement on Form N-2 filed with the Commission on March 3, 2004 [File No. 333-113236]).                                                                                                                                                                                                                                                                        
|              | 
|10.59         |  | MCG Master Trust Class B Note issued to MCG Finance Corporation II, dated as of February 12, 2004 (Incorporated by reference to Exhibit
99.f.29 to MCG Capitals registration statement on Form N-2 filed with the Commission on March 3, 2004 [File No. 333-113236]).                                                                                                                                                                                                                                                                                 
|              | 
|10.60         |  | Credit and Warehouse Agreement, dated as of January 29, 2004, among UBS AG, Stamford Branch, MCG Commercial Loan Trust 2003-1 and MCG
Capital Corporation (Incorporated by reference to Exhibit 99.f.30 to MCG Capitals registration statement on Form N-2 filed with the Commission on March 3, 2004 [File No. 333-113236]).                                                                                                                                                                                                                         
|              | 
|10.61         |  | Form of Amended and Restated Restricted Stock Agreement for senior management (Incorporated by reference to Exhibit 99.i.26 to MCG
Capitals registration statement on Form N-2 filed with the Commission on March 3, 2004 [File No. 333-113236]).                                                                                                                                                                                                                                                                                                     
|              | 
|10.62++       |  | Amended and Restated Credit and Warehouse Agreement, date as of March 11, 2004, among USB AG, Stamford Branch, MCG Commercial Loan
Trust 2003-1 and MCG Capital Corporation.                                                                                                                                                                                                                                                                                                                                                                           
|              | 
|10.63++       |  | Pledge, Security and Custody Agreement by and among MCG Commercial Loan Trust 2003-1, MCG Finance IV, LLC, MCG Capital Corporation, UBS AG,
Stamford Branch, and Wells Fargo Bank, National Association, dated as of March 11, 2004.                                                                                                                                                                                                                                                                                                                   
|              | 
|10.64++       |  | Master Conveyance Assignment, dated as of March 11, 2004 among MCG Capital Corporation, MCG Finance IV, LLC, and MCG Commercial Loan Trust
2003-1.                                                                                                                                                                                                                                                                                                                                                                                                     
|              | 
|11            |  | Statement regarding computation of per share earnings is included in Note J to the Companys Notes to the Consolidated Financial
Statements.                                                                                                                                                                                                                                                                                                                                                                                                           
|              | 
|21++          |  | Subsidiaries of the Company and jurisdiction of incorporation/organization.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            



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|              |  |                                                                                                                                     
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                             
|              | 
|31.1++        |  | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.                      
|              | 
|31.2++        |  | Certification of President and Chief Operating Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of
1934.        
|              | 
|31.3++        |  | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.                      
|              | 
|32.1++        |  | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350).              
|              | 
|32.2++        |  | Certification of President and Chief Operating Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U. S. C.
1350).
|              | 
|32.3++        |  | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350).              

---

|++ |  | Filed Herewith
|-- |  | --------------



|(b) |  | Reports on Form 8-K.
|--- |  | --------------------



On November 5, 2003, we filed a current report on Form 8-K, pursuant to Item 12 reporting the issuance of a press release, announcing our financial
results for the three and nine months ended September 30, 2003.



On February 12, 2004, we filed a current report on Form 8-K, pursuant to Item 12 reporting the issuance of a press release, announcing our financial results for the three months and year ended December 31, 2003.



98



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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 12, 2004.



MCG CAPITAL CORPORATIONBy:

/s/    BRYAN J.
MITCHELLBryan J. Mitchell 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.



|                                              |  |                                                                      |  |               
|--------------------------------------------- |  | -------------------------------------------------------------------- |  | --------------
|Signature                                     |  | Title                                                                |  | Date          
|                                              |  |                                                                     
|/s/    BRYAN J.
MITCHELLBryan J.
Mitchell     |  | Chief Executive Officer (Principal Executive Officer)                |  | March 12, 2004
|                                              |  |                                                                     
|/s/    STEVEN F.
TUNNEYSteven F. Tunney       |  | Director, President and Chief Operating Officer                      |  | March 12, 2004
|                                              |  |                                                                     
|/s/    JANET C.
PERLOWSKIJanet C.
Perlowski   |  | Chief Financial Officer (Principal Financial and Accounting Officer) |  | March 12, 2004
|                                              |  |                                                                     
|/s/    WALLACE B.
MILLNERWallace B.
Millner   |  | Chairman of the Board and Director                                   |  | March 12, 2004
|                                              |  |                                                                     
|/s/    NORMAN W.
ALPERTNorman W. Alpert       |  | Director                                                             |  | March 12, 2004
|                                              |  |                                                                     
|/s/    JOSEPH H.
GLEBERMANJoseph H.
Gleberman |  | Director                                                             |  | March 12, 2004
|                                              |  |                                                                     
|/s/    JEFFREY M.
BUCHERJeffrey M. Bucher     |  | Director                                                             |  | March 12, 2004
|                                              |  |                                                                     
|/s/    KENNETH J.
OKEEFEKenneth J.
OKeefe   |  | Director                                                             |  | March 12, 2004
|                                              |  |                                                                     
|/s/    ROBERT J.
MERRICKRobert J. Merrick     |  | Director                                                             |  | March 12, 2004
|                                              |  |                                                                     
|/s/    MICHAEL A.
PRUZANMichael A. Pruzan     |  | Director                                                             |  | March 12, 2004



99