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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



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|- | 
|x | 
|  | 
|  | 
|  | 
| ̈ | 
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|  | 



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 August 6, 2003 was 31,254,910.



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MCG CAPITAL CORPORATION



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



TABLE OF CONTENTS



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



2



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PA
RT 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 EndedJune 30, |         | Six Months EndedJune 30,
|------------------------------------------------------------------------------------------ |  | -------------------------- | ------- | ------------------------
|(dollars in thousands except per share data)                                               |  | 2003                       |         | 2002                    
|Income Statement Data:                                                                     |  |                            |         |                         
|Operating income                                                                           |  | $                          | 19,636  |                         
|Net operating income before investment gains and losses                                    |  |                            | 11,684  |                         
|Net income/Net increase in stockholders equity resulting from earnings                    |  |                            | 8,989   |                         
|                                                                                           |  |                            |         |                         
|Per Common Share Data:                                                                     |  |                            |         |                         
|Earnings per common share:                                                                 |  |                            |         |                         
|basic                                                                                      |  | $                          | 0.30    |                         
|diluted                                                                                    |  |                            | 0.30    |                         
|Net operating income before investment gains and losses per common share basic and diluted |  |                            | 0.39    |                         
|Net asset value per common share (a)                                                       |  |                            | 11.42   |                         
|Cash dividends declared per common share                                                   |  |                            | 0.41    |                         
|                                                                                           |  |                            |         |                         
|Selected Period-End Balances:                                                              |  |                            |         |                         
|Total investment portfolio                                                                 |  | $                          | 620,365 |                         
|Total assets                                                                               |  |                            | 707,866 |                         
|Borrowings                                                                                 |  |                            | 333,204 |                         
|                                                                                           |  |                            |         |                         
|Other data:                                                                                |  |                            |         |                         
|Number of portfolio companies                                                              |  |                            | 76      |                         
|Number of employees                                                                        |  |                            | 57      |                         



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



3



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Item 1.    Financial Statements (unaudited)



MCG Capital Corporation

Consolidated Balance Sheets

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



|                                                                                                                                                               |  | June 30,2003 |         |   | December 31,2002 |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | -
|                                                                                                                                                               |  |              |        
|Assets                                                                                                                                                         |  |              |         |   |                  |  
|Cash and cash equivalents                                                                                                                                      |  | $            | 54,777  |   |                  | $
|Cash, securitization accounts                                                                                                                                  |  |              | 17,026  |   |                  |  
|Investments:                                                                                                                                                   |  |              |         |   |                  |  
|Commercial loans, at fair value (cost of $597,095 and $694,977, respectively)                                                                                  |  |              | 587,892 |   |                  |  
|Investments in equity securities, at fair value (cost of $60,541 and $37,014, respectively)                                                                    |  |              | 43,417  |   |                  |  
|Unearned income on commercial loans                                                                                                                            |  |              | (10,944 | ) |                  |  
|                                                                                                                                                               |  |              |        
|Total investments                                                                                                                                              |  |              | 620,365 |   |                  |  
|Interest receivable                                                                                                                                            |  |              | 5,899   |   |                  |  
|Other assets                                                                                                                                                   |  |              | 9,799   |   |                  |  
|                                                                                                                                                               |  |              |        
|Total assets                                                                                                                                                   |  | $            | 707,866 |   |                  | $
|                                                                                                                                                               |  |              |        
|                                                                                                                                                               |  |             
|Liabilities                                                                                                                                                    |  |              |         |   |                  |  
|Borrowings                                                                                                                                                     |  | $            | 333,204 |   |                  | $
|Interest payable                                                                                                                                               |  |              | 1,086   |   |                  |  
|Dividends payable                                                                                                                                              |  |              | 12,813  |   |                  |  
|Other liabilities                                                                                                                                              |  |              | 3,882   |   |                  |  
|                                                                                                                                                               |  |              |        
|Total liabilities                                                                                                                                              |  |              | 350,985 |   |                  |  
|                                                                                                                                                               |  |              |        
|                                                                                                                                                               |  |             
|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, 31,252 issued and outstanding on June 30, 2003 and 31,259 issued and
outstanding on December 31, 2002 |  |              | 313     |   |                  |  
|Paid-in capital                                                                                                                                                |  |              | 419,841 |   |                  |  
|Stockholder loans                                                                                                                                              |  |              | (5,437  | ) |                  |  
|Unearned compensationrestricted stock                                                                                                                         |  |              | (6,586  | ) |                  |  
|Distributions in excess of earnings                                                                                                                            |  |              | (24,924 | ) |                  |  
|Net unrealized depreciation on investments                                                                                                                     |  |              | (26,326 | ) |                  |  
|                                                                                                                                                               |  |              |        
|Total stockholders equity                                                                                                                                     |  |              | 356,881 |   |                  |  
|                                                                                                                                                               |  |              |        
|Total liabilities and stockholders equity                                                                                                                     |  | $            | 707,866 |   |                  | $
|                                                                                                                                                               |  |              |        



See notes to consolidated financial
statements.



4



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MCG Capital Corporation

Consolidated Statements of Operations (unaudited)

(in thousands, except per share amounts)



|                                                                        |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|----------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | -
|                                                                        |  |                            |        |   |                          |  
|                                                                        |  | 2003                       |        |   | 2002                     |  
|                                                                        |  |                            |        |   |                          |  
|Operating income                                                        |  |                            |        |   |                          |  
|Interest and dividend income                                            |  | $                          | 18,756 |   |                          | $
|Advisory fees and other income                                          |  |                            | 880    |   |                          |  
|                                                                        |  |                            |        |   |                          |  
|Total operating income                                                  |  |                            | 19,636 |   |                          |  
|                                                                        |  |                            |        |   |                          |  
|Operating expenses                                                      |  |                            |        |   |                          |  
|Interest expense                                                        |  |                            | 2,281  |   |                          |  
|Employee compensation:                                                  |  |                            |        |   |                          |  
|Salaries and benefits                                                   |  |                            | 2,157  |   |                          |  
|Long-term incentive compensation                                        |  |                            | 1,501  |   |                          |  
|                                                                        |  |                            |        |   |                          |  
|Total employee compensation                                             |  |                            | 3,658  |   |                          |  
|General and administrative expense                                      |  |                            | 2,013  |   |                          |  
|                                                                        |  |                            |        |   |                          |  
|Total operating expenses                                                |  |                            | 7,952  |   |                          |  
|                                                                        |  |                            |        |   |                          |  
|Net operating income before investment gains and losses                 |  |                            | 11,684 |   |                          |  
|                                                                        |  |                            |        |   |                          |  
|Net realized losses on investments                                      |  |                            | (1,843 | ) |                          |  
|Net change in unrealized appreciation (depreciation) on investments     |  |                            | (852   | ) |                          |  
|                                                                        |  |                            |        |   |                          |  
|Net investment gains and losses                                         |  |                            | (2,695 | ) |                          |  
|                                                                        |  |                            |        |   |                          |  
|Net income/Net increase in stockholders equity resulting from earnings |  | $                          | 8,989  |   |                          | $
|                                                                        |  |                            |        |   |                          |  
|Earnings per common share:                                              |  |                            |        |   |                          |  
|Basic                                                                   |  | $                          | 0.30   |   |                          | $
|Diluted                                                                 |  | $                          | 0.30   |   |                          | $
|Cash dividends declared per common share                                |  | $                          | 0.41   |   |                          | $
|Weighted average common shares outstanding                              |  |                            | 30,121 |   |                          |  
|Weighted average common shares outstandingdiluted                      |  |                            | 30,121 |   |                          |  



See notes to consolidated financial
statements.





5



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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 |   |         | UnearnedCompen-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/Net increase (decrease) in stockholders equity resulting from earnings (loss) |  |              |   |                |   |        |                   |   |         |                                        |  |   |                                              |   |  |                                          |         |   |                          |  
|Issuance of common shares, net of costs                                                   |  | 3,000        |   |                |   | 30     |                   |   | 50,220  |                                        |  |   |                                              |   |  |                                          |         |   |                          |  
|Dividends declared, $0.88 per share                                                       |  |              |   |                |   |        |                   |   |         |                                        |  |   |                                              |   |  |                                          |         |   |                          |  
|Dividend reinvestment                                                                     |  | 7            |   |                |   |        |                   |   | 135     |                                        |  |   |                                              |   |  |                                          |         |   |                          |  
|Amortization of restricted stock awards                                                   |  |              |   |                |   |        |                   |   |         |                                        |  |   |                                              |   |  |                                          | 1,882   |   |                          |  
|Reduction in employee loans                                                               |  | (8           | ) |                |   |        |                   |   | (136    | )                                      |  |   | 638                                          |   |  |                                          | 117     |   |                          |  
|                                                                                          |  |              |   |                |   |        |                   |   |         |                                        |  |   |                                              |   |  |                                          |         |   |                          |  
|Balance June 30, 2002                                                                     |  | 31,286       |   |                | $ | 313    |                   | $ | 420,306 |                                        |  | $ | (5,872                                       | ) |  | $                                        | (11,078 | ) |                          | $
|                                                                                          |  |              |   |                |   |        |                   |   |         |                                        |  |   |                                              |   |  |                                          |         |   |                          |  
|Balance December 31, 2002                                                                 |  | 31,259       |   |                | $ | 313    |                   | $ | 419,961 |                                        |  | $ | (5,513                                       | ) |  | $                                        | (8,566  | ) |                          | $
|Net income/Net increase (decrease) in stockholders equity resulting from earnings (loss) |  |              |   |                |   |        |                   |   |         |                                        |  |   |                                              |   |  |                                          |         |   |                          |  
|Dividends declared, $0.81 per share                                                       |  |              |   |                |   |        |                   |   |         |                                        |  |   |                                              |   |  |                                          |         |   |                          |  
|Amortization of restricted stock awards                                                   |  |              |   |                |   |        |                   |   |         |                                        |  |   |                                              |   |  |                                          | 1,906   |   |                          |  
|Reduction in employee loans                                                               |  | (7           | ) |                |   |        |                   |   | (120    | )                                      |  |   | 76                                           |   |  |                                          | 74      |   |                          |  
|                                                                                          |  |              |   |                |   |        |                   |   |         |                                        |  |   |                                              |   |  |                                          |         |   |                          |  
|Balance June 30, 2003                                                                     |  | 31,252       |   |                | $ | 313    |                   | $ | 419,841 |                                        |  | $ | (5,437                                       | ) |  | $                                        | (6,586  | ) |                          | $
|                                                                                          |  |              |   |                |   |        |                   |   |         |                                        |  |   |                                              |   |  |                                          |         |   |                          |  



See notes to consolidated financial
statements.





6



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MCG Capital Corporation

Consolidated Statements of Cash Flows (unaudited)

(in thousands)



|                                                                                                                                               |  | Six Months EndedJune 30, |        
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | -------
|                                                                                                                                               |  | 2003                     |        
|                                                                                                                                              
|Operating activities                                                                                                                           |  |                          |        
|Net income/Net increase in stockholders equity resulting from earnings                                                                        |  | $                        | 17,886 
|Adjustments to reconcile net income/net increase in stockholders equity resulting from earnings to net cash provided by
operating activities: |  |                          |        
|Depreciation and amortization                                                                                                                  |  |                          | 277    
|Amortization of restricted stock awards                                                                                                        |  |                          | 1,906  
|Amortization of deferred debt issuance costs                                                                                                   |  |                          | 663    
|Net realized losses on investments                                                                                                             |  |                          | 21,539 
|Net change in unrealized depreciation (appreciation) on investments                                                                            |  |                          | (16,795
|(Increase) decrease in cashsecuritization accounts from interest collections                                                                  |  |                          | 2,637  
|Increase in interest receivable                                                                                                                |  |                          | (1,033 
|Increase in accrued payment-in-kind interest                                                                                                   |  |                          | (8,337 
|Decrease in unearned income                                                                                                                    |  |                          | (2,329 
|(Increase) decrease in other assets                                                                                                            |  |                          | 812    
|Increase (decrease) in interest payable                                                                                                        |  |                          | (441   
|Decrease in other liabilities                                                                                                                  |  |                          | (241   
|                                                                                                                                              
|Net cash provided by operating activities                                                                                                      |  |                          | 16,544 
|                                                                                                                                              
|Investing activities                                                                                                                           |  |                          |        
|Originations, draws and advances on loans                                                                                                      |  |                          | (12,971
|Principal payments on loans                                                                                                                    |  |                          | 78,888 
|Purchase of equity investments                                                                                                                 |  |                          | (4,415 
|Proceeds from sales of equity investments                                                                                                      |  |                          | 1,045  
|Purchase of premises, equipment and software                                                                                                   |  |                          | (978   
|                                                                                                                                              
|Net cash provided by (used in) investing activities                                                                                            |  |                          | 61,569 
|                                                                                                                                              
|Financing activities                                                                                                                           |  |                          |        
|Net proceeds (payments) from borrowings                                                                                                        |  |                          | (30,072
|(Increase) decrease in cashsecuritization cash accounts for paydown of principal on debt                                                      |  |                          | 22,945 
|Payment of financing costs                                                                                                                     |  |                          |       
|Issuance of common stock, net of costs                                                                                                         |  |                          |       
|Dividends paid                                                                                                                                 |  |                          | (25,633
|Repayment of loans granted to officers/shareholders                                                                                            |  |                          | 35     
|                                                                                                                                              
|Net cash (used in) provided by financing activities                                                                                            |  |                          | (32,725
|                                                                                                                                              
|Increase (decrease) in cash and cash equivalents                                                                                               |  |                          | 45,388 
|Cash and cash equivalents at beginning of period                                                                                               |  |                          | 9,389  
|                                                                                                                                              
|Cash and cash equivalents at end of period                                                                                                     |  | $                        | 54,777 
|                                                                                                                                              
|Supplemental disclosures                                                                                                                       |  |                          |        
|Interest paid                                                                                                                                  |  | $                        | 4,506  
|Income taxes paid (received)                                                                                                                   |  |                          | (37    



See notes to consolidated financial
statements.





7



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MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|Portfolio Company                           |  | Title of Securities Held by the Company |               | Percentage of Class Held on a Fully Diluted Basis (9) |                   |  |      |         |           
|------------------------------------------- |  | --------------------------------------- | ------------- | ----------------------------------------------------- | ----------------- |  | ---- | ------- | ----------
|                                            |  |                                         | June 30, 2003 |                                                       | December 31, 2002
|                                            |  |                                         | Cost          |                                                       | Fair Value        |  | Cost |         | Fair Value
|                                           
|Newspaper:                                  |  |                                         |               |                                                       |                   |  |      |         |           
|                                           
|21st Century Newspapers,                    |  | Subordinated Debt                       |               |                                                       |                   |  | $    | 21,599  |           
|Inc.                                        |  | Common Stock                            |               | 1.0                                                   | %                 |  |      | 452     |           
|                                           
|American Consolidated Media Inc. (1)        |  | Senior Debt                             |               |                                                       |                   |  |      | 19,650  |           
|                                           
|Badoud Enterprises,Inc. (1)                 |  | Senior Debt                             |               |                                                       |                   |  |      | 8,025   |           
|                                           
|Brookings Newspapers, L.L.C. (1)            |  | Senior Debt                             |               |                                                       |                   |  |      | 2,900   |           
|                                           
|Community Media Group, Inc. (1)             |  | Senior Debt                             |               |                                                       |                   |  |      | 10,999  |           
|                                           
|Country Media, Inc. (12)                    |  | Senior Debt                             |               |                                                       |                   |  |      | 7,276   |           
|                                            |  | Common Stock                            |               | 6.3                                                   | %                 |  |      | 100     |           
|                                           
|Creative Loafing, Inc. (1)                  |  | Senior Debt                             |               |                                                       |                   |  |      | 14,950  |           
|                                           
|Crescent Publishing Company LLC (1)         |  | Senior Debt                             |               |                                                       |                   |  |      | 14,165  |           
|                                           
|The Joseph F. Biddle Publishing Company (1) |  | Senior Debt                             |               |                                                       |                   |  |      | 11,105  |           
|                                           
|The Korea Times Los Angeles, Inc.           |  | Senior Debt                             |               |                                                       |                   |  |      | 11,107  |           
|                                           
|McGinnis-Johnson Consulting, LLC (1)        |  | Subordinated Debt                       |               |                                                       |                   |  |      | 9,809   |           
|                                           
|Minnesota Publishers,Inc. (1)               |  | Senior Debt                             |               |                                                       |                   |  |      | 14,250  |           
|                                           
|Murphy McGinnis Media, Inc. (1)             |  | Senior Debt                             |               |                                                       |                   |  |      | 20,845  |           
|                                           
|Pacific-Sierra Publishing, Inc.             |  | Senior Debt                             |               |                                                       |                   |  |      | 23,765  |           
|                                           
|Stonebridge Press, Inc. (1)                 |  | Senior Debt                             |               |                                                       |                   |  |      | 5,705   |           
|                                           
|Wyoming Newspapers, Inc. (1)                |  | Senior Debt                             |               |                                                       |                   |  |      | 11,147  |           
|                                           
|Total Newspaper                             |  |                                         |               |                                                       |                   |  |      | 207,849 |           
|                                           
|Publishing:                                 |  |                                         |               |                                                       |                   |  |      |         |           
|                                           
|Boucher Communications,                     |  | Senior Debt                             |               |                                                       |                   |  |      | 1,850   |           
|Inc. (1)                                    |  | Stock Appreciation Rights               |               |                                                       |                   |  |      |        |           
|                                           
|Canon Communications                        |  | Subordinated Debt                       |               |                                                       |                   |  |      | 16,731  |           
|LLC and Chemical Week Publishing L.L.C. (1) |  |                                         |               |                                                       |                   |  |      |         |           
|                                           
|Corporate Legal Times                       |  | Senior Debt                             |               |                                                       |                   |  |      | 4,661   |           
|L.L.C. (8) (10)                             |  | Subordinated Debt                       |               |                                                       |                   |  |      | 1,198   |           
|                                            |  | LLC Interest                            |               | 90.6                                                  | %                 |  |      | 313     |           
|                                           
|Dowden Health Media, Inc.                   |  | Senior Debt                             |               |                                                       |                   |  |      | 900     |           
|                                           



See notes to consolidated financial
statements.





8



---

MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|Portfolio Company               |  | Title of Securities Held by the Company         |               | Percentage of Class Held on a Fully Diluted Basis (9) |                   |  |      |        |           
|------------------------------- |  | ----------------------------------------------- | ------------- | ----------------------------------------------------- | ----------------- |  | ---- | ------ | ----------
|                                |  |                                                 | June 30, 2003 |                                                       | December 31, 2002
|                                |  |                                                 | Cost          |                                                       | Fair Value        |  | Cost |        | Fair Value
|                               
|Fawcette Technical              |  | Senior Debt                                     |               |                                                       |                   |  | $    | 12,000 |           
|Publications Holding (1) (13)   |  | Subordinated Debt                               |               |                                                       |                   |  |      | 4,000  |           
|                                |  | Convertible Subordinated Debt                   |               |                                                       |                   |  |      | 2,569  |           
|                                |  | Warrants to purchase                            |               |                                                       |                   |  |      |        |           
|                                |  | Common Stock                                    |               | 38.9                                                  | %                 |  |      | 519    |           
|                               
|Miles Media Group,              |  | Senior Debt                                     |               |                                                       |                   |  |      | 7,862  |           
|Inc. (1)                        |  | Warrants to purchase Common Stock               |               | 12.4                                                  | %                 |  |      | 20     |           
|                               
|Pfingsten Publishing,LLC (1)    |  | Senior Debt                                     |               |                                                       |                   |  |      |       |           
|                               
|Rising Tide Holdings            |  | Senior Debt                                     |               |                                                       |                   |  |      |       |           
|LLC (1)                         |  | Warrants to purchase membership interest in LLC |               |                                                       |                   |  |      |       |           
|                               
|Sabot Publishing, Inc. (1)      |  | Senior Debt                                     |               |                                                       |                   |  |      | 10,273 |           
|                                |  | Warrants to purchase Common Stock               |               | 1.8                                                   | %                 |  |      |       |           
|                               
|Sunshine Media                  |  | Senior Debt                                     |               |                                                       |                   |  |      | 12,362 |           
|Delaware,                       |  | Class A LLC Interest                            |               | 12.8                                                  | %                 |  |      | 500    |           
|LLC (1) (12)                    |  | Warrants to purchase Class B LLC interest       |               | 100.0                                                 | %                 |  |      |       |           
|                               
|THE Journal, LLC (8)            |  | Senior Debt                                     |               |                                                       |                   |  |      | 3,266  |           
|                               
|UMAC, Inc. (8) (10)             |  | Common Stock                                    |               | 100.0                                                 | %                 |  |      | 10,531 |           
|                               
|VS&A-PBI Holding LLC            |  | Senior Debt                                     |               |                                                       |                   |  |      |       |           
|(1)(8)                          |  | LLC Interest                                    |               | 0.8                                                   | %                 |  |      | 500    |           
|                               
|Wicks Business Information, LLC |  | Unsecured Note                                  |               |                                                       |                   |  |      | 200    |           
|                               
|Wiesner Publishing              |  | Senior Debt                                     |               |                                                       |                   |  |      | 6,100  |           
|Company, LLC (1)                |  | Subordinated Debt                               |               |                                                       |                   |  |      | 5,559  |           
|                                |  | Warrants to purchase membership interest in LLC |               | 15.0                                                  | %                 |  |      | 406    |           
|                               
|Witter Publishing               |  | Senior Debt                                     |               |                                                       |                   |  |      | 2,507  |           
|Co., Inc.                       |  | Warrants to purchase Common Stock               |               | 10.5                                                  | %                 |  |      | 87     |           
|                               



See notes to consolidated financial
statements.





9



---

MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|Portfolio Company                   |  | Title of Securities Held by the Company |               | Percentage of Class Held on a Fully Diluted Basis (9) |                   |  |      |         |           
|----------------------------------- |  | --------------------------------------- | ------------- | ----------------------------------------------------- | ----------------- |  | ---- | ------- | ----------
|                                    |  |                                         | June 30, 2003 |                                                       | December 31, 2002
|                                    |  |                                         | Cost          |                                                       | Fair Value        |  | Cost |         | Fair Value
|                                   
|Working Mother Media,               |  | Senior Debt                             |               |                                                       |                   |  | $    | 7,161   |           
|Inc. (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                    |  |                                         |               |                                                       |                   |  |      | 120,575 |           
|                                   
|                                    |  |                                         |               |                                                       |                   |  |      |         |           
|                                   
|Broadcasting:                       |  |                                         |               |                                                       |                   |  |      |         |           
|                                   
|Amalfi Coast, L.L.C. (1)            |  | Senior Debt                             |               |                                                       |                   |  |      |        |           
|                                   
|Costa De OroTelevision, Inc.        |  | Senior Debt                             |               |                                                       |                   |  |      |        |           
|                                   
|Crystal Media Network, LLC (5) (10) |  | LLC Interest                            |               | 100.0                                                 | %                 |  |      | 6,132   |           
|                                   
|dick clark productions,             |  | Subordinated Debt                       |               |                                                       |                   |  |      | 15,916  |           
|inc.                                |  | Warrants to purchase Common Stock       |               | 5.6                                                   | %                 |  |      | 858     |           
|                                    |  | Common Stock                            |               | 0.4                                                   | %                 |  |      | 150     |           
|                                   
|JMP Media, L.L.C. (1)               |  | Senior Debt                             |               |                                                       |                   |  |      |        |           
|                                   
|NBG Radio Network,                  |  | Senior Debt                             |               |                                                       |                   |  |      |        |           
|Inc. (1) (5)                        |  | Warrants to purchase Common Stock       |               |                                                       |                   |  |      |        |           
|                                   
|New Northwest Broadcasters LLC (1)  |  | Senior Debt                             |               |                                                       |                   |  |      | 10,533  |           
|                                   
|New Vision Broadcasting, LLC (1)    |  | Senior Debt                             |               |                                                       |                   |  |      | 13,367  |           
|                                   
|Total Broadcasting                  |  |                                         |               |                                                       |                   |  |      | 46,956  |           
|                                   



See notes to consolidated financial
statements.





10



---

MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|Portfolio Company                  |  | Title of Securities Held by the Company         |               | Percentage of Class Held on a Fully Diluted Basis (9) |                   |  |      |        |           
|---------------------------------- |  | ----------------------------------------------- | ------------- | ----------------------------------------------------- | ----------------- |  | ---- | ------ | ----------
|                                   |  |                                                 | June 30, 2003 |                                                       | December 31, 2002
|                                   |  |                                                 | Cost          |                                                       | Fair Value        |  | Cost |        | Fair Value
|                                  
|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,                 |  | Senior Debt                                     |               |                                                       |                   |  |      | 16,475 |           
|Inc. (1) (10)                      |  | Common Stock                                    |               | 2.0                                                   | %                 |  |      | 18     |           
|                                   |  | Preferred Stock                                 |               | 100.0                                                 | %                 |  |      | 4,864  |           
|                                   |  | Warrants to purchase Common Stock               |               | 71.2                                                  | %                 |  |      | 253    |           
|                                  
|Bridgecom Holdings,                |  | Senior Debt                                     |               |                                                       |                   |  |      | 21,951 |           
|Inc. (1)                           |  | Warrants to purchase Common Stock               |               | 13.0                                                  | %                 |  |      |       |           
|                                  
|I-55 Internet Services,            |  | Senior Debt                                     |               |                                                       |                   |  |      | 2,733  |           
|Inc.                               |  | Warrants to purchase Common Stock               |               | 7.5                                                   | %                 |  |      | 103    |           
|                                  
|IDS Telcom LLC                     |  | Senior Debt                                     |               |                                                       |                   |  |      | 18,623 |           
|                                   |  | Warrants to purchase membership interest in LLC |               | 11.0                                                  | %                 |  |      | 375    |           
|                                  
|Joseph C. Millstone                |  | Senior Debt                                     |               |                                                       |                   |  |      | 500    |           
|                                  
|Manhattan                          |  | Senior Debt                                     |               |                                                       |                   |  |      | 25,882 |           
|Telecommunications Corporation (1) |  | Warrants to purchase Common Stock               |               | 17.5                                                  | %                 |  |      | 754    |           
|                                  
|Midwest Towers Partners, LLC (1)   |  | Senior Debt                                     |               |                                                       |                   |  |      | 17,313 |           
|                                  
|nii communications,                |  | Senior Debt                                     |               |                                                       |                   |  |      | 7,173  |           
|inc. (1)                           |  | Common Stock                                    |               | 3.1                                                   | %                 |  |      | 400    |           
|                                   |  | Warrants to purchase Common Stock               |               | 35.6                                                  | %                 |  |      | 1,095  |           
|                                  
|NOW Communications,                |  | Senior Debt                                     |               |                                                       |                   |  |      | 4,590  |           
|Inc. (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    |           
|                                  



See notes to consolidated financial
statements.





11



---

MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|Portfolio Company                     |  | Title of Securities Held by the Company         |               | Percentage of Class Held on a Fully Diluted Basis (9) |                   |  |      |         |           
|------------------------------------- |  | ----------------------------------------------- | ------------- | ----------------------------------------------------- | ----------------- |  | ---- | ------- | ----------
|                                      |  |                                                 | June 30, 2003 |                                                       | December 31, 2002
|                                      |  |                                                 | Cost          |                                                       | Fair Value        |  | Cost |         | Fair Value
|                                     
|Powercom Corporation                  |  | Senior Debt                                     |               |                                                       |                   |  | $    | 2,191   |           
|(1)                                   |  | Warrants to purchase Class A Common Stock       |               | 18.6                                                  | %                 |  |      | 263     |           
|                                     
|Talk America Holdings, Inc. (8)       |  | Common Stock Warrants to purchase               |               | 1.4                                                   | %                 |  |      | 935     |           
|                                      |  | Common Stock                                    |               | 0.8                                                   | %                 |  |      | 25      |           
|                                     
|Telecomm South, LLC                   |  | Senior Debt                                     |               |                                                       |                   |  |      | 3,514   |           
|(2)(8)(10)                            |  | LLC Interest                                    |               | 100.0                                                 | %                 |  |      | 10      |           
|                                     
|Tower Resource                        |  | Senior Debt                                     |               |                                                       |                   |  |      | 1,969   |           
|Management, Inc.                      |  | Warrants to purchase Common Stock               |               | 8.9                                                   | %                 |  |      |        |           
|                                     
|WirelessLines,                        |  | Senior Debt                                     |               |                                                       |                   |  |      |        |           
|Inc.                                  |  | Warrants to purchase Common Stock               |               |                                                       |                   |  |      |        |           
|                                     
|WirelessLines II, Inc.                |  | Senior Debt                                     |               |                                                       |                   |  |      | 482     |           
|                                     
|Total Telecommunications              |  |                                                 |               |                                                       |                   |  |      | 145,373 |           
|                                     
|                                      |  |                                                 |               |                                                       |                   |  |      |         |           
|                                     
|Information Services:                 |  |                                                 |               |                                                       |                   |  |      |         |           
|                                     
|Cambridge Information Group, Inc. (1) |  | Senior Debt                                     |               |                                                       |                   |  |      | 17,917  |           
|                                     
|Creatas, L.L.C. (1) (12)              |  | Senior Debt                                     |               |                                                       |                   |  |      | 15,770  |           
|                                      |  | Investor Class LLC
Interest                     |               | 100                                                   | %                 |  |      | 100     |           
|                                     
|Eli Research, Inc. (1)                |  | Senior Debt                                     |               |                                                       |                   |  |      | 10,192  |           
|                                      |  | Warrants to purchase Common Stock               |               | 3.0                                                   | %                 |  |      |        |           
|                                     
|Images.com, Inc.                      |  | Senior Debt                                     |               |                                                       |                   |  |      | 3,092   |           
|                                     
|Information Today,Inc. (1)            |  | Senior Debt                                     |               |                                                       |                   |  |      | 9,600   |           
|                                     
|R.R. Bowker LLC (1)                   |  | Senior Debt                                     |               |                                                       |                   |  |      | 11,283  |           
|                                      |  | Warrants to purchase membership interest in LLC |               | 14.0                                                  | %                 |  |      | 882     |           
|                                     
|Robert N. Snyder                      |  | Senior Debt                                     |               |                                                       |                   |  |      | 1,300   |           
|                                     



See notes to consolidated financial
statements.





12



---

MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|Portfolio Company             |  | Title of Securities Held by the Company             |               | Percentage of Class Held on a Fully Diluted Basis (9) |                   |  |      |        |           
|----------------------------- |  | --------------------------------------------------- | ------------- | ----------------------------------------------------- | ----------------- |  | ---- | ------ | ----------
|                              |  |                                                     | June 30, 2003 |                                                       | December 31, 2002
|                              |  |                                                     | Cost          |                                                       | Fair Value        |  | Cost |        | Fair Value
|                             
|TGI Group, LLC                |  | Senior Debt                                         |               |                                                       |                   |  | $    | 6,343  |           
|                              |  | Warrants to purchase membership interest in LLC     |               | 5.0                                                   | %                 |  |      | 126    |           
|                             
|Unifocus, Inc.                |  | Senior Debt                                         |               |                                                       |                   |  |      | 3,665  |           
|and Unifocus LLC (1)          |  | Warrants to purchase Common Stock and LLC interests |               | 20.0                                                  | %                 |  |      | 247    |           
|                             
|Total Information Services    |  |                                                     |               |                                                       |                   |  |      | 80,517 |           
|                             
|                              |  |                                                     |               |                                                       |                   |  |      |        |           
|                             
|Technology:                   |  |                                                     |               |                                                       |                   |  |      |        |           
|                             
|The Adrenaline Group,Inc. (8) |  | Common Stock                                        |               | 2.7                                                   | %                 |  |      |       |           
|                             
|Dakota Imaging, Inc.          |  | Senior Debt                                         |               |                                                       |                   |  |      | 6,824  |           
|                              |  | Warrants to purchase Common Stock                   |               | 9.4                                                   | %                 |  |      | 1,585  |           
|                             
|FTI Technologies              |  | Senior Debt                                         |               |                                                       |                   |  |      | 21,800 |           
|Holdings, Inc. (1)            |  | Warrants to purchase Common Stock                   |               | 4.2                                                   | %                 |  |      |       |           
|                             
|Netplexus Corporation         |  | Senior Debt                                         |               |                                                       |                   |  |      | 1,870  |           
|(1)(8)(12)                    |  | Preferred Stock                                     |               | 51.0                                                  | %                 |  |      | 766    |           
|                              |  | Warrants to purchase Class A Common Stock           |               | 4.8                                                   | %                 |  |      |       |           
|                             
|Systems Xcellence             |  | Senior Debt                                         |               |                                                       |                   |  |      | 7,600  |           
|USA, Inc. (1)                 |  | Warrants to purchase Common Stock                   |               | 2.7                                                   | %                 |  |      |       |           
|                             
|Total Technology              |  |                                                     |               |                                                       |                   |  |      | 40,445 |           
|                             



See notes to consolidated financial
statements.



13



---

MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|Portfolio Company        |  | Title of Securities Held by the Company         |               | Percentage of Class Held on a Fully Diluted Basis (9) |                   |  |      |        |           
|------------------------ |  | ----------------------------------------------- | ------------- | ----------------------------------------------------- | ----------------- |  | ---- | ------ | ----------
|                         |  |                                                 | June 30, 2003 |                                                       | December 31, 2002
|                         |  |                                                 | Cost          |                                                       | Fair Value        |  | Cost |        | Fair Value
|                        
|Security Alarm:          |  |                                                 |               |                                                       |                   |  |      |        |           
|                        
|Barcom Electronic Inc.   |  | Senior Debt                                     |               |                                                       |                   |  | $    | 3,569  |           
|                        
|Copperstate              |  | Senior Debt                                     |               |                                                       |                   |  |      | 980    |           
|Technologies, Inc. (3)   |  | Class A Common Stock                            |               | 93.0                                                  | %                 |  |      | 2,000  |           
|(10)                     |  | Class B Common Stock                            |               | 0.1                                                   | %                 |  |      |       |           
|                         |  | Warrants to purchase Class B Common Stock       |               | 99.9                                                  | %                 |  |      |       |           
|                        
|Interactive Business     |  | Senior Debt                                     |               |                                                       |                   |  |      | 75     |           
|Solutions, Inc. (4) (10) |  | Common Stock                                    |               | 100.0                                                 | %                 |  |      | 2,750  |           
|                        
|National Systems         |  | Common Stock                                    |               | 46.0                                                  | %                 |  |      |       |           
|Integration, Inc.        |  | Class B2                                       |               |                                                       |                   |  |      |        |           
|(3) (4) (7) (8) (11)     |  | Preferred Stock                                 |               | 100.0                                                 | %                 |  |      | 4,409  |           
|                         |  | Debtor in Possession Financing                  |               |                                                       |                   |  |      |       |           
|                         |  | Senior Debt                                     |               |                                                       |                   |  |      |       |           
|                        
|Total Security Alarm     |  |                                                 |               |                                                       |                   |  |      | 13,783 |           
|                        
|                         |  |                                                 |               |                                                       |                   |  |      |        |           
|                        
|Other:                   |  |                                                 |               |                                                       |                   |  |      |        |           
|                        
|CCG Consulting, LLC      |  | Senior Debt                                     |               |                                                       |                   |  |      | 1,468  |           
|                         |  | Warrants to purchase membership interest in LLC |               | 14.0                                                  | %                 |  |      |       |           
|                         |  | 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.





14



---

MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|Portfolio Company                            |  | Title of Securities Held by the Company |               | Percentage of Class Held on a Fully Diluted Basis (9) |   |                   |   |         |      |         |  
|-------------------------------------------- |  | --------------------------------------- | ------------- | ----------------------------------------------------- | - | ----------------- | - | ------- | ---- | ------- | -
|                                             |  |                                         | June 30, 2003 |                                                       |   | December 31, 2002 |  
|                                             |  |                                         | Cost          |                                                       |   | Fair Value        |   |         | Cost |         |  
|                                            
|Executive Enterprise Institute, LLC (8) (12) |  | LLC Interest                            |               | 10.0                                                  | % |                   | $ | 301     |      |         | $
|                                            
|Jeffrey A. Stern (8)                         |  | Senior Debt                             |               |                                                       |   |                   |   | 65      |      |         |  
|                                            
|Marketron International, Inc. (6) (8)        |  | Warrants to purchase Common Stock       |               | 1.5                                                   | % |                   |   |        |      |         |  
|                                            
|New Century                                  |  | Common Stock                            |               | 2.7                                                   | % |                   |   | 157     |      |         |  
|Companies, Inc. (8)                          |  | Preferred Stock                         |               |                                                       |   |                   |   |        |      |         |  
|                                             |  | Warrants to purchase Common Stock       |               | 0.5                                                   | % |                   |   |        |      |         |  
|                                            
|Total Other                                  |  |                                         |               |                                                       |   |                   |   | 2,138   |      |         |  
|                                            
|Total Investments                            |  |                                         |               |                                                       |   |                   |   | 657,636 |      |         |  
|Unearned income                              |  |                                         |               |                                                       |   |                   |   | (10,944 | )    |         |  
|                                             |  |                                         |               |                                                       |   |                   |   |         |      |         |  
|Total Investments net of unearned income     |  |                                         |               |                                                       | $ | 646,692           |   |         | $    | 620,365 |  
|                                             |  |                                         |               |                                                       |   |                   |   |         |      |         |  



|(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 is 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 June 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.



15



---

|(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, the 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.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See notes to consolidated financial statements.





16



---

MCG Capital Corporation

N
otes 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 will elect 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 will be 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.



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.



17



---

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share data)



Note 2.    Investments



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



|                                 |  | June 30, 2003 |         |   | December 31, 2002 |  
|-------------------------------- |  | ------------- | ------- | - | ----------------- | -
|                                 |  | Cost          |         |   | Fair Value        |  
|Commercial loans                 |  | $             | 597,095 |   |                   | $
|Investments in equity securities |  |               | 60,541  |   |                   |  
|Unearned income                  |  |               | (10,944 | ) |                   |  
|                                 |  |               |         |   |                   |  
|Total                            |  | $             | 646,692 |   |                   | $
|                                 |  |               |         |   |                   |  



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 June 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 32% 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 June 30, 2003, over 50% of MCGs loans had associated
detachable warrants or an option to purchase warrants, appreciation rights or other equity interests or other provisions designed to provide the Company with an enhanced internal rate of return. These equity and equity-like instruments generally do
not produce a current return, but are held for potential investment appreciation and capital gains. The warrants and options to purchase warrants typically are exercisable immediately and typically remain exercisable for 10 years. The exercise
prices on the warrants vary from nominal exercise prices to exercise prices that are at or above the current fair market value of the equity for which we are receiving warrants. In some cases, some or all of the deferred interest 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 MCG 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.



18



---

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 June 30, 2003 and December 31, 2002 at cost and fair
value was as follows excluding unearned income:



|                              |  | June 30, 2003             |         |                              | December 31, 2002 |  
|----------------------------- |  | ------------------------- | ------- | ---------------------------- | ----------------- | -
|                              |  |                           |        
|                              |  | Investments atCost        |         | Percentage ofTotal Portfolio |                   |  
|                              |  |                           |        
|Senior Debt                   |  | $                         | 519,515 |                              | 79.0              | %
|Subordinated Debt             |  |                           | 74,812  |                              | 11.4              | %
|Convertible Subordinated Debt |  |                           | 2,569   |                              | 0.4               | %
|Unsecured Note                |  |                           | 200     |                              | 0.0               | %
|Equity                        |  |                           | 52,670  |                              | 8.0               | %
|Warrants to Acquire Equity    |  |                           | 7,870   |                              | 1.2               | %
|Equity Appreciation Rights    |  |                           |        |                              | 0.0               | %
|                              |  |                           |        
|Total                         |  | $                         | 657,636 |                              | 100.0             | %
|                              |  |                           |        
|                              |  |                          
|                              |  | June 30, 2003             |         |                              | December 31, 2002 |  
|                              |  |                           |        
|                              |  | Investments at Fair Value |         | Percentage ofTotal Portfolio |                   |  
|                              |  |                           |        
|Senior Debt                   |  | $                         | 511,509 |                              | 81.0              | %
|Subordinated Debt             |  |                           | 73,614  |                              | 11.7              | %
|Convertible Subordinated Debt |  |                           | 2,569   |                              | 0.4               | %
|Unsecured Note                |  |                           | 200     |                              | 0.0               | %
|Equity                        |  |                           | 32,670  |                              | 5.2               | %
|Warrants to Acquire Equity    |  |                           | 10,403  |                              | 1.6               | %
|Equity Appreciation Rights    |  |                           | 344     |                              | 0.1               | %
|                              |  |                           |        
|Total                         |  | $                         | 631,309 |                              | 100.0             | %
|                              |  |                           |        



19



---

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 June 30, 2003 and December 31, 2002:



|                     |  |                         
|-------------------- |  | ------------------------
|                     |  | June 30, 2003           
|                     |  |                         
|                     |  | Investments atCost      
|                     |  |                         
|Media                |  |                         
|Newspaper            |  | $                       
|Publishing           |  |                         
|Broadcasting         |  |                         
|Telecommunications   |  |                         
|Information Services |  |                         
|Technology           |  |                         
|Security Alarm       |  |                         
|Other                |  |                         
|                     |  |                         
|Total                |  | $                       
|                     |  |                         
|                     |  |                         
|                     |  | June 30, 2003           
|                     |  |                         
|                     |  | Investments atFair Value
|                     |  |                         
|Media                |  |                         
|Newspaper            |  | $                       
|Publishing           |  |                         
|Broadcasting         |  |                         
|Telecommunications   |  |                         
|Information Services |  |                         
|Technology           |  |                         
|Security Alarm       |  |                         
|Other                |  |                         
|                     |  |                         
|Total                |  | $                       
|                     |  |                         



At June 30, 2003,
there were $15,827 of loans greater than 60 days past due compared to $21,527 of loans at December 31, 2002. At June 30, 2003, including $1,580 of the loans greater than 60 days past due, there were $24,580 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 June 30, 2003, $142,234 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 June 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 repaid through the issuance of Series 2000-1 Notes. The Revolving Credit Facility was secured by
$217,263 of commercial loans as of June 30, 2003 and $224,620 of commercial loans as of December 31, 2002. We are



20



---

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share data)



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 1.0% and interest is payable monthly.



Our $200,000 Revolving Credit Facility is scheduled to terminate on July 7, 2005, or earlier (but not before January 3, 2004) if Wachovia Bank does not
renew the liquidity support that it provides to the commercial paper conduit that is the lender under this facility. If the liquidity support for the facility is not renewed or amended on or before July 7, 2003, then the liquidity support would
continue for an additional 180 days through January 3, 2004 under the same terms but with a 2% increase in the rate on the borrowings under the facility (Class A Notes). We are in active negotiations with Wachovia around the amendment,
restructure and/or renewal of this and other contemplated credit facilities. After January 3, 2004, 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 $273,166 as of June 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 June 30, 2003, $190,970 of the Series 2001-1 Notes were outstanding, of which $155,607 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



21



---

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



|                      |  | June 30, 2003 |         | December 31, 2002
|--------------------- |  | ------------- | ------- | -----------------
|90-day LIBOR          |  | $             | 190,970 |                  
|Commercial Paper Rate |  |               | 142,234 |                  
|                      |  |               |         |                  
|                      |  | $             | 333,204 |                  
|                      |  |               |         |                  



The maximum
outstandings under the Notes issued by the Revolving Credit Facility during the three and six months ended June 30, 2003 was $147,797 and $148,325, respectively, and the average outstandings were $144,851, and $140,146, respectively. The maximum
outstandings under the Notes issued by the Revolving Credit Facility during the three and six months ended June 30, 2002 was $88,897 and the average outstandings were $76,228, and $50,342, respectively. The weighted average interest rates, excluding
the amortization of deferred financing costs, for the three and six months ended June 30, 2003 were 2.4% and 2.5%, respectively. The weighted average interest rates, excluding the amortization of deferred financing costs, for the three and
six months ended June 30, 2002 were 3.3% and 3.5%, respectively, and the interest rates at June 30, 2003 and 2002 were 2.3% and 3.4%, respectively.



There were no outstandings under the Swingline Notes during the three and six months ended June 30, 2003. There were no outstandings under the Swingline
Notes at June 30, 2002. The maximum outstandings under the Swingline Notes during the three and six months ended June 30, 2002 was $22,900 and the average outstandings were $503 and $633, respectively. The weighted average interest rate for the
three and six months ended June 30, 2002 was 2.9% and 2.8%, respectively.



The maximum outstandings under the Notes issued by the Trust during the three and six months ended June 30, 2003 was $207,112 and $240,120, respectively, and the average outstandings were $194,518 and $204,427,
respectively. The weighted average interest rate, excluding the amortization of deferred financing costs, for the three and six months ended June 30, 2002 was 2.1% and 2.2%, respectively. The maximum outstandings under the Notes issued by the Trust
during the three and six months ended June 30, 2002 was $261,417 and $265,223, respectively, and the average outstandings were $256,112 and $259,170, respectively. The weighted average interest rate, excluding the amortization of deferred financing
costs, for the three and six months ended June 30, 2002 was 2.6%. The interest rates at June 30, 2003 and 2002 were 2.1% and 2.7%, respectively.



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 $57,766 and $76,282 at June 30, 2003 and December 31, 2002, respectively.



22



---

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 six months ended June 30, 2003 and 2002:



|                                                                                   |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|---------------------------------------------------------------------------------- |  | -------------------------- | ------ | ------------------------
|(in thousands except per share amounts)                                            |  | 2003                       |        | 2002                    
|Basic                                                                              |  |                            |        |                         
|Net income/Net increase in stockholders equity resulting from earnings            |  | $                          | 8,989  |                         
|Weighted average common shares outstanding                                         |  |                            | 30,121 |                         
|Earnings per common sharebasic                                                    |  | $                          | 0.30   |                         
|Diluted                                                                            |  |                            |        |                         
|Net income/Net increase in stockholders equity resulting from earnings            |  | $                          | 8,989  |                         
|Weighted average common shares outstanding                                         |  |                            | 30,121 |                         
|Dilutive effect of restricted stock on which forfeiture provisions have not lapsed |  |                            |       |                         
|                                                                                   |  |                            |        |                         
|Weighted average common shares outstandingdiluted                                 |  |                            | 30,121 |                         
|                                                                                   |  |                            |        |                         
|Earnings 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.



23



---

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 six months ended
June 30, 2003 and 2002:



|                                                                                |  | Six Months EndedJune 30, |        
|------------------------------------------------------------------------------- |  | ------------------------ | -------
|                                                                                |  | 2003                     |        
|Per Share Data (1):                                                             |  |                          |        
|Net asset value at beginning of period                                          |  | $                        | 11.56  
|Net operating income before investment gains and losses                         |  |                          | 0.72   
|Net realized losses on investments                                              |  |                          | (0.69  
|Increase in unrealized appreciation (depreciation) on investments               |  |                          | 0.54   
|                                                                                |  |                          |        
|Net increase in stockholders equity resulting from earnings                    |  |                          | 0.57   
|Dividends declared                                                              |  |                          | (0.81  
|Antidilutive effect of stock offering on distributions                          |  |                          |       
|Antidilutive effect of distributions recorded as compensation expense           |  |                          | 0.04   
|                                                                                |  |                          |        
|Net decrease in stockholders equity resulting from distributions               |  |                          | (0.77  
|Net increase in shareholders equity resulting from reduction in employee loans |  |                          |       
|Issuance of shares                                                              |  |                          |       
|Dilutive effect of share issuances                                              |  |                          |       
|Net increase in shareholders equity from restricted stock amortization         |  |                          | 0.06   
|                                                                                |  |                          |        
|Net increase in stockholders equity relating to share issuances                |  |                          | 0.06   
|                                                                                |  |                          |        
|Net asset value at end of period                                                |  | $                        | 11.42  
|                                                                                |  |                          |        
|Per share market value at end of period                                         |  | $                        | 14.51  
|Total return (2)                                                                |  |                          | 42.34  
|Shares outstanding at end of period                                             |  |                          | 31,252 
|Ratio/Supplemental Data:                                                        |  |                          |        
|Net assets at end of period                                                     |  | $                        | 356,881
|Ratio of operating expenses to average net assets (annualized)                  |  |                          | 8.47   
|Ratio of net operating income to average net assets (annualized)                |  |                          | 12.33  



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

|(2) |  | 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 ($0.82 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 ($1.27 per share), divided by the beginning price. Total return is not annualized.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



24



---

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:



|                                               |  | June 30, |        | December 31,
|---------------------------------------------- |  | -------- | ------ | ------------
|                                               |  | 2003     |        | 2002        
|Assets Held:                                   |  |          |        |             
|Majority Owned Companies (a):                  |  |          |        |             
|Loans at fair value                            |  | $        | 33,756 |             
|Non-accrual loans at fair value included above |  |          | 16,228 |             
|Equity Investments at fair value               |  |          | 15,864 |             
|Controlled Companies (b):                      |  |          |        |             
|Loans at fair value                            |  |          | 875    |             
|Non-accrual loans at fair value included above |  |          |       |             
|Equity Investments at fair value               |  |          | 8,640  |             
|Other Affiliates (c):                          |  |          |        |             
|Loans at fair value                            |  |          | 35,197 |             
|Non-accrual loans at fair value included above |  |          | 204    |             
|Equity Investments at fair value               |  |          | 3,127  |             



|                                                                    |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | -
|                                                                    |  | 2003                       |        |   | 2002                     |  
|Income Recognized:                                                  |  |                            |        |   |                          |  
|From Majority Owned Companies (a):                                  |  |                            |        |   |                          |  
|Interest and fee income                                             |  | $                          | 537    |   |                          | $
|Net change in unrealized appreciation (depreciation) on investments |  |                            | (5,715 | ) |                          |  
|Realized losses on investments                                      |  |                            |       |   |                          |  
|From Controlled Companies (b):                                      |  |                            |        |   |                          |  
|Interest and fee income                                             |  |                            | 12     |   |                          |  
|Net change in unrealized appreciation (depreciation) on investments |  |                            | (363   | ) |                          |  
|Realized losses on investments                                      |  |                            |       |   |                          |  
|From Other Affiliates (c):                                          |  |                            |        |   |                          |  
|Interest and fee income                                             |  |                            | 1,130  |   |                          |  
|Net change in unrealized appreciation (depreciation) on investments |  |                            | 1,570  |   |                          |  
|Realized losses on investments                                      |  |                            |       |   |                          |  



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



25



---

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 alleges 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 asserts 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 seeks 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 names only us and certain of our officers
and directors as defendants, and alleges 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 have filed a motion to dismiss the consolidated amended class action
complaint and intend to vigorously defend the lawsuit.



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 July 2003, we completed a transaction to acquire the assets of one of our portfolio companies, THE Journal LLC, in satisfaction of debt and
transfer those assets to a wholly-owned subsidiary. In August 2003, we sold 50% of the equity in the wholly-owned subsidiary to third party investors. Our investment had a fair value of $1,513 and unrealized depreciation of $1,753 as of June 30,
2003. In conjunction with these transactions, we expect to realize a loss of approximately $959 in the third quarter of 2003 and, at the same time, reverse the unrealized depreciation of $1,753. Accordingly, we expect these transactions will result
in approximately $794 of net realized and unrealized gains and losses in the third quarter of 2003.



26



---

I
ndependent 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
June 30, 2003, including the consolidated schedule of investments, and the related consolidated statements of operations for the three-month and six-month periods ended June 30, 2003 and 2002 and the consolidated statements of stockholders
equity and cash flows for the six-month periods ended June 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, 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

July 27, 2003





27



---

I
tem 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 downturn is impairing our customers ability to repay our loans and increasing our non-performing assets, (2) the current
economic downturn is disproportionately impacting 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 will elect 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 will be 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.



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.



28



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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 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. The total portfolio value of our investments was $631.3 million and $688.9 million at June 30, 2003 and December 31, 2002, respectively
(exclusive of unearned income).



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



|(dollars in millions)                        |  | Six MonthsEndedJune 30, 2003 |       |   | Year EndedDecember 31, 2002 |  
|-------------------------------------------- |  | ---------------------------- | ----- | - | --------------------------- | -
|Beginning Portfolio                          |  | $                            | 688.9 |   |                             | $
|Originations/Draws/Advances on Loans         |  |                              | 22.3  |   |                             |  
|Originations/Warrants Received on Equity (a) |  |                              | 23.7  |   |                             |  
|Gross Payments/Reductions (a)                |  |                              | (37.4 | ) |                             |  
|Early Pay-offs/Sales of Securities           |  |                              | (61.5 | ) |                             |  
|Realized Gains on Investments                |  |                              | 0.8   |   |                             |  
|Realized Losses on Investments               |  |                              | (22.4 | ) |                             |  
|Unrealized Appreciation in Investments       |  |                              | 29.6  |   |                             |  
|Unrealized Depreciation in Investments       |  |                              | (12.7 | ) |                             |  
|                                             |  |                              |       |   |                             |  
|Ending Portfolio                             |  | $                            | 631.3 |   |                             | $
|                                             |  |                              |       |   |                             |  



|a) |  | Included in these amounts is the conversion of $17.8 million and $5.4 million of debt to equity in connection with certain restructurings for the six months ended June 30, 2003 and
year ended December 31, 2002, respectively.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Business activity for the six months ended June 30, 2003 included follow on investments in several of our existing portfolio companies. We also completed several restructurings of our existing portfolio companies. We believe we have a
strong pipeline of potential new investments in our target industries. We are currently in the origination process of several new investments, though none were completed by the end of the second quarter.



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



|                              |  | June 30, 2003            |       |                              | December 31, 2002 |  
|----------------------------- |  | ------------------------ | ----- | ---------------------------- | ----------------- | -
|                              |  |                          |      
|(dollars in millions)         |  | Investments atFair Value |       | Percentage ofTotal Portfolio |                   |  
|                              |  |                          |      
|Senior Debt                   |  | $                        | 511.5 |                              | 81.0              | %
|Subordinated Debt             |  |                          | 73.6  |                              | 11.7              | %
|Convertible Subordinated Debt |  |                          | 2.6   |                              | 0.4               | %
|Unsecured Note                |  |                          | 0.2   |                              | 0.0               | %
|Equity                        |  |                          | 32.7  |                              | 5.2               | %
|Warrants to Acquire Equity    |  |                          | 10.4  |                              | 1.6               | %
|Equity Appreciation Rights    |  |                          | 0.3   |                              | 0.1               | %
|                              |  |                          |      
|                              |  | $                        | 631.3 |                              | 100.0             | %
|                              |  |                          |      



29



---

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



|                      |  | June 30, 2003            |       |                              | December 31, 2002 |  
|--------------------- |  | ------------------------ | ----- | ---------------------------- | ----------------- | -
|                      |  |                          |      
|(dollars in millions) |  | Investments atFair Value |       | Percentage ofTotal Portfolio |                   |  
|                      |  |                          |      
|Media                 |  |                          |       |                              |                   |  
|Newspaper             |  | $                        | 208.2 |                              | 33.0              | %
|Publishing            |  |                          | 101.5 |                              | 16.1              | %
|Broadcasting          |  |                          | 46.8  |                              | 7.4               | %
|Telecommunications    |  |                          | 139.3 |                              | 22.1              | %
|Information Services  |  |                          | 82.4  |                              | 13.0              | %
|Technology            |  |                          | 38.5  |                              | 6.1               | %
|Security Alarm        |  |                          | 13.0  |                              | 2.0               | %
|Other                 |  |                          | 1.6   |                              | 0.3               | %
|                      |  |                          |      
|                      |  | $                        | 631.3 |                              | 100.0             | %
|                      |  |                          |      



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



|                                               |  | June 30,2003 |        | December 31,2002
|---------------------------------------------- |  | ------------ | ------ | ----------------
|Assets Held:                                   |  |              |        |                 
|Majority Owned Companies (a):                  |  |              |        |                 
|Loans at fair value                            |  | $            | 33,756 |                 
|Non-accrual loans at fair value included above |  |              | 16,228 |                 
|Equity Investments at fair value               |  |              | 15,864 |                 
|Controlled Companies (b):                      |  |              |        |                 
|Loans at fair value                            |  |              | 875    |                 
|Non-accrual loans at fair value included above |  |              |       |                 
|Equity Investments at fair value               |  |              | 8,640  |                 
|Other Affiliates (c):                          |  |              |        |                 
|Loans at fair value                            |  |              | 35,197 |                 
|Non-accrual loans at fair value included above |  |              | 204    |                 
|Equity Investments at fair value               |  |              | 3,127  |                 



|                                                                    |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | -
|                                                                    |  | 2003                       |        |   | 2002                     |  
|Income Recognized:                                                  |  |                            |        |   |                          |  
|From Majority Owned Companies (a):                                  |  |                            |        |   |                          |  
|Interest and fee income                                             |  | $                          | 537    |   |                          | $
|Net change in unrealized appreciation (depreciation) on investments |  |                            | (5,715 | ) |                          |  
|Realized losses on investments                                      |  |                            |       |   |                          |  
|From Controlled Companies (b):                                      |  |                            |        |   |                          |  
|Interest and fee income                                             |  |                            | 12     |   |                          |  
|Net change in unrealized appreciation (depreciation) on investments |  |                            | (363   | ) |                          |  
|Realized losses on investments                                      |  |                            |       |   |                          |  
|From Other Affiliates (c):                                          |  |                            |        |   |                          |  
|Interest and fee income                                             |  |                            | 1,130  |   |                          |  
|Net change in unrealized appreciation (depreciation) on investments |  |                            | 1,570  |   |                          |  
|Realized losses on investments                                      |  |                            |       |   |                          |  



30



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|(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 June 30, 2003 and December 31, 2002, unrealized depreciation on investments totaled $26.3 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



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



|(dollars in millions) |  |                          |       |                              |                   |  
|--------------------- |  | ------------------------ | ----- | ---------------------------- | ----------------- | -
|                      |  | June 30, 2003            |       |                              | December 31, 2002 |  
|                      |  |                          |      
|InvestmentRating      |  | Investments atFair Value |       | Percentage ofTotal Portfolio |                   |  
|                      |  |                          |      
|1                     |  | $                        | 123.3 |                              | 19.5              | %
|2                     |  |                          | 263.1 |                              | 41.7              | %
|3                     |  |                          | 193.0 |                              | 30.6              | %
|4                     |  |                          | 42.9  |                              | 6.8               | %
|5                     |  |                          | 9.0   |                              | 1.4               | %
|                      |  |                          |      
|                      |  | $                        | 631.3 |                              | 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 June 30, 2003, of the investments with a 5
rating, $4.7 million were loans, all of which were on non-accrual. Of the investments with a 4 rating, $38.1 million were loans, of which $19.9 million were on non-accrual. At



31



---

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 June 30, 2003 and December 31, 2002, there were $15.8 million and $21.5 million, respectively, of loans, or approximately
2.5% or 3.1%, respectively, of the investment portfolio, greater than 60 days past due. At June 30, 2003, including $1.6 million of the loans greater than 60 days past due, there were $24.6 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 June 30, 2003, of the $33.8 million of loans to our majority
owned companies, $16.2 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 June 30, 2003, of the $0.9 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 June 30, 2003, of the $35.2 million of loans to other affiliates, $0.2 million were on
non-accrual status. At December 31, 2002, of the $34.3 million of loans to other affiliates, none were on non-accrual status.



When principal and interest on a loan is not paid within the applicable grace period, we will contact the customer for collection. At that time, we will
make a determination as to the extent of the problem, if any. We will then pursue a commitment for immediate payment and 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.



32



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Results of Operations



Comparison of the Three and Six Months Ended June 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 six months ended June 30, 2003 compared to the same periods in 2002 is attributable to the following items:



|                                             |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|-------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | -
|(dollars in thousands)                       |  | 2003 vs. 2002              |        |   | 2003 vs. 2002            |  
|Change due to:                               |  |                            |        |   |                          |  
|Asset growth (decrease) (a)                  |  | $                          | (788   | ) |                          | $
|Change in LIBOR (a)                          |  |                            | (1,154 | ) |                          |  
|Change in spread (a)                         |  |                            | 2,861  |   |                          |  
|Net decrease in loan fee and dividend income |  |                            | (418   | ) |                          |  
|Decrease in advisory fees and other income   |  |                            | (298   | ) |                          |  
|                                             |  |                            |        |   |                          |  
|Total change in operating income             |  | $                          | 203    |   |                          | $
|                                             |  |                            |        |   |                          |  



|(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 June 30, 2003 increased $0.2 million, or 1.0%, to $19.6 million from $19.4 million for the three
months ended June 30, 2002. Operating income for the second quarter of 2003 included $0.4 million of dividend income. Loan interest increased by $0.9 million for the three months ended June 30, 2003 as compared to the three months ended June 30,
2002. Average three month LIBOR decreased 68 basis points over these periods from 1.92% to 1.24%, decreasing income by $1.2 million. Average commercial loans decreased 4.9% for the three months ended June 30, 2003 when compared to the three months
ended June 30, 2002, contributing a $0.8 million decrease in income. The coupon spread increased 175 basis points for the three months ended June 30, 2003 when compared to the three months ended June 30, 2002, resulting in a $2.9 million increase in
income. Loan fees and dividend income decreased by $0.4 million from the second quarter of 2002 to the second quarter of 2003. Advisory fees and other income for the three months ended June 30, 2003 decreased $0.3 million to $0.9 million from $1.2
million for the three months ended June 30, 2002 as a greater number of financial advisory projects were completed during the second quarter of 2002. The increase in weighted average spreads more than offset the affects of the decrease in LIBOR
rates, decrease in loan volume and decline in advisory and other income for the three months ended June 30, 2003 to the same period in 2002.



Total operating income for the six months ended June 30, 2003 increased $1.7 million, or 4.6%, to $38.2 million from $36.5 million for the six months
ended June 30, 2002. Operating income for the first six months of 2003 included $0.4 million of dividend income. Loan interest increased by $3.1 million for the six months ended June 30, 2003 as compared to the six months ended June 30, 2002.
Average three month LIBOR decreased 63 basis points over these periods from 1.91% to 1.28%, decreasing income by $2.0 million. Average commercial loans increased 2.5% for the six months ended June 30, 2003 when compared to the six months ended June
30, 2002, contributing a $0.7 million increase in income. The coupon spread increased 136 basis points for the six months ended June 30, 2003 when compared to the six months ended June 30, 2002, resulting



33



---

in a $4.4 million increase in income. Loan fees and dividend income decreased by $0.4 million from the first six months of 2002 to the first six months of
2003. Advisory fees and other income for the six months ended June 30, 2003 decreased $1.0 million to $1.6 million from $2.6 million for the six months ended June 30, 2002 as a greater number of financial advisory projects were completed during
the first half of 2002. The loan growth and increase in weighted average spreads more than offset the affects of the decrease in LIBOR rates and decline in advisory and other income for the six months ended June 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 six months ended June 30, 2003 compared to the same period in 2002 is attributable to the following
items:



|                                   |  | Three Months EndedJune 30, |      |   | Six Months EndedJune 30, |  
|---------------------------------- |  | -------------------------- | ---- | - | ------------------------ | -
|(dollars in thousands)             |  | 2003 vs. 2002              |      |   | 2003 vs. 2002            |  
|Change due to:                     |  |                            |      |   |                          |  
|Increase in borrowings (a)         |  | $                          | 48   |   |                          | $
|Change in LIBOR (a)                |  |                            | (580 | ) |                          |  
|Change in spread (a)               |  |                            | 142  |   |                          |  
|Debt cost amortization             |  |                            | (173 | ) |                          |  
|Salaries and benefits              |  |                            | 315  |   |                          |  
|Long-term incentive compensation   |  |                            | (230 | ) |                          |  
|General and administrative expense |  |                            | 447  |   |                          |  
|                                   |  |                            |      |   |                          |  
|Total change in operating expense  |  | $                          | (31  | ) |                          | $
|                                   |  |                            |      |   |                          |  



|(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 June 30, 2003 remained relatively level at $8.0 million when compared to the three months ended June 30, 2002. Borrowing costs decreased 19.8% from $2.8 million for the three months ended June 30, 2002 to $2.3
million for the three months ended June 30, 2003. Average three month LIBOR decreased 68 basis points over these periods from 1.92% to 1.24%, which caused interest expense to decline by $0.6 million. The increase in average borrowings and spreads
caused interest expense to rise by $0.2 million. Salaries and benefits increased $0.3 million. Long-term incentive compensation related to the amortization of restricted stock awards and the treatment of dividends on certain shares of common stock
securing employee loans as compensation declined $0.2 million quarter to quarter. General and administrative expenses increased $0.4 million for the three months ended June 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 six months ended June 30, 2003 increased
$0.5 million, or 3.1%, to $15.5 million. Borrowing costs decreased by 11.5% from $5.3 million for the six months ended June 30, 2002 to $4.7 million for the six months ended June 30, 2003. Average three month LIBOR decreased 63 basis points
over these periods from 1.91% to 1.28%, which caused interest expense to decline by $1.0 million. The increase in average borrowings and spreads caused interest expense to rise by $0.8 million. Salaries and benefits increased $0.2 million. Long-term
incentive compensation related to the amortization of restricted stock awards and the treatment of dividends on certain shares of common stock securing employee loans as compensation decreased



34



---

$0.2 million over these periods. General and administrative expenses increased $1.1 million for the six months ended June 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 six months ended June 30, 2003 totaled $11.7 million and $22.6 million, respectively, compared with $11.5 million and $21.4 million for the same respective periods in 2002.



Net Investment Gains and Losses



For the first half of 2003, net investment gains and losses totaled ($4.7)
million, of which ($2.7) million is related to the second quarter. For the first half of 2002, net investment gains and losses totaled ($8.3) million, of which ($2.0) million is related to the second 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 six months ended June 30, 2003 and 2002. There were no realized gains and losses for the three and six months ended June 30, 2002:



MCG Capital Corporation

Summary of Realized Gains and Losses on Investments

(dollars in thousands)



|                                              |  |                    |  | Three Months EndedJune 30 |        | Six Months EndedJune 30
|--------------------------------------------- |  | ------------------ |  | ------------------------- | ------ | -----------------------
|Portfolio Company                             |  | Sector             |  | 2003                      |        |                        
|                                             
|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         |  |                           | (2,675 | )                      
|NBG Radio Network, Inc.                       |  | Broadcasting       |  |                           |       |                        
|                                              |  |                    |  |                           |        |                        
|                                              |  |                    |  |                           | (2,675 | )                      
|                                              |  |                    |  |                           |        |                        
|Realized gains (losses) on equity investments |  |                    |  |                           |        |                        
|Talk America Holdings, Inc.                   |  | Telecommunications |  |                           | 832    |                        
|                                              |  |                    |  |                           |        |                        
|                                              |  |                    |  |                           | 832    |                        
|                                              |  |                    |  |                           |        |                        
|Net realized gains (losses) on investments    |  |                    |  | $                         | (1,843 | )                      
|                                              |  |                    |  |                           |        |                        



35



---

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



MCG Capital Corporation

Summary of Net Change in Unrealized Appreciation and Depreciation on Investments

(dollars in thousands)



|                                                                    |  |                      |        | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|------------------------------------------------------------------- |  | -------------------- | ------ | -------------------------- | ------ | - | ------------------------ | -
|Portfolio Company                                                   |  | Sector               |        | 2003                       |        |   | 2002                     |  
|                                                                   
|Unrealized appreciation on loans                                    |  |                      |        |                            |        |   |                          |  
|Other                                                               |  |                      |        | $                          | 133    |   |                          | $
|                                                                    |  |                      |        |                            |       
|Unrealized appreciation on equity investments                       |  |                      |        |                            |        |   |                          |  
|Creatas, L.L.C.                                                     |  | Information Services |        |                            | 2,657  |   |                          |  
|Talk America Holdings, Inc.                                         |  | Telecommunications   |        |                            | 1,677  |   |                          |  
|Bridgecom Holdings, Inc.                                            |  | Telecommunications   |        |                            | 421    |   |                          |  
|Systems Xcellence USA, Inc.                                         |  | Technology           |        |                            | 631    |   |                          |  
|Manhattan Telecommunications Corporation                            |  | Telecommunications   |        |                            | 100    |   |                          |  
|Other                                                               |  |                      |        |                            | 444    |   |                          |  
|                                                                    |  |                      |        |                            |       
|                                                                    |  |                      |        |                            | 5,930  |   |                          |  
|                                                                    |  |                      |        |                            |       
|Unrealized appreciation on investments                              |  |                      | 6,063  |                            |        |   | 5,996                    |  
|                                                                    |  |                      |        |                            |       
|Unrealized depreciation on loans                                    |  |                      |        |                            |        |   |                          |  
|AMI Telecommunications Corporation                                  |  | Telecommunications   |        | $                          | (1,720 | ) |                          |  
|Images.com, Inc.                                                    |  | Information Services |        |                            | (437   | ) |                          |  
|Netplexus Corporation                                               |  | Technology           |        |                            | (647   | ) |                          |  
|NOW Communications, Inc.                                            |  | Telecommunications   |        |                            | (465   | ) |                          |  
|Sunshine Media, Delaware, LLC                                       |  | Publishing           |        |                            | (415   | ) |                          |  
|Corporate Legal Times                                               |  | Publishing           |        |                            | (384   | ) |                          |  
|National Systems Integration, Inc.                                  |  | Security Alarm       |        |                            |       |   |                          |  
|ValuePage Holdings, Inc.                                            |  | Telecommunications   |        |                            |       |   |                          |  
|Rising Tide Holdings, Inc.                                          |  | Publishing           |        |                            |       |   |                          |  
|THE Journal, LLC                                                    |  | Publishing           |        |                            | (44    | ) |                          |  
|Other                                                               |  |                      |        |                            | (150   | ) |                          |  
|                                                                    |  |                      |        |                            |       
|                                                                    |  |                      |        |                            | (4,262 | ) |                          |  
|                                                                    |  |                      |        |                            |       
|Unrealized depreciation on equity investments                       |  |                      |        |                            |        |   |                          |  
|AMI Telecommunications Corporation                                  |  | Telecommunications   |        | $                          | (2,695 | ) |                          |  
|Biznessonline.com, Inc.                                             |  | Telecommunications   |        |                            |       |   |                          |  
|Working Mother Media, Inc.                                          |  | Publishing           |        |                            | (687   | ) |                          |  
|National Systems Integration, Inc.                                  |  | Security Alarm       |        |                            | (258   | ) |                          |  
|Interactive Business Solutions, Inc.                                |  | Security Alarm       |        |                            | (389   | ) |                          |  
|Wiesner Publishing Company, LLC                                     |  | Publishing           |        |                            | (228   | ) |                          |  
|Miles Media Group, LLC                                              |  | Publishing           |        |                            | (210   | ) |                          |  
|New Century Companies, Inc.                                         |  | Other                |        |                            | (169   | ) |                          |  
|UMAC, Inc.                                                          |  | Publishing           |        |                            | (19    | ) |                          |  
|nii communications, inc.                                            |  | Telecommunications   |        |                            |       |   |                          |  
|Other                                                               |  |                      |        |                            | (368   | ) |                          |  
|                                                                    |  |                      |        |                            |       
|                                                                    |  |                      |        |                            | (5,023 | ) |                          |  
|                                                                    |  |                      |        |                            |       
|Unrealized depreciation on investments                              |  |                      | (9,285 | )                          |        |   | (8,020                   | )
|                                                                    |  |                      |        |                            |       
|Reversal of unrealized depreciation (appreciation)*                 |  |                      |        |                            |        |   |                          |  
|VS&A-PBI Holding LLC                                                |  | Publishing           |        |                            |       |   |                          |  
|National Systems Integration, Inc.                                  |  | Security Alarm       |        |                            |       |   |                          |  
|AMI Telecommunications Corporation                                  |  | Telecommunications   |        |                            |       |   |                          |  
|Rising Tide Holdings, Inc.                                          |  | Publishing           |        |                            | 2,735  |   |                          |  
|Talk America Holdings, Inc.                                         |  | Telecommunications   |        |                            | (365   | ) |                          |  
|NBG Radio Network, Inc.                                             |  | Broadcasting         |        |                            |       |   |                          |  
|                                                                    |  |                      |        |                            |       
|Total reversal of unrealized depreciation (appreciation)            |  |                      | 2,370  |                            |        |   |                         |  
|                                                                    |  |                      |        |                            |       
|Net change in unrealized appreciation (depreciation) on investments |  | $                    | (852   | )                          |        | $ | (2,024                   | )
|                                                                    |  |                      |        |                            |       



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



36



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Income Taxes



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



Net Income



Net income
totaled $9.0 million for the quarter ended June 30, 2003 compared to $9.4 million for the quarter ended June 30, 2002. Net income totaled $17.9 million for the six months ended June 30, 2003 compared to $13.1 million for the six months ended June
30, 2002.



Financial Condition, Liquidity and Capital
Resources



Cash, Cash Equivalents and Cash, Securitization Accounts



At June 30, 2003 and December 31, 2002, we had $54.8
million and $9.4 million, respectively, in cash and cash equivalents. In addition, at June 30, 2003 and December 31, 2002, we had $17.0 million and $43.2 million, respectively, in cash, securitization accounts. We invest cash on hand in interest
bearing deposit accounts with daily sweep features. 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 and operations.



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 June
30, 2003, we had unused commitments to extend credit to our customers of $13.2 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 $57.8 million. See Borrowings section below for discussion of our borrowing facilities.



The following table shows our contractual obligations as of June 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 $13.2 million as discussed above.
|--- |  | -----------------------------------------------------------------------------------------------------------



37



---

|(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 June 30, 2003, this ratio was 212%. This requirement limits the amount that we
may borrow. To fund growth in our investment portfolio, 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 $273.2 million as of June 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 June 30, 2003, $191.0 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 June 30, 2003, $142.2 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 June 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 $217.3 million of commercial loans as of June 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 1.0% and interest is payable
monthly.



38



---

Our $200.0 million Revolving Credit Facility is scheduled to terminate on July 7, 2005, or earlier (but
not before January 3, 2004) if Wachovia Bank does not renew the liquidity support that it provides to the commercial paper conduit that is the lender under this facility. If the liquidity support for the facility is not renewed or amended on or
before July 7, 2003, then the liquidity support would continue for an additional 180 days through January 3, 2004 under the same terms but with a 2% increase in the rate on the borrowings under the facility (Class A Notes). We are in active
negotiations with Wachovia around the amendment, restructure and/or renewal of this and other contemplated credit facilities. After January 3, 2004, if the liquidity support still has not been renewed or amended and our securitization facilty 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 June
30, 2003, we had aggregate outstanding borrowings of $333.2 million. The following table shows the facility amounts and outstanding borrowings at June 30, 2003:



|(dollars in millions)                         |  | Facilityamount |       | Amountoutstanding |   | InterestRate (a) | 
|--------------------------------------------- |  | -------------- | ----- | ----------------- | - | ---------------- | 
|Series 2001-1 Class A Asset Backed Bonds      |  | $              | 155.6 |                   | $ | 155.6            | 
|Series 2001-1 Class B Asset Backed Bonds      |  |                | 35.4  |                   |   | 35.4             | 
|Series 2000-1 Class A Asset Backed Securities |  |                | 200.0 |                   |   | 142.2            | 
|                                              |  |                |       |                   |   |                  | 
|Total borrowings                              |  | $              | 391.0 |                   | $ | 333.2            | 
|                                              |  |                |       |                   |   |                  | 



|(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.



39



---

Dividends



As a business development company that will elect to be treated as a regulated investment company, we are required to (i) distribute at least 90% of our
investment company taxable income and 90% of any ordinary pre-RIC built in gains we recognize between January 1, 2002 and December 31, 2011, less any taxes due on those gains to avoid corporate level taxes on the amount distributed to stockholders
(other than any built in gain recognized between January 1, 2002 and December 31, 2011) and (ii) distribute (actually or on a deemed basis) at least 98% of our income (both ordinary income and net capital gains) to avoid an excise tax. We intend to
make distributions on a quarterly basis to our stockholders of all of our income, except for certain net capital gains and adjustments for long-term incentive compensation expense. We intend to make deemed distributions to our stockholders of any
retained net capital gains.



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



The following table summarizes our dividends declared to date:



|Date Declared      |  | Record Date       |  | Payment Date     |  | Amount
|------------------ |  | ----------------- |  | ---------------- |  | ------
|                  
|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.



40



---

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 $29.8 million or 4.7% of our portfolio of
investments as of June 30, 2003 and $27.2 million or 4.0% of our portfolio of investments as of December 31, 2002.



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



|(in millions)                              |  | Six MonthsEndedJune 30, 2003 |      |   | Year EndedDecember 31,2002 |  
|------------------------------------------ |  | ---------------------------- | ---- | - | -------------------------- | -
|Beginning PIK loan balance                 |  | $                            | 27.2 |   |                            | $
|PIK interest earned during the period      |  |                              | 9.5  |   |                            |  
|Change in interest receivable on PIK loans |  |                              | 0.1  |   |                            |  
|Principal payments of cash on PIK loans    |  |                              | (1.1 | ) |                            |  
|PIK loans converted to other securities    |  |                              | (5.9 | ) |                            |  
|                                           |  |                              |      |   |                            |  
|Ending PIK loan balance                    |  | $                            | 29.8 |   |                            | $
|                                           |  |                              |      |   |                            |  



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. Had 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 $6.7 million of payments would have been applied against the June 30, 2003 PIK loan balance of $29.8 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 June 30, 2003, 93.7% of the $29.8 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 $10.9 million and $12.8 million of unearned fees as of June 30, 2003 and December 31, 2002,
respectively. We recognized $2.3 million of these fees in income during the first six months of 2003 and $3.0 million of these fees in income during the first six months of 2002.



41



---

Valuation of Investments



At June 30, 2003, approximately 89% 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



As a
general rule, we do not 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.



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 publicly traded securities may be valued at discounts from the public market value due to restrictions on sale, the size of our
investment or market liquidity concerns.



42



---

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 $490.4 million at June 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.



Recent Developments



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).



In July 2003, we completed a transaction to acquire the assets of one of our portfolio companies, THE Journal LLC, in satisfaction of debt and transfer those assets to a wholly-owned subsidiary. In August 2003, we sold 50% of the equity in
the wholly-owned subsidiary to third party investors. Our investment had a fair value of $1.5 million and unrealized depreciation of $1.8 million as of June 30, 2003. In conjunction with these transactions, we expect to realize a loss of
approximately $1.0 million in the third quarter of 2003 and, at the same time, reverse the unrealized depreciation of $1.8 million. Accordingly, we expect these transactions will result in approximately $0.8 million of net realized and unrealized
gains and losses in the third quarter of 2003.



On August 6,
2003, our Board of Directors declared a third quarter 2003 dividend of $0.42 per share. The third quarter dividend is payable on October 30, 2003, with a record date of August 18, 2003.



I
tem 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 88% 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 32% of our loan portfolio has a LIBOR floor, at various levels. Our interest rates on our borrowings are based on LIBOR and commercial paper rates, with the majority based on LIBOR.



We regularly measure exposure to interest rate risk. We have interest rate
risk exposure mainly from the portion of the commercial loan portfolio funded using stockholders equity. Our board of directors assesses interest rate risk and we manage our interest rate exposure on an ongoing basis. The following table shows
a



43



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comparison of the interest rate base for our outstanding commercial loans and our outstanding borrowings at June 30, 2003 and December 31, 2002:



|                      |  | June 30, 2003   |       | December 31, 2002
|--------------------- |  | --------------- | ----- | -----------------
|                      |  |                
|(dollars in millions) |  | CommercialLoans |       | Borrowings       
|                      |  |                
|Prime Rate            |  | $               | 16.3  |                  
|30-Day LIBOR          |  |                 | 28.5  |                  
|60-Day LIBOR          |  |                 |      |                  
|90-Day LIBOR          |  |                 | 469.8 |                  
|Commercial Paper Rate |  |                 |      |                  
|Fixed Rate            |  |                 | 73.3  |                  
|                      |  |                 |       |                  
|Total                 |  | $               | 587.9 |                  
|                      |  |                 |       |                  



Based on our June 30,
2003 balance sheet, for a 100 basis point increase in interest rates, our annual interest income and interest expense would each increase by $3.3 million resulting in no change in annual net income, assuming no changes in our investments or
borrowing structure. Due to the imposition of LIBOR floors, the impact of an additional 100 basis point increase is different from the first 100 basis point change discussed in the preceding sentence. For that additional 100 basis point increase in
interest rates, our annual interest income would increase an additional $3.8 million resulting in an increase in annual net income of an additional $0.4 million, assuming no changes in our investments or borrowing structure. For a 100 basis
point decrease in interest rates, our annual interest income and interest expense would each decrease by $3.3 million resulting in no change in annual net income, assuming no changes in our investment and borrowing structure.



As a business development company, we will use a greater portion of equity to
fund our business than we have in the past. Accordingly, other things being equal, increases in interest rates will result in greater increases in our net interest income and reductions in interest rates will result in greater decreases in our net
interest income compared with the effects of interest rate changes on our results under the more highly leveraged capital structure we have maintained in the past.



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



I
tem 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 June 30, 2003 that have materially affected, or are
reasonably likely to materially affect, MCGs internal control over financial reporting.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



44



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PART II.    OTHER INFORMATION



I
tem 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 alleges 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 asserts 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 seeks 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 names only us and certain of our officers and directors as defendants, and alleges 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 have filed a motion to dismiss the consolidated amended class action complaint and intend to vigorously defend the lawsuit.



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.



I
tem 2.    Changes in Securities and Use of Proceeds



Not Applicable.



I
tem 3.    Defaults Upon Senior Securities



Not Applicable.



I
tem 4.    Submission of Matters to a Vote of Security Holders



On May 14, 2003, the Company held its Annual Meeting of Stockholders. The following two matters were submitted to the stockholders for consideration:



| | 1. |  | To elect three directors of the Company who will serve for three years, or until their successors are elected and qualified; and
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------



| | 2. |  | To ratify the selection of Ernst & Young LLP to serve as independent auditors for the Company for the fiscal year ending December 31, 2003
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------



The results of the shares voted with regard to each of these matters is as
follows:



| | 1. |  | Election of Directors:
| | -- |  | ----------------------



|Director           |  | For        |  |  |  | Withheld
|------------------ |  | ---------- |  |  |  | --------
|Jeffrey M. Bucher  |  | 28,916,682 |  |  |  | 194,731 
|Kenneth J. OKeefe |  | 28,916,682 |  |  |  | 194,731 
|Michael A. Pruzan  |  | 28,162,562 |  |  |  | 948,851 



Continuing Directors
whose terms did not expire at the annual meeting were as follows: Bryan J. Mitchell, Steven F. Tunney, Robert J. Merrick, Wallace B. Millner, III, Joseph H. Gleberman and Norman W. Alpert.



45



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| | 2. |  | Ratification of appointment of Ernst & Young LLP as auditors:
| | -- |  | -------------------------------------------------------------



|For        |  | Against |  | Abstain
|---------- |  | ------- |  | -------
|28,896,808 |  | 163,030 |  | 51,575 



There were no broker
non-votes for items 1 and 2 above.



I
tem 5.    Other Information



Not Applicable.





I
tem 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):



|Exhibit Number |  | 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).              



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



On April 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 quarter ended March 31, 2003.



On June 16, 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 $0.41 per share for the quarter ending June 30, 2003.



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.



46



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S
IGNATURES



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 August 7, 2003.



MCG CAPITAL CORPORATIONBy:

/s/    BRYAN J. MITCHELLBryan J. Mitchell Chief Executive Officer


By:

/s/    STEVEN F. TUNNEYSteven F. Tunney President and Chief Operating Officer


By:

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




47