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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



|x |  | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- |  | ---------------------------------------------------------------------------------------



For the Quarter Ended September 30, 2003.



| ̈ |  | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- |  | ----------------------------------------------------------------------------------------



Commission File Number: 0-33377



MCG CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)



|Delaware                                                       |  | 54-1889518                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|1100 Wilson Boulevard, Suite 3000 Arlington, VA                |  | 22209                               
|(Address of principal executive office)                        |  | (Zip Code)                          



(703) 247-7500

(Registrants telephone number, including area code)



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 and (2) has been subject to such filing requirements for the past 90 days. Yes x  No ̈



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



The number of shares of the registrants Common Stock, $.01 par value, outstanding as of November 13, 2003 was 38,731,523.



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##### Table of Contents

MCG CAPITAL CORPORATION



FORM 10-Q FOR
THE QUARTER ENDED SEPTEMBER 30, 2003



TABLE OF CONTENTS



|PART I     |  | FINANCIAL INFORMATION                                                                                 |  | 3 
|---------- |  | ----------------------------------------------------------------------------------------------------- |  | --
|           |  |                                                                                                      
|           |  | Selected Consolidated Financial and Other Data                                                        |  | 3 
|           |  |                                                                                                      
|Item 1.    |  | Financial Statements (Unaudited)                                                                      |  | 4 
|           |  |                                                                                                      
|           |  | Consolidated Balance Sheets  September 30, 2003 and December 31, 2002                                |  | 4 
|           |  |                                                                                                      
|           |  | Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002 |  | 5 
|           |  |                                                                                                      
|           |  | Consolidated Statement of Stockholders Equity for the nine months ended September 30, 2003 and 2002  |  | 6 
|           |  |                                                                                                      
|           |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002           |  | 7 
|           |  |                                                                                                      
|           |  | Consolidated Schedules of Investments as of September 30, 2003 and December 31, 2002                  |  | 8 
|           |  |                                                                                                      
|           |  | Notes to Consolidated Financial Statements                                                            |  | 17
|           |  |                                                                                                      
|           |  | Independent Accountants Review Report                                                                |  | 27
|           |  |                                                                                                      
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                 |  | 28
|           |  |                                                                                                      
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                            |  | 44
|           |  |                                                                                                      
|Item 4.    |  | Controls and Procedures                                                                               |  | 45
|           |  |                                                                                                      
|PART II    |  | OTHER INFORMATION                                                                                     |  | 46
|           |  |                                                                                                      
|Item 1.    |  | Legal Proceedings                                                                                     |  | 46
|           |  |                                                                                                      
|Item 2.    |  | Changes in Securities and Use of Proceeds                                                             |  | 46
|           |  |                                                                                                      
|Item 3.    |  | Defaults upon Senior Securities                                                                       |  | 46
|           |  |                                                                                                      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                   |  | 46
|           |  |                                                                                                      
|Item 5.    |  | Other Information                                                                                     |  | 46
|           |  |                                                                                                      
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                      |  | 47
|           | 
|Signatures |  | 48                                                                                                   



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PART I.    FINANCIAL INFORMATION



In this Quarterly 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.



Selected Consolidated Financial and Other Data



The selected consolidated financial and other data below should be read in conjunction with our Managements Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements (unaudited) and notes thereto.



|                                                                                                 |  | Three Months EndedSeptember 30, |         |      | Nine Months EndedSeptember 30,
|------------------------------------------------------------------------------------------------ |  | ------------------------------- | ------- | ---- | ------------------------------
|(dollars in thousands except per share data)                                                     |  | 2003                            |         | 2002 |                               
|Income statement data:                                                                           |  |                                 |         |      |                               
|Operating income                                                                                 |  | $                               | 19,904  |      | $                             
|Net operating income before investment gains and losses                                          |  |                                 | 11,740  |      |                               
|Net income (loss)/Net increase (decrease) in stockholders equity resulting from earnings (loss) |  |                                 | 9,913   |      |                               
|                                                                                                 |  |                                 |         |     
|Per common share data:                                                                           |  |                                 |         |      |                               
|Earnings (loss) per common share:                                                                |  |                                 |         |      |                               
|Basic                                                                                            |  | $                               | 0.30    |      | $                             
|Diluted                                                                                          |  |                                 | 0.30    |      |                               
|Net operating income before investment gains and losses per common share basic and diluted       |  |                                 | 0.36    |      |                               
|Net asset value per common share (a)                                                             |  |                                 | 11.99   |      |                               
|Cash dividends declared per common share                                                         |  |                                 | 0.42    |      |                               
|                                                                                                 |  |                                 |         |     
|Selected period-end balances:                                                                    |  |                                 |         |      |                               
|Total investment portfolio                                                                       |  | $                               | 611,927 |      | $                             
|Total assets                                                                                     |  |                                 | 801,354 |      |                               
|Borrowings                                                                                       |  |                                 | 318,471 |      |                               
|                                                                                                 |  |                                 |         |     
|Other data (at period-end):                                                                      |  |                                 |         |      |                               
|Number of portfolio companies                                                                    |  |                                 | 78      |      |                               
|Number of employees                                                                              |  |                                 | 54      |      |                               

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



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##### Table of Contents

Item 1.    Financial Statements (unaudited)



MCG Capital Corporation

Consolidated Balance Sheets

(in thousands, except per share data) (unaudited)



|                                                                                                                                                                    |  | September 30,2003 |         |   | December 31,2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | -
|Assets                                                                                                                                                              |  |                   |         |   |                  |  
|Cash and cash equivalents                                                                                                                                           |  | $                 | 154,591 |   |                  | $
|Cash, securitization accounts                                                                                                                                       |  |                   | 21,091  |   |                  |  
|Investments:                                                                                                                                                        |  |                   |         |   |                  |  
|Commercial loans, at fair value (cost of $588,855 and $694,977, respectively)                                                                                       |  |                   | 579,794 |   |                  |  
|Investments in equity securities, at fair value (cost of $70,729 and $37,014, respectively)                                                                         |  |                   | 49,573  |   |                  |  
|Unearned income on commercial loans                                                                                                                                 |  |                   | (17,440 | ) |                  |  
|                                                                                                                                                                    |  |                   |         |   |                  |  
|Total investments                                                                                                                                                   |  |                   | 611,927 |   |                  |  
|Interest receivable                                                                                                                                                 |  |                   | 4,697   |   |                  |  
|Other assets                                                                                                                                                        |  |                   | 9,048   |   |                  |  
|                                                                                                                                                                    |  |                   |         |   |                  |  
|Total assets                                                                                                                                                        |  | $                 | 801,354 |   |                  | $
|                                                                                                                                                                    |  |                   |         |   |                  |  
|                                                                                                                                                                    |  |                  
|Liabilities                                                                                                                                                         |  |                   |         |   |                  |  
|Borrowings                                                                                                                                                          |  | $                 | 318,471 |   |                  | $
|Interest payable                                                                                                                                                    |  |                   | 1,186   |   |                  |  
|Dividends payable                                                                                                                                                   |  |                   | 13,127  |   |                  |  
|Other liabilities                                                                                                                                                   |  |                   | 4,131   |   |                  |  
|                                                                                                                                                                    |  |                   |         |   |                  |  
|Total liabilities                                                                                                                                                   |  |                   | 336,915 |   |                  |  
|                                                                                                                                                                    |  |                   |         |   |                  |  
|                                                                                                                                                                    |  |                  
|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, 38,729 issued and outstanding on September 30, 2003 and 31,259 issued and
outstanding on December 31, 2002 |  |                   | 387     |   |                  |  
|Paid-in capital                                                                                                                                                     |  |                   | 529,129 |   |                  |  
|Stockholder loans                                                                                                                                                   |  |                   | (5,295  | ) |                  |  
|Unearned compensationrestricted stock                                                                                                                              |  |                   | (5,889  | ) |                  |  
|Distributions in excess of earnings                                                                                                                                 |  |                   | (23,676 | ) |                  |  
|Net unrealized depreciation on investments                                                                                                                          |  |                   | (30,217 | ) |                  |  
|                                                                                                                                                                    |  |                   |         |   |                  |  
|Total stockholders equity                                                                                                                                          |  |                   | 464,439 |   |                  |  
|                                                                                                                                                                    |  |                   |         |   |                  |  
|Total liabilities and stockholders equity                                                                                                                          |  | $                 | 801,354 |   |                  | $
|                                                                                                                                                                    |  |                   |         |   |                  |  



See
notes to consolidated financial statements (unaudited).



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MCG Capital Corporation

Consolidated Statements of Operations (unaudited)

(in thousands, except per share amounts)



|                                                                                                 |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|------------------------------------------------------------------------------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | -
|                                                                                                 |  | 2003                            |        |   | 2002                           |  
|Operating income                                                                                 |  |                                 |        |   |                                |  
|Interest and dividend income                                                                     |  | $                               | 17,666 |   |                                | $
|Advisory fees and other income                                                                   |  |                                 | 2,238  |   |                                |  
|                                                                                                 |  |                                 |        |   |                                |  
|Total operating income                                                                           |  |                                 | 19,904 |   |                                |  
|                                                                                                 |  |                                 |        |   |                                |  
|Operating expenses                                                                               |  |                                 |        |   |                                |  
|Interest expense                                                                                 |  |                                 | 2,701  |   |                                |  
|Employee compensation:                                                                           |  |                                 |        |   |                                |  
|Salaries and benefits                                                                            |  |                                 | 1,759  |   |                                |  
|Long-term incentive compensation                                                                 |  |                                 | 1,759  |   |                                |  
|                                                                                                 |  |                                 |        |   |                                |  
|Total employee compensation                                                                      |  |                                 | 3,518  |   |                                |  
|General and administrative expense                                                               |  |                                 | 1,945  |   |                                |  
|                                                                                                 |  |                                 |        |   |                                |  
|Total operating expenses                                                                         |  |                                 | 8,164  |   |                                |  
|                                                                                                 |  |                                 |        |   |                                |  
|Net operating income before investment gains and losses                                          |  |                                 | 11,740 |   |                                |  
|                                                                                                 |  |                                 |        |   |                                |  
|Net realized gains (losses) on investments                                                       |  |                                 | 2,064  |   |                                |  
|Net change in unrealized appreciation (depreciation) on investments                              |  |                                 | (3,891 | ) |                                |  
|                                                                                                 |  |                                 |        |   |                                |  
|Net investment gains and losses                                                                  |  |                                 | (1,827 | ) |                                |  
|                                                                                                 |  |                                 |        |   |                                |  
|Net income (loss)/Net increase (decrease) in stockholders equity resulting from earnings (loss) |  | $                               | 9,913  |   |                                | $
|                                                                                                 |  |                                 |        |   |                                |  
|Earnings (loss) per common share:                                                                |  |                                 |        |   |                                |  
|Basic                                                                                            |  | $                               | 0.30   |   |                                | $
|Diluted                                                                                          |  | $                               | 0.30   |   |                                | $
|Net operating income before investment gains and losses per common share basic and diluted       |  | $                               | 0.36   |   |                                | $
|Cash dividends declared per common share                                                         |  | $                               | 0.42   |   |                                | $
|Weighted average common shares outstanding                                                       |  |                                 | 32,878 |   |                                |  
|Weighted average common shares outstandingdiluted                                               |  |                                 | 32,906 |   |                                |  



See
notes to consolidated financial statements (unaudited).



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MCG Capital Corporation

Consolidated Statement of Stockholders Equity (unaudited)

(in thousands, except per share amounts)



|                                                                                                 |        | Common Stock |   | Paid-inCapital |   |     | Stock-holderLoans |   |         | Unearned Compen- sation Restricted stock |  |   | Distributions(in excess of)less thanearnings |   |  | Net UnrealizedDepreciation onInvestments |         |   | TotalStockholdersEquity |  
|------------------------------------------------------------------------------------------------ | ------ | ------------ | - | -------------- | - | --- | ----------------- | - | ------- | ----------------------------------------- |  | - | -------------------------------------------- | - |  | ---------------------------------------- | ------- | - | ------------------------ | -
|                                                                                                 | Shares |              |   | Amount         |   |     |                   |   |         |                                          
|Balance December 31, 2001                                                                        |        | 28,287       |   |                | $ | 283 |                   | $ | 370,087 |                                           |  | $ | (6,510                                       | ) |  | $                                        | (13,077 | ) |                          | $
|Net income (loss)/Net increase (decrease) in stockholders equity resulting from earnings (loss) |        |              |   |                |   |     |                   |   |         |                                           |  |   |                                              |   |  |                                          |         |   |                          |  
|Issuance of common shares, net of costs                                                          |        | 3,000        |   |                |   | 30  |                   |   | 50,220  |                                           |  |   |                                              |   |  |                                          |         |   |                          |  
|Dividends declared, $1.34 per share                                                              |        |              |   |                |   |     |                   |   |         |                                           |  |   |                                              |   |  |                                          |         |   |                          |  
|Dividend reinvestment                                                                            |        | 14           |   |                |   |     |                   |   | 226     |                                           |  |   |                                              |   |  |                                          |         |   |                          |  
|Amortization of restricted stock awards                                                          |        |              |   |                |   |     |                   |   |         |                                           |  |   |                                              |   |  |                                          | 3,030   |   |                          |  
|Reduction in employee loans                                                                      |        | (48          | ) |                |   |     |                   |   | (659    | )                                         |  |   | 847                                          |   |  |                                          | 523     |   |                          |  
|                                                                                                 |        |              |   |                |   |     |                   |   |         |                                           |  |   |                                              |   |  |                                          |         |   |                          |  
|Balance September 30, 2002                                                                       |        | 31,253       |   |                | $ | 313 |                   | $ | 419,874 |                                           |  | $ | (5,663                                       | ) |  | $                                        | (9,524  | ) |                          | $
|                                                                                                 |        |              |   |                |   |     |                   |   |         |                                           |  |   |                                              |   |  |                                          |         |   |                          |  
|Balance December 31, 2002                                                                        |        | 31,259       |   |                | $ | 313 |                   | $ | 419,961 |                                           |  | $ | (5,513                                       | ) |  | $                                        | (8,566  | ) |                          | $
|Net income (loss)/Net increase (decrease) in stockholders equity resulting from earnings (loss) |        |              |   |                |   |     |                   |   |         |                                           |  |   |                                              |   |  |                                          |         |   |                          |  
|Issuance of common shares, net of costs                                                          |        | 7,475        |   |                |   | 74  |                   |   | 108,759 |                                           |  |   |                                              |   |  |                                          |         |   |                          |  
|Dividends declared, $1.23 per share                                                              |        |              |   |                |   |     |                   |   |         |                                           |  |   |                                              |   |  |                                          |         |   |                          |  
|Dividend reinvestment                                                                            |        | 2            |   |                |   |     |                   |   | 38      |                                           |  |   |                                              |   |  |                                          |         |   |                          |  
|Amortization/vesting of restricted stock awards                                                  |        |              |   |                |   |     |                   |   | 506     |                                           |  |   |                                              |   |  |                                          | 2,588   |   |                          |  
|Reduction in employee loans                                                                      |        | (7           | ) |                |   |     |                   |   | (135    | )                                         |  |   | 218                                          |   |  |                                          | 89      |   |                          |  
|                                                                                                 |        |              |   |                |   |     |                   |   |         |                                           |  |   |                                              |   |  |                                          |         |   |                          |  
|Balance September 30, 2003                                                                       |        | 38,729       |   |                | $ | 387 |                   | $ | 529,129 |                                           |  | $ | (5,295                                       | ) |  | $                                        | (5,889  | ) |                          | $
|                                                                                                 |        |              |   |                |   |     |                   |   |         |                                           |  |   |                                              |   |  |                                          |         |   |                          |  



See
notes to consolidated financial statements (unaudited).



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MCG Capital Corporation

Consolidated Statements of Cash Flows (unaudited)

(in thousands)



|                                                                                                                                               |  | Nine Months Ended September 30, |        
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | -------
|                                                                                                                                               |  | 2003                            |        
|                                                                                                                                              
|Operating activities                                                                                                                           |  |                                 |        
|Net income/Net increase in stockholders equity resulting from earnings                                                                        |  | $                               | 27,799 
|Adjustments to reconcile net income/net increase in stockholders equity resulting from earnings to net cash provided by
operating activities: |  |                                 |        
|Depreciation and amortization                                                                                                                  |  |                                 | 429    
|Amortization of restricted stock awards                                                                                                        |  |                                 | 3,094  
|Amortization of deferred debt issuance costs                                                                                                   |  |                                 | 968    
|Net realized losses on investments                                                                                                             |  |                                 | 19,475 
|Net change in unrealized depreciation (appreciation) on investments                                                                            |  |                                 | (12,904
|(Increase) decrease in cashsecuritization accounts from interest collections                                                                  |  |                                 | 2,403  
|Increase in interest receivable                                                                                                                |  |                                 | (414   
|Increase in accrued payment-in-kind interest                                                                                                   |  |                                 | (9,676 
|Decrease in unearned income                                                                                                                    |  |                                 | (3,231 
|Decrease in other assets                                                                                                                       |  |                                 | 1,275  
|Increase (decrease) in interest payable                                                                                                        |  |                                 | (341   
|Increase (decrease) in other liabilities                                                                                                       |  |                                 | 579    
|                                                                                                                                               |  |                                 |        
|Net cash provided by operating activities                                                                                                      |  |                                 | 29,456 
|                                                                                                                                               |  |                                 |        
|Investing activities                                                                                                                           |  |                                 |        
|Originations, draws and advances on loans                                                                                                      |  |                                 | (34,340
|Principal payments on loans                                                                                                                    |  |                                 | 105,693
|Purchase of equity investments                                                                                                                 |  |                                 | (4,980 
|Proceeds from sales of equity investments                                                                                                      |  |                                 | 5,570  
|Purchase of premises, equipment and software                                                                                                   |  |                                 | (1,105 
|                                                                                                                                               |  |                                 |        
|Net cash provided by (used in) investing activities                                                                                            |  |                                 | 70,838 
|                                                                                                                                               |  |                                 |        
|Financing activities                                                                                                                           |  |                                 |        
|Net proceeds (payments) from borrowings                                                                                                        |  |                                 | (44,752
|(Increase) decrease in cashsecuritization cash accounts for paydown of principal on debt                                                      |  |                                 | 19,060 
|Payment of financing costs                                                                                                                     |  |                                 | (2     
|Issuance of common stock, net of costs                                                                                                         |  |                                 | 108,871
|Dividends paid                                                                                                                                 |  |                                 | (38,446
|Repayment of loans granted to officers/shareholders                                                                                            |  |                                 | 177    
|                                                                                                                                               |  |                                 |        
|Net cash provided by financing activities                                                                                                      |  |                                 | 44,908 
|                                                                                                                                               |  |                                 |        
|Increase (decrease) in cash and cash equivalents                                                                                               |  |                                 | 145,202
|Cash and cash equivalents at beginning of period                                                                                               |  |                                 | 9,389  
|                                                                                                                                               |  |                                 |        
|Cash and cash equivalents at end of period                                                                                                     |  | $                               | 154,591
|                                                                                                                                               |  |                                 |        
|Supplemental disclosures                                                                                                                       |  |                                 |        
|Interest paid                                                                                                                                  |  | $                               | 6,802  
|Income taxes received                                                                                                                          |  |                                 | (436   



See
notes to consolidated financial statements (unaudited).



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|                                            |  | Title of Securities Held by theCompany |  | Percentage ofClass Held ona FullyDiluted Basis(9) |   |            | September 30, 2003 |         | December 31, 2002
|------------------------------------------- |  | -------------------------------------- |  | ------------------------------------------------- | - | ---------- | ------------------ | ------- | -----------------
|Portfolio Company                           |  |                                        |  | Cost                                              |   | Fair Value |                    | Cost    |                  
|                                           
|Newspaper:                                  |  |                                        |  |                                                   |   |            |                    |         |                  
|                                           
|21st Century Newspapers,                    |  | Subordinated Debt                      |  |                                                   |   |            | $                  | 21,930  |                  
|Inc.                                        |  | Common Stock                           |  | 1.0                                               | % |            |                    | 452     |                  
|                                           
|All Island Media, Inc. (12)                 |  | Senior Debt                            |  |                                                   |   |            |                    | 8,500   |                  
|                                            |  | Common Stock                           |  | 9.1                                               | % |            |                    | 500     |                  
|                                           
|American Consolidated Media Inc. (1)        |  | Senior Debt                            |  |                                                   |   |            |                    | 19,475  |                  
|                                           
|Badoud Enterprises, Inc. (1)                |  | Senior Debt                            |  |                                                   |   |            |                    | 7,850   |                  
|                                           
|Brookings Newspapers, L.L.C. (1)            |  | Senior Debt                            |  |                                                   |   |            |                    | 2,800   |                  
|                                           
|Community Media Group, Inc. (1)             |  | Senior Debt                            |  |                                                   |   |            |                    | 10,672  |                  
|                                           
|Country Media, Inc. (12)                    |  | Senior Debt                            |  |                                                   |   |            |                    | 7,226   |                  
|                                            |  | Common Stock                           |  | 6.3                                               | % |            |                    | 100     |                  
|                                           
|Creative Loafing, Inc. (1)                  |  | Senior Debt                            |  |                                                   |   |            |                    | 14,050  |                  
|                                           
|Crescent Publishing Company LLC (1)         |  | Senior Debt                            |  |                                                   |   |            |                    | 14,318  |                  
|                                           
|The Joseph F. Biddle Publishing Company (1) |  | Senior Debt                            |  |                                                   |   |            |                    | 10,705  |                  
|                                           
|The Korea Times Los Angeles, Inc.           |  | Senior Debt                            |  |                                                   |   |            |                    | 10,997  |                  
|                                           
|McGinnis-Johnson Consulting, LLC (1)        |  | Subordinated Debt                      |  |                                                   |   |            |                    | 10,177  |                  
|                                           
|Minnesota Publishers, Inc. (1)              |  | Senior Debt                            |  |                                                   |   |            |                    | 14,250  |                  
|                                           
|Murphy McGinnis Media, Inc. (1)             |  | Senior Debt                            |  |                                                   |   |            |                    | 20,935  |                  
|                                           
|Pacific-Sierra Publishing, Inc.             |  | Senior Debt                            |  |                                                   |   |            |                    | 25,014  |                  
|                                           
|Stonebridge Press, Inc. (1)                 |  | Senior Debt                            |  |                                                   |   |            |                    | 5,705   |                  
|                                           
|Wyoming Newspapers, Inc. (1)                |  | Senior Debt                            |  |                                                   |   |            |                    | 10,763  |                  
|                                           
|Total Newspaper                             |  |                                        |  |                                                   |   |            |                    | 216,419 |                  
|                                           



See
notes to consolidated financial statements (unaudited).



8



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|                                                                 |  | Title of Securities Held by the Company         |  | Percentage ofClass Held ona FullyDiluted Basis(9) |   |            | September 30, 2003 |        | December 31, 2002
|---------------------------------------------------------------- |  | ----------------------------------------------- |  | ------------------------------------------------- | - | ---------- | ------------------ | ------ | -----------------
|Portfolio Company                                                |  |                                                 |  | Cost                                              |   | Fair Value |                    | Cost   |                  
|                                                                
|Publishing:                                                      |  |                                                 |  |                                                   |   |            |                    |        |                  
|                                                                
|Boucher Communications,                                          |  | Senior Debt                                     |  |                                                   |   |            | $                  | 1,700  |                  
|Inc. (1)                                                         |  | Stock Appreciation Rights                       |  |                                                   |   |            |                    |       |                  
|                                                                
|Canon Communications LLC and Chemical Week Publishing L.L.C. (1) |  | Subordinated Debt                               |  |                                                   |   |            |                    |       |                  
|                                                                
|Corporate Legal Times L.L.C.                                     |  | Senior Debt                                     |  |                                                   |   |            |                    | 4,516  |                  
|(10)                                                             |  | Subordinated Debt                               |  |                                                   |   |            |                    | 1,340  |                  
|                                                                 |  | LLC Interest                                    |  | 90.6                                              | % |            |                    | 313    |                  
|                                                                
|Dowden Health Media, Inc.                                        |  | Senior Debt                                     |  |                                                   |   |            |                    | 800    |                  
|                                                                
|ETC Group, LLC (11) (14)                                         |  | Senior Debt                                     |  |                                                   |   |            |                    | 1,200  |                  
|                                                                 |  | Series A LLC Interest                           |  | 100.0                                             | % |            |                    | 650    |                  
|                                                                 |  | Series C LLC Interest                           |  | 100.0                                             | % |            |                    | 100    |                  
|                                                                
|Fawcette Technical                                               |  | Senior Debt                                     |  |                                                   |   |            |                    | 12,080 |                  
|Publications Holding (1) (11)                                    |  | Subordinated Debt                               |  |                                                   |   |            |                    | 4,000  |                  
|(13)                                                             |  | Series A Preferred Stock                        |  | 100.0                                             | % |            |                    | 2,569  |                  
|                                                                 |  | Common Stock                                    |  | 36.0                                              | % |            |                    |       |                  
|                                                                 |  | Warrants to purchase Common Stock               |  |                                                   |   |            |                    |       |                  
|                                                                
|Miles Media Group, Inc. (1)                                      |  | Senior Debt                                     |  |                                                   |   |            |                    | 7,884  |                  
|                                                                 |  | Warrants to purchase Common Stock               |  | 12.4                                              | % |            |                    | 20     |                  
|                                                                
|Pfingsten Publishing, LLC (1)                                    |  | Senior Debt                                     |  |                                                   |   |            |                    |       |                  
|                                                                
|Rising Tide Holdings LLC (1)                                     |  | Senior Debt                                     |  |                                                   |   |            |                    |       |                  
|                                                                 |  | Warrants to purchase membership interest in LLC |  |                                                   |   |            |                    |       |                  
|                                                                
|Sabot Publishing, Inc. (1) (8)                                   |  | Senior Debt                                     |  |                                                   |   |            |                    | 10,520 |                  
|                                                                 |  | Warrants to purchase Common Stock               |  | 2.7                                               | % |            |                    |       |                  
|                                                                
|Sunshine Media Delaware,                                         |  | Senior Debt                                     |  |                                                   |   |            |                    | 12,747 |                  
|LLC (1) (12)                                                     |  | Class A LLC Interest                            |  | 12.8                                              | % |            |                    | 564    |                  
|                                                                 |  | Warrants to purchase Class B LLC interest       |  | 100.0                                             | % |            |                    |       |                  
|                                                                



See
notes to consolidated financial statements (unaudited).



9



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|                                    |  | Title of Securities Held by the Company         |  | Percentage ofClass Held ona FullyDiluted Basis(9) |   |            | September 30, 2003 |         | December 31, 2002
|----------------------------------- |  | ----------------------------------------------- |  | ------------------------------------------------- | - | ---------- | ------------------ | ------- | -----------------
|Portfolio Company                   |  |                                                 |  | Cost                                              |   | Fair Value |                    | Cost    |                  
|                                   
|THE Journal, LLC (14)               |  | Senior Debt                                     |  |                                                   |   |            | $                  |        |                  
|                                   
|UMAC, Inc. (8) (10)                 |  | Common Stock                                    |  | 100.0                                             | % |            |                    | 10,441  |                  
|                                   
|VS&A-PBI Holding LLC                |  | Senior Debt                                     |  |                                                   |   |            |                    |        |                  
|(8)                                 |  | LLC Interest                                    |  | 0.8                                               | % |            |                    | 500     |                  
|                                   
|Wicks Business Information, LLC     |  | Unsecured Note                                  |  |                                                   |   |            |                    | 200     |                  
|                                   
|Wiesner Publishing                  |  | Senior Debt                                     |  |                                                   |   |            |                    | 5,908   |                  
|Company, LLC (1)                    |  | Subordinated Debt                               |  |                                                   |   |            |                    | 5,590   |                  
|                                    |  | Warrants to purchase membership interest in LLC |  | 15.0                                              | % |            |                    | 406     |                  
|                                   
|Witter Publishing Co., Inc.         |  | Senior Debt                                     |  |                                                   |   |            |                    | 2,419   |                  
|                                    |  | Warrants to purchase Common Stock               |  | 10.5                                              | % |            |                    | 87      |                  
|                                   
|Working Mother Media, Inc.          |  | Senior Debt                                     |  |                                                   |   |            |                    | 7,526   |                  
|(8) (10)                            |  | Class A Preferred Stock                         |  | 98.8                                              | % |            |                    | 8,497   |                  
|                                    |  | Class B Preferred Stock                         |  | 100.0                                             | % |            |                    | 1       |                  
|                                    |  | Class C Preferred Stock                         |  | 100.0                                             | % |            |                    | 1       |                  
|                                    |  | Common Stock                                    |  | 51.0                                              | % |            |                    | 1       |                  
|                                   
|Total Publishing                    |  |                                                 |  |                                                   |   |            |                    | 102,580 |                  
|                                   
|                                    |  |                                                 |  |                                                   |   |            |                    |         |                  
|                                   
|Broadcasting:                       |  |                                                 |  |                                                   |   |            |                    |         |                  
|                                   
|Amalfi Coast, L.L.C. (1)            |  | Senior Debt                                     |  |                                                   |   |            |                    |        |                  
|                                   
|Costa De Oro Television, Inc.       |  | Senior Debt                                     |  |                                                   |   |            |                    |        |                  
|                                   
|Crystal Media Network, LLC (5) (10) |  | LLC Interest                                    |  | 100.0                                             | % |            |                    | 6,132   |                  
|                                   
|dick clark productions, inc.        |  | Subordinated Debt                               |  |                                                   |   |            |                    | 16,191  |                  
|                                    |  | Warrants to purchase Common Stock               |  | 5.6                                               | % |            |                    | 858     |                  
|                                    |  | Common Stock                                    |  | 0.4                                               | % |            |                    | 150     |                  
|                                   
|JMP Media, L.L.C. (1)               |  | Senior Debt                                     |  |                                                   |   |            |                    |        |                  
|                                   
|NBG Radio Network, Inc.             |  | Senior Debt                                     |  |                                                   |   |            |                    |        |                  
|(1) (5)                             |  | Warrants to purchase Common Stock               |  |                                                   |   |            |                    |        |                  
|                                   



See
notes to consolidated financial statements (unaudited).



10



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|                                   |  | Title of Securities Held by the Company         |  | Percentage ofClass Held ona FullyDiluted Basis(9) |   |            | September 30, 2003 |        | December 31, 2002
|---------------------------------- |  | ----------------------------------------------- |  | ------------------------------------------------- | - | ---------- | ------------------ | ------ | -----------------
|Portfolio Company                  |  |                                                 |  | Cost                                              |   | Fair Value |                    | Cost   |                  
|                                  
|New Northwest Broadcasters LLC (1) |  | Senior Debt                                     |  |                                                   |   |            | $                  | 10,496 |                  
|                                  
|New Vision Broadcasting, LLC (1)   |  | Senior Debt                                     |  |                                                   |   |            |                    | 13,367 |                  
|                                  
|Total Broadcasting                 |  |                                                 |  |                                                   |   |            |                    | 47,194 |                  
|                                  
|                                   |  |                                                 |  |                                                   |   |            |                    |        |                  
|                                  
|Telecommunications:                |  |                                                 |  |                                                   |   |            |                    |        |                  
|                                  
|AMI Telecommunications             |  | Senior Debt                                     |  |                                                   |   |            |                    | 3,100  |                  
|Corporation (1) (8) (10)           |  | Common Stock                                    |  | 5.1                                               | % |            |                    | 200    |                  
|                                   |  | Series A-1 Preferred Stock                      |  | 82.3                                              | % |            |                    | 700    |                  
|                                   |  | Series A-2 Preferred Stock                      |  | 100.0                                             | % |            |                    | 1,995  |                  
|                                   |  | Series A-3 Preferred Stock                      |  | 37.5                                              | % |            |                    | 1,100  |                  
|                                  
|Biznessonline.com, Inc. (1)        |  | Senior Debt                                     |  |                                                   |   |            |                    | 16,690 |                  
|(10)                               |  | Common Stock                                    |  | 2.0                                               | % |            |                    | 18     |                  
|                                   |  | Preferred Stock                                 |  | 100.0                                             | % |            |                    | 4,864  |                  
|                                   |  | Warrants to purchase Common Stock               |  | 71.2                                              | % |            |                    | 253    |                  
|                                  
|Bridgecom Holdings, Inc. (1)       |  | Senior Debt                                     |  |                                                   |   |            |                    | 22,114 |                  
|                                   |  | Warrants to purchase Common Stock               |  | 13.0                                              | % |            |                    | 2,122  |                  
|                                  
|Graycom, LLC (8)                   |  | Warrants to purchase membership interest in LLC |  | 20.0                                              | % |            |                    | 51     |                  
|                                  
|I-55 Internet Services, Inc.       |  | Senior Debt                                     |  |                                                   |   |            |                    | 2,473  |                  
|                                   |  | Warrants to purchase Common Stock               |  | 7.5                                               | % |            |                    | 103    |                  
|                                  
|IDS Telcom LLC                     |  | Senior Debt                                     |  |                                                   |   |            |                    | 18,623 |                  
|                                   |  | Warrants to purchase membership interest in LLC |  | 20.0                                              | % |            |                    | 1,824  |                  
|                                  
|Joseph C. Millstone                |  | Senior Debt                                     |  |                                                   |   |            |                    | 500    |                  
|                                  
|Manhattan                          |  | Senior Debt                                     |  |                                                   |   |            |                    | 13,925 |                  
|Telecommunications                 |  | Subordinated Debt                               |  |                                                   |   |            |                    | 12,486 |                  
|Corporation (1)                    |  | Preferred Stock                                 |  | 100.0                                             | % |            |                    | 1,800  |                  
|                                   |  | Warrants to purchase Common Stock               |  | 28.0                                              | % |            |                    | 2,805  |                  
|                                  



See
notes to consolidated financial statements (unaudited).



11



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|                                      |  | Title of Securities Held by the Company   |  | Percentage ofClass Held ona FullyDiluted Basis(9) |   |            | September 30, 2003 |         | December 31, 2002
|------------------------------------- |  | ----------------------------------------- |  | ------------------------------------------------- | - | ---------- | ------------------ | ------- | -----------------
|Portfolio Company                     |  |                                           |  | Cost                                              |   | Fair Value |                    | Cost    |                  
|                                     
|Midwest Towers Partners, LLC (1)      |  | Senior Debt                               |  |                                                   |   |            | $                  | 17,007  |                  
|                                     
|nii communications, inc. (1)          |  | Senior Debt                               |  |                                                   |   |            |                    | 7,261   |                  
|                                      |  | Common Stock                              |  | 3.0                                               | % |            |                    | 400     |                  
|                                      |  | Warrants to purchase Common Stock         |  | 38.5                                              | % |            |                    | 1,218   |                  
|                                     
|NOW Communications, Inc.              |  | Senior Debt                               |  |                                                   |   |            |                    | 4,684   |                  
|(1)                                   |  | Warrants to purchase Common Stock         |  | 10.0                                              | % |            |                    |        |                  
|                                     
|Platinum Wireless, Inc. (11)          |  | Senior Debt                               |  |                                                   |   |            |                    | 875     |                  
|                                      |  | Common Stock                              |  | 37.0                                              | % |            |                    | 4,640   |                  
|                                      |  | Option to purchase Common Stock           |  | 2.1                                               | % |            |                    | 272     |                  
|                                     
|Powercom Corporation (1)              |  | Senior Debt                               |  |                                                   |   |            |                    | 2,176   |                  
|                                      |  | Warrants to purchase Class A Common Stock |  | 18.6                                              | % |            |                    | 263     |                  
|                                     
|Talk America Holdings, Inc.           |  | Common Stock                              |  | 0.8                                               | % |            |                    | 499     |                  
|(8)                                   |  | Warrants to purchase Common
Stock         |  | 0.8                                               | % |            |                    | 25      |                  
|                                     
|Telecomm South, LLC (2)               |  | Senior Debt                               |  |                                                   |   |            |                    | 3,403   |                  
|(8) (10)                              |  | LLC Interest                              |  | 100.0                                             | % |            |                    | 10      |                  
|                                     
|Tower Resource                        |  | Senior Debt                               |  |                                                   |   |            |                    | 1,737   |                  
|Management, Inc.                      |  | Warrants to purchase Common Stock         |  | 8.9                                               | % |            |                    |        |                  
|                                     
|WirelessLines, Inc.                   |  | Senior Debt                               |  |                                                   |   |            |                    |        |                  
|                                      |  | Warrants to purchase Common Stock         |  |                                                   |   |            |                    |        |                  
|                                     
|WirelessLines II, Inc.                |  | Senior Debt                               |  |                                                   |   |            |                    | 464     |                  
|                                     
|Total Telecommunications              |  |                                           |  |                                                   |   |            |                    | 152,680 |                  
|                                     
|                                      |  |                                           |  |                                                   |   |            |                    |         |                  
|                                     
|Information Services:                 |  |                                           |  |                                                   |   |            |                    |         |                  
|                                     
|Cambridge Information Group, Inc. (1) |  | Senior Debt                               |  |                                                   |   |            |                    | 16,904  |                  
|                                     



See
notes to consolidated financial statements (unaudited).



12



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|                               |  | Title of Securities Held by the Company             |  | Percentage ofClass Held ona FullyDiluted Basis(9) |   |            | September 30, 2003 |        | December 31, 2002
|------------------------------ |  | --------------------------------------------------- |  | ------------------------------------------------- | - | ---------- | ------------------ | ------ | -----------------
|Portfolio Company              |  |                                                     |  | Cost                                              |   | Fair Value |                    | Cost   |                  
|                              
|Creatas, L.L.C. (1) (12)       |  | Senior Debt                                         |  |                                                   |   |            | $                  | 16,220 |                  
|                               |  | Investor Class LLC Interest                         |  | 100.0                                             | % |            |                    | 100    |                  
|                               |  | Guaranty ($501)                                     |  |                                                   |   |            |                    |        |                  
|                              
|Eli Research, Inc. (1)         |  | Senior Debt                                         |  |                                                   |   |            |                    | 10,029 |                  
|                               |  | Warrants to purchase Common Stock                   |  | 3.0                                               | % |            |                    |       |                  
|                              
|Images.com, Inc.               |  | Senior Debt                                         |  |                                                   |   |            |                    | 3,140  |                  
|                              
|Information Today, Inc. (1)    |  | Senior Debt                                         |  |                                                   |   |            |                    | 9,600  |                  
|                              
|R.R. Bowker LLC (1)            |  | Senior Debt                                         |  |                                                   |   |            |                    | 10,308 |                  
|                               |  | Warrants to purchase membership interest in LLC     |  | 14.0                                              | % |            |                    | 882    |                  
|                              
|Robert N. Snyder               |  | Senior Debt                                         |  |                                                   |   |            |                    | 1,300  |                  
|                              
|TGI Group, LLC                 |  | Senior Debt                                         |  |                                                   |   |            |                    | 6,250  |                  
|                               |  | Warrants to purchase membership interest in LLC     |  | 5.0                                               | % |            |                    | 126    |                  
|                              
|Unifocus, Inc. and Unifocus    |  | Senior Debt                                         |  |                                                   |   |            |                    |       |                  
|LLC (1)                        |  | Warrants to purchase Common Stock and LLC interests |  |                                                   |   |            |                    |       |                  
|                              
|Total Information Services     |  |                                                     |  |                                                   |   |            |                    | 74,859 |                  
|                              
|                               |  |                                                     |  |                                                   |   |            |                    |        |                  
|                              
|Technology:                    |  |                                                     |  |                                                   |   |            |                    |        |                  
|                              
|The Adrenaline Group, Inc. (8) |  | Common Stock                                        |  | 2.7                                               | % |            |                    |       |                  
|                              
|Dakota Imaging, Inc.           |  | Senior Debt                                         |  |                                                   |   |            |                    | 6,941  |                  
|                               |  | Warrants to purchase Common Stock                   |  | 9.4                                               | % |            |                    | 1,586  |                  
|                              
|FTI Technologies Holdings,     |  | Senior Debt                                         |  |                                                   |   |            |                    | 22,125 |                  
|Inc. (1)                       |  | Warrants to purchase Common Stock                   |  | 4.2                                               | % |            |                    |       |                  
|                              
|Netplexus Corporation          |  | Senior Debt                                         |  |                                                   |   |            |                    | 1,820  |                  
|(1)(8)(12)                     |  | Preferred Stock                                     |  | 51.0                                              | % |            |                    | 766    |                  
|                               |  | Warrants to purchase Class A Common Stock           |  | 4.8                                               | % |            |                    |       |                  
|                              



See
notes to consolidated financial statements (unaudited).



13



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|                                              |  | Title of Securities Held by the Company         |  | Percentage ofClass Held ona FullyDiluted Basis(9) |   |            | September 30, 2003 |          | December 31, 2002
|--------------------------------------------- |  | ----------------------------------------------- |  | ------------------------------------------------- | - | ---------- | ------------------ | -------- | -----------------
|Portfolio Company                             |  |                                                 |  | Cost                                              |   | Fair Value |                    | Cost     |                  
|                                             
|Systems Xcellence USA, Inc.                   |  | Senior Debt                                     |  |                                                   |   |            | $                  | 7,600    |                  
|(1)                                           |  | Warrants to purchase Common Stock               |  |                                                   |   |            |                    |         |                  
|                                             
|ViewTrust Technology (8) (12)                 |  | Common Stock                                    |  | 7.5                                               | % |            |                    | 1        |                  
|                                             
|Total Technology                              |  |                                                 |  |                                                   |   |            |                    | 40,839   |                  
|                                             
|                                              |  |                                                 |  |                                                   |   |            |                    |          |                  
|                                             
|Security Alarm:                               |  |                                                 |  |                                                   |   |            |                    |          |                  
|                                             
|Barcom Electronic Inc.                        |  | Senior Debt                                     |  |                                                   |   |            |                    | 3,481    |                  
|                                             
|Copperstate Technologies,                     |  | Senior Debt                                     |  |                                                   |   |            |                    | 910      |                  
|Inc. (3) (10)                                 |  | Class A Common Stock                            |  | 93.0                                              | % |            |                    | 2,000    |                  
|                                              |  | Class B Common Stock                            |  | 0.1                                               | % |            |                    |         |                  
|                                              |  | Warrants to purchase Class B Common Stock       |  | 99.9                                              | % |            |                    |         |                  
|                                             
|Interactive Business Solutions, Inc. (4) (10) |  | Senior Debt Common Stock                        |  | 100.0                                             | % |            |                    | 75 2,750 |                  
|                                             
|National Systems Integration,                 |  | Senior Debt                                     |  |                                                   |   |            |                    | 500      |                  
|Inc.(3) (4) (7) (11)                          |  | Common Stock                                    |  | 46.0                                              | % |            |                    |         |                  
|                                              |  | Class B2 Preferred Stock                       |  | 100.0                                             | % |            |                    | 4,409    |                  
|                                              |  | Debtor in Possession Financing                  |  |                                                   |   |            |                    |         |                  
|                                             
|Total Security Alarm                          |  |                                                 |  |                                                   |   |            |                    | 14,125   |                  
|                                             
|Cable:                                        |  |                                                 |  |                                                   |   |            |                    |          |                  
|                                             
|New Wave Communications, LLC (1)              |  | Senior Debt                                     |  |                                                   |   |            |                    | 8,759    |                  
|                                             
|Total Cable                                   |  |                                                 |  |                                                   |   |            |                    | 8,759    |                  
|                                             
|                                              |  |                                                 |  |                                                   |   |            |                    |          |                  
|                                             
|Other:                                        |  |                                                 |  |                                                   |   |            |                    |          |                  
|                                             
|CCG Consulting, LLC                           |  | Senior Debt                                     |  |                                                   |   |            |                    | 1,464    |                  
|                                              |  | Warrants to purchase membership interest in LLC |  | 16.1                                              | % |            |                    |         |                  
|                                              |  | Option to purchase LLC interest                 |  | 5.5                                               | % |            |                    |         |                  
|                                             
|Connective Corp. (8)                          |  | Common Stock                                    |  | 0.2                                               | % |            |                    | 57       |                  
|                                             
|The e-Media Club, LLC (8)                     |  | LLC Interest                                    |  | 0.8                                               | % |            |                    | 90       |                  
|                                             



See
notes to consolidated financial statements (unaudited).



14



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|                                             |  | Title of Securities Held by the Company |  | Percentage ofClass Held ona FullyDiluted Basis(9) |   |         | September 30, 2003 |         |   | December 31, 2002 |  
|-------------------------------------------- |  | --------------------------------------- |  | ------------------------------------------------- | - | ------- | ------------------ | ------- | - | ----------------- | -
|Portfolio Company                            |  |                                         |  | Cost                                              |   |         | Fair Value         |         |   | Cost              |  
|                                            
|Executive Enterprise Institute, LLC (8) (12) |  | LLC Interest                            |  | 10.0                                              | % |         | $                  | 301     |   |                   | $
|                                            
|Jeffrey A. Stern (8)                         |  | Senior Debt                             |  |                                                   |   |         |                    | 60      |   |                   |  
|                                            
|Marketron International, Inc. (6) (8)        |  | Warrants to purchase Common Stock       |  | 1.5                                               | % |         |                    |        |   |                   |  
|                                            
|New Century Companies,                       |  | Common Stock                            |  | 2.7                                               | % |         |                    | 157     |   |                   |  
|Inc. (8)                                     |  | Preferred Stock                         |  |                                                   |   |         |                    |        |   |                   |  
|                                             |  | Warrants to purchase Common Stock       |  | 0.5                                               | % |         |                    |        |   |                   |  
|                                            
|Total Other                                  |  |                                         |  |                                                   |   |         |                    | 2,129   |   |                   |  
|                                            
|Total Investments                            |  |                                         |  |                                                   |   |         |                    | 659,584 |   |                   |  
|Unearned income                              |  |                                         |  |                                                   |   |         |                    | (17,440 | ) |                   |  
|                                             |  |                                         |  |                                                   |   |         |                    |         |   |                   |  
|Total Investments net of unearned income     |  |                                         |  |                                                   | $ | 642,144 |                    |         | $ | 611,927           |  
|                                             |  |                                         |  |                                                   |   |         |                    |         |   |                   |  



|(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 Network, Inc. in satisfaction of debt. The assets are held and operated through a separate portfolio company, Crystal Media
Network, LLC, which at the time was a wholly owned indirect subsidiary of MCG Finance III, LLC.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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 September 30, 2003.
|--- |  | -------------------------------------------

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



See notes to consolidated financial statements (unaudited).



15



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|(10) |  | This is a majority owned company. Majority owned companies 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) |  | This is a controlled company. Controlled companies 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) |  | This is an other affiliate. Other affiliates 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) |  | On July 1, 2003, Fawcette Technical Publications Holding convertible subordinated debt was converted into a combination of preferred stock, common stock and warrants with a fair
value equal to the carrying value of these investments as of June 30, 2003. At the same time, the existing warrants to purchase common stock in Fawcette Technical Publications Holding were cancelled.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) |  | 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.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See notes to consolidated financial statements (unaudited).



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited)

(in thousands except share and per share data)



Note 1.    Description of Business and Unaudited Interim Consolidated Financial Statements Basis of Presentation



MCG Capital Corporation (MCG or the Company or
we or us or our) is a solutions-focused financial services company that provides financing and advisory services to companies throughout the United States in the communications, information services, media and
technology industry sectors. 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.



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 as of 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.



Interim consolidated financial statements of MCG are prepared
in accordance with generally accepted accounting principles (GAAP) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures
accompanying annual consolidated financial statements prepared in accordance with GAAP are omitted. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of
financial statements for the interim periods, have been included. The current periods results of operations are not necessarily indicative of results that ultimately may be achieved for the year. The interim unaudited consolidated financial
statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Companys Form 10-K for the fiscal year ended December 31, 2002, as filed with the SEC.



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



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share data)



Note 2.    Investments



As of September 30, 2003 and December 31, 2002, investments consisted of the following:



|                                 |  | September 30, 2003 |         |   | December 31, 2002 |  
|-------------------------------- |  | ------------------ | ------- | - | ----------------- | -
|                                 |  | Cost               |         |   | Fair Value        |  
|Commercial loans                 |  | $                  | 588,855 |   |                   | $
|Investments in equity securities |  |                    | 70,729  |   |                   |  
|Unearned income                  |  |                    | (17,440 | ) |                   |  
|                                 |  |                    |         |   |                   |  
|Total                            |  | $                  | 642,144 |   |                   | $
|                                 |  |                    |         |   |                   |  



MCGs customer
base includes primarily small- and medium-sized private companies in the communications, information services, media and technology industry sectors. The proceeds of the loans to these companies are generally used for buyouts, growth, acquisitions,
liquidity, refinancings and restructurings. In addition, we have occasionally made loans to individuals who are principals in these companies where the proceeds are used 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 300 to 1400 basis points above LIBOR, a portion of which may be deferred. At September 30, 2003, approximately 88% of loans in the
portfolio were at variable rates determined on the basis of a benchmark LIBOR or prime rate and approximately 12% were at fixed rates. In addition, approximately 59% of the loan portfolio has floors of between 2% 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 September 30, 2003, over 55% of MCGs loans had
associated detachable warrants or an option to purchase warrants, appreciation rights or other equity interests or other provisions designed to provide the Company with an enhanced internal rate of return. In lieu of cash for loan origination fees,
MCG received warrants valued at $9,221 and $2,369 for the nine months ended September 30, 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.



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share data)



The composition of MCGs investments as of September 30, 2003 and December 31, 2002 at cost and
fair value was as follows excluding unearned income:



|                           |  | September 30, 2003        |         |                              | December 31, 2002 |  
|-------------------------- |  | ------------------------- | ------- | ---------------------------- | ----------------- | -
|                           |  | Investments atCost        |         | Percentage ofTotal Portfolio |                   |  
|Senior Debt                |  | $                         | 516,941 |                              | 78.4              | %
|Subordinated Debt          |  |                           | 71,714  |                              | 10.9              |  
|Unsecured Note             |  |                           | 200     |                              |                  |  
|Equity                     |  |                           | 57,828  |                              | 8.8               |  
|Warrants to Acquire Equity |  |                           | 12,901  |                              | 1.9               |  
|Equity Appreciation Rights |  |                           |        |                              |                  |  
|                           |  |                           |         |                              |                   |  
|Total                      |  | $                         | 659,584 |                              | 100.0             | %
|                           |  |                           |         |                              |                   |  
|                           |  |                          
|                           |  | September 30, 2003        |         |                              | December 31, 2002 |  
|                           |  | Investments at Fair Value |         | Percentage ofTotal Portfolio |                   |  
|Senior Debt                |  | $                         | 509,197 |                              | 80.9              | %
|Subordinated Debt          |  |                           | 70,397  |                              | 11.1              |  
|Unsecured Note             |  |                           | 200     |                              |                  |  
|Equity                     |  |                           | 32,457  |                              | 5.2               |  
|Warrants to Acquire Equity |  |                           | 16,777  |                              | 2.7               |  
|Equity Appreciation Rights |  |                           | 339     |                              | 0.1               |  
|                           |  |                           |         |                              |                   |  
|Total                      |  | $                         | 629,367 |                              | 100.0             | %
|                           |  |                           |         |                              |                   |  



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share data)



Set forth below are tables showing the composition of MCGs portfolio by industry sector
(excluding unearned income) at cost and fair value at September 30, 2003 and December 31, 2002:



|                     |  | September 30, 2003 |         |                              | December 31, 2002 |  
|-------------------- |  | ------------------ | ------- | ---------------------------- | ----------------- | -
|                     |  | Investments atCost |         | Percentage ofTotal Portfolio |                   |  
|Media                |  |                    |         |                              |                   |  
|Newspaper            |  | $                  | 216,419 |                              | 32.8              | %
|Publishing           |  |                    | 102,580 |                              | 15.6              |  
|Broadcasting         |  |                    | 47,194  |                              | 7.2               |  
|Telecommunications   |  |                    | 152,680 |                              | 23.1              |  
|Information Services |  |                    | 74,859  |                              | 11.4              |  
|Technology           |  |                    | 40,839  |                              | 6.2               |  
|Security Alarm       |  |                    | 14,125  |                              | 2.1               |  
|Cable                |  |                    | 8,759   |                              | 1.3               |  
|Other                |  |                    | 2,129   |                              | 0.3               |  
|                     |  |                    |         |                              |                   |  
|Total                |  | $                  | 659,584 |                              | 100.0             | %
|                     |  |                    |         |                              |                   |  



|                     |  | September 30, 2003        |         |                              | December 31, 2002 |  
|-------------------- |  | ------------------------- | ------- | ---------------------------- | ----------------- | -
|                     |  | Investments at Fair Value |         | Percentage ofTotal Portfolio |                   |  
|Media                |  |                           |         |                              |                   |  
|Newspaper            |  | $                         | 216,696 |                              | 34.4              | %
|Publishing           |  |                           | 84,914  |                              | 13.5              |  
|Broadcasting         |  |                           | 45,816  |                              | 7.3               |  
|Telecommunications   |  |                           | 143,719 |                              | 22.8              |  
|Information Services |  |                           | 75,454  |                              | 12.0              |  
|Technology           |  |                           | 38,385  |                              | 6.1               |  
|Security Alarm       |  |                           | 13,973  |                              | 2.2               |  
|Cable                |  |                           | 8,759   |                              | 1.4               |  
|Other                |  |                           | 1,651   |                              | 0.3               |  
|                     |  |                           |         |                              |                   |  
|Total                |  | $                         | 629,367 |                              | 100.0             | %
|                     |  |                           |         |                              |                   |  



At September 30, 2003,
there were $14,322 of loans greater than 60 days past due compared to $21,527 of loans at December 31, 2002. At September 30, 2003, including $10,197 of the loans greater than 60 days past due, there were $24,653 of loans on non-accrual. At December
31, 2002, including all $21,527 of the loans greater than 60 days past due, there were $42,703 of loans on non-accrual.



Note 3.    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 September 30, 2003, $133,362 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 September 30, 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



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share data)



repaid through the issuance of Series 2000-1 Notes. The Revolving Credit Facility was secured by $206,715 of commercial loans as of September 30, 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.



Our $200,000 Revolving Credit Facility is scheduled to terminate on July 7, 2005, or sooner (but not before January 3, 2004) if the liquidity support
provided by Wachovia to the facility is not renewed. As required by the underlying liquidity support agreement, we have received a notice from Wachovia stating that it does not currently intend to renew the liquidity support when it expires on
January 4, 2004. We remain in active negotiations with Wachovia concerning the renewal of this agreement and with other lenders to provide similar and other contemplated credit facilities to the company. If the liquidity support still has not been
renewed or amended and our securitization facility has not been amended, refinanced or satisfied, then all principal and interest payments received in the ordinary course on the assets in the securitization facility, after payment of our
compensation as a servicer and certain facility expenses, would be applied to the Class A Notes until these notes are fully paid.



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 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.



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 $261,225 as of September 30, 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.



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
September 30, 2003, $185,109 of the Series 2001-1 Notes were outstanding, of which $149,746 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



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share data)



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
September 30, 2003 and December 31, 2002 by interest rate benchmark were as follows:



|                                                  |  | September 30, 2003 |         | December 31, 2002
|------------------------------------------------- |  | ------------------ | ------- | -----------------
|90-day LIBOR (Trust Notes)                        |  | $                  | 185,109 |                  
|Commercial Paper Rate (Revolving Credit Facility) |  |                    | 133,362 |                  
|                                                  |  |                    |         |                  
|                                                  |  | $                  | 318,471 |                  
|                                                  |  |                    |         |                  



The following is a
summary of the borrowings for the three and nine months ended September 30, 2003 and 2002:



|(dollars in thousands)                                 |  | MaximumOutstanding |  | AverageOutstanding |  | WeightedAverageInterest Rate |   |  | Interest Rateat Period-End |  
|------------------------------------------------------ |  | ------------------ |  | ------------------ |  | ---------------------------- | - |  | -------------------------- | -
|For September 30, 2003 and the three months then ended |  |                    |  |                    |  |                              |   |  |                            |  
|Trust Notes                                            |  | 190,970            |  | 186,383            |  | 2.0                          | % |  | 1.9                        | %
|Revolving Credit Facility                              |  | 142,234            |  | 136,983            |  | 4.1                          | % |  | 4.3                        | %
|Swingline Notes                                        |  |                   |  |                   |  |                             |   |  |                           |  
|                                                       |  |                    |  |                   
|For September 30, 2003 and the nine months then ended  |  |                    |  |                    |  |                              |   |  |                            |  
|Trust Notes                                            |  | 240,120            |  | 198,346            |  | 2.1                          | % |  | 1.9                        | %
|Revolving Credit Facility                              |  | 148,325            |  | 139,080            |  | 3.0                          | % |  | 4.3                        | %
|Swingline Notes                                        |  |                   |  |                   |  |                             |   |  |                           |  
|                                                       |  |                    |  |                   
|For September 30, 2002 and the three months then ended |  |                    |  |                    |  |                              |   |  |                            |  
|Trust Notes                                            |  | 254,617            |  | 248,245            |  | 2.6                          | % |  | 2.6                        | %
|Revolving Credit Facility                              |  | 102,001            |  | 80,122             |  | 3.3                          | % |  | 3.1                        | %
|Swingline Notes                                        |  | 20,000             |  | 1,304              |  | 2.8                          | % |  |                           |  
|                                                       |  |                    |  |                   
|For September 30, 2002 and the nine months then ended  |  |                    |  |                    |  |                              |   |  |                            |  
|Trust Notes                                            |  | 265,223            |  | 255,489            |  | 2.6                          | % |  | 2.6                        | %
|Revolving Credit Facility                              |  | 102,001            |  | 60,378             |  | 3.4                          | % |  | 3.1                        | %
|Swingline Notes                                        |  | 22,900             |  | 859                |  | 2.8                          | % |  |                           |  



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 $66,638 and $76,282 at September 30, 2003 and December 31,
2002, respectively.



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share data)



Note 4.    Earnings Per Share



The following table sets forth the computation of basic and diluted earnings
per common share for the three and nine months ended September 30, 2003 and 2002:



|                                                                                                  |  | Three Months EndedSeptember 30, |        |      | Nine Months EndedSeptember 30,
|------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | ---- | ------------------------------
|(in thousands except per share amounts)                                                           |  | 2003                            |        | 2002 |                               
|Basic                                                                                             |  |                                 |        |      |                               
|Net income (loss) /Net increase (decrease) in stockholders equity resulting from earnings (loss) |  | $                               | 9,913  |      | $                             
|Weighted average common shares outstanding                                                        |  |                                 | 32,878 |      |                               
|Earnings (loss) per common sharebasic                                                            |  | $                               | 0.30   |      | $                             
|Diluted                                                                                           |  |                                 |        |      |                               
|Net income (loss) /Net increase (decrease) in stockholders equity resulting from earnings (loss) |  | $                               | 9,913  |      | $                             
|Weighted average common shares outstanding                                                        |  |                                 | 32,878 |      |                               
|Dilutive effect of restricted stock on which forfeiture provisions have not lapsed                |  |                                 | 28     |      |                               
|                                                                                                  |  |                                 |        |      |                               
|Weighted average common shares outstandingdiluted                                                |  |                                 | 32,906 |      |                               
|                                                                                                  |  |                                 |        |      |                               
|Earnings (loss) per common sharediluted                                                          |  | $                               | 0.30   |      | $                             



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. 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.



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share data)



Note 5.    Financial Highlights



The following is a schedule of financial highlights for the nine months
ended September 30, 2003 and 2002:



|                                                                                |  | Nine Months EndedSeptember 30, |        
|------------------------------------------------------------------------------- |  | ------------------------------ | -------
|                                                                                |  | 2003                           |        
|Per Share Data:                                                                 |  |                                |        
|Net asset value at beginning of period (1)                                      |  | $                              | 11.56  
|Net operating income before investment gains and losses (2)                     |  |                                | 1.11   
|Realized losses on investments (2)                                              |  |                                | (0.63  
|Increase in unrealized appreciation (depreciation) on investments (2)           |  |                                | 0.42   
|                                                                                |  |                                |        
|Net increase in stockholders equity resulting from earnings                    |  |                                | 0.90   
|Dividends declared                                                              |  |                                | (1.23  
|Antidilutive effect of stock offering on distributions                          |  |                                | 0.23   
|Antidilutive effect of distributions recorded as compensation expense (2)       |  |                                | 0.05   
|                                                                                |  |                                |        
|Net decrease in stockholders equity resulting from distributions               |  |                                | (0.95  
|Net increase in shareholders equity resulting from reduction in employee loans |  |                                |       
|Issuance of shares                                                              |  |                                | 2.99   
|Dilutive effect of share issuance and unvested restricted stock                 |  |                                | (2.60  
|Net increase in shareholders equity from restricted stock amortization (2)     |  |                                | 0.09   
|                                                                                |  |                                |        
|Net increase in stockholders equity relating to share issuances                |  |                                | 0.48   
|                                                                                |  |                                |        
|Net asset value at end of period (1)                                            |  | $                              | 11.99  
|                                                                                |  |                                |        
|Per share market value at end of period                                         |  | $                              | 15.60  
|Total return (3)                                                                |  |                                | 56.27  
|Shares outstanding at end of period                                             |  |                                | 38,729 
|Ratio/Supplemental Data:                                                        |  |                                |        
|Net assets at end of period                                                     |  | $                              | 464,439
|Ratio of operating expenses to average net assets (annualized)                  |  |                                | 8.33   
|Ratio of net operating income to average net assets (annualized)                |  |                                | 12.08  



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

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

|(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 ($1.23 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 ($1.74 per share), divided by the beginning price. Total return is not annualized.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share data)



Note 6.    Assets Held and Income From Majority Owned Companies, Controlled Companies and
Other Affiliates



The following table summarizes MCGs
assets held and income from majority owned companies, controlled companies and other affiliates:



|                                               |  | September 30,2003 |        | December 31,2002
|---------------------------------------------- |  | ----------------- | ------ | ----------------
|Assets Held:                                   |  |                   |        |                 
|Majority Owned Companies (a):                  |  |                   |        |                 
|Loans at fair value                            |  | $                 | 32,477 |                 
|Non-accrual loans at fair value included above |  |                   | 10,286 |                 
|Equity Investments at fair value               |  |                   | 15,767 |                 
|Controlled Companies (b):                      |  |                   |        |                 
|Loans at fair value                            |  |                   | 18,155 |                 
|Non-accrual loans at fair value included above |  |                   |       |                 
|Equity Investments at fair value               |  |                   | 10,462 |                 
|Other Affiliates (c):                          |  |                   |        |                 
|Loans at fair value                            |  |                   | 44,863 |                 
|Non-accrual loans at fair value included above |  |                   | 170    |                 
|Equity Investments at fair value               |  |                   | 2,506  |                 



|                                                                    |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | -
|                                                                    |  | 2003                             |        |   | 2002                            |  
|Income Recognized:                                                  |  |                                  |        |   |                                 |  
|From Majority Owned Companies (a):                                  |  |                                  |        |   |                                 |  
|Interest and fee income                                             |  | $                                | 643    |   |                                 | $
|Net change in unrealized appreciation (depreciation) on investments |  |                                  | (1,680 | ) |                                 |  
|Reversal of unrealized depreciation on investments                  |  |                                  |       |   |                                 |  
|Realized losses on investments                                      |  |                                  |       |   |                                 |  
|From Controlled Companies (b):                                      |  |                                  |        |   |                                 |  
|Interest and fee income                                             |  |                                  | 365    |   |                                 |  
|Net change in unrealized appreciation (depreciation) on investments |  |                                  | (1,629 | ) |                                 |  
|Reversal of unrealized depreciation on investments                  |  |                                  | 519    |   |                                 |  
|Realized losses on investments                                      |  |                                  | (519   | ) |                                 |  
|From Other Affiliates (c):                                          |  |                                  |        |   |                                 |  
|Interest and fee income                                             |  |                                  | 1,341  |   |                                 |  
|Net change in unrealized appreciation (depreciation) on investments |  |                                  | (803   | ) |                                 |  
|Reversal of unrealized depreciation on investments                  |  |                                  | 48     |   |                                 |  
|Realized losses on investments                                      |  |                                  | (48    | ) |                                 |  



|(a) |  | Majority owned companies 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.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | Controlled companies 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.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) |  | Other affiliates 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.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share data)



Note 7.    Contingencies



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. On October 7, 2003, 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. 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.



Note 8.    Subsequent Event



In October 2003, we completed a transaction in which the assets of Sabot Publishing, Inc. and its subsidiaries were sold to
an unaffiliated third party. At the time of this sale, we loaned $10,200 to the third party purchaser to finance a portion of the purchase price. Our investment in Sabot Publishing, Inc. had a fair value of $10,136 and unrealized depreciation of
$384 at September 30, 2003. In conjunction with the acquisition and subsequent sale, we expect to realize a loss of approximately $405 in the fourth quarter of 2003 and, at the same time, reverse the unrealized depreciation of $384. Accordingly, we
expect these transactions will result in approximately ($21) of net realized and unrealized gains and losses in the fourth quarter of 2003. In addition, as a result of the satisfaction of the loan outstanding to Sabot Publishing, Inc. and its
subsidiaries, our loans past due greater than 60 days and our non-accrual loans will decrease by $10,136.



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##### Table of Contents

Independent Accountants Review Report



Board
of Directors and Shareholders

MCG Capital Corporation



We have reviewed the accompanying consolidated balance sheet of MCG Capital Corporation as of September 30, 2003, including the consolidated schedule of investments, and
the related consolidated statements of operations for the three-month and nine-month periods ended September 30, 2003 and 2002 and the consolidated statements of stockholders equity and cash flows for the nine-month periods ended September 30,
2003 and 2002. These financial statements are the responsibility of the Companys management.



We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical
procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.



Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial
statements referred to above for them to be in conformity with accounting principles generally accepted in the United States.



We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of MCG Capital Corporation as of
December 31, 2002, including the consolidated schedules of investments, and the related consolidated statements of operations, stockholders equity, and cash flows for the year then ended (not presented herein), and in our report dated February
14, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2002, including the consolidated schedules of
investments, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.



/s/  ERNST & YOUNG LLP



McLean, Virginia

October 29, 2003



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##### Table of Contents

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



The information contained in this section should be read in conjunction with the Selected Consolidated Financial and Other Data, and our Consolidated
Financial Statements and notes thereto appearing elsewhere in this Quarterly Report. This Quarterly Report, including the Managements Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements
that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our industry, our beliefs, and our assumptions. Words such as
anticipates, expects, intends, plans, believes, seeks, and estimates and variations of these words and similar expressions are intended to identify forward-looking
statements. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from
those expressed or forecasted in the forward-looking statements including without limitation (1) the current economic conditions may impair our customers ability to repay our loans and increase our non-performing assets, (2) the current
economic conditions may disproportionately impact the communications, information services, media and technology industries in which we concentrate causing us to suffer losses in our portfolio and experience diminished demand for capital in these
industry sectors, (3) a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities, (4) interest rate volatility could adversely affect our results, (5) the risks associated
with the possible disruption in our operations due to terrorism and (6) 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. Important assumptions include our ability to originate new credits, certain margins and levels of profitability, the availability of additional capital, and the ability to maintain certain debt to asset ratios. In light of
these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly 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 Quarterly Report.



Overview



MCG Capital
Corporation is a solutions-focused financial services company providing financing and advisory services to small and medium-sized companies throughout the United States in the communications, information services, media and technology industry
sectors. On December 4, 2001, we completed an initial public offering of 13,375,000 shares of our common stock and a concurrent private offering of 625,000 shares of our common stock with gross proceeds totaling $237.3 million. Upon completion of
these offerings, we became an internally managed, non-diversified, closed-end investment company that elected to be treated as a business development company under the Investment Company Act of 1940. 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.



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 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 $100.8 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.



28



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##### Table of Contents

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



Portfolio Composition and Asset Quality



Our primary business is lending to and investing in private businesses, primarily in the communications, information
services, media, and technology industry sectors, through investments in senior debt, subordinated debt and equity-based investments, including warrants and equity appreciation rights. The total portfolio value of our investments was $629.4 million
and $688.9 million at September 30, 2003 and December 31, 2002, respectively (exclusive of unearned income). The decrease in investments during the first nine months of 2003 was primarily due to approximately $82.1 million of early payoffs on loans.
The increase in investments during 2002 was primarily attributable to originated debt securities, including $55.5 million of subordinated debt to four companies. Though we intend to increase our level of subordinated debt and equity-based
investments, we expect a substantial majority of our portfolio will continue to consist of investments in senior secured commercial loans.



Total portfolio investment activity for the nine months ended September 30, 2003 and year ended December 31, 2002, was as follows (exclusive of unearned
income):



|(dollars in millions)                        |  | Nine MonthsEndedSeptember 30, 2003 |       |   | Year EndedDecember 31, 2002 |  
|-------------------------------------------- |  | ---------------------------------- | ----- | - | --------------------------- | -
|Beginning Portfolio                          |  | $                                  | 688.9 |   |                             | $
|Originations/Draws/Advances on Loans         |  |                                    | 49.2  |   |                             |  
|Originations/Warrants Received on Equity (a) |  |                                    | 35.4  |   |                             |  
|Gross Payments/Reductions (a)                |  |                                    | (49.9 | ) |                             |  
|Early Pay-offs/Sales of Securities           |  |                                    | (87.6 | ) |                             |  
|Realized Gains on Investments                |  |                                    | 4.4   |   |                             |  
|Realized Losses on Investments               |  |                                    | (23.9 | ) |                             |  
|Unrealized Appreciation in Investments       |  |                                    | 30.3  |   |                             |  
|Unrealized Depreciation in Investments       |  |                                    | (17.4 | ) |                             |  
|                                             |  |                                    |       |   |                             |  
|Ending Portfolio                             |  | $                                  | 629.4 |   |                             | $
|                                             |  |                                    |       |   |                             |  



|a) |  | Included in these amounts is the conversion of $21.4 million and $5.4 million of debt to equity in connection with certain restructurings for the nine months ended September 30,
2003 and year ended December 31, 2002, respectively.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Business activity for the nine months ended September 30, 2003 included investments in two new customers totaling $17.8 million and follow on investments in several of our existing portfolio companies. We also completed several
restructurings of our existing portfolio companies. We are currently in the origination process of several new investments.



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##### Table of Contents

The following table shows the fair value of our portfolio of investments by asset class as of September
30, 2003 and December 31, 2002:



|                           |  | September 30, 2003       |       |                              | December 31, 2002 |  
|-------------------------- |  | ------------------------ | ----- | ---------------------------- | ----------------- | -
|(dollars in millions)      |  | Investments atFair Value |       | Percentage ofTotal Portfolio |                   |  
|Senior Debt                |  | $                        | 509.2 |                              | 80.9              | %
|Subordinated Debt          |  |                          | 70.4  |                              | 11.1              |  
|Unsecured Note             |  |                          | 0.2   |                              |                  |  
|Equity                     |  |                          | 32.5  |                              | 5.2               |  
|Warrants to Acquire Equity |  |                          | 16.8  |                              | 2.7               |  
|Equity Appreciation Rights |  |                          | 0.3   |                              | 0.1               |  
|                           |  |                          |       |                              |                   |  
|                           |  | $                        | 629.4 |                              | 100.0             | %
|                           |  |                          |       |                              |                   |  



Set forth below is a
table showing the composition of MCGs portfolio by industry sector (excluding unearned income) at fair value at September 30, 2003 and December 31, 2002:



|                      |  | September 30, 2003       |       |                              | December 31, 2002 |  
|--------------------- |  | ------------------------ | ----- | ---------------------------- | ----------------- | -
|(dollars in millions) |  | Investments atFair Value |       | Percentage ofTotal Portfolio |                   |  
|Media                 |  |                          |       |                              |                   |  
|Newspaper             |  | $                        | 216.7 |                              | 34.4              | %
|Publishing            |  |                          | 84.9  |                              | 13.5              |  
|Broadcasting          |  |                          | 45.8  |                              | 7.3               |  
|Telecommunications    |  |                          | 143.7 |                              | 22.8              |  
|Information Services  |  |                          | 75.5  |                              | 12.0              |  
|Technology            |  |                          | 38.4  |                              | 6.1               |  
|Security Alarm        |  |                          | 14.0  |                              | 2.2               |  
|Cable                 |  |                          | 8.8   |                              | 1.4               |  
|Other                 |  |                          | 1.6   |                              | 0.3               |  
|                      |  |                          |       |                              |                   |  
|                      |  | $                        | 629.4 |                              | 100.0             | %
|                      |  |                          |       |                              |                   |  



The following table
summarizes MCGs assets held and income from majority owned companies, controlled companies and other affiliates:



|                                               |  | September 30,2003 |        | December 31,2002
|---------------------------------------------- |  | ----------------- | ------ | ----------------
|Assets Held:                                   |  |                   |        |                 
|Majority Owned Companies (a):                  |  |                   |        |                 
|Loans at fair value                            |  | $                 | 32,477 |                 
|Non-accrual loans at fair value included above |  |                   | 10,286 |                 
|Equity Investments at fair value               |  |                   | 15,767 |                 
|Controlled Companies (b):                      |  |                   |        |                 
|Loans at fair value                            |  |                   | 18,155 |                 
|Non-accrual loans at fair value included above |  |                   |       |                 
|Equity Investments at fair value               |  |                   | 10,462 |                 
|Other Affiliates (c):                          |  |                   |        |                 
|Loans at fair value                            |  |                   | 44,863 |                 
|Non-accrual loans at fair value included above |  |                   | 170    |                 
|Equity Investments at fair value               |  |                   | 2,506  |                 



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|                                                                    |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | -
|                                                                    |  | 2003                            |        |   | 2002                           |  
|Income Recognized:                                                  |  |                                 |        |   |                                |  
|From Majority Owned Companies (a):                                  |  |                                 |        |   |                                |  
|Interest and fee income                                             |  | $                               | 643    |   |                                | $
|Net change in unrealized appreciation (depreciation) on investments |  |                                 | (1,680 | ) |                                |  
|Reversal of unrealized depreciation on investments                  |  |                                 |       |   |                                |  
|Realized losses on investments                                      |  |                                 |       |   |                                |  
|From Controlled Companies (b):                                      |  |                                 |        |   |                                |  
|Interest and fee income                                             |  |                                 | 365    |   |                                |  
|Net change in unrealized appreciation (depreciation) on investments |  |                                 | (1,629 | ) |                                |  
|Reversal of unrealized depreciation on investments                  |  |                                 | 519    |   |                                |  
|Realized losses on investments                                      |  |                                 | (519   | ) |                                |  
|From Other Affiliates (c):                                          |  |                                 |        |   |                                |  
|Interest and fee income                                             |  |                                 | 1,341  |   |                                |  
|Net change in unrealized appreciation (depreciation) on investments |  |                                 | (803   | ) |                                |  
|Reversal of unrealized depreciation on investments                  |  |                                 | 48     |   |                                |  
|Realized losses on investments                                      |  |                                 | (48    | ) |                                |  



|(a) |  | Majority owned companies 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.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | Controlled companies 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.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) |  | Other affiliates 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.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Asset Quality



Asset quality is generally a function of our underwriting and ongoing
management of our investment portfolio. As a business development company, our loans and equity investments are carried at market value or, in the absence of market value, at fair value as determined by our board of directors in good faith on a
quarterly basis. As of September 30, 2003 and December 31, 2002, unrealized depreciation on investments totaled $30.2 million and $43.1 million, respectively. For additional information on the change 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:



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



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The following table shows the distribution of our investments on the 1 to 5 investment rating scale at
fair value as of September 30, 2003 and December 31, 2002:



|(dollars in millions) |  |                          |       |                              |                   |   |                          |  
|--------------------- |  | ------------------------ | ----- | ---------------------------- | ----------------- | - | ------------------------ | -
|                      |  | September 30, 2003       |       |                              | December 31, 2002 |  
|InvestmentRating      |  | Investments atFair Value |       | Percentage ofTotal Portfolio |                   |   | Investments atFair Value |  
|1                     |  | $                        | 90.0  |                              | 14.3              | % |                          | $
|2                     |  |                          | 257.8 |                              | 41.0              |   |                          |  
|3                     |  |                          | 228.1 |                              | 36.2              |   |                          |  
|4                     |  |                          | 46.4  |                              | 7.4               |   |                          |  
|5                     |  |                          | 7.1   |                              | 1.1               |   |                          |  
|                      |  |                          |       |                              |                   |   |                          |  
|                      |  | $                        | 629.4 |                              | 100.0             | % |                          | $
|                      |  |                          |       |                              |                   |   |                          |  



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 September 30, 2003, of the investments with
a 5 rating, $2.9 million were loans, all of which were on non-accrual. Of the investments with a 4 rating, $40.2 million were loans, of which $21.7 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, 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 September 30,
2003 and December 31, 2002, there were $14.3 million and $21.5 million, respectively, of loans, or approximately 2.3% or 3.1%, respectively, of the investment portfolio, greater than 60 days past due. At September 30, 2003, including $10.2 million
of the loans greater than 60 days past due, there were $24.7 million of loans, or approximately 3.9% 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 on non-accrual status representing 6.2% of the investment portfolio. 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, continue to experience sluggish advertising revenue. Certain companies in the telecommunications industry have suffered from competitive
pressure from low cost and prepaid cellular calling plans. At September 30, 2003, of the $32.5 million of loans to our majority owned companies, $10.3 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 September 30, 2003, of the $18.2 million of loans to controlled companies, none 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 September 30, 2003, of the $44.9 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.



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When principal and interest on a loan is not paid within the applicable grace period, we will contact the
customer for collection. At that time, we will make a determination as to the extent of the problem, if any. We will then pursue a commitment for immediate payment and will begin to more actively monitor the investment. We will formulate strategies
to optimize the resolution process and will begin the process of restructuring the investment to better reflect the current financial performance of the customer. Such a restructuring may involve deferring payments of principal and interest,
adjusting interest rates or warrant positions, imposing additional fees, amending financial or operating covenants or converting debt to equity. In general, in order to compensate us for any enhanced risk, we receive 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.



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Results of Operations



Comparison of the Three and Nine Months Ended September 30, 2003 and 2002



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 for the three and nine months ended September 30, 2003 compared to the same periods in 2002 is attributable to the following items:



|(dollars in thousands)                                  |  | Three Months EndedSeptember 30,2003 vs. 2002 |        |   | Nine Months EndedSeptember 30,2003 vs. 2002 |  
|------------------------------------------------------- |  | -------------------------------------------- | ------ | - | ------------------------------------------- | -
|Change due to:                                          |  |                                              |        |   |                                             |  
|Decrease in assets (a)                                  |  | $                                            | (3,300 | ) |                                             | $
|Change in LIBOR (a)                                     |  |                                              | (1,267 | ) |                                             |  
|Change in spread (a)                                    |  |                                              | 2,525  |   |                                             |  
|Net increase (decrease) in loan fee and dividend income |  |                                              | 312    |   |                                             |  
|Increase in advisory fees and other income              |  |                                              | 1,496  |   |                                             |  
|                                                        |  |                                              |        |   |                                             |  
|Total change in operating income                        |  | $                                            | (234   | ) |                                             | $
|                                                        |  |                                              |        |   |                                             |  



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



Total operating income for the
three months ended September 30, 2003 decreased $0.2 million, or 1.2%, to $19.9 million from $20.1 million for the three months ended September 30, 2002. Loan interest decreased by $2.0 million for the three months ended September 30, 2003 as
compared to the three months ended September 30, 2002. Average three month LIBOR decreased 68 basis points over these periods from 1.81% to 1.13%, decreasing income by $1.2 million. Average commercial loans decreased 18.0% for the three months ended
September 30, 2003 when compared to the three months ended September 30, 2002, contributing a $3.3 million decrease in income. The coupon spread increased 146 basis points for the three months ended September 30, 2003 when compared to the three
months ended September 30, 2002, resulting in a $2.5 million increase in income. LIBOR floors, which are included in approximately 60% 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 by $0.3 million from the third quarter of 2002 to the third quarter of 2003. Advisory fees and other income for the three months ended September 30, 2003 increased $1.5 million to $2.2 million
from $0.7 million for the three months ended September 30, 2002 as a greater number of financial advisory projects were completed during the third quarter of 2003. The increase in weighted average spreads, increase in advisory and other income and
increase in loan fee and dividend income was more than offset by the affects of the decrease in LIBOR rates and decrease in loan volume for the three months ended September 30, 2003 to the same period in 2002.



Total operating income for the nine months ended September 30, 2003 increased
$1.5 million, or 2.6%, to $58.1 million from $56.6 million for the nine months ended September 30, 2002. Operating income for the first nine months of 2003 included $0.4 million of dividend income. Loan interest increased by $1.2 million for the
nine months ended September 30, 2003 as compared to the nine months ended September 30, 2002. Average three month LIBOR decreased 65 basis points over these periods from 1.88% to 1.23%, decreasing income by $3.2 million. Average commercial loans
decreased 4.9% for the nine months ended September 30, 2003 when compared to the nine months ended September 30, 2002, contributing a $2.3 million decrease in income. The coupon spread increased 137 basis points for the nine months ended September
30, 2003 when compared to the



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nine months ended September 30, 2002, resulting in a $6.7 million increase in income. LIBOR floors, which are included in approximately 60% 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 decreased by $0.1 million from the first nine months of 2002 to the first nine months of 2003. Advisory
fees and other income for the nine months ended September 30, 2003 increased $0.4 million to $3.8 million from $3.4 million for the nine months ended September 30, 2002 as a greater number of financial advisory projects were completed during the
first nine months of 2002. 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 nine months ended September 30, 2003
to the same period in 2002.



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 expenses for the three and nine months ended September 30, 2003 compared to the same period in 2002 is attributable to the
following items:



|(dollars in thousands)                |  | Three Months EndedSeptember 30,2003 vs. 2002 |      |   | Nine Months EndedSeptember 30,2003 vs. 2002 |  
|------------------------------------- |  | -------------------------------------------- | ---- | - | ------------------------------------------- | -
|Change due to:                        |  |                                              |      |   |                                             |  
|Increase (decrease) in borrowings (a) |  | $                                            | (45  | ) |                                             | $
|Change in LIBOR (a)                   |  |                                              | (574 | ) |                                             |  
|Change in spread (a)                  |  |                                              | 657  |   |                                             |  
|Debt cost amortization                |  |                                              | (178 | ) |                                             |  
|Salaries and benefits                 |  |                                              | (199 | ) |                                             |  
|Long-term incentive compensation      |  |                                              | (57  | ) |                                             |  
|General and administrative expense    |  |                                              | 75   |   |                                             |  
|                                      |  |                                              |      |   |                                             |  
|Total change in operating expense     |  | $                                            | (321 | ) |                                             | $
|                                      |  |                                              |      |   |                                             |  



|(a) |  | The change in interest expense due to 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 three months ended September 30, 2003 declined $0.3 million, or 3.8%, to $8.2 million when compared to the three months ended September 30, 2002. Borrowing costs decreased 4.9% from $2.8 million for the three months ended September
30, 2002 to $2.7 million for the three months ended September 30, 2003. Average three month LIBOR decreased 68 basis points over these periods from 1.81% to 1.13%, which caused interest expense to decline by $0.6 million. A decrease in average
borrowings decreased interest expense by less than $0.1 million. The increase in spreads caused interest expense to rise by $0.7 million. Salaries and benefits decreased $0.2 million. Long-term incentive compensation related to the amortization of
restricted stock awards and the treatment of dividends on performance based restricted shares and certain shares of common stock securing employee loans as compensation declined less than $0.1 million quarter to quarter. General and administrative
expenses increased less than $0.1 million for the three months ended September 30, 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 nine months ended September 30, 2003 increased $0.1 million, or 0.6%, to $23.7 million. Borrowing costs decreased by 9.2%
from $8.2 million for the nine months ended September 30, 2002 to $7.4 million for the nine months ended September 30, 2003. Average three month LIBOR decreased 65 basis points over these periods from 1.88% to 1.23%, which caused interest expense to
decline by $1.6 million. The increase in average borrowings and spreads caused interest expense to rise by $1.3 million. Salaries and benefits remained level at $5.8 million. Long-term incentive compensation related to the amortization of



35



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##### Table of Contents

restricted stock awards and the treatment of dividends on performance based restricted shares and certain shares of common stock securing employee loans as
compensation decreased $0.3 million over these periods. General and administrative expenses increased $1.2 million for the nine months ended September 30, 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.



Net Operating Income Before Investment Gains and Losses



Net operating income before investment gains and losses (NOI) for the three
and nine months ended September 30, 2003 totaled $11.7 million and $34.4 million, respectively, compared with $11.7 million and $33.1 million for the same respective periods in 2002.



Net Investment Gains and Losses



For the first nine months of 2003, net investment gains and losses totaled ($6.6) million, of which ($1.8) million is related to the third quarter. For
the first nine months of 2002, net investment gains and losses totaled ($23.4) million, of which ($15.1) million is related to the third quarter. 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.



The following table summarizes our realized gains and losses on investments
for the three and nine months ended September 30, 2003 and 2002:



MCG Capital Corporation

Summary of Realized Gains and Losses on Investments

(dollars in thousands)



|                                              |  |                      |  | Three Months EndedSeptember 30 |        |   | Nine Months EndedSeptember 30 |  
|--------------------------------------------- |  | -------------------- |  | ------------------------------ | ------ | - | ----------------------------- | -
|Portfolio Company                             |  | Sector               |  | 2003                           |        |   | 2002                          |  
|                                             
|Realized gains (losses) on loans              |  |                      |  |                                |        |   |                               |  
|VS&A-PBI Holding LLC                          |  | Publishing           |  | $                              |       |   |                               | $
|National Systems Integration                  |  | Security Alarm       |  |                                |       |   |                               |  
|AMI Telecommunications Corporation            |  | Telecommunications   |  |                                |       |   |                               |  
|Rising Tide Holdings, Inc.                    |  | Publishing           |  |                                |       |   |                               |  
|THE Journal, LLC                              |  | Publishing           |  |                                | (959   | ) |                               |  
|NBG Radio Network, Inc.                       |  | Broadcasting         |  |                                |       |   |                               |  
|Netplexus Corporation                         |  | Technology           |  |                                | (48    | ) |                               |  
|ValuePage Holdings, Inc.                      |  | Telecommunications   |  |                                |        |   |                               |  
|                                              |  |                      |  |                                |        |   |                               |  
|                                              |  |                      |  |                                | (1,007 | ) |                               |  
|                                              |  |                      |  |                                |        |   |                               |  
|Realized gains (losses) on equity investments |  |                      |  |                                |        |   |                               |  
|Talk America Holdings, Inc.                   |  | Telecommunications   |  |                                | 1,858  |   |                               |  
|Systems Xcellence USA, Inc.                   |  | Technology           |  |                                | 1,679  |   |                               |  
|Fawcette Technical Holding                    |  | Publishing           |  |                                | (519   | ) |                               |  
|Unifocus, Inc.                                |  | Information Services |  |                                | 53     |   |                               |  
|                                              |  |                      |  |                                |        |   |                               |  
|                                              |  |                      |  |                                | 3,071  |   |                               |  
|                                              |  |                      |  |                                |        |   |                               |  
|Realized gains (losses) on investments        |  |                      |  | $                              | 2,064  |   |                               | $
|                                              |  |                      |  |                                |        |   |                               |  



36



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##### Table of Contents

The following table summarizes the net change in our unrealized appreciation and depreciation on
investments for the three and nine months ended September 30, 2003 and 2002:



MCG Capital Corporation

Summary of Net Change in Unrealized Appreciation and Depreciation on
Investments

(dollars in thousands)



|                                                                    |  |                      |        | Three Months EndedSeptember 30 |        |   | Nine Months EndedSeptember 30 |  
|------------------------------------------------------------------- |  | -------------------- | ------ | ------------------------------ | ------ | - | ----------------------------- | -
|Portfolio Company                                                   |  | Sector               |        | 2003                           |        |   | 2002                          |  
|                                                                   
|Unrealized appreciation on loans                                    |  |                      |        |                                |        |   |                               |  
|Sunshine Media, Delaware, LLC                                       |  | Publishing           |        | $                              | 415    |   |                               | $
|Other                                                               |  |                      |        |                                |       |   |                               |  
|                                                                    |  |                      |        |                                |        |   |                               |  
|                                                                    |  |                      |        |                                | 415    |   |                               |  
|Unrealized appreciation on equity investments                       |  |                      |        |                                |        |   |                               |  
|Creatas, L.L.C.                                                     |  | Information Services |        | $                              |       |   |                               | $
|Talk America Holdings, Inc.                                         |  | Telecommunications   |        |                                | 82     |   |                               |  
|Bridgecom Holdings, Inc.                                            |  | Telecommunications   |        |                                | 331    |   |                               |  
|Copperstate Technologies, Inc.                                      |  | Security Alarm       |        |                                | 1,268  |   |                               |  
|Systems Xcellence USA, Inc.                                         |  | Technology           |        |                                |       |   |                               |  
|Manhattan Telecommunications Corporation                            |  | Telecommunications   |        |                                |       |   |                               |  
|Other                                                               |  |                      |        |                                | 537    |   |                               |  
|                                                                    |  |                      |        |                                |        |   |                               |  
|                                                                    |  |                      |        |                                | 2,218  |   |                               |  
|                                                                    |  |                      |        |                                |        |   |                               |  
|Unrealized appreciation on investments                              |  |                      |        |                                | 2,633  |   |                               |  
|                                                                    |  |                      |        |                                |        |   |                               |  
|Unrealized depreciation on loans                                    |  |                      |        |                                |        |   |                               |  
|AMI Telecommunications Corporation                                  |  | Telecommunications   |        | $                              | (1,143 | ) |                               | $
|Images.com, Inc.                                                    |  | Information Services |        |                                | (38    | ) |                               |  
|Netplexus Corporation                                               |  | Technology           |        |                                | (32    | ) |                               |  
|NOW Communications, Inc.                                            |  | Telecommunications   |        |                                | (94    | ) |                               |  
|Corporate Legal Times                                               |  | Publishing           |        |                                | (35    | ) |                               |  
|Telecomm South, LLC                                                 |  | Telecommunications   |        |                                | (497   | ) |                               |  
|National Systems Integration                                        |  | Security Alarm       |        |                                |       |   |                               |  
|ValuePage Holdings, Inc.                                            |  | Telecommunications   |        |                                |       |   |                               |  
|VS&A-PBI Holding LLC                                                |  | Publishing           |        |                                |       |   |                               |  
|Rising Tide Holdings, Inc.                                          |  | Publishing           |        |                                |       |   |                               |  
|THE Journal, LLC                                                    |  | Publishing           |        |                                |       |   |                               |  
|Other                                                               |  |                      |        |                                | (234   | ) |                               |  
|                                                                    |  |                      |        |                                |        |   |                               |  
|                                                                    |  |                      |        |                                | (2,073 | ) |                               |  
|                                                                    |  |                      |        |                                |        |   |                               |  
|Unrealized depreciation on equity investments                       |  |                      |        |                                |        |   |                               |  
|AMI Telecommunications Corporation                                  |  | Telecommunications   |        | $                              |       |   |                               | $
|Biznessonline.com, Inc.                                             |  | Telecommunications   |        |                                |       |   |                               |  
|Working Mother Media, Inc.                                          |  | Publishing           |        |                                |       |   |                               |  
|Creatas, L.L.C.                                                     |  | Information Services |        |                                | (1,175 | ) |                               |  
|Crystal Media Network, LLC                                          |  | Broadcasting         |        |                                | (983   | ) |                               |  
|Fawcette Technical Holding                                          |  | Publishing           |        |                                | (1,328 | ) |                               |  
|Interactive Business Solutions, Inc.                                |  | Security Alarm       |        |                                | (480   | ) |                               |  
|National Systems Integration                                        |  | Security Alarm       |        |                                | (132   | ) |                               |  
|UMAC, Inc.                                                          |  | Publishing           |        |                                |       |   |                               |  
|Talk America Holdings, Inc.                                         |  | Telecommunications   |        |                                |       |   |                               |  
|Other                                                               |  |                      |        |                                | (607   | ) |                               |  
|                                                                    |  |                      |        |                                |        |   |                               |  
|                                                                    |  |                      |        |                                | (4,705 | ) |                               |  
|                                                                    |  |                      |        |                                |        |   |                               |  
|Unrealized depreciation on investments                              |  |                      |        |                                | (6,778 | ) |                               |  
|                                                                    |  |                      |        |                                |        |   |                               |  
|Reversal of unrealized depreciation (appreciation)*                 |  |                      |        |                                |        |   |                               |  
|ValuePage Holdings, Inc.                                            |  | Telecommunications   |        | $                              |       |   |                               | $
|VS&A-PBI Holding LLC                                                |  | Publishing           |        |                                |       |   |                               |  
|National Systems Integration                                        |  | Security Alarm       |        |                                |       |   |                               |  
|AMI Telecommunications Corporation                                  |  | Telecommunications   |        |                                |       |   |                               |  
|Rising Tide Holdings, Inc.                                          |  | Publishing           |        |                                |       |   |                               |  
|THE Journal, LLC                                                    |  | Publishing           |        |                                | 1,752  |   |                               |  
|Talk America Holdings, Inc.                                         |  | Telecommunications   |        |                                | (1,381 | ) |                               |  
|Systems Xcellence USA, Inc.                                         |  | Technology           |        |                                | (631   | ) |                               |  
|NBG Radio Network, Inc.                                             |  | Broadcasting         |        |                                |       |   |                               |  
|Fawcette Technical Holding                                          |  | Publishing           |        |                                | 519    |   |                               |  
|Other                                                               |  |                      |        |                                | (5     | ) |                               |  
|                                                                    |  |                      |        |                                |        |   |                               |  
|Total reversal of unrealized depreciation (appreciation)            |  |                      | 254    |                                |        |   | 9,617                         |  
|                                                                    |  |                      |        |                                |        |   |                               |  
|Net change in unrealized appreciation (depreciation) on investments |  | $                    | (3,891 | )                              |        | $ | (5,497                        | )
|                                                                    |  |                      |        |                                |        |   |                               |  



|* |  | 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 on income to the extent such income is distributed to
stockholders and we meet certain minimum dividend distribution and other requirements.



Net Income



Net income totaled $9.9 million
for the quarter ended September 30, 2003 compared to a net loss of $3.5 million for the quarter ended September 30, 2002. Net income totaled $27.8 million for the nine months ended September 30, 2003 compared to $9.7 million for the nine months
ended September 30, 2002.



Financial Condition, Liquidity and
Capital Resources



Cash, Cash Equivalents and Cash, Securitization
Accounts



At September 30, 2003 and December 31, 2002, we
had $154.6 million and $9.4 million, respectively, in cash and cash equivalents. In addition, at September 30, 2003 and December 31, 2002, we had $21.1 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 restructure our debt facilities.



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, borrowings under our credit facilities and equity financings.



As of September 30, 2003, we had unused commitments to extend credit to our
customers of $23.6 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 $66.6 million. See Borrowings section below for discussion of our borrowing facilities.



The following table shows our contractual obligations as of September 30, 2003:



|                                                  |  | Payments Due by Period
|------------------------------------------------- |  | ----------------------
|(dollars in millions) Contractual Obligations (a) |  | Total                 
|                                                 
|Borrowings (b)                                    |  | $                     
|Future minimum rental obligations                 |  |                       
|                                                  |  |                       
|Total contractual obligations                     |  | $                     
|                                                  |  |                       



|(a) |  | This excludes the unused commitments to extend credit to our customers of $23.6 million as discussed above.
|--- |  | -----------------------------------------------------------------------------------------------------------



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|(b) |  | Borrowings under the Revolving Credit Facility are listed based on the contractual maturity of the facility. Repayments of 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.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 September 30, 2003, this ratio was 250%. 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 public and private equity markets and the securitization or other debt-related
markets.



Borrowings



On December 27, 2001, we established the MCG Commercial Loan Trust 2001-1
(the Trust), which issued two classes of Series 2001-1 Notes to 15 institutional investors. The facility is secured by all of the Trusts existing assets which were contributed by us and totaled $261.2 million as of September 30,
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 September 30, 2003, $185.1 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.



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 September 30, 2003, $133.4 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 September 30, 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 $206.7 million of commercial loans as of September 30, 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.



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Our $200.0 million Revolving Credit Facility is scheduled to terminate on July 7, 2005, or sooner (but
not before January 3, 2004) if the liquidity support provided by Wachovia to the facility is not renewed. As required by the underlying liquidity support agreement, we have received a notice from Wachovia stating that it does not currently intend to
renew the liquidity support when it expires on January 4, 2004. We remain in active negotiations with Wachovia concerning the renewal of the agreement and with other lenders to provide similar and other contemplated credit facilities to us. If the
liquidity support still has not been renewed or amended and our securitization facility has not been amended, refinanced or satisfied, then all principal and interest payments received in the ordinary course on the assets in the securitization
facility, after payment of our compensation as a servicer and certain facility expenses, would be applied to the Class A Notes until these notes are fully paid.



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 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.



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.



At September 30, 2003, we had aggregate outstanding borrowings of $318.5 million. The following table shows the facility amounts and outstanding
borrowings at September 30, 2003:



|(dollars in millions)                         |  | Facilityamount |       | Amountoutstanding |   | InterestRate (a) | 
|--------------------------------------------- |  | -------------- | ----- | ----------------- | - | ---------------- | 
|Series 2001-1 Class A Asset Backed Bonds      |  | $              | 149.7 |                   | $ | 149.7            | 
|Series 2001-1 Class B Asset Backed Bonds      |  |                | 35.4  |                   |   | 35.4             | 
|Series 2000-1 Class A Asset Backed Securities |  |                | 200.0 |                   |   | 133.4            | 
|                                              |  |                |       |                   |   |                  | 
|Total borrowings                              |  | $              | 385.1 |                   | $ | 318.5            | 
|                                              |  |                |       |                   |   |                  | 



|(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)                         |  | Facilityamount |       | Amountoutstanding |   | InterestRate (a) | 
|--------------------------------------------- |  | -------------- | ----- | ----------------- | - | ---------------- | 
|Series 2001-1 Class A Asset Backed Bonds      |  | $              | 204.7 |                   | $ | 204.7            | 
|Series 2001-1 Class B Asset Backed Bonds      |  |                | 35.4  |                   |   | 35.4             | 
|Series 2000-1 Class A Asset Backed Securities |  |                | 200.0 |                   |   | 123.7            | 
|                                              |  |                |       |                   |   |                  | 
|Total borrowings                              |  | $              | 440.1 |                   | $ | 363.8            | 
|                                              |  |                |       |                   |   |                  | 



|(a) |  | Excludes the cost of commitment fees and other facility fees.
|--- |  | -------------------------------------------------------------



See Note 3 to the Consolidated Financial Statements for further discussion of our borrowings.



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##### Table of Contents

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.



The following table summarizes our dividends declared to date:



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



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.



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.



In accordance with GAAP, we include in income certain amounts that we have not yet received in cash, such as contractual payment-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 $26.3 million or 4.2% of our portfolio of
investments as of September 30, 2003 and $27.2 million or 4.0% of our portfolio of investments as of December 31, 2002.



PIK related activity for the nine months ended September 30, 2003 and year ended December 31, 2002 was as follows:



|(in millions)                              |  | Nine MonthsEndedSeptember 30, 2003 |       |   | Year EndedDecember 31,2002 |  
|------------------------------------------ |  | ---------------------------------- | ----- | - | -------------------------- | -
|Beginning PIK loan balance                 |  | $                                  | 27.2  |   |                            | $
|PIK interest earned during the period      |  |                                    | 14.6  |   |                            |  
|Change in interest receivable on PIK loans |  |                                    |      |   |                            |  
|Principal payments of cash on PIK loans    |  |                                    | (4.9  | ) |                            |  
|PIK loans converted to other securities    |  |                                    | (10.6 | ) |                            |  
|                                           |  |                                    |       |   |                            |  
|Ending PIK loan balance                    |  | $                                  | 26.3  |   |                            | $
|                                           |  |                                    |       |   |                            |  



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 been applied first to any outstanding
PIK loan balance outstanding at the time of the payment, and any remainder applied to the non-PIK loan balance, an additional $7.6 million of payments would have been applied against the September 30, 2003 PIK loan balance of $26.3 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 September 30, 2003, 90.5% of the $26.3 million of PIK loans outstanding had 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 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 $17.4 million and $12.8 million of unearned fees as of September 30, 2003 and December 31, 2002,
respectively.



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Unearned fee activity for the nine months ended September 30, 2003 and year ended December 31, 2002 was
as follows:



|                                                         |  | Nine Months Ended September 30, 2003 |      |   | Year Ended December 31, 2002         |  
|-------------------------------------------------------- |  | ------------------------------------ | ---- | - | ------------------------------------ | -
|(in millions)                                            |  | CashReceived                         |      |   | Equity Interestand FutureReceivables |  
|Beginning unearned fee balance                           |  | $                                    | 8.3  |   |                                      | $
|Additional fees                                          |  |                                      | 1.1  |   |                                      |  
|Fee income recognized                                    |  |                                      | (2.2 | ) |                                      |  
|Realized (gains) losses on investments and other changes |  |                                      | (1.6 | ) |                                      |  
|                                                         |  |                                      |      |   |                                      |  
|Ending unearned fee balance                              |  | $                                    | 5.6  |   |                                      | $
|                                                         |  |                                      |      |   |                                      |  



Valuation of Investments



At September 30, 2003, approximately 79% 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 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 become impaired, 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. 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 fair value
methodology includes the examination of, among other things, the underlying investment performance, financial condition and market changing events that impact valuation.



Valuation of Loans and Debt Securities



It is unlikely that we would value our loans or debt securities above cost, but loans and debt securities will be subject to fair value write-downs when
the asset is considered impaired. 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.



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Valuation of Equity Securities



With respect to private equity securities, each investment is valued using industry valuation benchmarks, and then the value
is assigned a discount reflecting the illiquid nature of the investment, as well as our minority, non-control position. When an external event such as a purchase transaction, public offering, or subsequent equity sale occurs, the pricing indicated
by the external event will be used to corroborate our private equity valuation. Securities that are traded in the over-the-counter market or on a stock exchange generally will be valued at the prevailing bid price on the valuation date. However,
restricted 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 equaling $467.9 million at September 30, 2003 and $520.1 million 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.



Other Matters



On May 28, 2003, a new federal tax law was enacted that generally reduces the maximum rate of taxation on non-corporate taxpayers for net long-term capital gains (i.e., the excess of net long-term capital gains over
net short-term capital losses for a taxable year) from 20% to 15% (from May 6, 2003 through December 31, 2008). Our dividends are generally not eligible for the new 15% tax rate on dividends. As a result, distributions of our investment company
taxable income generally will continue to be taxed at the higher tax rates applicable to ordinary income. However, the 15% tax rate for net long-term capital gains and dividends will generally apply to: U.S. stockholders long-term capital
gains, if any, recognized on the disposition of our shares; our distributions designated as capital gain dividends; and our distributions consisting of dividends we have received from qualifying corporations (which we generally do not receive).



Recent Development



In October 2003, we completed a transaction in which the assets of Sabot
Publishing, Inc. and its subsidiaries were sold to an unaffiliated third party. At the time of this sale, we loaned $10.2 million to the third party purchaser to finance a portion of the purchase price. Our investment in Sabot Publishing, Inc. had a
fair value of $10.1 million and unrealized depreciation of $0.4 million at September 30, 2003. In conjunction with the acquisition and subsequent sale, we expect to realize a loss of approximately $0.4 million in the fourth quarter of 2003 and, at
the same time, reverse the unrealized depreciation of $0.4 million. Accordingly, we expect these transactions will result in an immaterial net realized and unrealized gain and loss in the fourth quarter of 2003. In addition, as a result of the
satisfaction of the loan outstanding to Sabot Publishing, Inc. and its subsidiaries, our loans past due greater than 60 days and our non-accrual loans will decrease by $10.1 million.



Item 3.    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 86% 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 60% of our loan portfolio



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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 outstanding commercial loans and our outstanding borrowings at September 30, 2003 and December 31, 2002:



|                          |  | September 30, 2003                       |       | December 31, 2002
|------------------------- |  | ---------------------------------------- | ----- | -----------------
|(dollars in millions)     |  | Interest BearingCash andCommercial Loans |       | Borrowings       
|Repurchase Agreement Rate |  | $                                        | 173.1 |                  
|Prime Rate                |  |                                          | 11.4  |                  
|30-Day LIBOR              |  |                                          | 27.8  |                  
|60-Day LIBOR              |  |                                          |      |                  
|90-Day LIBOR              |  |                                          | 473.8 |                  
|Commercial Paper Rate     |  |                                          |      |                  
|Fixed Rate                |  |                                          | 66.8  |                  
|                          |  |                                          |       |                  
|Total                     |  | $                                        | 752.9 |                  
|                          |  |                                          |       |                  



Based on our September
30, 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 |  | Interest Income |      |   | Interest Expense |   |      | Net Income | 
|------------------ |  | --------------- | ---- | - | ---------------- | - | ---- | ---------- | 
|                  
|(100)              |  | $               | (3.5 | ) |                  | $ | (3.2 | )          | 
|100                |  | $               | 3.6  |   |                  | $ | 3.2  |            | 
|200                |  | $               | 8.9  |   |                  | $ | 6.4  |            | 
|300                |  | $               | 15.9 |   |                  | $ | 9.6  |            | 



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



Item 4.    Controls and Procedures



| | (a) |  | As of the end of the period covered by this report, 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 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 been no changes in MCGs internal control over financial reporting that occurred during the quarter ended September 30, 2003 that have materially affected, or are
reasonably likely to materially affect, MCGs internal control over financial reporting.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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PART II.    OTHER INFORMATION



Item 1.    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. On October 7, 2003, 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. 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 2.    Changes in Securities and Use of Proceeds



During the nine months ended September 30, 2003, MCG issued a total of 2,521 shares of common stock under its dividend reinvestment plan pursuant to an
exemption from the registration requirements of the Securities Act of 1933. The aggregate offering proceeds for the shares of common stock sold under the dividend reinvestment plan were approximately $38 thousand.



Item 3.    Defaults Upon Senior Securities



Not Applicable.



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



Not Applicable.



Item 5.    Other Information



Not Applicable.



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Item 6.    Exhibits and Reports on Form 8-K



(a)    Exhibits



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                                                                                                             
|------------- | - |  | ------------------------------------------------------------------------------------------------------------------------------------
|              |  
|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).              



|* |  | Submitted herewith.
|- |  | -------------------



(b)    Reports on Form 8-K



On July 30, 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 six months ended June 30, 2003.



On August 6,
2003, we filed a current report on Form 8-K, pursuant to Item 12 reporting the issuance of a press release, announcing we had declared a dividend of $0.42 per share for the quarter ending September 30, 2003.



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.



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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 November 14, 2003.



MCG CAPITAL CORPORATIONBy:

/s/    BRYAN J. MITCHELLBryan J. Mitchell Chief Executive OfficerBy:

/s/    STEVEN F. TUNNEYSteven F. Tunney President and Chief Operating OfficerBy:

/s/    JANET C. PERLOWSKIJanet C. Perlowski Chief Financial Officer




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