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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



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



For the Quarter Ended June 30, 2004.



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



Commission File Number: 0-33377



MCG CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)



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



(703) 247-7500

(Registrants telephone number, including area code)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x  No ̈



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



The number of shares of the registrants Common Stock, $.01 par value, outstanding as of August 5, 2004 was 43,048,293.



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##### Table of Contents

MCG CAPITAL CORPORATION



FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2004



TABLE OF CONTENTS



|           |  |                                                                                                 |  |   
|---------- |  | ----------------------------------------------------------------------------------------------- |  | --
|PART I     |  | FINANCIAL INFORMATION                                                                           |  | 3 
|           |  |                                                                                                
|           |  | Selected Financial Data                                                                         |  | 3 
|           |  |                                                                                                
|Item 1.    |  | Financial Statements (Unaudited)                                                                |  | 4 
|           |  |                                                                                                
|           |  | Consolidated Balance Sheets  June 30, 2004 and December 31, 2003                               |  | 4 
|           |  |                                                                                                
|           |  | Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003 |  | 5 
|           |  |                                                                                                
|           |  | Consolidated Statements of Stockholders Equity for the six months ended June 30, 2004 and 2003 |  | 6 
|           |  |                                                                                                
|           |  | Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003           |  | 7 
|           |  |                                                                                                
|           |  | Consolidated Schedule of Investments as of June 30, 2004                                        |  | 8 
|           |  |                                                                                                
|           |  | Consolidated Schedule of Investments as of December 31, 2003                                    |  | 16
|           |  |                                                                                                
|           |  | Notes to Consolidated Financial Statements                                                      |  | 25
|           |  |                                                                                                
|           |  | Independent Accountants Review Report                                                          |  | 34
|           |  |                                                                                                
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations           |  | 35
|           |  |                                                                                                
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                      |  | 51
|           |  |                                                                                                
|Item 4.    |  | Controls and Procedures                                                                         |  | 52
|           |  |                                                                                                
|PART II    |  | OTHER INFORMATION                                                                               |  | 53
|           |  |                                                                                                
|Item 1.    |  | Legal Proceedings                                                                               |  | 53
|           |  |                                                                                                
|Item 2.    |  | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities                |  | 53
|           |  |                                                                                                
|Item 3.    |  | Defaults upon Senior Securities                                                                 |  | 53
|           |  |                                                                                                
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                             |  | 53
|           |  |                                                                                                
|Item 5.    |  | Other Information                                                                               |  | 54
|           |  |                                                                                                
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                |  | 55
|           | 
|Signatures |  | 56                                                                                             



2



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##### Table of Contents

PART I.    FINANCIAL INFORMATION



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



Selected Financial Data



The
following table sets forth selected financial data from our unaudited financial statements. The selected financial data should be read in conjunction with our Managements Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements (unaudited) and notes thereto included in this Quarterly Report.



|                                                                                           |  |                            |         |                          |   |         |  |      |        |  |   |       
|------------------------------------------------------------------------------------------ |  | -------------------------- | ------- | ------------------------ | - | ------- |  | ---- | ------ |  | - | ------
|                                                                                           |  | Three Months EndedJune 30, |         | Six Months EndedJune 30,
|(dollars in thousands except per share amounts and statistical data)                       |  | 2004                       |         | 2003                     |   | 2004    |  | 2003
|Income statement data:                                                                     |  |                            |         |                          |   |         |  |      |        |  |   |       
|Operating income                                                                           |  | $                          | 22,784  |                          | $ | 19,636  |  | $    | 44,989 |  | $ | 38,175
|Net operating income before investment gains and losses                                    |  |                            | 12,474  |                          |   | 11,684  |  |      | 22,315 |  |   | 22,630
|Net income                                                                                 |  |                            | 17,643  |                          |   | 8,989   |  |      | 19,740 |  |   | 17,886
|                                                                                           |  |                            |         |                         
|Per common share data:                                                                     |  |                            |         |                          |   |         |  |      |        |  |   |       
|Earnings per common share basic and diluted                                                |  |                            | 0.44    |                          |   | 0.30    |  |      | 0.51   |  |   | 0.59  
|Net operating income before investment gains and losses per common share basic and diluted |  |                            | 0.31    |                          |   | 0.39    |  |      | 0.58   |  |   | 0.75  
|Net asset value per common share (a)                                                       |  |                            | 12.09   |                          |   | 11.42   |  |      | 12.09  |  |   | 11.42 
|Cash dividends declared per common share                                                   |  |                            | 0.42    |                          |   | 0.41    |  |      | 0.84   |  |   | 0.81  
|                                                                                           |  |                            |         |                         
|Selected period-end balances:                                                              |  |                            |         |                          |   |         |  |      |        |  |   |       
|Total investment portfolio                                                                 |  | $                          | 758,948 |                          | $ | 620,365 |  |      |        |  |   |       
|Total assets                                                                               |  |                            | 866,709 |                          |   | 707,866 |  |      |        |  |   |       
|Borrowings                                                                                 |  |                            | 322,806 |                          |   | 333,204 |  |      |        |  |   |       
|                                                                                           |  |                            |         |                         
|Other data (at period-end):                                                                |  |                            |         |                          |   |         |  |      |        |  |   |       
|Number of portfolio companies                                                              |  |                            | 91      |                          |   | 76      |  |      |        |  |   |       
|Number of employees                                                                        |  |                            | 100     |                          |   | 57      |  |      |        |  |   |       



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



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##### Table of Contents

Item 1.    Financial Statements (unaudited)



MCG Capital Corporation

Consolidated Balance Sheets (unaudited)

(in thousands, except per share amounts)



|                                                                                                                                                               |  |              |         |   |                  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                               |  | June 30,2004 |         |   | December 31,2003 |  
|Assets                                                                                                                                                         |  |              |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                      |  | $            | 58,419  |   |                  | $ | 60,072  |  
|Cash, securitization accounts                                                                                                                                  |  |              | 31,165  |   |                  |   | 33,434  |  
|Investments at fair value                                                                                                                                      |  |              |         |   |                  |   |         |  
|Commercial loans (cost of $674,243 and $615,253, respectively)                                                                                                 |  |              | 663,336 |   |                  |   | 605,551 |  
|Investments in equity securities (cost of $125,349 and $112,850, respectively)                                                                                 |  |              | 110,190 |   |                  |   | 93,391  |  
|Unearned income on commercial loans                                                                                                                            |  |              | (14,578 | ) |                  |   | (16,416 | )
|                                                                                                                                                               |  |              |         |   |                  |   |         |  
|Total investments                                                                                                                                              |  |              | 758,948 |   |                  |   | 682,526 |  
|Interest receivable                                                                                                                                            |  |              | 5,392   |   |                  |   | 5,717   |  
|Other assets                                                                                                                                                   |  |              | 12,785  |   |                  |   | 9,166   |  
|                                                                                                                                                               |  |              |         |   |                  |   |         |  
|Total assets                                                                                                                                                   |  | $            | 866,709 |   |                  | $ | 790,915 |  
|                                                                                                                                                               |  |              |         |   |                  |   |         |  
|Liabilities                                                                                                                                                    |  |              |         |   |                  |   |         |  
|Borrowings                                                                                                                                                     |  | $            | 322,806 |   |                  | $ | 304,131 |  
|Interest payable                                                                                                                                               |  |              | 868     |   |                  |   | 1,185   |  
|Dividends payable                                                                                                                                              |  |              | 16,268  |   |                  |   | 16,267  |  
|Other liabilities                                                                                                                                              |  |              | 6,499   |   |                  |   | 5,382   |  
|                                                                                                                                                               |  |              |         |   |                  |   |         |  
|Total liabilities                                                                                                                                              |  |              | 346,441 |   |                  |   | 326,965 |  
|                                                                                                                                                               |  |              |         |   |                  |   |         |  
|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, 43,047 issued and outstanding on June 30, 2004 and 38,732 issued and outstanding on
December 31, 2003 |  |              | 430     |   |                  |   | 387     |  
|Paid-in capital                                                                                                                                                |  |              | 601,976 |   |                  |   | 529,168 |  
|Stockholder loans                                                                                                                                              |  |              | (5,139  | ) |                  |   | (5,293  | )
|Unearned compensationrestricted stock                                                                                                                         |  |              | (9,950  | ) |                  |   | (4,911  | )
|Distributions in excess of earnings                                                                                                                            |  |              | (40,983 | ) |                  |   | (26,240 | )
|Net unrealized depreciation on investments                                                                                                                     |  |              | (26,066 | ) |                  |   | (29,161 | )
|                                                                                                                                                               |  |              |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                     |  |              | 520,268 |   |                  |   | 463,950 |  
|                                                                                                                                                               |  |              |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                     |  | $            | 866,709 |   |                  | $ | 790,915 |  
|                                                                                                                                                               |  |              |         |   |                  |   |         |  



See
notes to consolidated financial statements (unaudited).



4



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##### Table of Contents

MCG Capital Corporation

Consolidated Statements of Operations (unaudited)

(in thousands, except per share amounts)



|                                                                                 |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |         |  
|-------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                                 |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|                                                                                 |  | 2004                        |        |   | 2003                      |   |        | 2004 |  |   | 2003   |  
|Operating income                                                                 |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |         |  
|Interest and dividend income                                                     |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |         |  
|Non-affiliate investments (less than 5% owned)                                   |  | $                           | 12,856 |   |                           | $ | 17,077 |      |  | $ | 25,176 |   |  | $ | 33,402  |  
|Affiliate investments (5% to 25% owned)                                          |  |                             | 767    |   |                           |   | 1,130  |      |  |   | 1,652  |   |  |   | 2,085   |  
|Control investments (more than 25% owned)                                        |  |                             | 5,170  |   |                           |   | 549    |      |  |   | 10,454 |   |  |   | 1,097   |  
|                                                                                 |  |                             |        |   |                           |   |        |     
|Total interest and dividend income                                               |  |                             | 18,793 |   |                           |   | 18,756 |      |  |   | 37,282 |   |  |   | 36,584  |  
|Advisory fees and other income                                                   |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |         |  
|Non-affiliate investments (less than 5% owned) and other income                  |  |                             | 2,489  |   |                           |   | 880    |      |  |   | 4,108  |   |  |   | 1,591   |  
|Control investments (more than 25% owned)                                        |  |                             | 1,502  |   |                           |   |       |      |  |   | 3,599  |   |  |   |        |  
|                                                                                 |  |                             |        |   |                           |   |        |     
|Total advisory fees and other income                                             |  |                             | 3,991  |   |                           |   | 880    |      |  |   | 7,707  |   |  |   | 1,591   |  
|                                                                                 |  |                             |        |   |                           |   |        |     
|Total operating income                                                           |  |                             | 22,784 |   |                           |   | 19,636 |      |  |   | 44,989 |   |  |   | 38,175  |  
|                                                                                 |  |                             |        |   |                           |   |        |     
|Operating expenses                                                               |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |         |  
|Interest expense                                                                 |  |                             | 2,065  |   |                           |   | 2,281  |      |  |   | 4,168  |   |  |   | 4,728   |  
|Employee compensation:                                                           |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |         |  
|Salaries and benefits                                                            |  |                             | 3,343  |   |                           |   | 2,157  |      |  |   | 6,228  |   |  |   | 4,041   |  
|Long-term incentive compensation                                                 |  |                             | 2,128  |   |                           |   | 1,501  |      |  |   | 7,679  |   |  |   | 3,027   |  
|                                                                                 |  |                             |        |   |                           |   |        |     
|Total employee compensation                                                      |  |                             | 5,471  |   |                           |   | 3,658  |      |  |   | 13,907 |   |  |   | 7,068   |  
|General and administrative expense                                               |  |                             | 2,774  |   |                           |   | 2,013  |      |  |   | 4,599  |   |  |   | 3,749   |  
|                                                                                 |  |                             |        |   |                           |   |        |     
|Total operating expenses                                                         |  |                             | 10,310 |   |                           |   | 7,952  |      |  |   | 22,674 |   |  |   | 15,545  |  
|                                                                                 |  |                             |        |   |                           |   |        |     
|Net operating income before investment gains and losses                          |  |                             | 12,474 |   |                           |   | 11,684 |      |  |   | 22,315 |   |  |   | 22,630  |  
|                                                                                 |  |                             |        |   |                           |   |        |     
|Net realized gains (losses) on investments                                       |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |         |  
|Non-affiliate investments (less than 5% owned)                                   |  |                             | 84     |   |                           |   | (1,843 | )    |  |   | 1,988  |   |  |   | (10,142 | )
|Control investments (more than 25% owned)                                        |  |                             | (7,658 | ) |                           |   |       |      |  |   | (7,658 | ) |  |   | (11,397 | )
|                                                                                 |  |                             |        |   |                           |   |        |     
|Total net realized gains (losses) on investments                                 |  |                             | (7,574 | ) |                           |   | (1,843 | )    |  |   | (5,670 | ) |  |   | (21,539 | )
|Net change in unrealized appreciation (depreciation) on investments              |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |         |  
|Non-affiliate investments (less than 5% owned)                                   |  |                             | 3,368  |   |                           |   | 3,656  |      |  |   | (125   | ) |  |   | 18,735  |  
|Affiliate investments (5% to 25% owned)                                          |  |                             | (1,947 | ) |                           |   | 1,570  |      |  |   | (3,367 | ) |  |   | 1,744   |  
|Control investments (more than 25% owned)                                        |  |                             | 11,322 |   |                           |   | (6,078 | )    |  |   | 6,587  |   |  |   | (3,684  | )
|                                                                                 |  |                             |        |   |                           |   |        |     
|Total net change in unrealized appreciation (depreciation) on investments        |  |                             | 12,743 |   |                           |   | (852   | )    |  |   | 3,095  |   |  |   | 16,795  |  
|                                                                                 |  |                             |        |   |                           |   |        |     
|Net investment gains (losses)                                                    |  |                             | 5,169  |   |                           |   | (2,695 | )    |  |   | (2,575 | ) |  |   | (4,744  | )
|                                                                                 |  |                             |        |   |                           |   |        |     
|Net income                                                                       |  | $                           | 17,643 |   |                           | $ | 8,989  |      |  | $ | 19,740 |   |  | $ | 17,886  |  
|                                                                                 |  |                             |        |   |                           |   |        |     
|Earnings per common share basic and diluted                                      |  | $                           | 0.44   |   |                           | $ | 0.30   |      |  | $ | 0.51   |   |  | $ | 0.59    |  
|Cash dividends declared per common share                                         |  | $                           | 0.42   |   |                           | $ | 0.41   |      |  | $ | 0.84   |   |  | $ | 0.81    |  
|Weighted average common shares outstanding                                       |  |                             | 39,650 |   |                           |   | 30,121 |      |  |   | 38,736 |   |  |   | 30,095  |  
|Weighted average common shares outstanding and dilutive common stock equivalents |  |                             | 39,680 |   |                           |   | 30,121 |      |  |   | 38,804 |   |  |   | 30,095  |  



See
notes to consolidated financial statements (unaudited).



5



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##### Table of Contents

MCG Capital Corporation

Consolidated Statements 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, 2002                    |  | 31,259       |   |                | $      | 313 |                    | $ | 419,961 |                                         |  | $ | (5,513                                       | ) |  | $                                        | (8,566  | ) |                           | $ | (1,824  | ) |  | $ | (43,121 | ) |  | $ | 361,250 |  
|Net income (loss)                            |  |              |   |                |        |     |                    |   |         |                                         |  |   |                                              |   |  |                                          |         |   |                           |   | 1,091   |   |  |   | 16,795  |   |  |   | 17,886  |  
|Dividends declared, $0.81 per share          |  |              |   |                |        |     |                    |   |         |                                         |  |   |                                              |   |  |                                          |         |   |                           |   | (24,191 | ) |  |   |         |   |  |   | (24,191 | )
|Dividend reinvestment                        |  |              |   |                |        |     |                    |   |         |                                         |  |   |                                              |   |  |                                          |         |   |                           |   |         |   |  |   |         |   |  |   |         |  
|Amortization of restricted stock awards      |  |              |   |                |        |     |                    |   |         |                                         |  |   |                                              |   |  |                                          | 1,906   |   |                           |   |         |   |  |   |         |   |  |   | 1,906   |  
|Reduction in employee loans                  |  | (7           | ) |                |        |     |                    |   | (120    | )                                       |  |   | 76                                           |   |  |                                          | 74      |   |                           |   |         |   |  |   |         |   |  |   | 30      |  
|                                             |  |              |   |                |        |     |                    |   |         |                                         |  |   |                                              |   |  |                                          |         |   |                           |   |         |   |  |   |         |   |  |   |         |  
|Balance June 30, 2003                        |  | 31,252       |   |                | $      | 313 |                    | $ | 419,841 |                                         |  | $ | (5,437                                       | ) |  | $                                        | (6,586  | ) |                           | $ | (24,924 | ) |  | $ | (26,326 | ) |  | $ | 356,881 |  
|                                             |  |              |   |                |        |     |                    |   |         |                                         |  |   |                                              |   |  |                                          |         |   |                           |   |         |   |  |   |         |   |  |   |         |  
|Balance December 31, 2003                    |  | 38,732       |   |                | $      | 387 |                    | $ | 529,168 |                                         |  | $ | (5,293                                       | ) |  | $                                        | (4,911  | ) |                           | $ | (26,240 | ) |  | $ | (29,161 | ) |  | $ | 463,950 |  
|Net income (loss)                            |  |              |   |                |        |     |                    |   |         |                                         |  |   |                                              |   |  |                                          |         |   |                           |   | 16,645  |   |  |   | 3,095   |   |  |   | 19,740  |  
|Issuance of common shares, net of costs      |  | 4,313        |   |                |        | 43  |                    |   | 61,187  |                                         |  |   |                                              |   |  |                                          |         |   |                           |   |         |   |  |   |         |   |  |   | 61,230  |  
|Dividends declared, $0.84 per share          |  |              |   |                |        |     |                    |   |         |                                         |  |   |                                              |   |  |                                          |         |   |                           |   | (31,388 | ) |  |   |         |   |  |   | (31,388 | )
|Dividend reinvestment                        |  | 2            |   |                |        |    |                    |   | 51      |                                         |  |   |                                              |   |  |                                          |         |   |                           |   |         |   |  |   |         |   |  |   | 51      |  
|Amortization of restricted stock awards      |  |              |   |                |        |     |                    |   |         |                                         |  |   |                                              |   |  |                                          | 6,531   |   |                           |   |         |   |  |   |         |   |  |   | 6,531   |  
|Change in vesting of restricted stock awards |  |              |   |                |        |     |                    |   | 11,570  |                                         |  |   |                                              |   |  |                                          | (11,570 | ) |                           |   |         |   |  |   |         |   |  |   |        |  
|Reduction in employee loans                  |  |              |   |                |        |     |                    |   |         |                                         |  |   | 154                                          |   |  |                                          |         |   |                           |   |         |   |  |   |         |   |  |   | 154     |  
|                                             |  |              |   |                |        |     |                    |   |         |                                         |  |   |                                              |   |  |                                          |         |   |                           |   |         |   |  |   |         |   |  |   |         |  
|Balance June 30, 2004                        |  | 43,047       |   |                | $      | 430 |                    | $ | 601,976 |                                         |  | $ | (5,139                                       | ) |  | $                                        | (9,950  | ) |                           | $ | (40,983 | ) |  | $ | (26,066 | ) |  | $ | 520,268 |  
|                                             |  |              |   |                |        |     |                    |   |         |                                         |  |   |                                              |   |  |                                          |         |   |                           |   |         |   |  |   |         |   |  |   |         |  



See
notes to consolidated financial statements (unaudited).



6



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##### Table of Contents

MCG Capital Corporation

Consolidated Statements of Cash Flows (unaudited)

(in thousands)



|                                                                                  |  |                           |          |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------- | -------- | - | ---- | - | ------- | -
|                                                                                  |  | Six Months Ended June 30, |         
|                                                                                  |  | 2004                      |          |   | 2003 |  
|Operating activities                                                              |  |                           |          |   |      |   |         |  
|Net income                                                                        |  | $                         | 19,740   |   |      | $ | 17,886  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |          |   |      |   |         |  
|Depreciation and amortization                                                     |  |                           | 482      |   |      |   | 277     |  
|Amortization of restricted stock awards                                           |  |                           | 6,531    |   |      |   | 1,906   |  
|Amortization of deferred debt issuance costs                                      |  |                           | 670      |   |      |   | 663     |  
|Net realized losses on investments                                                |  |                           | 5,670    |   |      |   | 21,539  |  
|Net change in unrealized depreciation (appreciation) on investments               |  |                           | (3,095   | ) |      |   | (16,795 | )
|(Increase) decrease in cashsecuritization accounts from interest collections     |  |                           | (237     | ) |      |   | 2,637   |  
|Decrease (increase) in interest receivable                                        |  |                           | 714      |   |      |   | (1,033  | )
|(Increase) decrease in accrued payment-in-kind interest and dividends             |  |                           | 1,694    |   |      |   | (8,337  | )
|Decrease in unearned income                                                       |  |                           | (3,999   | ) |      |   | (2,329  | )
|(Increase) decrease in other assets                                               |  |                           | (2,977   | ) |      |   | 812     |  
|Decrease in interest payable                                                      |  |                           | (317     | ) |      |   | (441    | )
|Increase (decrease) in other liabilities                                          |  |                           | 2,264    |   |      |   | (241    | )
|                                                                                  |  |                           |          |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                           | 27,140   |   |      |   | 16,544  |  
|                                                                                  |  |                           |          |   |      |   |         |  
|Investing activities                                                              |  |                           |          |   |      |   |         |  
|Originations, draws and advances on loans                                         |  |                           | (157,194 | ) |      |   | (12,971 | )
|Principal payments on loans                                                       |  |                           | 82,301   |   |      |   | 78,888  |  
|Purchase of equity investments                                                    |  |                           | (12,861  | ) |      |   | (4,415  | )
|Proceeds from sales of equity investments                                         |  |                           | 10,445   |   |      |   | 1,045   |  
|Purchase of premises, equipment and software                                      |  |                           | (437     | ) |      |   | (978    | )
|                                                                                  |  |                           |          |   |      |   |         |  
|Net cash provided by (used in) investing activities                               |  |                           | (77,746  | ) |      |   | 61,569  |  
|                                                                                  |  |                           |          |   |      |   |         |  
|Financing activities                                                              |  |                           |          |   |      |   |         |  
|Net increase (payments) on borrowings                                             |  |                           | 18,811   |   |      |   | (30,072 | )
|Decrease in cashsecuritization accounts for paydown of principal on debt         |  |                           | 2,371    |   |      |   | 22,945  |  
|Payment of financing costs                                                        |  |                           | (1,129   | ) |      |   |        |  
|Dividends paid                                                                    |  |                           | (32,535  | ) |      |   | (25,633 | )
|Issuance of common stock, net of costs                                            |  |                           | 61,281   |   |      |   |        |  
|Repayment of loans to employees                                                   |  |                           | 154      |   |      |   | 35      |  
|                                                                                  |  |                           |          |   |      |   |         |  
|Net cash provided by (used in) financing activities                               |  |                           | 48,953   |   |      |   | (32,725 | )
|                                                                                  |  |                           |          |   |      |   |         |  
|(Decrease) increase in cash and cash equivalents                                  |  |                           | (1,653   | ) |      |   | 45,388  |  
|Cash and cash equivalents at beginning of period                                  |  |                           | 60,072   |   |      |   | 9,389   |  
|                                                                                  |  |                           |          |   |      |   |         |  
|Cash and cash equivalents at end of period                                        |  | $                         | 58,419   |   |      | $ | 54,777  |  
|                                                                                  |  |                           |          |   |      |   |         |  



See
notes to consolidated financial statements (unaudited).



7



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

June 30, 2004



(dollars in thousands)



|                                                |  |                        |  |                                                 |      |                                                   |            |  |               |        |  |   |       
|----------------------------------------------- |  | ---------------------- |  | ----------------------------------------------- | ---- | ------------------------------------------------- | ---------- |  | ------------- | ------ |  | - | ------
|                                                |  | Industry               |  | Title of Securities Held by theCompany          |      | Percentage ofClass Held ona
FullyDiluted Basis(9) |            |  | June 30, 2004
|Portfolio Company                               |  |                        |  |                                                 | Cost |                                                   | Fair Value
|Non-affiliate investments (less than 5% owned): |  |                        |  |                                                 |      |                                                   |            |  |               |        | 
|21st Century Newspapers,                        |  | Newspaper              |  | Subordinated Debt                               |      |                                                   |            |  | $             | 22,947 |  | $ | 22,947
|Inc.                                            |  |                        |  | Common Stock                                    |      | 1.4                                               | %          |  |               | 696    |  |   | 3,137 
|The Adrenaline Group, Inc. (8)                  |  | Technology             |  | Common Stock                                    |      | 2.7                                               | %          |  |               |       |  |   | 2     
|Allens T.V. Cable Service, Inc.                |  | Cable                  |  | Senior Debt                                     |      |                                                   |            |  |               | 7,130  |  |   | 7,130 
|American Consolidated Media Inc. (1)            |  | Newspaper              |  | Senior Debt                                     |      |                                                   |            |  |               | 18,950 |  |   | 18,950
|Auto Europe, LLC                                |  | Equipment Leasing      |  | Senior Debt                                     |      |                                                   |            |  |               | 8,047  |  |   | 8,047 
|Badoud Enterprises, Inc. (1)                    |  | Newspaper              |  | Senior Debt                                     |      |                                                   |            |  |               | 6,294  |  |   | 6,294 
|Boucher Communications,                         |  | Publishing             |  | Senior Debt                                     |      |                                                   |            |  |               | 1,100  |  |   | 1,100 
|Inc. (1)                                        |  |                        |  | Stock Appreciation Rights                       |      |                                                   |            |  |               |       |  |   | 360   
|Builders FirstSource, Inc.                      |  | Building & Development |  | Senior Debt                                     |      |                                                   |            |  |               | 4,988  |  |   | 5,025 
|Cambridge Information Group, Inc. (1)           |  | Information Services   |  | Senior Debt                                     |      |                                                   |            |  |               | 14,525 |  |   | 14,525
|CCG Consulting, LLC                             |  | Business Services      |  | Senior Debt                                     |      |                                                   |            |  |               | 1,441  |  |   | 1,441 
|                                                |  |                        |  | Warrants to purchase membership interest in LLC |      | 19.9                                              | %          |  |               |       |  |   |      
|Communications & Power Industries, Inc.         |  | Aerospace & Defense    |  | Senior Debt                                     |      |                                                   |            |  |               | 1,995  |  |   | 2,029 
|Community Media Group, Inc. (1)                 |  | Newspaper              |  | Senior Debt                                     |      |                                                   |            |  |               | 9,691  |  |   | 9,691 
|Creative Loafing, Inc. (1)                      |  | Newspaper              |  | Senior Debt                                     |      |                                                   |            |  |               | 19,900 |  |   | 19,900
|Crescent Publishing Company LLC (1)             |  | Newspaper              |  | Senior Debt                                     |      |                                                   |            |  |               | 10,624 |  |   | 10,624
|Cruz Bay Publishing,                            |  | Publishing             |  | Senior Debt                                     |      |                                                   |            |  |               | 6,298  |  |   | 6,298 
|Inc. (1)                                        |  |                        |  | Subordinated Debt                               |      |                                                   |            |  |               | 10,054 |  |   | 10,054
|dick clark productions,                         |  | Broadcasting           |  | Subordinated Debt                               |      |                                                   |            |  |               | 17,143 |  |   | 17,143
|inc.                                            |  |                        |  | Warrants to purchase Common Stock               |      | 5.6                                               | %          |  |               | 858    |  |   | 855   
|                                                |  |                        |  | Common Stock                                    |      | 0.4                                               | %          |  |               | 150    |  |   | 66    



See
notes to consolidated financial statements (unaudited).



8



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)(Continued)

June 30, 2004



(dollars in thousands)



|                             |  |                      |  |                                                 |      |                                                   |            |  |               |        |  |   |       
|---------------------------- |  | -------------------- |  | ----------------------------------------------- | ---- | ------------------------------------------------- | ---------- |  | ------------- | ------ |  | - | ------
|                             |  | Industry             |  | Title of Securities Held by theCompany          |      | Percentage ofClass Held ona
FullyDiluted Basis(9) |            |  | June 30, 2004
|Portfolio Company            |  |                      |  |                                                 | Cost |                                                   | Fair Value
|Dowden Health Media, Inc.    |  | Publishing           |  | Senior Debt                                     |      |                                                   |            |  | $             | 500    |  | $ | 500   
|The e-Media Club, LLC (8)    |  | Investment Fund      |  | LLC Interest                                    |      | 0.8                                               | %          |  |               | 88     |  |   | 27    
|FTI Technologies             |  | Technology           |  | Senior Debt                                     |      |                                                   |            |  |               | 19,592 |  |   | 18,000
|Holdings, Inc. (1)           |  |                      |  | Warrants to purchase Common Stock               |      | 4.2                                               | %          |  |               |       |  |   |      
|GCA Services Group, Inc.     |  | Commercial Services  |  | Subordinated Debt                               |      |                                                   |            |  |               | 10,000 |  |   | 10,000
|Graycom, LLC (8)             |  | Telecommunications   |  | Warrants to purchase membership interest in LLC |      | 27.8                                              | %          |  |               | 71     |  |   | 85    
|The Hillman Group, Inc.      |  | Industrial Equipment |  | Senior Debt                                     |      |                                                   |            |  |               | 5,985  |  |   | 6,060 
|Home Interiors & Gifts, Inc. |  | Home Furnishings     |  | Senior Debt                                     |      |                                                   |            |  |               | 4,961  |  |   | 4,821 
|Hometown Telephone, LLC (8)  |  | Telecommunications   |  | Warrants to purchase membership interest in LLC |      | 27.8                                              | %          |  |               |       |  |   |      
|I-55 Internet Services, Inc. |  | Telecommunications   |  | Senior Debt                                     |      |                                                   |            |  |               | 2,313  |  |   | 2,313 
|                             |  |                      |  | Warrants to purchase Common Stock               |      | 20.0                                              | %          |  |               | 366    |  |   | 378   
|IDS Telcom LLC               |  | Telecommunications   |  | Senior Debt                                     |      |                                                   |            |  |               | 18,823 |  |   | 18,823
|                             |  |                      |  | Warrants to purchase membership interest in LLC |      | 27.8                                              | %          |  |               | 2,693  |  |   | 3,087 
|Images.com, Inc.             |  | Information Services |  | Senior Debt                                     |      |                                                   |            |  |               | 3,197  |  |   | 3,197 
|Information Today, Inc. (1)  |  | Information Services |  | Senior Debt                                     |      |                                                   |            |  |               | 8,792  |  |   | 8,792 
|Jeffrey A. Stern (8)         |  | Other                |  | Senior Debt                                     |      |                                                   |            |  |               | 45     |  |   | 45    
|Jenzabar, Inc. (1)           |  | Technology           |  | Senior Debt                                     |      |                                                   |            |  |               | 20,000 |  |   | 20,000
|                             |  |                      |  | Subordinated Debt                               |      |                                                   |            |  |               | 10,000 |  |   | 10,000
|                             |  |                      |  | Senior Preferred Stock                          |      | 100.0                                             | %          |  |               | 5,000  |  |   | 5,000 
|                             |  |                      |  | Subordinated Preferred Stock                    |      | 100.0                                             | %          |  |               | 1,098  |  |   | 1,098 
|                             |  |                      |  | Warrants to purchase Common Stock               |      | 18.0                                              | %          |  |               | 422    |  |   | 422   





See notes to consolidated financial statements (unaudited).



9



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)(Continued)

June 30, 2004



(dollars in thousands)



|                                            |  |                     |  |                                        |      |                                                   |            |  |               |        |  |   |       
|------------------------------------------- |  | ------------------- |  | -------------------------------------- | ---- | ------------------------------------------------- | ---------- |  | ------------- | ------ |  | - | ------
|                                            |  | Industry            |  | Title of Securities Held by theCompany |      | Percentage ofClass Held ona
FullyDiluted Basis(9) |            |  | June 30, 2004
|Portfolio Company                           |  |                     |  |                                        | Cost |                                                   | Fair Value
|The Joseph F. Biddle Publishing Company (1) |  | Newspaper           |  | Senior Debt                            |      |                                                   |            |  | $             | 9,505  |  | $ | 9,505 
|Joseph C. Millstone                         |  | Telecommunications  |  | Senior Debt                            |      |                                                   |            |  |               | 500    |  |   | 500   
|Knowledge Learning Corporation              |  | Healthcare          |  | Senior Debt                            |      |                                                   |            |  |               | 7,340  |  |   | 7,381 
|The Korea Times Los Angeles, Inc.           |  | Newspaper           |  | Senior Debt                            |      |                                                   |            |  |               | 10,322 |  |   | 10,322
|LaGrange Acquisition, L.P.                  |  | Oil and Gas         |  | Senior Debt                            |      |                                                   |            |  |               | 3,000  |  |   | 3,017 
|Maidenform, Inc.                            |  | Clothing/Textiles   |  | Senior Debt                            |      |                                                   |            |  |               | 5,000  |  |   | 5,062 
|                                            |  |                     |  | Subordinated Debt                      |      |                                                   |            |  |               | 1,000  |  |   | 1,004 
|Majesco Holdings Inc. (8) (18)              |  | Leisure Goods       |  | Common Stock                           |      | 0.1                                               | %          |  |               | 57     |  |   | 57    
|Manhattan                                   |  | Telecommunications  |  | Senior Debt                            |      |                                                   |            |  |               | 13,925 |  |   | 13,925
|Telecommunications                          |  |                     |  | Subordinated Debt                      |      |                                                   |            |  |               | 12,328 |  |   | 12,328
|Corporation (1)                             |  |                     |  | Preferred Stock                        |      | 100.0                                             | %          |  |               | 1,909  |  |   | 1,962 
|                                            |  |                     |  | Warrants to purchase Common Stock      |      | 28.0                                              | %          |  |               | 2,805  |  |   | 4,162 
|McGinnis-Johnson Consulting, LLC (1)        |  | Newspaper           |  | Unsecured Note                         |      |                                                   |            |  |               | 1,000  |  |   | 1,000 
|MedAssets, Inc.                             |  | Healthcare          |  | Senior Debt                            |      |                                                   |            |  |               | 4,822  |  |   | 4,845 
|                                            |  |                     |  | Subordinated Debt                      |      |                                                   |            |  |               | 2,500  |  |   | 2,525 
|The Meow Mix Company                        |  | Food Products       |  | Senior Debt                            |      |                                                   |            |  |               | 3,784  |  |   | 3,775 
|Midwest Towers Partners, LLC (1)            |  | Telecommunications  |  | Senior Debt                            |      |                                                   |            |  |               | 17,009 |  |   | 17,009
|Miles Media Group,                          |  | Publishing          |  | Senior Debt                            |      |                                                   |            |  |               | 7,954  |  |   | 7,954 
|Inc. (1)                                    |  |                     |  | Warrants to purchase Common Stock      |      | 12.3                                              | %          |  |               | 20     |  |   | 35    
|Minnesota Publishers, Inc. (1)              |  | Newspaper           |  | Senior Debt                            |      |                                                   |            |  |               | 14,250 |  |   | 14,250
|MultiPlan, Inc.                             |  | Insurance           |  | Senior Debt                            |      |                                                   |            |  |               | 4,988  |  |   | 5,037 
|NALCO Company                               |  | Ecological Services |  | Senior Debt                            |      |                                                   |            |  |               | 4,566  |  |   | 4,635 
|New Century                                 |  | Industrial          |  | Common Stock                           |      | 2.3                                               | %          |  |               | 157    |  |   | 48    
|Companies, Inc. (8)                         |  | Equipment           |  | Warrants to purchase Common Stock      |      | 0.4                                               | %          |  |               |       |  |   |      



See
notes to consolidated financial statements (unaudited).



10



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)(Continued)

June 30, 2004



(dollars in thousands)



|                                    |  |                       |  |                                                 |      |                                                   |            |  |               |        |  |   |       
|----------------------------------- |  | --------------------- |  | ----------------------------------------------- | ---- | ------------------------------------------------- | ---------- |  | ------------- | ------ |  | - | ------
|                                    |  | Industry              |  | Title of Securities Held by theCompany          |      | Percentage ofClass Held ona
FullyDiluted Basis(9) |            |  | June 30, 2004
|Portfolio Company                   |  |                       |  |                                                 | Cost |                                                   | Fair Value
|New Vision Broadcasting, LLC (1)    |  | Broadcasting          |  | Senior Debt                                     |      |                                                   |            |  | $             | 16,033 |  | $ | 16,033
|New Wave Communications, LLC (1)    |  | Cable                 |  | Senior Debt                                     |      |                                                   |            |  |               | 10,848 |  |   | 10,848
|nii communications,                 |  | Telecommunications    |  | Senior Debt                                     |      |                                                   |            |  |               | 7,541  |  |   | 7,541 
|inc. (1)                            |  |                       |  | Common Stock                                    |      | 3.0                                               | %          |  |               | 400    |  |   | 170   
|                                    |  |                       |  | Warrants to purchase Common Stock               |      | 38.6                                              | %          |  |               | 1,218  |  |   | 1,870 
|Polypore, Inc.                      |  | Industrial Equipment  |  | Senior Debt                                     |      |                                                   |            |  |               | 500    |  |   | 505   
|Powercom                            |  | Telecommunications    |  | Senior Debt                                     |      |                                                   |            |  |               | 2,113  |  |   | 2,113 
|Corporation (1)                     |  |                       |  | Warrants to purchase Class A Common Stock       |      | 20.0                                              | %          |  |               | 278    |  |   | 134   
|R.R. Bowker LLC (1)                 |  | Information Services  |  | Senior Debt                                     |      |                                                   |            |  |               | 13,700 |  |   | 13,700
|Robert N. Snyder                    |  | Information Services  |  | Senior Debt                                     |      |                                                   |            |  |               | 1,300  |  |   | 1,300 
|Sheridan Healthcare, Inc.           |  | Healthcare            |  | Senior Debt                                     |      |                                                   |            |  |               | 2,963  |  |   | 3,000 
|Solo Cup Company                    |  | Containers & Glass    |  | Senior Debt                                     |      |                                                   |            |  |               | 3,491  |  |   | 3,533 
|Sterigenics International, Inc.     |  | Healthcare            |  | Senior Debt                                     |      |                                                   |            |  |               | 4,000  |  |   | 4,050 
|Stonebridge Press, Inc. (1)         |  | Newspaper             |  | Senior Debt                                     |      |                                                   |            |  |               | 5,203  |  |   | 5,203 
|SXC Health Solutions, Inc. (1) (16) |  | Technology            |  | Senior Debt                                     |      |                                                   |            |  |               | 7,600  |  |   | 7,600 
|Talk America Holdings,              |  | Telecommunications    |  | Common Stock                                    |      | 0.8                                               | %          |  |               | 499    |  |   | 1,617 
|Inc. (8)                            |  |                       |  | Warrants to purchase Common Stock               |      | 0.7                                               | %          |  |               | 25     |  |   | 273   
|TGI Group, LLC (8)                  |  | Information Services  |  | Warrants to purchase membership interest in LLC |      | 5.0                                               | %          |  |               | 126    |  |   | 5     
|United Industries Corporation       |  | Farming & Agriculture |  | Senior Debt                                     |      |                                                   |            |  |               | 1,496  |  |   | 1,519 
|U. S. I. Holdings Corporation       |  | Insurance             |  | Senior Debt                                     |      |                                                   |            |  |               | 1,000  |  |   | 1,010 
|VS&A-PBI Holding LLC (8)            |  | Publishing            |  | LLC Interest                                    |      | 0.8                                               | %          |  |               | 500    |  |   |      





See notes to consolidated financial statements (unaudited).



11



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)(Continued)

June 30, 2004



(dollars in thousands)



|                                        |  |                    |  |                                                 |      |                                                   |            |  |               |         |  |   |        
|--------------------------------------- |  | ------------------ |  | ----------------------------------------------- | ---- | ------------------------------------------------- | ---------- |  | ------------- | ------- |  | - | -------
|                                        |  | Industry           |  | Title of Securities Held by theCompany          |      | Percentage ofClass Held ona
FullyDiluted Basis(9) |            |  | June 30, 2004
|Portfolio Company                       |  |                    |  |                                                 | Cost |                                                   | Fair Value
|Waddington North America, Inc.          |  | Containers & Glass |  | Senior Debt                                     |      |                                                   |            |  | $             | 4,950   |  | $ | 4,938  
|Wicks Business Information, LLC         |  | Publishing         |  | Unsecured Note                                  |      |                                                   |            |  |               | 200     |  |   | 200    
|Wiesner Publishing                      |  | Publishing         |  | Senior Debt                                     |      |                                                   |            |  |               | 5,314   |  |   | 5,314  
|Company,                                |  |                    |  | Subordinated Debt                               |      |                                                   |            |  |               | 5,561   |  |   | 5,561  
|LLC (1)                                 |  |                    |  | Warrants to purchase membership interest in LLC |      | 15.0                                              | %          |  |               | 406     |  |   | 385    
|WirelessLines II, Inc.                  |  | Telecommunications |  | Senior Debt                                     |      |                                                   |            |  |               | 380     |  |   | 380    
|Witter Publishing Co.,                  |  | Publishing         |  | Senior Debt                                     |      |                                                   |            |  |               | 2,537   |  |   | 2,537  
|Inc.                                    |  |                    |  | Warrants to purchase Common Stock               |      | 20.0                                              | %          |  |               | 146     |  |   | 160    
|Wyoming Newspapers, Inc. (1)            |  | Newspapers         |  | Senior Debt                                     |      |                                                   |            |  |               | 15,000  |  |   | 15,000 
|Total Non-affiliate investments         |  |                    |  |                                                 |      |                                                   |            |  |               | 520,846 |  |   | 525,103
|                                        |  |                    |  |                                                 |      |                                                   |            |  |               |         |  |   |        
|Affiliate investments (12):             |  |                    |  |                                                 |      |                                                   |            |  |               |         |  |   |        
|All Island Media, Inc.                  |  | Newspaper          |  | Senior Debt                                     |      |                                                   |            |  |               | 7,200   |  |   | 7,200  
|                                        |  |                    |  | Common Stock                                    |      | 8.9                                               | %          |  |               | 500     |  |   | 500    
|Country Media, Inc.                     |  | Newspaper          |  | Senior Debt                                     |      |                                                   |            |  |               | 7,076   |  |   | 7,076  
|                                        |  |                    |  | Common Stock                                    |      | 6.3                                               | %          |  |               | 100     |  |   | 147    
|Executive Enterprise Institute, LLC (8) |  | Business Services  |  | LLC Interest                                    |      | 10.0                                              | %          |  |               | 301     |  |   |       



See
notes to consolidated financial statements (unaudited).



12



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)(Continued)

June 30, 2004



(dollars in thousands)



|                                              |  |                      |  |                                           |      |                                                   |            |        |               |        |        |   |       
|--------------------------------------------- |  | -------------------- |  | ----------------------------------------- | ---- | ------------------------------------------------- | ---------- | ------ | ------------- | ------ | ------ | - | ------
|                                              |  | Industry             |  | Title of Securities Held by theCompany    |      | Percentage ofClass Held ona
FullyDiluted Basis(9) |            |        | June 30, 2004
|Portfolio Company                             |  |                      |  |                                           | Cost |                                                   | Fair Value
|Netplexus                                     |  | Technology           |  | Senior Debt                               |      |                                                   |            |        | $             | 1,811  |        | $ | 90    
|Corporation (1) (8)                           |  |                      |  | Preferred Stock                           |      | 51.0                                              | %          |        |               | 766    |        |   |      
|                                              |  |                      |  | Warrants to purchase Class A Common Stock |      | 4.8                                               | %          |        |               |       |        |   |      
|Sunshine Media                                |  | Publishing           |  | Senior Debt                               |      |                                                   |            |        |               | 12,933 |        |   | 9,302 
|Delaware, LLC (1)                             |  |                      |  | Class A LLC Interest                      |      | 12.8                                              | %          |        |               | 564    |        |   |      
|                                              |  |                      |  | Warrants to purchase Class B LLC interest |      | 100.0                                             | %          |        |               |       |        |   |      
|ViewTrust Technology (8)                      |  | Technology           |  | Common Stock                              |      | 7.5                                               | %          |        |               | 1      |        |   | 3     
|Total Affiliate investments                   |  |                      |  |                                           |      |                                                   |            |        |               | 31,252 |        |   | 24,318
|Control investments: Non-majority-owned (11): |  |                      |  |                                           |      |                                                   |            |        |               |        |       
|Creatas, L.L.C. (1)                           |  | Information Services |  | Senior Debt                               |      |                                                   |            |        |               | 18,078 |        |   | 18,078
|                                              |  |                      |  | Investor Class LLC Interest               |      | 100.0                                             | %          |        |               | 1,273  |        |   | 10,036
|                                              |  |                      |  | Guaranty ($501)                           |      |                                                   |            |        |               |        |        |   |       
|ETC Group, LLC (13)                           |  | Publishing           |  | Senior Debt                               |      |                                                   |            |        |               | 1,200  |        |   | 1,184 
|                                              |  |                      |  | Series A LLC Interest                     |      | 100.0                                             | %          |        |               | 650    |        |   |      
|                                              |  |                      |  | Series C LLC Interest                     |      | 100.0                                             | %          |        |               | 100    |        |   |      
|Fawcette Technical                            |  | Publishing           |  | Senior Debt                               |      |                                                   |            |        |               | 12,336 |        |   | 12,336
|Publications Holding (1)                      |  |                      |  | Subordinated Debt                         |      |                                                   |            |        |               | 3,940  |        |   | 3,940 
|                                              |  |                      |  | Series A Preferred Stock                  |      | 100.0                                             | %          |        |               | 2,569  |        |   | 1,777 
|                                              |  |                      |  | Common Stock                              |      | 36.0                                              | %          |        |               |       |        |   |      
|National Systems                              |  | Security Alarm       |  | Senior Debt                               |      |                                                   |            |        |               | 910    |        |   |      
|Integration, Inc. (3) (4) (7) (8)             |  |                      |  | Class B-2 Preferred Stock                 |      | 100.0                                             | %          |        |               | 4,409  |        |   |      
|                                              |  |                      |  | Common Stock                              |      | 46.0                                              | %          |        |               |       |        |   |      
|Platinum Wireless, Inc.                       |  | Telecommunications   |  | Senior Debt                               |      |                                                   |            |        |               | 875    |        |   | 875   
|                                              |  |                      |  | Common Stock                              |      | 37.0                                              | %          |        |               | 4,640  |        |   | 4,392 
|                                              |  |                      |  | Option to purchase Common Stock           |      | 1.5                                               | %          |        |               | 272    |        |   | 93    
|Total Control investments: Non-majority-owned |  |                      |  |                                           |      |                                                   |            | 51,252 |               |        | 52,711



See
notes to consolidated financial statements (unaudited).



13



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)(Continued)

June 30, 2004



(dollars in thousands)



|                                          |  |                    |  |                                           |      |                                                   |            |  |               |        |  |   |       
|----------------------------------------- |  | ------------------ |  | ----------------------------------------- | ---- | ------------------------------------------------- | ---------- |  | ------------- | ------ |  | - | ------
|                                          |  | Industry           |  | Title of Securities Held by theCompany    |      | Percentage ofClass Held ona
FullyDiluted Basis(9) |            |  | June 30, 2004
|Portfolio Company                         |  |                    |  |                                           | Cost |                                                   | Fair Value
|Control investments: Majority-owned (10): |  |                    |  |                                           |      |                                                   |            |  |               |        | 
|Bridgecom Holdings,                       |  | Telecommunications |  | Senior Debt                               |      |                                                   |            |  | $             | 23,634 |  | $ | 23,634
|Inc. (1) (14)                             |  |                    |  | Preferred Stock                           |      | 100.0                                             | %          |  |               | 38,608 |  |   | 38,608
|                                          |  |                    |  | Common Stock                              |      | 100.0                                             | %          |  |               |       |  |   | 1,433 
|ClearTel                                  |  | Telecommunications |  | Senior Debt                               |      |                                                   |            |  |               | 22,320 |  |   | 22,320
|Communications,                           |  |                    |  | Subordinated Debt                         |      |                                                   |            |  |               | 1,588  |  |   | 1,588 
|Inc. (1) (17)                             |  |                    |  | Preferred Stock                           |      | 100.0                                             | %          |  |               | 9,196  |  |   | 4,332 
|                                          |  |                    |  | Common Stock                              |      | 100.0                                             | %          |  |               | 540    |  |   |      
|                                          |  |                    |  | Guaranty ($275)                           |      |                                                   |            |  |               |        |  |   |       
|Copperstate                               |  | Security Alarm     |  | Senior Debt                               |      |                                                   |            |  |               | 985    |  |   | 985   
|Technologies, Inc. (3)                    |  |                    |  | Class A Common Stock                      |      | 93.0                                              | %          |  |               | 2,000  |  |   | 1,212 
|                                          |  |                    |  | Warrants to purchase Class B Common Stock |      | 97.3                                              | %          |  |               |       |  |   |      
|                                          |  |                    |  | Guaranty ($1,000)                         |      |                                                   |            |  |               |        |  |   |       
|Corporate Legal Times                     |  | Publishing         |  | Senior Debt                               |      |                                                   |            |  |               | 4,626  |  |   | 4,414 
|L.L.C.                                    |  |                    |  | Subordinated Debt                         |      |                                                   |            |  |               | 1,338  |  |   |      
|                                          |  |                    |  | LLC Interest                              |      | 90.6                                              | %          |  |               | 313    |  |   |      
|Crystal Media Network,                    |  | Broadcasting       |  | Senior Debt                               |      |                                                   |            |  |               | 699    |  |   | 699   
|LLC (5)                                   |  |                    |  | LLC Interest                              |      | 100.0                                             | %          |  |               | 6,132  |  |   | 4,802 
|Interactive Business                      |  | Security Alarm     |  | Senior Debt                               |      |                                                   |            |  |               | 75     |  |   | 75    
|Solutions, Inc. (4)                       |  |                    |  | Common Stock                              |      | 100.0                                             | %          |  |               | 2,750  |  |   | 724   
|Superior Publishing                       |  | Newspaper          |  | Senior Debt                               |      |                                                   |            |  |               | 20,759 |  |   | 20,759
|Corporation. (1) (15)                     |  |                    |  | Subordinated Debt                         |      |                                                   |            |  |               | 20,405 |  |   | 20,405
|                                          |  |                    |  | Preferred Stock                           |      | 100.0                                             | %          |  |               | 7,999  |  |   | 8,484 
|                                          |  |                    |  | Common Stock                              |      | 100.0                                             | %          |  |               | 365    |  |   | 654   
|Telecomm South,                           |  | Telecommunications |  | Senior Debt                               |      |                                                   |            |  |               | 3,071  |  |   | 1,142 
|LLC (2) (8)                               |  |                    |  | LLC Interest                              |      | 100.0                                             | %          |  |               | 11     |  |   |      
|UMAC, Inc. (8)                            |  | Publishing         |  | Common Stock                              |      | 100.0                                             | %          |  |               | 10,202 |  |   | 234   



See
notes to consolidated financial statements (unaudited).



14



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)(Continued)

June 30, 2004



(dollars in thousands)



|                                          |  |            |  |                                        |      |                                                   |   |            |               |        |   |         |   |       | 
|----------------------------------------- |  | ---------- |  | -------------------------------------- | ---- | ------------------------------------------------- | - | ---------- | ------------- | ------ | - | ------- | - | ----- | 
|                                          |  | Industry   |  | Title of Securities Held by theCompany |      | Percentage ofClass Held ona
FullyDiluted Basis(9) |   |            | June 30, 2004 |       
|Portfolio Company                         |  |            |  |                                        | Cost |                                                   |   | Fair Value |              
|Working Mother Media,                     |  | Publishing |  | Senior Debt                            |      |                                                   |   |            | $             | 7,526  |   |         | $ | 7,526 | 
|Inc. (8)                                  |  |            |  | Class A Preferred Stock                |      | 99.1                                              | % |            |               | 11,097 |   |         |   | 7,364 | 
|                                          |  |            |  | Class B Preferred Stock                |      | 100.0                                             | % |            |               | 1      |   |         |   |      | 
|                                          |  |            |  | Class C Preferred Stock                |      | 100.0                                             | % |            |               | 1      |   |         |   |      | 
|                                          |  |            |  | Common Stock                           |      | 51.0                                              | % |            |               | 1      |   |         |   |      | 
|                                          |  |            |  | Guaranty ($1,371)                      |      |                                                   |   |            |               |        |   |         |   |       | 
|Total Control investments: Majority-owned |  |            |  |                                        |      |                                                   |   | 196,242    |               |        |   | 171,394 |  
|Total Investments                         |  |            |  |                                        |      |                                                   |   | 799,592    |               |        |   | 773,526 |  
|Unearned income                           |  |            |  |                                        |      |                                                   |   | (14,578    | )             |        |   | (14,578 | )
|                                          |  |            |  |                                        |      |                                                   |   |            |               |        |   |         |   |       | 
|Total Investments net of unearned income  |  |            |  |                                        |      |                                                   | $ | 785,014    |               |        | $ | 758,948 |  
|                                          |  |            |  |                                        |      |                                                   |   |            |               |        |   |         |   |       | 



See
notes to consolidated financial statements (unaudited).



15



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

December 31, 2003



(dollars in thousands)



|                                                |  |                      |  |                                                 |      |                                                     |            |                   |        |  |   |       
|----------------------------------------------- |  | -------------------- |  | ----------------------------------------------- | ---- | --------------------------------------------------- | ---------- | ----------------- | ------ |  | - | ------
|                                                |  | Industry             |  | Title of Securities Held bythe Company          |      | Percentage ofClass Held on
a FullyDiluted Basis (9) |            | December 31, 2003
|Portfolio Company                               |  |                      |  |                                                 | Cost |                                                     | Fair Value
|Non-affiliate investments (less than 5% owned): |  |                      |  |                                                 |      |                                                     |            |                  
|21st Century                                    |  | Newspaper            |  | Subordinated Debt                               |      |                                                     |            | $                 | 22,266 |  | $ | 22,266
|Newspapers, Inc.                                |  |                      |  | Common Stock                                    |      | 1.0%                                                |            |                   | 453    |  |   | 667   
|aaiPharma Inc.                                  |  | Drugs                |  | Senior Debt                                     |      |                                                     |            |                   | 4,875  |  |   | 4,875 
|The Adrenaline Group, Inc. (8)                  |  | Technology           |  | Common Stock                                    |      | 2.7%                                                |            |                   |       |  |   | 4     
|American Consolidated Media Inc. (1)            |  | Newspaper            |  | Senior Debt                                     |      |                                                     |            |                   | 19,300 |  |   | 19,300
|Auto Europe, LLC                                |  | Equipment Leasing    |  | Senior Debt                                     |      |                                                     |            |                   | 10,000 |  |   | 10,000
|Badoud Enterprises, Inc. (1)                    |  | Newspaper            |  | Senior Debt                                     |      |                                                     |            |                   | 7,675  |  |   | 7,675 
|Barcom Electronic Inc.                          |  | Security Alarm       |  | Senior Debt                                     |      |                                                     |            |                   | 3,393  |  |   | 3,393 
|Boucher                                         |  | Publishing           |  | Senior Debt                                     |      |                                                     |            |                   | 1,400  |  |   | 1,400 
|Communications, Inc. (1)                        |  |                      |  | Stock Appreciation Rights                       |      |                                                     |            |                   |       |  |   | 340   
|Bridgecom Holdings,                             |  | Telecommunications   |  | Senior Debt                                     |      |                                                     |            |                   | 22,114 |  |   | 22,114
|Inc. (1) (14)                                   |  |                      |  | Warrants to purchase Common Stock               |      | 13.0%                                               |            |                   | 2,122  |  |   | 4,364 
|Brookings Newspapers, L.L.C. (1)                |  | Newspaper            |  | Senior Debt                                     |      |                                                     |            |                   | 2,700  |  |   | 2,700 
|Cambridge Information Group, Inc. (1)           |  | Information Services |  | Senior Debt                                     |      |                                                     |            |                   | 15,450 |  |   | 15,450
|CCG Consulting, LLC                             |  | Business Services    |  | Senior Debt                                     |      |                                                     |            |                   | 1,451  |  |   | 1,451 
|                                                |  |                      |  | Warrants to purchase membership interest in LLC |      | 21.5%                                               |            |                   |       |  |   |      
|Community Media Group, Inc. (1)                 |  | Newspaper            |  | Senior Debt                                     |      |                                                     |            |                   | 10,345 |  |   | 10,345
|Connective Corp. (8) (18)                       |  | Leisure Goods        |  | Common Stock                                    |      | 0.2%                                                |            |                   | 57     |  |   | 25    
|Creative Loafing, Inc. (1)                      |  | Newspaper            |  | Senior Debt                                     |      |                                                     |            |                   | 14,050 |  |   | 14,050
|Crescent Publishing Company LLC (1)             |  | Newspaper            |  | Senior Debt                                     |      |                                                     |            |                   | 14,304 |  |   | 14,304



See
notes to consolidated financial statements (unaudited).



16



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)(Continued)

December 31, 2003



(dollars in thousands)



|                            |  |                      |  |                                                 |      |                                                     |            |                   |        |  |   |       
|--------------------------- |  | -------------------- |  | ----------------------------------------------- | ---- | --------------------------------------------------- | ---------- | ----------------- | ------ |  | - | ------
|                            |  | Industry             |  | Title of Securities Held bythe Company          |      | Percentage ofClass Held on
a FullyDiluted Basis (9) |            | December 31, 2003
|Portfolio Company           |  |                      |  |                                                 | Cost |                                                     | Fair Value
|Cruz Bay Publishing,        |  | Publishing           |  | Senior Debt                                     |      |                                                     |            | $                 | 6,200  |  | $ | 6,200 
|Inc. (1)                    |  |                      |  | Subordinated Debt                               |      |                                                     |            |                   | 4,035  |  |   | 4,035 
|Dakota Imaging, Inc.        |  | Technology           |  | Senior Debt                                     |      |                                                     |            |                   | 7,062  |  |   | 7,062 
|                            |  |                      |  | Warrants to purchase Common Stock               |      | 9.4%                                                |            |                   | 1,586  |  |   | 1,671 
|dick clark productions,     |  | Broadcasting         |  | Subordinated Debt                               |      |                                                     |            |                   | 16,479 |  |   | 16,479
|inc.                        |  |                      |  | Warrants to purchase Common Stock               |      | 5.6%                                                |            |                   | 858    |  |   | 639   
|                            |  |                      |  | Common Stock                                    |      | 0.4%                                                |            |                   | 150    |  |   | 49    
|Dowden Health Media, Inc.   |  | Publishing           |  | Senior Debt                                     |      |                                                     |            |                   | 700    |  |   | 700   
|The e-Media Club, LLC (8)   |  | Investment Fund      |  | LLC Interest                                    |      | 0.8%                                                |            |                   | 88     |  |   | 27    
|FTI Technologies            |  | Technology           |  | Senior Debt                                     |      |                                                     |            |                   | 22,450 |  |   | 22,450
|Holdings, Inc. (1)          |  |                      |  | Warrants to purchase Common Stock               |      | 4.2%                                                |            |                   |       |  |   |      
|Graycom, LLC (8)            |  | Telecommunications   |  | Warrants to purchase membership interest in LLC |      | 27.8%                                               |            |                   | 71     |  |   | 74    
|Hometown Telephone, LLC (8) |  | Telecommunications   |  | Warrants to purchase membership interest in LLC |      | 27.8%                                               |            |                   |       |  |   |      
|I-55 Internet Services,     |  | Telecommunications   |  | Senior Debt                                     |      |                                                     |            |                   | 2,301  |  |   | 2,301 
|Inc.                        |  |                      |  | Warrants to purchase Common Stock               |      | 7.5%                                                |            |                   | 103    |  |   | 156   
|IDS Telcom LLC              |  | Telecommunications   |  | Senior Debt                                     |      |                                                     |            |                   | 18,823 |  |   | 18,823
|                            |  |                      |  | Warrants to purchase membership interest in LLC |      | 27.8%                                               |            |                   | 2,693  |  |   | 3,101 
|Images.com, Inc.            |  | Information Services |  | Senior Debt                                     |      |                                                     |            |                   | 3,188  |  |   | 1,722 
|Information Today, Inc. (1) |  | Information Services |  | Senior Debt                                     |      |                                                     |            |                   | 9,192  |  |   | 9,192 
|Jeffrey A. Stern (8)        |  | Other                |  | Senior Debt                                     |      |                                                     |            |                   | 50     |  |   | 50    



See
notes to consolidated financial statements (unaudited).



17



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)(Continued)

December 31, 2003



(dollars in thousands)



|                                            |  |                    |  |                                        |      |                                                     |            |  |                   |        |  |   |       
|------------------------------------------- |  | ------------------ |  | -------------------------------------- | ---- | --------------------------------------------------- | ---------- |  | ----------------- | ------ |  | - | ------
|                                            |  | Industry           |  | Title of Securities Held bythe Company |      | Percentage ofClass Held on
a FullyDiluted Basis (9) |            |  | December 31, 2003
|Portfolio Company                           |  |                    |  |                                        | Cost |                                                     | Fair Value
|The Joseph F. Biddle Publishing Company (1) |  | Newspaper          |  | Senior Debt                            |      |                                                     |            |  | $                 | 10,305 |  | $ | 10,305
|Joseph C. Millstone                         |  | Telecommunications |  | Senior Debt                            |      |                                                     |            |  |                   | 500    |  |   | 500   
|The Korea Times Los Angeles, Inc.           |  | Newspaper          |  | Senior Debt                            |      |                                                     |            |  |                   | 10,602 |  |   | 10,602
|Manhattan                                   |  | Telecommunications |  | Senior Debt                            |      |                                                     |            |  |                   | 13,925 |  |   | 13,925
|Telecommunications                          |  |                    |  | Subordinated Debt                      |      |                                                     |            |  |                   | 12,328 |  |   | 12,328
|Corporation (1)                             |  |                    |  | Preferred Stock                        |      | 100.0                                               | %          |  |                   | 1,800  |  |   | 1,854 
|                                            |  |                    |  | Warrants to purchase Common Stock      |      | 28.0                                                | %          |  |                   | 2,805  |  |   | 4,021 
|Marketron International, Inc. (6) (8)       |  | Business Services  |  | Warrants to purchase Common Stock      |      | 1.5                                                 | %          |  |                   |       |  |   |      
|McGinnis-Johnson Consulting, LLC (1)        |  | Newspaper          |  | Subordinated Debt                      |      |                                                     |            |  |                   | 10,531 |  |   | 10,531
|The Meow Mix Company                        |  | Food Products      |  | Senior Debt                            |      |                                                     |            |  |                   | 4,969  |  |   | 4,969 
|Midwest Towers Partners, LLC (1)            |  | Telecommunications |  | Senior Debt                            |      |                                                     |            |  |                   | 17,009 |  |   | 17,009
|Miles Media Group,                          |  | Publishing         |  | Senior Debt                            |      |                                                     |            |  |                   | 7,906  |  |   | 7,906 
|Inc. (1)                                    |  |                    |  | Warrants to purchase Common Stock      |      | 12.4                                                | %          |  |                   | 21     |  |   | 21    
|Minnesota Publishers, Inc. (1)              |  | Newspaper          |  | Senior Debt                            |      |                                                     |            |  |                   | 14,250 |  |   | 14,250
|New Century                                 |  | Industrial         |  | Common Stock                           |      | 2.3                                                 | %          |  |                   | 157    |  |   | 144   
|Companies, Inc. (8)                         |  | Equipment          |  | Warrants to purchase Common Stock      |      | 0.4                                                 | %          |  |                   |       |  |   |      
|New Vision Broadcasting, LLC (1)            |  | Broadcasting       |  | Senior Debt                            |      |                                                     |            |  |                   | 13,367 |  |   | 13,367
|New Wave Communications, LLC (1)            |  | Cable              |  | Senior Debt                            |      |                                                     |            |  |                   | 8,804  |  |   | 8,804 



See
notes to consolidated financial statements (unaudited).



18



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)(Continued)

December 31, 2003



(dollars in thousands)



|                                    |  |                      |  |                                                 |      |                                                     |            |  |                   |        |  |   |       
|----------------------------------- |  | -------------------- |  | ----------------------------------------------- | ---- | --------------------------------------------------- | ---------- |  | ----------------- | ------ |  | - | ------
|                                    |  | Industry             |  | Title of Securities Held bythe Company          |      | Percentage ofClass Held on
a FullyDiluted Basis (9) |            |  | December 31, 2003
|Portfolio Company                   |  |                      |  |                                                 | Cost |                                                     | Fair Value
|nii communications,                 |  | Telecommunications   |  | Senior Debt                                     |      |                                                     |            |  | $                 | 7,353  |  | $ | 7,353 
|inc. (1)                            |  |                      |  | Common Stock                                    |      | 3.0                                                 | %          |  |                   | 400    |  |   | 137   
|                                    |  |                      |  | Warrants to purchase Common Stock               |      | 38.5                                                | %          |  |                   | 1,218  |  |   | 1,501 
|NOW Communications,                 |  | Telecommunications   |  | Senior Debt                                     |      |                                                     |            |  |                   | 4,783  |  |   | 4,125 
|Inc. (1)                            |  |                      |  | Warrants to purchase Common Stock               |      | 10.0                                                | %          |  |                   |       |  |   |      
|Pacific-Sierra Publishing, Inc.     |  | Newspaper            |  | Senior Debt                                     |      |                                                     |            |  |                   | 25,734 |  |   | 25,734
|Powercom                            |  | Telecommunications   |  | Senior Debt                                     |      |                                                     |            |  |                   | 2,160  |  |   | 2,160 
|Corporation (1)                     |  |                      |  | Warrants to purchase Class A Common Stock       |      | 18.6                                                | %          |  |                   | 263    |  |   | 211   
|R.R. Bowker LLC (1)                 |  | Information Services |  | Senior Debt                                     |      |                                                     |            |  |                   | 9,500  |  |   | 9,500 
|                                    |  |                      |  | Warrants to purchase membership interest in LLC |      | 14.0                                                | %          |  |                   | 882    |  |   | 1,434 
|Robert N. Snyder                    |  | Information Services |  | Senior Debt                                     |      |                                                     |            |  |                   | 1,300  |  |   | 1,300 
|Stonebridge Press, Inc. (1)         |  | Newspaper            |  | Senior Debt                                     |      |                                                     |            |  |                   | 5,466  |  |   | 5,466 
|SXC Health Solutions, Inc. (1) (16) |  | Technology           |  | Senior Debt                                     |      |                                                     |            |  |                   | 7,600  |  |   | 7,600 
|Talk America Holdings,              |  | Telecommunications   |  | Common Stock                                    |      | 0.8                                                 | %          |  |                   | 499    |  |   | 2,484 
|Inc. (8)                            |  |                      |  | Warrants to purchase Common Stock               |      | 0.8                                                 | %          |  |                   | 25     |  |   | 474   
|TGI Group, LLC                      |  | Information Services |  | Senior Debt                                     |      |                                                     |            |  |                   | 6,225  |  |   | 6,225 
|                                    |  |                      |  | Warrants to purchase membership interest in LLC |      | 5.0                                                 | %          |  |                   | 126    |  |   |      
|Tower Resource                      |  | Telecommunications   |  | Senior Debt                                     |      |                                                     |            |  |                   | 1,503  |  |   | 1,503 
|Management, Inc.                    |  |                      |  | Warrants to purchase Common Stock               |      | 8.9                                                 | %          |  |                   |       |  |   |      



See
notes to consolidated financial statements (unaudited).



19



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)(Continued)

December 31, 2003



(dollars in thousands)



|                                        |  |                      |  |                                                 |      |                                                     |            |  |                   |         |  |   |        
|--------------------------------------- |  | -------------------- |  | ----------------------------------------------- | ---- | --------------------------------------------------- | ---------- |  | ----------------- | ------- |  | - | -------
|                                        |  | Industry             |  | Title of Securities Held bythe Company          |      | Percentage ofClass Held on
a FullyDiluted Basis (9) |            |  | December 31, 2003
|Portfolio Company                       |  |                      |  |                                                 | Cost |                                                     | Fair Value
|VS&A-PBI Holding LLC (8)                |  | Publishing           |  | LLC Interest                                    |      | 0.8                                                 | %          |  | $                 | 500     |  | $ |       
|Wicks Business Information, LLC         |  | Publishing           |  | Unsecured Note                                  |      |                                                     |            |  |                   | 200     |  |   | 200    
|Wiesner Publishing                      |  | Publishing           |  | Senior Debt                                     |      |                                                     |            |  |                   | 5,461   |  |   | 5,461  
|Company,                                |  |                      |  | Subordinated Debt                               |      |                                                     |            |  |                   | 5,623   |  |   | 5,623  
|LLC (1)                                 |  |                      |  | Warrants to purchase membership interest in LLC |      | 15.0                                                | %          |  |                   | 406     |  |   | 398    
|WirelessLines II, Inc.                  |  | Telecommunications   |  | Senior Debt                                     |      |                                                     |            |  |                   | 437     |  |   | 437    
|Witter Publishing Co.,                  |  | Publishing           |  | Senior Debt                                     |      |                                                     |            |  |                   | 2,340   |  |   | 2,340  
|Inc.                                    |  |                      |  | Warrants to purchase Common Stock               |      | 10.5                                                | %          |  |                   | 87      |  |   | 78     
|Wyoming Newspapers, Inc. (1)            |  | Newspaper            |  | Senior Debt                                     |      |                                                     |            |  |                   | 10,378  |  |   | 10,378 
|Total Non-affiliate investments         |  |                      |  |                                                 |      |                                                     |            |  |                   | 477,732 |  |   | 482,112
|                                        |  |                      |  |                                                 |      |                                                     |            |  |                   |         |  |   |        
|Affiliate investments (12):             |  |                      |  |                                                 |      |                                                     |            |  |                   |         | 
|All Island Media, Inc.                  |  | Newspaper            |  | Senior Debt                                     |      |                                                     |            |  |                   | 8,000   |  |   | 8,000  
|                                        |  |                      |  | Common Stock                                    |      | 9.1                                                 | %          |  |                   | 500     |  |   | 500    
|Country Media, Inc.                     |  | Newspaper            |  | Senior Debt                                     |      |                                                     |            |  |                   | 7,176   |  |   | 7,176  
|                                        |  |                      |  | Common Stock                                    |      | 6.3                                                 | %          |  |                   | 100     |  |   | 134    
|Creatas, L.L.C. (1)                     |  | Information Services |  | Senior Debt                                     |      |                                                     |            |  |                   | 17,735  |  |   | 17,735 
|                                        |  |                      |  | Investor Class LLC Interest Guaranty ($501)     |      | 100.0                                               | %          |  |                   | 1,273   |  |   | 2,951  
|Executive Enterprise Institute, LLC (8) |  | Business Services    |  | LLC Interest                                    |      | 10.0                                                | %          |  |                   | 301     |  |   |       
|Netplexus                               |  | Technology           |  | Senior Debt                                     |      |                                                     |            |  |                   | 1,817   |  |   | 170    
|Corporation (1) (8)                     |  |                      |  | Preferred Stock                                 |      | 51.0                                                | %          |  |                   | 766     |  |   |       
|                                        |  |                      |  | Warrants to purchase Class A Common Stock       |      | 4.8                                                 | %          |  |                   |        |  |   |       



See
notes to consolidated financial statements (unaudited).



20



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MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)(Continued)

December 31, 2003



(dollars in thousands)



|                                              |  |                    |  |                                           |      |                                                     |            |                   |        |        |   |       
|--------------------------------------------- |  | ------------------ |  | ----------------------------------------- | ---- | --------------------------------------------------- | ---------- | ----------------- | ------ | ------ | - | ------
|                                              |  | Industry           |  | Title of Securities Held bythe Company    |      | Percentage ofClass Held on
a FullyDiluted Basis (9) |            | December 31, 2003
|Portfolio Company                             |  |                    |  |                                           | Cost |                                                     | Fair Value
|Sunshine Media                                |  | Publishing         |  | Senior Debt                               |      |                                                     |            | $                 | 12,839 |        | $ | 12,516
|Delaware,                                     |  |                    |  | Class A LLC Interest                      |      | 12.8%                                               |            |                   | 564    |        |   |      
|LLC (1)                                       |  |                    |  | Warrants to purchase Class B LLC interest |      | 100.0%                                              |            |                   |       |        |   |      
|ViewTrust Technology (8)                      |  | Technology         |  | Common Stock                              |      | 7.5%                                                |            |                   | 1      |        |   | 1     
|Total Affiliate investments                   |  |                    |  |                                           |      |                                                     | 51,072     |                   |        | 49,183
|                                              |  |                    |  |                                           |      |                                                     |            |                   |        |        |   |       
|Control investments: Non-majority-owned (11): |  |                    |  |                                           |      |                                                     |            |                   |        |       
|ETC Group, LLC (13)                           |  | Publishing         |  | Senior Debt                               |      |                                                     |            |                   | 1,200  |        |   | 1,200 
|                                              |  |                    |  | Series A LLC Interest                     |      | 100.0%                                              |            |                   | 650    |        |   | 650   
|                                              |  |                    |  | Series C LLC Interest                     |      | 100.0%                                              |            |                   | 100    |        |   | 100   
|Fawcette Technical                            |  | Publishing         |  | Senior Debt                               |      |                                                     |            |                   | 12,160 |        |   | 12,160
|Publications                                  |  |                    |  | Subordinated Debt                         |      |                                                     |            |                   | 3,906  |        |   | 3,906 
|Holding (1)                                   |  |                    |  | Series A Preferred Stock                  |      | 100.0%                                              |            |                   | 2,569  |        |   | 718   
|                                              |  |                    |  | Common Stock                              |      | 36.0%                                               |            |                   |       |        |   |      
|National Systems                              |  | Security Alarm     |  | Senior Debt                               |      |                                                     |            |                   | 500    |        |   | 500   
|Integration, Inc. (3) (4) (7)                 |  |                    |  | Class B-2 Preferred Stock                 |      | 100.0%                                              |            |                   | 4,409  |        |   | 3,833 
|                                              |  |                    |  | Common Stock                              |      | 46.0%                                               |            |                   |       |        |   |      
|Platinum Wireless, Inc.                       |  | Telecommunications |  | Senior Debt                               |      |                                                     |            |                   | 875    |        |   | 875   
|                                              |  |                    |  | Common Stock                              |      | 37.0%                                               |            |                   | 4,640  |        |   | 4,519 
|                                              |  |                    |  | Options to purchase Common Stock          |      | 1.5%                                                |            |                   | 272    |        |   | 98    
|Total Control investments: Non-majority-owned |  |                    |  |                                           |      |                                                     | 31,281     |                   |        | 28,559



See
notes to consolidated financial statements (unaudited).



21



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MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)(Continued)

December 31, 2003



(dollars in thousands)



|                                          |  |                    |  |                                           |      |                                                     |            |                   |        |  |   |       
|----------------------------------------- |  | ------------------ |  | ----------------------------------------- | ---- | --------------------------------------------------- | ---------- | ----------------- | ------ |  | - | ------
|                                          |  | Industry           |  | Title of Securities Held bythe Company    |      | Percentage ofClass Held on
a FullyDiluted Basis (9) |            | December 31, 2003
|Portfolio Company                         |  |                    |  |                                           | Cost |                                                     | Fair Value
|Control investments: Majority-owned (10): |  |                    |  |                                           |      |                                                     |            |                   |        | 
|AMI                                       |  | Telecommunications |  | Senior Debt                               |      |                                                     |            | $                 | 3,100  |  | $ | 237   
|Telecommunications Corporation (1) (8)    |  |                    |  | 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  |  |   |      
|                                          |  |                    |  | Common Stock                              |      | 5.1%                                                |            |                   | 200    |  |   |      
|Biznessonline.com,                        |  | Telecommunications |  | Senior Debt                               |      |                                                     |            |                   | 18,556 |  |   | 18,556
|Inc. (1) (17)                             |  |                    |  | Preferred Stock                           |      | 100.0%                                              |            |                   | 4,864  |  |   |      
|                                          |  |                    |  | Common Stock                              |      | 73.2%                                               |            |                   | 540    |  |   |      
|Copperstate                               |  | Security Alarm     |  | Senior Debt                               |      |                                                     |            |                   | 910    |  |   | 910   
|Technologies, Inc. (3)                    |  |                    |  | Class A Common Stock                      |      | 93.0%                                               |            |                   | 2,000  |  |   | 2,160 
|                                          |  |                    |  | Class B Common Stock                      |      | 0.1%                                                |            |                   |       |  |   | 1     
|                                          |  |                    |  | Warrants to purchase Class B Common Stock |      | 99.9%                                               |            |                   |       |  |   | 1,343 
|Corporate Legal Times                     |  | Publishing         |  | Senior Debt                               |      |                                                     |            |                   | 4,624  |  |   | 4,302 
|L.L.C.                                    |  |                    |  | Subordinated Debt                         |      |                                                     |            |                   | 1,340  |  |   |      
|                                          |  |                    |  | LLC Interest                              |      | 90.6%                                               |            |                   | 313    |  |   |      
|Crystal Media Network, LLC (5)            |  | Broadcasting       |  | LLC Interest                              |      | 100.0%                                              |            |                   | 6,132  |  |   | 5,149 
|Interactive Business                      |  | Security Alarm     |  | Senior Debt                               |      |                                                     |            |                   | 75     |  |   | 75    
|Solutions, Inc. (4)                       |  |                    |  | Common Stock                              |      | 100.0%                                              |            |                   | 2,750  |  |   | 1,351 
|Superior Publishing                       |  | Newspaper          |  | Senior Debt                               |      |                                                     |            |                   | 20,760 |  |   | 20,760
|Corporation. (1) (15)                     |  |                    |  | Subordinated Debt                         |      |                                                     |            |                   | 28,000 |  |   | 28,000
|                                          |  |                    |  | Preferred Stock                           |      | 100.0%                                              |            |                   | 7,999  |  |   | 7,999 
|                                          |  |                    |  | Common Stock                              |      | 100.0%                                              |            |                   | 1      |  |   | 1     
|Telecomm North                            |  | Telecommunications |  | Preferred Stock                           |      | 100.0%                                              |            |                   | 31,856 |  |   | 31,856
|Corp. (14)                                |  |                    |  | Common Stock                              |      | 100.0%                                              |            |                   |       |  |   |      
|Telecomm South,                           |  | Telecommunications |  | Senior Debt                               |      |                                                     |            |                   | 3,292  |  |   | 2,210 
|LLC (2) (8)                               |  |                    |  | LLC Interest                              |      | 100.0%                                              |            |                   | 10     |  |   |      



See
notes to consolidated financial statements (unaudited).



22



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MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)(Continued)

December 31, 2003



(dollars in thousands)



|                                          |  |            |  |                                        |      |                                                     |   |            |                   |         |   |         |   |         |  
|----------------------------------------- |  | ---------- |  | -------------------------------------- | ---- | --------------------------------------------------- | - | ---------- | ----------------- | ------- | - | ------- | - | ------- | -
|                                          |  | Industry   |  | Title of Securities Held bythe Company |      | Percentage ofClass Held on
a FullyDiluted Basis (9) |   |            | December 31, 2003 |        
|Portfolio Company                         |  |            |  |                                        | Cost |                                                     |   | Fair Value |                  
|UMAC, Inc. (8)                            |  | Publishing |  | Common Stock                           |      | 100.0                                               | % |            | $                 | 10,375  |   |         | $ | 344     |  
|Working Mother                            |  | Publishing |  | Senior Debt                            |      |                                                     |   |            |                   | 8,026   |   |         |   | 8,026   |  
|Media, Inc. (8)                           |  |            |  | Class A Preferred Stock                |      | 98.8                                                | % |            |                   | 8,497   |   |         |   | 5,808   |  
|                                          |  |            |  | Class B Preferred Stock                |      | 100.0                                               | % |            |                   | 1       |   |         |   |        |  
|                                          |  |            |  | Class C Preferred Stock                |      | 100.0                                               | % |            |                   | 1       |   |         |   |        |  
|                                          |  |            |  | Common Stock                           |      | 51.0                                                | % |            |                   | 1       |   |         |   |        |  
|Total Control investments: Majority-owned |  |            |  |                                        |      |                                                     |   | 168,018    |                   |         |   | 139,088 |  
|Total Investments                         |  |            |  |                                        |      |                                                     |   |            |                   | 728,103 |   |         |   | 698,942 |  
|Unearned income                           |  |            |  |                                        |      |                                                     |   |            |                   | (16,416 | ) |         |   | (16,416 | )
|                                          |  |            |  |                                        |      |                                                     |   |            |                   |         |   |         |   |         |  
|Total Investments net of unearned income  |  |            |  |                                        |      |                                                     | $ | 711,687    |                   |         | $ | 682,526 |  
|                                          |  |            |  |                                        |      |                                                     |   |            |                   |         |   |         |   |         |  



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

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

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

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

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

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

|(7) |  | In March 2003, we converted $8,631 of senior debt and $1,262 of debtor in possession financing in Intellisec Holdings, Inc., into preferred and common stock in connection with a
plan of reorganization. In March 2003, Intellisec Holdings, Inc. changed its name to National Systems Integration, Inc. In June 2004, National Systems Integration, Inc. ceased operations and filed for protection under Chapter 7 of the United States
Bankruptcy Code.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



See notes to consolidated financial statements (unaudited).



23



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##### Table of Contents

|(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 in that companys most recent public filings with the SEC.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

|(14) |  | In December 2003, Telecomm North Corp., a wholly owned portfolio company, entered into an agreement to merge with another of our portfolio companies, Bridgecom Holdings, Inc. The
merger was completed in March 2004 with Bridgecom Holdings, Inc. as the surviving corporation.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|(17) |  | In February, 2004, BiznessOnline.com, Inc. changed its name to ClearTel Communications, Inc.
|---- |  | --------------------------------------------------------------------------------------------

|(18) |  | In April, 2004, Connective Corp. changed its name to Majesco Holdings Inc.
|---- |  | --------------------------------------------------------------------------



See notes to consolidated financial statements (unaudited).



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MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited)

(in thousands except share and per share amounts)



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 providing financing and advisory services to a variety of small- and medium-sized companies throughout the United States with a focus on growth
oriented companies. Currently, our portfolio consists primarily of companies in the communications, information services, media and technology, including software and technology-enabled business services, industry sectors. Our capital is generally
used by our portfolio companies to finance acquisitions, recapitalizations, management buyouts, organic growth and working capital. Prior to its name change effective June 14, 2001, the Companys legal name was MCG Credit Corporation. The
Company is a non-diversified internally managed, closed-end investment company that elected to be treated as a business development company under the Investment Company Act of 1940, as amended (1940 Act).



On March 3, 2004, MCG filed a Form N-2 Registration Statement with the
Securities and Exchange Commission (SEC) which allows MCG to offer, from time to time, 6,320,896 shares of common stock in one or more offerings and allows certain selling shareholders named therein to offer, from time to time, up to
11,679,104 shares of common stock in one or more offerings. In connection with this Registration Statement, on May 21, 2004 MCG raised $56,250 of gross proceeds by selling 3,750,000 shares of common stock at an offering price of $15.00 per share. On
June 8, 2004, the underwriters in the May 21, 2004 offering exercised their over-allotment and purchased an additional 562,500 shares of common stock at an offering price of $15.00 per share. As a result of the underwriters exercising their
over-allotment, MCG raised an additional $8,438 of gross proceeds.



Interim consolidated financial statements of MCG are prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and
Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in accordance with GAAP are omitted. In the opinion of management, all adjustments, consisting solely of normal recurring
accruals, considered necessary for the fair presentation of financial statements for the interim periods, have been included. The current periods results of operations are not necessarily indicative of results that ultimately may be achieved
for the year. The interim unaudited consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Companys Form 10-K for the fiscal year ended December 31,
2003, as filed with the SEC.



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



25



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MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share amounts)



Note 2.    Investments



As of June 30, 2004 and December 31, 2003, investments consisted of the following:



|                                 |  |               |         |   |                   |   |         |      |  |   |            |   |  |   |         |  
|-------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | ---- |  | - | ---------- | - |  | - | ------- | -
|                                 |  | June 30, 2004 |         |   | December 31, 2003 |  
|                                 |  | Cost          |         |   | Fair Value        |   |         | Cost |  |   | Fair Value |  
|Commercial loans                 |  | $             | 674,243 |   |                   | $ | 663,336 |      |  | $ | 615,253    |   |  | $ | 605,551 |  
|Investments in equity securities |  |               | 125,349 |   |                   |   | 110,190 |      |  |   | 112,850    |   |  |   | 93,391  |  
|Unearned income                  |  |               | (14,578 | ) |                   |   | (14,578 | )    |  |   | (16,416    | ) |  |   | (16,416 | )
|                                 |  |               |         |   |                   |   |         |      |  |   |            |   |  |   |         |  
|Total                            |  | $             | 785,014 |   |                   | $ | 758,948 |      |  | $ | 711,687    |   |  | $ | 682,526 |  
|                                 |  |               |         |   |                   |   |         |      |  |   |            |   |  |   |         |  



MCGs customer
base includes primarily small- and medium-sized private companies in the communications, information services, media and technology, including software and technology-enabled business services, industry sectors. The proceeds of the loans to these
companies are generally used for buyouts, growth, acquisitions, liquidity, refinancings and restructurings. In addition, we have occasionally made loans to individuals who are principals in these companies where the proceeds are used for or in
connection with the operations or capitalization of such companies. Our debt instruments generally provide for a contractual variable interest rate generally ranging from approximately 4% to 14%, a portion of which may be deferred. At June 30, 2004,
approximately 88% of loans in the portfolio, based on amounts outstanding at fair value, were at variable rates determined on the basis of a benchmark LIBOR or prime rate and approximately 12% were at fixed rates. In addition, approximately 50% of
the loan portfolio has floors of between 1.25% and 3% on the LIBOR base index. The Companys loans generally have stated maturities at origination that range from 2 to 8 years. Customers typically pay an origination fee based on a percentage of
the commitment amount. They also often pay a fee based on any undrawn commitments.



At June 30, 2004, approximately 41% of MCGs loans had detachable warrants or an option to purchase warrants, stock appreciation rights or other equity interests or other provisions designed to provide the
Company with an enhanced internal rate of return through the potential recognition of capital gains from the sale of such interests. In lieu of cash for loan origination fees, MCG received warrants valued at $2,101 and $1,625 for the six months
ended June 30, 2004 and 2003, respectively. These equity and equity-like instruments generally do not produce a current return, but are held for potential investment appreciation and capital gains. The warrants and options to purchase warrants
typically are exercisable immediately and typically remain exercisable for 10 years. The exercise prices on the warrants vary from nominal exercise prices to exercise prices that are at or above the current fair market value of the equity for which
we are receiving warrants. The equity interests and warrants and options to purchase warrants often include registration rights, which allow us, under certain circumstances, to require the portfolio company to register the underlying securities with
the SEC after the portfolio companys initial public offering. Realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the Consolidated Statements of Operations.



26



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MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share amounts)



The composition of MCGs investments as of June 30, 2004 and December 31, 2003 at cost and fair
value was as follows (excluding unearned income):



|                           |  |                    |         |                              |                   |   |                    |   |                              |  |       |  
|-------------------------- |  | ------------------ | ------- | ---------------------------- | ----------------- | - | ------------------ | - | ---------------------------- |  | ----- | -
|                           |  | June 30, 2004      |         |                              | December 31, 2003 |  
|                           |  | Investments atCost |         | Percentage ofTotal Portfolio |                   |   | Investments atCost |   | Percentage ofTotal Portfolio | 
|Senior Debt                |  | $                  | 554,239 |                              | 69.3              | % |                    | $ | 510,545                      |  | 70.1  | %
|Subordinated Debt          |  |                    | 120,004 |                              | 15.0              | % |                    |   | 104,708                      |  | 14.4  | %
|Equity                     |  |                    | 115,643 |                              | 14.5              | % |                    |   | 99,312                       |  | 13.6  | %
|Warrants to Acquire Equity |  |                    | 9,706   |                              | 1.2               | % |                    |   | 13,538                       |  | 1.9   | %
|Equity Appreciation Rights |  |                    |        |                              | 0.0               | % |                    |   |                             |  | 0.0   | %
|                           |  |                    |         |                              |                   |   |                    |   |                              |  |       |  
|Total                      |  | $                  | 799,592 |                              | 100.0             | % |                    | $ | 728,103                      |  | 100.0 | %
|                           |  |                    |         |                              |                   |   |                    |   |                              |  |       |  



|                           |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|-------------------------- |  | ------------------------ | ------- | ---------------------------- | ----------------- | - | ------------------------ | - | ---------------------------- |  | ----- | -
|                           |  | June 30, 2004            |         |                              | December 31, 2003 |  
|                           |  | Investments atFair Value |         | Percentage ofTotal Portfolio |                   |   | Investments atFair Value |   | Percentage ofTotal Portfolio | 
|Senior Debt                |  | $                        | 544,641 |                              | 70.4              | % |                          | $ | 502,183                      |  | 71.9  | %
|Subordinated Debt          |  |                          | 118,695 |                              | 15.3              | % |                          |   | 103,368                      |  | 14.7  | %
|Equity                     |  |                          | 97,886  |                              | 12.7              | % |                          |   | 73,467                       |  | 10.5  | %
|Warrants to Acquire Equity |  |                          | 11,944  |                              | 1.5               | % |                          |   | 19,584                       |  | 2.8   | %
|Equity Appreciation Rights |  |                          | 360     |                              | 0.1               | % |                          |   | 340                          |  | 0.1   | %
|                           |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|Total                      |  | $                        | 773,526 |                              | 100.0             | % |                          | $ | 698,942                      |  | 100.0 | %
|                           |  |                          |         |                              |                   |   |                          |   |                              |  |       |  



27



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share amounts)



Set forth below are tables showing the composition of MCGs portfolio by industry sector
(excluding unearned income) at cost and fair value as of June 30, 2004 and December 31, 2003:



|                          |  |                    |         |                              |                   |   |                    |   |                              |  |       |  
|------------------------- |  | ------------------ | ------- | ---------------------------- | ----------------- | - | ------------------ | - | ---------------------------- |  | ----- | -
|                          |  | June 30, 2004      |         |                              | December 31, 2003 |  
|                          |  | Investments atCost |         | Percentage ofTotal Portfolio |                   |   | Investments atCost |   | Percentage ofTotal Portfolio | 
|Media                     |  |                    |         |                              |                   |   |                    |   |                              |  |       |  
|Newspaper                 |  | $                  | 208,786 |                              | 26.1              | % |                    | $ | 250,895                      |  | 34.5  | %
|Publishing                |  |                    | 109,987 |                              | 13.8              | % |                    |   | 102,045                      |  | 14.0  | %
|Broadcasting              |  |                    | 58,994  |                              | 7.4               | % |                    |   | 45,790                       |  | 6.3   | %
|Telecommunications        |  |                    | 201,079 |                              | 25.1              | % |                    |   | 201,272                      |  | 27.6  | %
|Other Diversified Sectors |  |                    | 93,464  |                              | 11.7              | % |                    |   | 21,948                       |  | 3.0   | %
|Information Services      |  |                    | 60,992  |                              | 7.6               | % |                    |   | 64,871                       |  | 8.9   | %
|Technology                |  |                    | 66,290  |                              | 8.3               | % |                    |   | 41,282                       |  | 5.7   | %
|                          |  |                    |         |                              |                   |   |                    |   |                              |  |       |  
|Total                     |  | $                  | 799,592 |                              | 100.0             | % |                    | $ | 728,103                      |  | 100.0 | %
|                          |  |                    |         |                              |                   |   |                    |   |                              |  |       |  



|                          |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|------------------------- |  | ------------------------ | ------- | ---------------------------- | ----------------- | - | ------------------------ | - | ---------------------------- |  | ----- | -
|                          |  | June 30, 2004            |         |                              | December 31, 2003 |  
|                          |  | Investments atFair Value |         | Percentage ofTotal Portfolio |                   |   | Investments atFair Value |   | Percentage ofTotal Portfolio | 
|Media                     |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|Newspaper                 |  | $                        | 212,049 |                              | 27.4              | % |                          | $ | 251,143                      |  | 35.9  | %
|Publishing                |  |                          | 88,533  |                              | 11.4              | % |                          |   | 84,432                       |  | 12.1  | %
|Broadcasting              |  |                          | 57,576  |                              | 7.4               | % |                          |   | 44,487                       |  | 6.4   | %
|Telecommunications        |  |                          | 190,084 |                              | 24.6              | % |                          |   | 192,872                      |  | 27.5  | %
|Other Diversified Sectors |  |                          | 93,435  |                              | 12.1              | % |                          |   | 21,541                       |  | 3.1   | %
|Information Services      |  |                          | 69,635  |                              | 9.1               | % |                          |   | 65,509                       |  | 9.4   | %
|Technology                |  |                          | 62,214  |                              | 8.0               | % |                          |   | 38,958                       |  | 5.6   | %
|                          |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|Total                     |  | $                        | 773,526 |                              | 100.0             | % |                          | $ | 698,942                      |  | 100.0 | %
|                          |  |                          |         |                              |                   |   |                          |   |                              |  |       |  



At June 30, 2004,
there were $136 of loans greater than 60 days past due compared to $4,175 of loans at December 31, 2003. At June 30, 2004, there were $11,221 of loans on non-accrual, including all $136 of the loans greater than 60 days past due. At December 31,
2003, there were $14,617 of loans on non-accrual, including $50 of the loans greater than 60 days past due.



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, 2004, $109,690 of the Series 2000-1 Notes were outstanding with one investor and as of December 31, 2003, $130,991 were outstanding with
one investor. As of June 30, 2004 and December 31, 2003, 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 $180,322 of commercial loans as of June 30, 2004 and
$194,308 of commercial loans as of December 31, 2003. 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



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share amounts)



amount was a minimum of $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. As noted below, on February 12,
2004, the requirement relating to loan charge-offs was eliminated. The Series 2000-1 Notes interest was based on a commercial paper rate plus 3.0% prior to February 12, 2004 at which time it was reduced to LIBOR plus 1.5%, and interest is
payable monthly.



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



| |  |  | a decrease in our borrowing capacity from $200,000 to $130,000, which was reduced to $115,000 on June 30, 2004 and which will further be reduced to $100,000 by September 30, 2004;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



On January 29, 2004, our wholly owned, bankruptcy remote, special purpose indirect subsidiary, MCG Commercial Loan Trust 2003-1 entered into a $200,000
secured warehouse credit facility with an affiliate of UBS AG. As of June 30, 2004, $70,153 was outstanding under this facility. The warehouse credit facility was secured by $99,977 of commercial loans as of June 30, 2004. We will use the warehouse
credit facility to fund our origination and purchase of a diverse pool of loans, including broadly syndicated rated loans, which we



29



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share amounts)



intend to securitize using an affiliate of the lender as the exclusive structurer and underwriter or placement agent. Advances under the credit facility bear
interest at LIBOR plus 0.50%. The warehouse credit facility operates much like a revolving credit facility that is primarily secured by the loans acquired with the advances under the credit facility. In addition, the lender will have recourse to MCG
Capital Corporation itself in a maximum aggregate amount of $72,000 in the event that the principal and interest payments from the loans transferred to MCG Commercial Loan Trust 2003-1 are insufficient to repay the outstanding amount due to the
lender. The warehouse credit facility is cancelable by the lender for cause at any time and has an expiration term of September 24, 2004. The warehouse credit facility is a short-term commitment of capital. If we are unable to consummate the
securitization transaction or otherwise arrange for new financing on terms acceptable to us, we will have to curtail our loan origination activities.



On December 27, 2001, we established the MCG Commercial Loan Trust 2001-1 (the Trust), which issued two classes of Series 2001-1 Notes to 15
institutional investors. The facility is secured by all of the Trusts commercial loans, totaling $209,136 as of June 30, 2004 and $247,490 as of December 31, 2003. 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. As of June 30, 2004, $142,963 of the Series 2001-1 Notes were outstanding and
$173,140 were outstanding as of December 31, 2003. 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.



Amounts outstanding under the Revolving Credit Facility, the Warehouse Credit Facility and the Trust Notes as of June 30, 2004 and December 31, 2003 by
interest rate benchmark were as follows:



|                      |  |               |         |                   |   |        
|--------------------- |  | ------------- | ------- | ----------------- | - | -------
|                      |  | June 30, 2004 |         | December 31, 2003
|30-day LIBOR          |  | $             | 179,843 |                   | $ |       
|90-day LIBOR          |  |               | 142,963 |                   |   | 173,140
|Commercial Paper Rate |  |               |        |                   |   | 130,991
|                      |  |               |         |                   |   |        
|                      |  | $             | 322,806 |                   | $ | 304,131
|                      |  |               |         |                   |   |        



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share amounts)



The following is a summary of the borrowings for the three and six months ended June 30, 2004 and
2003:



|                                                    |  |                    |         |                    |   |                              |  |     |                            |  |     |  
|--------------------------------------------------- |  | ------------------ | ------- | ------------------ | - | ---------------------------- |  | --- | -------------------------- |  | --- | -
|(dollars in thousands)                              |  | MaximumOutstanding |         | AverageOutstanding |   | WeightedAverageInterest Rate |  |     | Interest Rateat Period-End | 
|As of June 30, 2004 and the three months then ended |  |                    |         |                    |   |                              |  |     |                            |  |     |  
|Trust Notes                                         |  | $                  | 159,297 |                    | $ | 146,374                      |  | 2.0 | %                          |  | 2.0 | %
|Revolving Credit Facility                           |  |                    | 114,938 |                    |   | 112,072                      |  | 2.7 |                            |  | 2.8 |  
|Warehouse Credit Facility                           |  |                    | 70,153  |                    |   | 46,598                       |  | 1.6 |                            |  | 1.6 |  
|Swingline Notes                                     |  |                    |        |                    |   |                             |  |    |                            |  |    |  
|                                                    |  |                    |         |                   
|As of June 30, 2003 and the three months then ended |  |                    |         |                    |   |                              |  |     |                            |  |     |  
|Trust Notes                                         |  | $                  | 207,112 |                    | $ | 194,518                      |  | 2.1 | %                          |  | 2.1 | %
|Revolving Credit Facility                           |  |                    | 147,797 |                    |   | 144,851                      |  | 2.4 |                            |  | 2.3 |  
|Swingline Notes                                     |  |                    |        |                    |   |                             |  |    |                            |  |    |  
|                                                    |  |                    |         |                   
|As of June 30, 2004 and the six months then ended   |  |                    |         |                    |   |                              |  |     |                            |  |     |  
|Trust Notes                                         |  | $                  | 173,140 |                    | $ | 154,280                      |  | 2.0 | %                          |  | 2.0 | %
|Revolving Credit Facility                           |  |                    | 130,991 |                    |   | 113,984                      |  | 2.9 |                            |  | 2.8 |  
|Warehouse Credit Facility                           |  |                    | 70,153  |                    |   | 23,463                       |  | 1.6 |                            |  | 1.6 |  
|Swingline Notes                                     |  |                    |        |                    |   |                             |  |    |                            |  |    |  
|                                                    |  |                    |         |                   
|As of June 30, 2003 and the six months then ended   |  |                    |         |                    |   |                              |  |     |                            |  |     |  
|Trust Notes                                         |  | $                  | 240,120 |                    | $ | 204,427                      |  | 2.2 | %                          |  | 2.1 | %
|Revolving Credit Facility                           |  |                    | 148,325 |                    |   | 140,146                      |  | 2.5 |                            |  | 2.3 |  
|Swingline Notes                                     |  |                    |        |                    |   |                             |  |    |                            |  |    |  



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 $5,310 and $69,009 at June 30, 2004 and December 31, 2003,
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 Warehouse Credit Facility totaled $129,847 at June 30, 2004.



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, 2004 and 2003:



|                                                                                   |  |                            |        |                          |   |        |  |      |        |  |   |       
|---------------------------------------------------------------------------------- |  | -------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                                                                                   |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|                                                                                   |  | 2004                       |        | 2003                     |   | 2004   |  | 2003
|Basic                                                                              |  |                            |        |                          |   |        |  |      |        |  |   |       
|Net income                                                                         |  | $                          | 17,643 |                          | $ | 8,989  |  | $    | 19,740 |  | $ | 17,886
|Weighted average common shares outstanding                                         |  |                            | 39,650 |                          |   | 30,121 |  |      | 38,736 |  |   | 30,095
|Earnings per common share-basic                                                    |  | $                          | 0.44   |                          | $ | 0.30   |  | $    | 0.51   |  | $ | 0.59  
|Diluted                                                                            |  |                            |        |                          |   |        |  |      |        |  |   |       
|Net income                                                                         |  | $                          | 17,643 |                          | $ | 8,989  |  | $    | 19,740 |  | $ | 17,886
|Weighted average common shares outstanding                                         |  |                            | 39,650 |                          |   | 30,121 |  |      | 38,736 |  |   | 30,095
|Dilutive effect of restricted stock on which forfeiture provisions have not lapsed |  |                            | 30     |                          |   |       |  |      | 68     |  |   |      
|                                                                                   |  |                            |        |                          |   |        |  |      |        |  |   |       
|Weighted average common shares and common stock equivalents                        |  |                            | 39,680 |                          |   | 30,121 |  |      | 38,804 |  |   | 30,095
|Earnings per common share-diluted                                                  |  | $                          | 0.44   |                          | $ | 0.30   |  | $    | 0.51   |  | $ | 0.59  



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share amounts)



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.



Note 5.    Employee Stock Plans



During the first quarter of 2004, as part of our review of executive compensation, our compensation committee waived the performance-based forfeiture
restrictions and modified the time-based forfeiture provisions associated with the Tier III shares of certain of our executive officers through their respective amended and restated restricted stock agreements. As a result, we recorded additional
paid-in-capital and unearned compensationrestricted stock of $11,570 and $(11,570), respectively, and we also recorded long-term incentive compensation expense of $4,003 during the first quarter. The net effect of these modifications was to
decrease stockholders equity by $4,003. The stock compensation expense would not have changed if SFAS No. 123 Accounting for Stock-Based Compensation was applied.



In addition, our compensation committee agreed to allow the restrictions on certain shares of restricted stock to lapse. As
a result, the Tier I and Tier II shares held by certain of our executive officers will vest immediately upon full repayment of the loans that are secured by the restricted stock. As of June 30, 2004, none of these executives had repaid these loans
and, therefore, there was no additional expense recorded during the quarter related to these modifications.



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share amounts)



Note 6.    Financial Highlights



The following is a schedule of financial highlights for the six months ended
June 30, 2004 and 2003:



|                                                                            |  |                           |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                            |  | Six Months Ended June 30, |        
|                                                                            |  | 2004                      |         |   | 2003 |  
|Per Share Data:                                                             |  |                           |         |   |      |   |         |  
|Net asset value at beginning of period (1)                                  |  | $                         | 11.98   |   |      | $ | 11.56   |  
|Net operating income before investment gains and losses (2)                 |  |                           | 0.57    |   |      |   | 0.75    |  
|Net realized losses on investments (2)                                      |  |                           | (0.15   | ) |      |   | (0.72   | )
|Net change in unrealized appreciation on investments (2)                    |  |                           | 0.09    |   |      |   | 0.56    |  
|                                                                            |  |                           |         |   |      |   |         |  
|Net income                                                                  |  |                           | 0.51    |   |      |   | 0.59    |  
|Dividends declared                                                          |  |                           | (0.84   | ) |      |   | (0.81   | )
|Antidilutive effect of stock offering on distributions                      |  |                           | 0.08    |   |      |   |        |  
|Antidilutive effect of distributions recorded as compensation expense (2)   |  |                           | 0.03    |   |      |   | 0.04    |  
|                                                                            |  |                           |         |   |      |   |         |  
|Net decrease in stockholders equity resulting from distributions           |  |                           | (0.73   | ) |      |   | (0.77   | )
|Issuance of shares                                                          |  |                           | 2.70    |   |      |   |        |  
|Dilutive effect of share issuances and unvested restricted stock            |  |                           | (2.54   | ) |      |   | (0.02   | )
|Net increase in shareholders equity from restricted stock amortization (2) |  |                           | 0.17    |   |      |   | 0.06    |  
|                                                                            |  |                           |         |   |      |   |         |  
|Net increase in stockholders equity relating to share issuances            |  |                           | 0.33    |   |      |   | 0.04    |  
|                                                                            |  |                           |         |   |      |   |         |  
|Net asset value at end of period (1)                                        |  | $                         | 12.09   |   |      | $ | 11.42   |  
|                                                                            |  |                           |         |   |      |   |         |  
|Per share market value at end of period                                     |  | $                         | 15.38   |   |      | $ | 14.51   |  
|Total return (3)                                                            |  |                           | -17.20  | % |      |   | 42.34   | %
|Shares outstanding at end of period                                         |  |                           | 43,047  |   |      |   | 31,252  |  
|Ratio/Supplemental Data:                                                    |  |                           |         |   |      |   |         |  
|Net assets at end of period                                                 |  | $                         | 520,268 |   |      | $ | 356,881 |  
|Ratio of operating expenses to average net assets (annualized)              |  |                           | 9.52    | % |      |   | 8.47    | %
|Ratio of net operating income to average net assets (annualized)            |  |                           | 9.37    | % |      |   | 12.33   | %



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

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

|(3) |  | For 2004, total return equals the increase of the ending market value over the December 31, 2003 price of $19.59 per share plus dividends paid ($0.84 per share), divided by the
beginning price. 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. Total return is not annualized.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Report of Independent Registered Public Accounting Firm



We have reviewed the accompanying consolidated balance sheet of MCG Capital Corporation as of
June 30, 2004, including the consolidated schedules of investments, and the related consolidated statements of operations for the three-month and six-month periods ended June 30, 2004 and 2003 and the consolidated statements of stockholders
equity, and statements of cash flows for the six-month periods ended June 30, 2004 and 2003. These financial statements are the responsibility of the Companys management.



We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of
interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.



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



We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of MCG
Capital Corporation as of December 31, 2003, 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 March 10, 2004 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, 2003, including the schedules
of investments, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.



/s/ Ernst and Young LLP



McLean, Virginia

July 29, 2004



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##### Table of Contents

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



The information contained in this section should be read in conjunction with the Selected Financial 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:



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



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



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



| |  |  | interest rate volatility could adversely affect our results,
| | - |  | ------------------------------------------------------------



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



| |  |  | the risks, uncertainties and other factors we identify from time to time in our filings with the Securities and Exchange Commission, including our Form 10-Ks, Form 10-Qs and Form
8-Ks.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Although we believe that the assumptions
on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be incorrect. In light of these and
other uncertainties, the inclusion of a projection or forward-looking statement in this 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. We undertake no obligation to update such statements to reflect subsequent events.



Overview



MCG Capital Corporation is a solutions-focused financial services company providing financing and advisory services to a variety of small and medium-sized
companies throughout the United States with a focus on growth oriented companies. Currently, our portfolio consists primarily of companies in the communications, information services, media, and technology, including software and technology-enabled
business services, industry sectors. Our capital is generally used by our portfolio companies to finance acquisitions, recapitalizations, management buyouts, organic growth and working capital. On December 4, 2001, we completed an initial public
offering and became an internally managed, non-diversified, closed-end investment company that elected to be treated as a business development company under the Investment Company Act of 1940. MCG Capital Corporation elected to be treated for
federal income tax purposes as a regulated investment company under the Internal Revenue Code with the filing of its federal corporate income tax return for 2002, which election was effective as of January 1, 2002. Pursuant to this election, we
generally will not have to pay corporate-level taxes on any income we distribute to our stockholders as dividends, allowing us to substantially reduce or eliminate our corporate-level tax liability.



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##### Table of Contents

Portfolio Composition and Asset Quality



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



The total portfolio value of our investments was $773.5 million and $698.9 million at June 30, 2004 and December 31, 2003, respectively (exclusive of
unearned income). During the first six months of 2004 we made investments in 21 new portfolio companies, including companies in diversified sectors (sectors other than communications, information services, media and technology), totaling $126.6
million and several follow on investments in existing customers representing $43.2 million. The increase in investments during 2003 and the first six months of 2004 was primarily due to newly originated debt and equity investments. In addition,
during 2003 a higher proportion of our new origination activity was in the form of equity securities, which included new investments of $44.1 million to control companies. Early pay-offs and sales of securities for the first six months of 2004
totaled $55.7 million and were due primarily to pay-offs of $30.4 million from two portfolio companies in the newspaper industry, $9.0 million from three portfolio companies in the telecommunications industry and $9.5 million from two portfolio
company in the technology industry. Early pay-offs and sales of securities in 2003 totaled $108.1 million and were primarily due to pay-offs of $42.5 million from six companies in the publishing industry and $46.5 million from four companies in the
broadcasting industry.



Total portfolio investment activity for
the six months ended June 30, 2004 and year ended December 31, 2003, was as follows (exclusive of unearned income):



|                                                |  |                              |       |   |                             |   |        |  
|----------------------------------------------- |  | ---------------------------- | ----- | - | --------------------------- | - | ------ | -
|(dollars in millions)                           |  | Six MonthsEndedJune 30, 2004 |       |   | Year EndedDecember 31, 2003 |  
|Beginning Portfolio                             |  | $                            | 698.9 |   |                             | $ | 688.9  |  
|Originations/Draws/Advances on Loans            |  |                              | 162.1 |   |                             |   | 115.3  |  
|Originations/Warrants Capitalized on Equity (a) |  |                              | 22.3  |   |                             |   | 77.5   |  
|Gross Payments/Reductions (a)                   |  |                              | (51.6 | ) |                             |   | (69.1  | )
|Early Pay-offs/Sales of Securities              |  |                              | (55.7 | ) |                             |   | (108.1 | )
|Realized Gains                                  |  |                              | 4.8   |   |                             |   | 4.7    |  
|Realized (Losses)                               |  |                              | (10.4 | ) |                             |   | (24.3  | )
|Unrealized Appreciation on Investments          |  |                              | 26.3  |   |                             |   | 35.1   |  
|Unrealized Depreciation on Investments          |  |                              | (23.2 | ) |                             |   | (21.1  | )
|                                                |  |                              |       |   |                             |   |        |  
|Ending Portfolio                                |  | $                            | 773.5 |   |                             | $ | 698.9  |  
|                                                |  |                              |       |   |                             |   |        |  



|(a) |  | Included in these amounts is the conversion of $4.8 million and $21.4 million of debt to equity in connection with certain restructurings for the six months ended June 30, 2004 and
year ended December 31, 2003, respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The
following table shows the fair value of our portfolio of investments by asset class as of June 30, 2004 and December 31, 2003 (excluding unearned income):



|                           |  |                          |       |                              |                   |   |                          |   |                              |  |       |  
|-------------------------- |  | ------------------------ | ----- | ---------------------------- | ----------------- | - | ------------------------ | - | ---------------------------- |  | ----- | -
|                           |  | June 30, 2004            |       |                              | December 31, 2003 |  
|(dollars in millions)      |  | Investments atFair Value |       | Percentage ofTotal Portfolio |                   |   | Investments atFair Value |   | Percentage ofTotal Portfolio | 
|Senior Debt                |  | $                        | 544.6 |                              | 70.4              | % |                          | $ | 502.2                        |  | 71.9  | %
|Subordinated Debt          |  |                          | 118.7 |                              | 15.3              | % |                          |   | 103.4                        |  | 14.7  | %
|Equity                     |  |                          | 97.9  |                              | 12.7              | % |                          |   | 73.4                         |  | 10.5  | %
|Warrants to Acquire Equity |  |                          | 11.9  |                              | 1.5               | % |                          |   | 19.6                         |  | 2.8   | %
|Equity Appreciation Rights |  |                          | 0.4   |                              | 0.1               | % |                          |   | 0.3                          |  | 0.1   | %
|                           |  |                          |       |                              |                   |   |                          |   |                              |  |       |  
|                           |  | $                        | 773.5 |                              | 100.0             | % |                          | $ | 698.9                        |  | 100.0 | %
|                           |  |                          |       |                              |                   |   |                          |   |                              |  |       |  



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##### Table of Contents

Set forth below is a table showing the composition of MCGs portfolio by industry sector at fair
value at June 30, 2004 and December 31, 2003 (excluding unearned income):



|                          |  |                          |       |                              |                   |   |                          |   |                              |  |       |  
|------------------------- |  | ------------------------ | ----- | ---------------------------- | ----------------- | - | ------------------------ | - | ---------------------------- |  | ----- | -
|                          |  | June 30, 2004            |       |                              | December 31, 2003 |  
|(dollars in millions)     |  | Investments atFair Value |       | Percentage ofTotal Portfolio |                   |   | Investments atFair Value |   | Percentage ofTotal Portfolio | 
|Media                     |  |                          |       |                              |                   |   |                          |   |                              |  |       |  
|Newspaper                 |  | $                        | 212.1 |                              | 27.4              | % |                          | $ | 251.1                        |  | 35.9  | %
|Publishing                |  |                          | 88.5  |                              | 11.4              | % |                          |   | 84.4                         |  | 12.1  | %
|Broadcasting              |  |                          | 57.6  |                              | 7.4               | % |                          |   | 44.5                         |  | 6.4   | %
|Telecommunications        |  |                          | 190.1 |                              | 24.6              | % |                          |   | 192.9                        |  | 27.5  | %
|Other Diversified Sectors |  |                          | 93.4  |                              | 12.1              | % |                          |   | 21.5                         |  | 3.1   | %
|Information Services      |  |                          | 69.6  |                              | 9.1               | % |                          |   | 65.5                         |  | 9.4   | %
|Technology                |  |                          | 62.2  |                              | 8.0               | % |                          |   | 39.0                         |  | 5.6   | %
|                          |  |                          |       |                              |                   |   |                          |   |                              |  |       |  
|                          |  | $                        | 773.5 |                              | 100.0             | % |                          | $ | 698.9                        |  | 100.0 | %
|                          |  |                          |       |                              |                   |   |                          |   |                              |  |       |  



Asset Quality



Asset quality is generally a function of economic
conditions, our underwriting and ongoing management of our investment portfolio. As a business development company, our loans and equity investments are carried at market value or, in the absence of market value, at fair value as determined by our
board of directors in good faith on a quarterly basis. As of June 30, 2004 and December 31, 2003, net unrealized depreciation on investments totaled $26.1 million and $29.2 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 or realized                                                                                                                              
|2                |  | Full return of principal and interest or dividend expected with customer performing in accordance with plan                                                    
|3                |  | Full return of principal and interest or dividend expected but customer requires closer monitoring                                                             
|4                |  | Some loss of interest or dividend expected but still expecting an overall positive internal rate of return on the investment                                   
|5                |  | Loss of interest or dividend and some loss of principal investment expected which would result in an overall negative internal rate of return on the investment



The following table
shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of June 30, 2004 and December 31, 2003 (excluding unearned income):



|                      |  |                          |       |                              |                   |   |                          |   |                              |  |       |  
|--------------------- |  | ------------------------ | ----- | ---------------------------- | ----------------- | - | ------------------------ | - | ---------------------------- |  | ----- | -
|(dollars in millions) |  |                          |       |                              |                   |  
|                      |  | June 30, 2004            |       |                              | December 31, 2003 |  
|InvestmentRating      |  | Investments atFair Value |       | Percentage ofTotal Portfolio |                   |   | Investments atFair Value |   | Percentage ofTotal Portfolio | 
|1                     |  | $                        | 238.1 |                              | 30.8              | % |                          | $ | 234.5                        |  | 33.5  | %
|2                     |  |                          | 328.9 |                              | 42.5              | % |                          |   | 255.4                        |  | 36.5  | %
|3                     |  |                          | 141.2 |                              | 18.3              | % |                          |   | 161.9                        |  | 23.2  | %
|4                     |  |                          | 63.0  |                              | 8.1               | % |                          |   | 38.8                         |  | 5.6   | %
|5                     |  |                          | 2.3   |                              | 0.3               | % |                          |   | 8.3                          |  | 1.2   | %
|                      |  |                          |       |                              |                   |   |                          |   |                              |  |       |  
|                      |  | $                        | 773.5 |                              | 100.0             | % |                          | $ | 698.9                        |  | 100.0 | %
|                      |  |                          |       |                              |                   |   |                          |   |                              |  |       |  



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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. The increase in investments with a 2 rating was primarily due to origination activity in the period. At June 30, 2004, of the
investments with a 5 rating, $1.2 million were loans, all of which were on non-accrual. Of the investments with a 4 rating, $49.5 million were loans, of which $9.2 million were on non-accrual. At December 31, 2003, of the investments with a 5
rating, $2.6 million were loans, all of which were on non-accrual. Of the investments with a 4 rating, $32.3 million were loans, of which $12.0 million were on non-accrual. The increase in investments with a 4 rating is due primarily to the
downgrade of one investment in the technology sector.



We
monitor individual customers financial trends in order to assess the appropriate course of action with respect to each customer and to evaluate overall portfolio quality. We closely monitor the status and performance of each individual
investment on a quarterly and, in some cases, a monthly or more frequent basis. Because we are a provider of long-term privately negotiated investment capital to growth-oriented companies and we actively manage our investments through our contract
structure and corporate governance rights, we do not believe that contract exceptions such as breaches of contractual covenants or late delivery of financial statements are necessarily an indication of deterioration in the credit quality or the need
to pursue remedies or an active workout of a portfolio investment.



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



At June 30, 2004 and December 31, 2003, there were $0.1 million and $4.2 million, respectively, of loans, or approximately
0.02% and 0.6%, respectively, of the investment portfolio, greater than 60 days past due. At June 30, 2004, $11.2 million of loans, including all of the loans greater than 60 days past due, were on non-accrual status, which represented 1.5% of the
investment portfolio. At December 31, 2003, $14.6 million of loans, including $0.1 million of the loans greater than 60 days past due, were on non-accrual status, which represented 2.1% of the investment portfolio. The non-accrual and past due loans
at June 30, 2004 and December 31, 2003 primarily represented borrowers in the publishing, telecommunications and paging businesses. Portions of the trade publishing industry, which are dependent on financial, technology or telecommunications
advertising, experienced sluggish advertising revenue. Certain companies in the telecommunications industry have suffered from competitive pressure from low cost and prepaid cellular calling plans.



At June 30, 2004, of the $140.0 million of loans to our controlled portfolio
companies, $11.1 million were on non-accrual status. At December 31, 2003, of the $101.7 million of loans to our controlled portfolio companies, $14.4 million were on non-accrual status. As of June 30, 2004, of the $23.7 million of loans to other
affiliates, $0.1 million were on non-accrual status. As of December 31, 2003, of the $45.6 million of loans to other affiliates, $0.2 million were on non-accrual status.



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



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Results of Operations



Comparison of the Three and Six Months Ended June 30, 2004 and 2003



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, 2004 compared to the same periods in 2003 is attributable to the following items:



|                                           |  |                                          |        |   |                                        |   |        |  
|------------------------------------------ |  | ---------------------------------------- | ------ | - | -------------------------------------- | - | ------ | -
|(dollars in thousands)                     |  | Three Months EndedJune 30, 2004 vs. 2003 |        |   | Six Months EndedJune 30, 2004 vs. 2003 |  
|Change due to:                             |  |                                          |        |   |                                        |   |        |  
|Increase (decrease) in assets (a)          |  | $                                        | 134    |   |                                        | $ | (1,716 | )
|Change in LIBOR (a)                        |  |                                          | 99     |   |                                        |   | (223   | )
|Change in spread (a)                       |  |                                          | (2,343 | ) |                                        |   | (1,359 | )
|Increase in loan fee and dividend income   |  |                                          | 2,147  |   |                                        |   | 3,996  |  
|Increase in advisory fees and other income |  |                                          | 3,111  |   |                                        |   | 6,116  |  
|                                           |  |                                          |        |   |                                        |   |        |  
|Total change in operating income           |  | $                                        | 3,148  |   |                                        | $ | 6,814  |  
|                                           |  |                                          |        |   |                                        |   |        |  



|(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
second quarter of 2004 was $22.8 million, an increase of $3.1 million or 16% compared to the second quarter of 2003. Total operating income is primarily comprised of interest and dividend income on investments. Interest and dividend income of $18.8
million for the second quarter of 2004 increased by less than 1% from the second quarter of 2003. An increase in dividend income was offset by a decrease in interest income on loans. The increase in dividend income was primarily related to dividends
on preferred stock of one of our control investments, Bridgecom Holdings, Inc. The decrease in interest income on loans was due primarily to a lower average yield on the loan portfolio. The lower yield is the result of investment activity which
includes originating some loans in diversified sectors (sectors other than communications, information services, media and technology) and the impact of nonaccrual of interest on certain loans. The loans in diversified sectors are generally lower
risk and yield lower interest rates which accounted for approximately $0.9 million of the change in spread. We have originated these loans to enhance our diversification to reduce overall portfolio risk and to achieve better execution on our debt
financing. Although loans increased from $597.1 million at June 30, 2003 to $674.2 million at June 30, 2004, the average loan balance and interest income for the second quarter of 2004 did not reflect the full impact of the growth due to the
concentration of 2004 origination activity toward the end of the period. Advisory fees and other income increased $3.1 million from the second quarter of 2003 to the second quarter of 2004 due primarily to research revenues from our subsidiary Kagan
Research, LLC, which we acquired in the first quarter of 2004, and management fees from one of our control investments, Bridgecom Holdings, Inc.



Total operating income for the first six months of 2004 was $45.0 million, an increase of $6.8 million or 18% compared to the first six months of 2003.
Total operating income is primarily comprised of interest and dividend income on investments. Interest and dividend income of $37.3 million for the first six months of 2004 increased 2% from the first six months of 2003. An increase in dividend
income was partially offset by a decrease in interest income on loans. The increase in dividend income was primarily related to dividends on preferred stock of one of our control investments, Bridgecom Holdings, Inc. The decrease in interest income
on loans was due partially to a lower average loan balance during the 2004 period compared to the 2003 period and a lower average yield on the loan portfolio. The lower yield is primarily attributable to investment activity which



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includes originating some loans in diversified sectors. These loans generally are lower risk and yield lower interest rates which accounted for approximately
$1.2 million of the change in spread. We have originated these loans to enhance our diversification to reduce overall portfolio risk and to achieve better execution on our debt financing. Although loans increased from $597.1 million at June 30, 2003
to $674.2 million at June 30, 2004, the average loan balance and interest income for the first six months of 2004 did not reflect the full impact of the growth due to the concentration of 2004 origination activity toward the end of the period.
Advisory fees and other income increased $6.1 million from the first six months of 2003 to the first six months of 2004 due to an increase in advisory services provided to new and existing customers compared to the prior years period, research
revenues from Kagan Research, LLC and management fees from one of our control investments, Bridgecom Holdings, Inc.



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, 2004 compared to the same periods in 2003 is attributable to the following items:



|                                   |  |                                          |       |   |                                        |   |       |  
|---------------------------------- |  | ---------------------------------------- | ----- | - | -------------------------------------- | - | ----- | -
|(dollars in thousands)             |  | Three Months EndedJune 30, 2004 vs. 2003 |       |   | Six Months EndedJune 30, 2004 vs. 2003 |  
|Change due to:                     |  |                                          |       |   |                                        |   |       |  
|Decrease in borrowings (a)         |  | $                                        | (199  | ) |                                        | $ | (617  | )
|Change in LIBOR (a)                |  |                                          | 55    |   |                                        |   | (127  | )
|Change in spread (a)               |  |                                          | (91   | ) |                                        |   | 177   |  
|Debt cost amortization             |  |                                          | 19    |   |                                        |   | 7     |  
|Salaries and benefits              |  |                                          | 1,186 |   |                                        |   | 2,187 |  
|Long-term incentive compensation   |  |                                          | 627   |   |                                        |   | 4,652 |  
|General and administrative expense |  |                                          | 761   |   |                                        |   | 850   |  
|                                   |  |                                          |       |   |                                        |   |       |  
|Total change in operating expense  |  | $                                        | 2,358 |   |                                        | $ | 7,129 |  
|                                   |  |                                          |       |   |                                        |   |       |  



|(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 second quarter of 2004 were $10.3 million, an increase of $2.4 million or 30% compared to the second quarter of 2003. Total operating expenses for the first six months of 2004 were $22.7 million, an increase of $7.1 million or 46%
compared to the first six months of 2003. Total operating expenses are comprised of three components: (1) interest expense, (2) salaries and benefits and general and administrative expenses, and (3) long-term incentive compensation.



Interest expense declined by 9% to $2.1 million in the second quarter of 2004
compared to $2.3 million in the second quarter of 2003 and interest expense declined by 12% to $4.2 million for the first six months of 2004 compared to $4.7 million for the first six months of 2003. The decrease in both periods is primarily
attributable to a decrease in average borrowings.



Salaries and
benefits and general and administrative expenses increased 47% from $4.2 million in the second quarter of 2003 to $6.1 million in the second quarter of 2004. Of this change, $1.2 million related to salaries and benefits and $0.7 million related to
general and administrative expenses. For the first six months of 2004 compared to the same period in 2003, these expenses increased 39% from $7.8 million in 2003 to $10.8 million in 2004. Of this change, $2.2 million related to salaries and benefits
and $0.8 million related to general and administrative expenses. In comparing both the quarter and year-to-date periods, the increases are primarily due to higher accrual of variable annual incentive compensation expense and salaries and benefits
and general and administrative expenses associated with Kagan Research, LLC.



Long-term incentive compensation expense is made up of non-cash amortization of restricted stock awards granted in 2001 and the treatment of dividends on all shares securing employee loans as compensation. During the
first quarter of 2004, our compensation committee waived the performance-based forfeiture restrictions and



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modified the time-based forfeiture provisions associated with the Tier III shares of certain of our executive officers. Long-term incentive compensation
totaled $2.1 million and $7.7 million for the second quarter and first six months of 2004, respectively, compared to $1.5 million and $3.0 million for the second quarter and first six months of 2003, respectively. The increases in long-term
incentive compensation are primarily due to the modifications made during the first quarter of 2004.



Net Operating Income Before Investment Gains and Losses



Net operating income before investment gains and losses (NOI) for the quarter ended June 30, 2004 totaled $12.5 million, an increase of 7% compared with
$11.7 million for the same quarter of 2003. NOI for the six months ended June 30, 2004 totaled $22.3 million, a decrease of 1% compared with $22.6 million for the six months ended June 30, 2003.



Net Investment Gains and Losses



Net investment gains (losses) totaled $5.2 million and ($2.6) million for
the second quarter and first six months of 2004, respectively, compared to ($2.7) million and ($4.7) million for the same respective periods of 2003. Net investment gains for the second quarter of 2004 were primarily attributable to gains and
appreciation on investments in the Information Services and Newspapers industries, partially offset by losses and depreciation primarily in the Security Alarm and Publishing industries. Net investment losses for the first six months of 2004 related
primarily to losses and depreciation in the Security Alarm, Technology and Publishing industries partially offset by gains and appreciation in the Information Services and Newspaper industries. See the tables below for more detail on net investment
gains and losses. 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, 2004 and 2003:



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               |  | 2004                       |        |   | 2003                     |   |        | 2004 |  |   | 2003   |  
|Realized gains (losses) on loans              |  |                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|VS&A-PBI Holding LLC                          |  | Publishing           |  | $                          |       |   |                          | $ |       |      |  | $ |       |   |  | $ | (7,901  | )
|National Systems Integration, Inc.            |  | Security Alarm       |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   | (5,812  | )
|AMI Telecommunications Corporation            |  | Telecommunications   |  |                            | (2,994 | ) |                          |   |       |      |  |   | (2,994 | ) |  |   | (5,585  | )
|Rising Tide Holdings, Inc.                    |  | Publishing           |  |                            |       |   |                          |   | (2,675 | )    |  |   |       |   |  |   | (2,675  | )
|FTI Technologies Holdings, Inc.               |  | Technology           |  |                            | (2,533 | ) |                          |   |       |      |  |   | (2,533 | ) |  |   |        |  
|NBG Radio Network, Inc.                       |  | Broadcasting         |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   | (398    | )
|ClearTel Communications, Inc.                 |  | Telecommunications   |  |                            | (669   | ) |                          |   |       |      |  |   | (669   | ) |  |   |        |  
|aaiPharma Inc.                                |  | Drugs                |  |                            | 13     |   |                          |   |       |      |  |   | (278   | ) |  |   |        |  
|Other                                         |  |                      |  |                            | 5      |   |                          |   |       |      |  |   | 42     |   |  |   |        |  
|                                              |  |                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|                                              |  |                      |  |                            | (6,178 | ) |                          |   | (2,675 | )    |  |   | (6,432 | ) |  |   | (22,371 | )
|                                              |  |                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Realized gains (losses) on equity investments |  |                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|AMI Telecommunications Corporation            |  | Telecommunications   |  |                            | (3,995 | ) |                          |   |       |      |  |   | (3,995 | ) |  |   |        |  
|Bridgecom Holdings, Inc.                      |  | Telecommunications   |  |                            |       |   |                          |   |       |      |  |   | 2,158  |   |  |   |        |  
|R.R. Bowker LLC                               |  | Information Services |  |                            | 2,268  |   |                          |   |       |      |  |   | 2,268  |   |  |   |        |  
|Dakota Imaging, Inc.                          |  | Technology           |  |                            | 331    |   |                          |   |       |      |  |   | 331    |   |  |   |        |  
|Talk America Holdings, Inc.                   |  | Telecommunications   |  |                            |       |   |                          |   | 832    |      |  |   |       |   |  |   | 832     |  
|                                              |  |                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|                                              |  |                      |  |                            | (1,396 | ) |                          |   | 832    |      |  |   | 762    |   |  |   | 832     |  
|                                              |  |                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Net realized gains (losses) on investments    |  |                      |  | $                          | (7,574 | ) |                          | $ | (1,843 | )    |  | $ | (5,670 | ) |  | $ | (21,539 | )
|                                              |  |                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  



41



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##### Table of Contents

The following table summarizes the net change in our unrealized appreciation and depreciation on
investments for the three and six months ended June 30, 2004 and 2003:



MCG Capital Corporation

Summary of Net Change in Unrealized Appreciation and Depreciation on Investments

(dollars in thousands)



|                                                     |  |                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|---------------------------------------------------- |  | -------------------- |  | -------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                     |  |                      |  | Three Months EndedJune 30, |        |   | Six Months Ended June 30, |  
|Portfolio Company                                    |  | Sector               |  | 2004                       |        |   | 2003                      |   |        | 2004 |  |   | 2003    |  
|Unrealized appreciation on loans                     |  |                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Images.com, Inc.                                     |  | Information Services |  | $                          | 241    |   |                           | $ |       |      |  | $ | 1,466   |   |  | $ |        |  
|Other                                                |  |                      |  |                            | 269    |   |                           |   | 133    |      |  |   | 726     |   |  |   | 179     |  
|                                                     |  |                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|                                                     |  |                      |  |                            | 510    |   |                           |   | 133    |      |  |   | 2,192   |   |  |   | 179     |  
|Unrealized appreciation on equity investments        |  |                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|21st Century Newspapers, Inc.                        |  | Newspaper            |  |                            | 2,234  |   |                           |   |       |      |  |   | 2,226   |   |  |   | 47      |  
|Fawcette Technical Publications Holding              |  | Publishing           |  |                            | 582    |   |                           |   |       |      |  |   | 1,059   |   |  |   |        |  
|NII Communications, Inc.                             |  | Telecommunications   |  |                            | 190    |   |                           |   | 130    |      |  |   | 403     |   |  |   | 179     |  
|Superior Publishing Corporation                      |  | Newspaper            |  |                            | 480    |   |                           |   |       |      |  |   | 774     |   |  |   |        |  
|Bridgecom Holdings, Inc.                             |  | Telecommunications   |  |                            | 1,433  |   |                           |   | 421    |      |  |   | 1,433   |   |  |   | 1,111   |  
|Creatas, L.L.C.                                      |  | Information Services |  |                            | 6,852  |   |                           |   | 2,657  |      |  |   | 7,085   |   |  |   | 2,954   |  
|Talk America Holdings, Inc.                          |  | Telecommunications   |  |                            |       |   |                           |   | 1,677  |      |  |   |        |   |  |   | 2,511   |  
|SXC Health Solutions, Inc.                           |  | Technology           |  |                            |       |   |                           |   | 631    |      |  |   |        |   |  |   | 631     |  
|Other                                                |  |                      |  |                            | 219    |   |                           |   | 414    |      |  |   | 1,043   |   |  |   | 666     |  
|                                                     |  |                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|                                                     |  |                      |  |                            | 11,990 |   |                           |   | 5,930  |      |  |   | 14,023  |   |  |   | 8,099   |  
|                                                     |  |                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Unrealized appreciation on investments               |  |                      |  |                            | 12,500 |   |                           |   | 6,063  |      |  |   | 16,215  |   |  |   | 8,278   |  
|Unrealized depreciation on loans                     |  |                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|AMI Telecommunications Corporation                   |  | Telecommunications   |  |                            |       |   |                           |   | (1,720 | )    |  |   |        |   |  |   | (1,720  | )
|FTI Technologies Holdings, Inc.                      |  | Technology           |  |                            |       |   |                           |   |       |      |  |   | (4,125  | ) |  |   |        |  
|Sunshine Media Delaware, LLC                         |  | Publishing           |  |                            | (1,884 | ) |                           |   | (415   | )    |  |   | (3,308  | ) |  |   | (415    | )
|National Systems Integration, Inc.                   |  | Security Alarm       |  |                            | (910   | ) |                           |   |       |      |  |   | (910    | ) |  |   |        |  
|Netplexus Corporation                                |  | Technology           |  |                            | (74    | ) |                           |   | (647   | )    |  |   | (74     | ) |  |   | (647    | )
|Corporate Legal Times L.L.C.                         |  | Publishing           |  |                            |       |   |                           |   | (384   | )    |  |   |        |   |  |   | (501    | )
|NOW Communications, Inc.                             |  | Telecommunications   |  |                            |       |   |                           |   | (465   | )    |  |   |        |   |  |   | (465    | )
|Telecomm South, LLC                                  |  | Telecommunications   |  |                            | (399   | ) |                           |   |       |      |  |   | (847    | ) |  |   |        |  
|Images.com, Inc.                                     |  | Information Services |  |                            |       |   |                           |   | (437   | )    |  |   |        |   |  |   | (821    | )
|Other                                                |  |                      |  |                            | (523   | ) |                           |   | (194   | )    |  |   | (177    | ) |  |   | (267    | )
|                                                     |  |                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|                                                     |  |                      |  |                            | (3,790 | ) |                           |   | (4,262 | )    |  |   | (9,441  | ) |  |   | (4,836  | )
|Unrealized depreciation on equity investments        |  |                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|AMI Telecommunications Corporation                   |  | Telecommunications   |  |                            |       |   |                           |   | (2,695 | )    |  |   |        |   |  |   | (2,695  | )
|Copperstate Technologies, Inc.                       |  | Security Alarm       |  |                            | (62    | ) |                           |   |       |      |  |   | (2,292  | ) |  |   |        |  
|Crystal Media Network, LLC                           |  | Broadcasting         |  |                            | (347   | ) |                           |   |       |      |  |   | (347    | ) |  |   |        |  
|Biznessonline.com, Inc.                              |  | Telecommunications   |  |                            |       |   |                           |   |       |      |  |   |        |   |  |   | (2,001  | )
|Talk America Holdings, Inc.                          |  | Telecommunications   |  |                            | (205   | ) |                           |   |       |      |  |   | (1,068  | ) |  |   |        |  
|Working Mother Media, Inc.                           |  | Publishing           |  |                            | (267   | ) |                           |   | (687   | )    |  |   | (1,044  | ) |  |   | (1,184  | )
|Platinum Wireless, Inc.                              |  | Telecommunications   |  |                            | (264   | ) |                           |   |       |      |  |   | (132    | ) |  |   |        |  
|ETC Group, LLC                                       |  | Publishing           |  |                            | (2     | ) |                           |   |       |      |  |   | (750    | ) |  |   |        |  
|Interactive Business Solutions, Inc.                 |  | Security Alarm       |  |                            |       |   |                           |   | (389   | )    |  |   | (627    | ) |  |   | (270    | )
|National Systems Integration, Inc.                   |  | Security Alarm       |  |                            | (2,578 | ) |                           |   | (258   | )    |  |   | (3,833  | ) |  |   | (575    | )
|Other                                                |  |                      |  |                            | (498   | ) |                           |   | (994   | )    |  |   | (258    | ) |  |   | (1,186  | )
|                                                     |  |                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|                                                     |  |                      |  |                            | (4,223 | ) |                           |   | (5,023 | )    |  |   | (10,351 | ) |  |   | (7,911  | )
|                                                     |  |                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Unrealized depreciation on investments               |  |                      |  |                            | (8,013 | ) |                           |   | (9,285 | )    |  |   | (19,792 | ) |  |   | (12,747 | )
|Reversal of unrealized (appreciation) depreciation*  |  |                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Bridgecom Holdings, Inc.                             |  | Telecommunications   |  |                            |       |   |                           |   |       |      |  |   | (2,242  | ) |  |   |        |  
|Dakota Imaging, Inc.                                 |  | Technology           |  |                            | (331   | ) |                           |   |       |      |  |   | (331    | ) |  |   |        |  
|FTI Technologies Holdings, Inc.                      |  | Technology           |  |                            | 2,533  |   |                           |   |       |      |  |   | 2,533   |   |  |   |        |  
|Talk America Holdings, Inc.                          |  | Telecommunications   |  |                            |       |   |                           |   | (365   | )    |  |   |        |   |  |   | (365    | )
|NBG Radio Network, Inc.                              |  | Broadcasting         |  |                            |       |   |                           |   |       |      |  |   |        |   |  |   | 574     |  
|RR Bowker                                            |  | Information Services |  |                            | (794   | ) |                           |   |       |      |  |   | (794    | ) |  |   |        |  
|Rising Tide Holdings, Inc.                           |  | Publishing           |  |                            |       |   |                           |   | 2,735  |      |  |   |        |   |  |   | 2,735   |  
|AMI Telecommunications Corporation                   |  | Telecommunications   |  |                            | 6,848  |   |                           |   |       |      |  |   | 6,848   |   |  |   | 5,143   |  
|National Systems Integration, Inc.                   |  | Security Alarm       |  |                            |       |   |                           |   |       |      |  |   |        |   |  |   | 5,276   |  
|VS&A-PBI Holding LLC                                 |  | Publishing           |  |                            |       |   |                           |   |       |      |  |   |        |   |  |   | 7,901   |  
|NOW Communications, Inc.                             |  | Telecommunications   |  |                            |       |   |                           |   |       |      |  |   | 658     |   |  |   |        |  
|                                                     |  |                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Reversal of unrealized depreciation                  |  |                      |  |                            | 8,256  |   |                           |   | 2,370  |      |  |   | 6,672   |   |  |   | 21,264  |  
|                                                     |  |                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Net change in unrealized depreciation on investments |  |                      |  | $                          | 12,743 |   |                           | $ | (852   | )    |  | $ | 3,095   |   |  | $ | 16,795  |  
|                                                     |  |                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  



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



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Net Income



Net income totaled $17.6 million for the quarter ended June 30, 2004 compared to $9.0 million for the quarter ended June 30, 2003. Earnings per share for
the quarter ended June 30, 2004 increased to $0.44 from $0.30 primarily due to the change in net investment gains and losses. For the six months ended June 30, 2004, net income totaled $19.7 million compared to $17.9 million for the six months ended
June 30, 2003. However, earnings per share decreased for the six months ended June 30, 2004 from $0.59 to $0.51 due primarily to a higher number of shares outstanding during the first six months of 2004.



Financial Condition, Liquidity and Capital Resources



Cash, Cash Equivalents and Cash, Securitization Accounts



At June 30, 2004 and December 31, 2003, we had $58.4 million and $60.1
million, respectively, in cash and cash equivalents. In addition, at June 30, 2004 and December 31, 2003, we had $31.2 million and $33.4 million, respectively, in cash, securitization accounts. We invest cash on hand in interest bearing deposit
accounts with daily sweep features. We have maintained adequate cash balances to support ongoing origination activity and follow-on investments in portfolio companies. Cash, securitization accounts includes amounts held in designated bank accounts
representing payments received on securitized loans. We are required to use a portion of these amounts to pay interest expense, reduce borrowings, or pay other amounts in accordance with the related securitization agreements. Our objective is to
maintain sufficient cash on hand to cover current funding requirements, operations and to maintain flexibility as we manage our debt facilities.



For the first six months of 2004, net cash provided by operating activities totaled $27.1 million, an increase of $10.6 million over the prior years
first six months amount. This increase was due primarily to higher cash receipts of previously deferred payment-in-kind interest during the first six months of 2004 as compared to the first six months of 2003. Cash used in investing and financing
activities totaled $28.8 million compared with a net provision of cash in the first six months of 2003 of $28.8 million. These changes were principally due to higher investment originations in 2004 partially offset by issuance of common stock.



Liquidity and Capital Resources



We expect our cash on hand and cash generated from operations, including the
portion of the cash in securitization accounts that will be released to us, to be adequate to meet our cash needs at our current level of operations, including the next twelve months. We generally fund new originations using cash on hand, advances
under our credit facilities and equity financings.



On March 3,
2004, we filed a registration statement on Form N-2 with the Securities and Exchange Commission (SEC) which allows us to offer, from time to time, 6,320,896 shares of common stock in one or more offerings and allows certain selling
shareholders named therein to offer, from time to time, up to 11,679,104 shares of common stock in one or more offerings. In connection with this Registration Statement, on May 21, 2004 we raised $56.3 million of gross proceeds by selling 3,750,000
shares of common stock at an offering price of $15.00 per share. On June 8, 2004, the underwriters in the May 21, 2004 offering exercised their over-allotment and purchased an additional 562,500 shares of common stock at an offering price of $15.00
per share. As a result of the underwriters exercising their over-allotment, we raised an additional $8.4 million of gross proceeds.



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, 2004, this ratio was 265%. This requirement limits the amount that we may borrow. To fund growth in our investment portfolio in the future, we
anticipate needing to raise additional capital from various sources, including the equity markets and the securitization or other debt-related markets.



43



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##### Table of Contents

Off-Balance Sheet Arrangements



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



As of June 30, 2004, we had unused commitments to extend credit to our customers of $11.0 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 amounts we can draw on our Revolving Credit Facility and our Warehouse Credit Facility, the unused portion of our borrowing facilities totaled $135.2 million. See Borrowings section below for discussion of our borrowing
facilities.



Contractual Obligations



The following table shows our significant contractual obligations as of June
30, 2004:



|                                                  |  |                        |       |                 |   |           |  |           |       |              |   |     |  |   |    
|------------------------------------------------- |  | ---------------------- | ----- | --------------- | - | --------- |  | --------- | ----- | ------------ | - | --- |  | - | ---
|                                                  |  | Payments Due by Period
|(dollars in millions) Contractual Obligations (a) |  | Total                  |       | Less than1 year |   | 1-3 years |  | 4-5 years |       | After5 years
|Borrowings (b)                                    |  | $                      | 322.8 |                 | $ | 224.9     |  | $         | 97.9  |              | $ |    |  | $ |   
|Future minimum rental obligations                 |  |                        | 13.7  |                 |   | 1.5       |  |           | 3.1   |              |   | 3.1 |  |   | 6.0
|                                                  |  |                        |       |                 |   |           |  |           |       |              |   |     |  |   |    
|Total contractual obligations                     |  | $                      | 336.5 |                 | $ | 226.4     |  | $         | 101.0 |              | $ | 3.1 |  | $ | 6.0
|                                                  |  |                        |       |                 |   |           |  |           |       |              |   |     |  |   |    



|(a) |  | This excludes the unused commitments to extend credit to our customers of $11.0 million as discussed above.
|--- |  | -----------------------------------------------------------------------------------------------------------

|(b) |  | Borrowings under the Warehouse Credit Facility and the Revolving Credit Facility are listed based on the contractual maturity of the respective 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.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Borrowings



Term Securitization



On December 27, 2001, we established the MCG Commercial Loan Trust 2001-1 (the Trust), which issued two classes
of Series 2001-1 Notes to 15 institutional investors. The facility is secured by all of the Trusts commercial loans which were contributed by us and totaled $209.1 million as of June 30, 2004 and $247.5 million as of December 31, 2003. 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, 2004, $143.0 million of the Series 2001-1 Notes were outstanding and $173.1 million were outstanding as of December 31, 2003. The Series 2001-1 Class A Asset Backed Bonds bear interest of LIBOR plus 0.60% and Series 2001-1 Class B
Asset Backed Bonds bear interest of LIBOR plus 1.75%, and interest on both is payable quarterly.



Revolving Credit Facility



As of June 1, 2000, we, through MCG Master Trust, established a revolving credit facility (the Revolving Credit Facility), which allowed us to issue up to $200.0 million of Series 2000-1 Class A Notes (the Series



44



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##### Table of Contents

2000-1 Notes or Series 2000-1 Class A Asset Backed Securities). On February 12, 2004, the Revolving Credit Facility was amended (see
separate discussion below) under which our borrowing capacity decreased from $200.0 million to $130.0 million. As of June 30, 2004, $109.7 million of the Series 2000-1 Notes were outstanding with one investor and, as of December 31, 2003, $131.0
million were outstanding with one investor. As of June 30, 2004 and December 31, 2003, 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 $180.3 million of
commercial loans as of June 30, 2004 and $194.3 million of commercial loans as of December 31, 2003. 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 $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. As noted below, on February 12, 2004, the
requirement relating to loan charge-offs was eliminated. The Series 2000-1 Notes interest was based on a commercial paper rate plus 3.0% prior to February 12, 2004 at which time it was reduced to LIBOR plus 1.5%. Interest is payable monthly.



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



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



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



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



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



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



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



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



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Warehouse Facility



On January 29, 2004, our wholly owned, bankruptcy remote, special purpose indirect subsidiary, MCG Commercial Loan Trust 2003-1 entered into a $200
million secured warehouse credit facility with an affiliate of UBS AG. As of June 30, 2004, $70.2 million was outstanding under this facility. The warehouse credit facility was secured by $100.0 million of commercial loans as of June 30, 2004. We
will use the warehouse credit facility to fund our origination and purchase of a diverse pool of loans, including broadly syndicated rated loans, which we intend to securitize using an affiliate of the lender as the exclusive structurer and
underwriter or placement agent. Advances under the credit facility bear interest at LIBOR plus 0.50%. The warehouse credit facility operates much like a revolving credit facility that is primarily secured by the loans acquired with the advances
under the credit facility. In addition, the lender will have recourse to MCG Capital Corporation itself in a maximum aggregate amount of $72 million in the event that the principal and interest payments from the loans transferred to MCG Commercial
Loan Trust 2003-1 are insufficient to repay the outstanding amount due to the lender. The warehouse credit facility is cancelable by the lender for cause at any time and has an expiration term of September 24, 2004. The warehouse credit facility is
a short-term commitment of capital. If we are unable to consummate the securitization transaction or otherwise arrange for new financing on terms acceptable to us, we will have to curtail our loan origination activities.



Outstanding Borrowings



Our $115 million Revolving Credit Facility is scheduled to terminate on September 30, 2009, or sooner upon repayment of our
borrowings thereunder after September 30, 2004. Our $265.2 million securitization facility is scheduled to terminate on February 20, 2013 or sooner upon repayment of our borrowings. Our $200 million secured warehouse facility with an affiliate of
UBS AG is scheduled to terminate on September 24, 2004.



At
June 30, 2004, we had aggregate outstanding borrowings of $322.8 million. The following table shows the facility amounts and outstanding borrowings at June 30, 2004:



|                                              |  |                |       |                   |   |                  |  |      |  
|--------------------------------------------- |  | -------------- | ----- | ----------------- | - | ---------------- |  | ---- | -
|(dollars in millions)                         |  | Facilityamount |       | Amountoutstanding |   | InterestRate (a) | 
|Term Securitization                           |  |                |       |                   |   |                  |  |      |  
|Series 2001-1 Class A Asset Backed Bonds      |  | $              | 107.6 |                   | $ | 107.6            |  | 1.75 | %
|Series 2001-1 Class B Asset Backed Bonds      |  |                | 35.4  |                   |   | 35.4             |  | 2.90 |  
|Revolving Credit Facilty                      |  |                |       |                   |   |                  |  |      |  
|Series 2000-1 Class A Asset Backed Securities |  |                | 115.0 |                   |   | 109.7            |  | 2.74 |  
|Warehouse Facilty                             |  |                |       |                   |   |                  |  |      |  
|Warehouse Facilty Notes                       |  |                | 200.0 |                   |   | 70.1             |  | 1.61 |  
|                                              |  |                |       |                   |   |                  |  |      |  
|Total borrowings                              |  | $              | 458.0 |                   | $ | 322.8            |  | 2.18 | %
|                                              |  |                |       |                   |   |                  |  |      |  



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



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



|                                              |  |                |       |                   |   |                  |  |      |  
|--------------------------------------------- |  | -------------- | ----- | ----------------- | - | ---------------- |  | ---- | -
|(dollars in millions)                         |  | Facilityamount |       | Amountoutstanding |   | InterestRate (a) | 
|Term Securitization                           |  |                |       |                   |   |                  |  |      |  
|Series 2001-1 Class A Asset Backed Bonds      |  | $              | 137.7 |                   | $ | 137.7            |  | 1.77 | %
|Series 2001-1 Class B Asset Backed Bonds      |  |                | 35.4  |                   |   | 35.4             |  | 2.92 |  
|Revolving Credit Facilty                      |  |                |       |                   |   |                  |  |      |  
|Series 2000-1 Class A Asset Backed Securities |  |                | 200.0 |                   |   | 131.0            |  | 4.12 |  
|                                              |  |                |       |                   |   |                  |  |      |  
|Total borrowings                              |  | $              | 373.1 |                   | $ | 304.1            |  | 2.91 | %
|                                              |  |                |       |                   |   |                  |  |      |  



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



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Each of our borrowing facilities is funded through bankruptcy remote, special purpose, wholly-owned
subsidiaries of ours and, therefore, their assets may not be available to our creditors. See Note 3 to the Consolidated Financial Statements for further discussion of our borrowings.



Dividends



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



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



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



|                   |  |                   |  |                  |  |        |     
|------------------ |  | ----------------- |  | ---------------- |  | ------ | ----
|Date Declared      |  | Record Date       |  | Payment Date     |  | Amount
|July 22, 2004      |  | August 20, 2004   |  | October 28, 2004 |  | $      | 0.42
|April 22, 2004     |  | May 7, 2004       |  | July 29, 2004    |  |        | 0.42
|March 25, 2004     |  | April 6, 2004     |  | April 29, 2004   |  |        | 0.42
|December 16, 2003  |  | December 31, 2003 |  | January 29, 2004 |  |        | 0.42
|August 6, 2003     |  | August 18, 2003   |  | October 30, 2003 |  |        | 0.42
|June 16, 2003      |  | June 23, 2003     |  | July 30, 2003    |  |        | 0.41
|March 28, 2003     |  | April 16, 2003    |  | April 29, 2003   |  |        | 0.40
|December 18, 2002  |  | December 30, 2002 |  | January 30, 2003 |  |        | 0.42
|September 30, 2002 |  | October 16, 2002  |  | October 30, 2002 |  |        | 0.46
|June 3, 2002       |  | June 11, 2002     |  | July 31, 2002    |  |        | 0.47
|March 28, 2002     |  | April 17, 2002    |  | April 30, 2002   |  |        | 0.41
|December 31, 2001  |  | January 22, 2002  |  | January 31, 2002 |  |        | 0.86
|                   |  |                   |  |                  |  |        |     
|Total Declared     |  |                   |  |                  |  | $      | 5.53
|                   |  |                   |  |                  |  |        |     



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.



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Related Party Transactions



Prior to election to be regulated as a business development company, we terminated our stock option plan and adopted a
restricted stock program under which we issued 1,539,851 shares of restricted common stock to employees and directors. The total number of shares issued for the termination of the option plan was based upon the Black-Scholes option-pricing model and
assumptions and approved by our board of directors.



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



In the first quarter of 2004, as part of a review of
our executive compensation, the compensation committee of our Board of Directors agreed with certain of our executive officers to allow the forfeiture restrictions to lapse with respect to their Tier I and Tier II shares immediately upon full
repayment of the partially nonrecourse promissory notes that are secured by the restricted stock. In addition, the compensation committee waived the performance-based forfeiture restrictions and modified the time-based forfeiture provisions
associated with the Tier III shares through their respective amended and restated restricted stock agreements. The impact of these changes on long-term incentive compensation expense was an increase of approximately $4.1 million for the first
quarter of 2004.



Critical Accounting Policies



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



Income
Recognition



Interest on commercial loans is computed by
methods that generally result in level rates of return on principal amounts outstanding. When a loan becomes 90 days or more past due, or if we otherwise do not expect the customer to be able to service its debt and other obligations, we will, as a
general matter, place the loan on non-accrual status and cease recognizing interest income on that loan until all principal has been paid. However, we may make exceptions to this policy if the investment is well secured and in the process of
collection.



Paid-in-Kind Interest



In accordance with GAAP, we include in income certain amounts that we have
not yet received in cash, such as contractual paid-in-kind (PIK) interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term. However, in certain cases, a customer makes
principal payments on its loan prior to making payments to reduce the PIK loan balances and, therefore, the PIK portion of a customers loan can increase while the total outstanding amount of the loan to that customer may stay the same or
decrease. PIK loans represented $18.2 million or 2.4% of our portfolio of investments as of June 30, 2004 and $27.3 million or 3.9% of our portfolio of investments as of December 31, 2003.



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PIK related activity for the six months ended June 30, 2004 and the year ended December 31, 2003 was as
follows:



|                                           |  |                              |      |   |                            |   |       |  
|------------------------------------------ |  | ---------------------------- | ---- | - | -------------------------- | - | ----- | -
|(in millions)                              |  | Six MonthsEndedJune 30, 2004 |      |   | Year EndedDecember 31,2003 |  
|Beginning PIK loan balance                 |  | $                            | 27.3 |   |                            | $ | 27.2  |  
|PIK interest earned during the period      |  |                              | 4.9  |   |                            |   | 18.3  |  
|Change in interest receivable on PIK loans |  |                              | (0.1 | ) |                            |   | 0.1   |  
|Principal payments of cash on PIK loans    |  |                              | (9.2 | ) |                            |   | (7.0  | )
|PIK loans converted to other securities    |  |                              | (4.7 | ) |                            |   | (10.9 | )
|Realized loss                              |  |                              |     |   |                            |   | (0.4  | )
|                                           |  |                              |      |   |                            |   |       |  
|Ending PIK loan balance                    |  | $                            | 18.2 |   |                            | $ | 27.3  |  
|                                           |  |                              |      |   |                            |   |       |  



As noted above, in
certain cases, a customer may make principal payments on its loan that are contractually applied first to the non-PIK loan balance instead of the PIK loan balance. If all principal payments from these customers had been applied first to any PIK loan
balance outstanding at the time of the payment, and any remainder applied to the non-PIK loan balance, an additional $5.8 million of payments would have been applied against the June 30, 2004 PIK loan balance of $18.2 million and an additional $6.6
million of payments would have been applied against the December 31, 2003 PIK loan balance of $27.3 million.



As of June 30, 2004, 98% of the $18.2 million of PIK loans outstanding have an investment rating of 3 or better and as of December 31, 2003, 93% of the
$27.3 million of PIK loans outstanding had an investment rating of 3 or better. The net increase in loan balances as a result of contracted PIK arrangements are separately identified on our consolidated statements of cash flows.



Loan Origination Fees



Loan origination fees are deferred and amortized as adjustments to the related loans yield over the contractual life
of the loan. In certain loan arrangements, warrants or other equity interests are received from the borrower as additional origination fees. The borrowers granting these interests are typically non-publicly traded companies. We record the financial
instruments received at fair value as determined by our board of directors. Fair values are determined using various valuation models which attempt to estimate the underlying value of the associated entity. These models are then applied to our
ownership share considering any discounts for transfer restrictions or other terms which impact the value. Changes in these values are recorded through our statement of operations. Any resulting discount on the loan from recordation of warrant and
other equity instruments are accreted into income over the term of the loan. We had $14.6 million and $16.4 million of unearned income as of June 30, 2004 and December 31, 2003, respectively.



Unearned fee activity for the six months ended June 30, 2004 and year ended
December 31, 2003 was as follows:



|                                           |  |                                |      |   |                                      |   |      |       |  |   |              |   |  |                                      |      |   |       |   |      |   |  |   |      |  
|------------------------------------------ |  | ------------------------------ | ---- | - | ------------------------------------ | - | ---- | ----- |  | - | ------------ | - |  | ------------------------------------ | ---- | - | ----- | - | ---- | - |  | - | ---- | -
|                                           |  | Six Months Ended June 30, 2004 |      |   | Year Ended December 31, 2003         |  
|(in millions)                              |  | CashReceived                   |      |   | Equity Interestand FutureReceivables |   |      | Total |  |   | CashReceived |   |  | Equity Interestand FutureReceivables |      |   | Total |  
|Beginning unearned income balance          |  | $                              | 5.6  |   |                                      | $ | 10.8 |       |  | $ | 16.4         |   |  | $                                    | 8.3  |   |       | $ | 4.5  |   |  | $ | 12.8 |  
|Additional fees                            |  |                                | 1.3  |   |                                      |   | 2.2  |       |  |   | 3.5          |   |  |                                      | 1.8  |   |       |   | 10.6 |   |  |   | 12.4 |  
|Unearned income recognized                 |  |                                | (1.6 | ) |                                      |   | (3.3 | )     |  |   | (4.9         | ) |  |                                      | (2.9 | ) |       |   | (4.1 | ) |  |   | (7.0 | )
|Unearned fees applied against loan balance |  |                                | (0.4 | ) |                                      |   |     |       |  |   | (0.4         | ) |  |                                      | (1.6 | ) |       |   | (0.2 | ) |  |   | (1.8 | )
|                                           |  |                                |      |   |                                      |   |      |       |  |   |              |   |  |                                      |      |   |       |   |      |   |  |   |      |  
|Ending unearned income balance             |  | $                              | 4.9  |   |                                      | $ | 9.7  |       |  | $ | 14.6         |   |  | $                                    | 5.6  |   |       | $ | 10.8 |   |  | $ | 16.4 |  
|                                           |  |                                |      |   |                                      |   |      |       |  |   |              |   |  |                                      |      |   |       |   |      |   |  |   |      |  



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



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Other Fees



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



Valuation of Investments



At June 30, 2004, approximately 89% of our total assets represented investments recorded at fair value. Value, as defined in Section 2(a)(41) of the
Investment Company Act of 1940, 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 decreased in value, including where collection of a loan or realization of an equity security is doubtful. Conversely, we will record unrealized
appreciation if we believe that the underlying portfolio company has appreciated in value and, therefore, our investment has also appreciated in value, where appropriate.



As a business development company, we invest primarily in illiquid securities including debt and equity securities of
private companies. The structure of each debt and equity security is specifically negotiated to enable us to protect our investment and maximize our returns. We generally include many terms governing interest rate, repayment terms, prepayment
penalties, financial covenants, operating covenants, ownership and corporate governance parameters, dilution parameters, liquidation preferences, voting rights, and put or call rights. In many cases, our loan agreements also allow for increases in
the spread to the base index rate if the financial or operational performance of the customer deteriorates or shows negative variances from the customers business plan and, in some cases, allow for decreases in the spread if financial or
operational performance improves or exceeds the customers plan. Our investments are generally subject to some restrictions on resale and generally have no established trading market. Because of the type of investments that we make and the
nature of our business, our valuation process requires an analysis of various factors. Our fair value methodology includes the examination of, among other things, the underlying investment performance, financial condition and market changing events
that impact valuation.



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



Stock-based Compensation



We account for stock-based compensation under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations. For restricted common stock issued to employees for



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##### Table of Contents

whom no return-based criteria apply, compensation expense, equal to the value of the shares at the later of the grant date or the date at which all
return-based forfeiture provisions lapsed or were removed, is recorded over the term of the forfeiture provisions. See Note 5 to the Consolidated Financial Statements for further discussion of our employee stock plans.



Securitization Transactions



Periodically, we transfer pools of loans to special purpose entities (SPEs)
for use in securitization transactions. These on-balance sheet securitization transactions comprise a significant source of our overall funding, with the total face amount of the outstanding loans and equity investments assumed by third parties
equaled $489.4 million at June 30, 2004 and $441.8 million at December 31, 2003. On April 1, 2001, the Company adopted the requirements of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, which applies prospectively to all securitization transactions occurring after March 31, 2001. Adoption of SFAS No. 140 did not have a material impact on our operations or financial position. Transfers of loans have not met
the requirements of SFAS No. 140 for sales treatment and are, therefore, treated as secured borrowings, with the transferred loans remaining in investments and the related liability recorded in borrowings.



Recent Developments



On July 22, 2004, we announced that we have named Michael R. McDonnell as
Executive Vice President and Chief Financial Officer of MCG. Mr. McDonnell will start with MCG on September 1, 2004, at which time Janet Perlowski will step down as Executive Vice President and Chief Financial Officer.



On August 4, 2004, we announced that we have named Kim D. Kelly as an
additional Independent Director effective August 1, 2004.



Item 3.    Quantitative and Qualitative Disclosures about Market Risk



Interest rate sensitivity refers to the change in earnings that may result from the changes in the level of interest rates. Our net interest income is
affected by changes in various interest rates, including LIBOR, prime rates and commercial paper rates. Over 87% 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 50% 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. At June 30, 2004, the rate spread to LIBOR of
our accruing loans and yielding equity investments was 11.1%.



We regularly measure exposure to interest rate risk. We have interest rate risk exposure mainly from the portion of the commercial loan portfolio funded using stockholders equity. Our board of directors assesses interest rate risk and
we manage our interest rate exposure on an ongoing basis. The following table shows a comparison of the interest rate base for our interest bearing cash, outstanding commercial loans and our outstanding borrowings at June 30, 2004 and December 31,
2003:



|                          |  |                                          |       |                   |   |                                          |  |            |       |  |   |      
|------------------------- |  | ---------------------------------------- | ----- | ----------------- | - | ---------------------------------------- |  | ---------- | ----- |  | - | -----
|                          |  | June 30, 2004                            |       | December 31, 2003
|(dollars in millions)     |  | Interest BearingCash andCommercial Loans |       | Borrowings        |   | Interest BearingCash andCommercial Loans |  | Borrowings
|Repurchase Agreement Rate |  | $                                        | 88.0  |                   | $ |                                         |  | $          | 93.0  |  | $ |     
|Prime Rate                |  |                                          | 8.5   |                   |   |                                         |  |            | 1.3   |  |   |     
|30-Day LIBOR              |  |                                          | 36.5  |                   |   | 179.8                                    |  |            | 20.9  |  |   |     
|60-Day LIBOR              |  |                                          | 12.3  |                   |   |                                         |  |            | 7.4   |  |   |     
|90-Day LIBOR              |  |                                          | 497.0 |                   |   | 143.0                                    |  |            | 481.6 |  |   | 173.1
|180-Day LIBOR             |  |                                          | 30.9  |                   |   |                                         |  |            |      |  |   |     
|Commercial Paper Rate     |  |                                          |      |                   |   |                                         |  |            |      |  |   | 131.0
|Fixed Rate                |  |                                          | 78.1  |                   |   |                                         |  |            | 94.4  |  |   |     
|                          |  |                                          |       |                   |   |                                          |  |            |       |  |   |      
|Total                     |  | $                                        | 751.3 |                   | $ | 322.8                                    |  | $          | 698.6 |  | $ | 304.1
|                          |  |                                          |       |                   |   |                                          |  |            |       |  |   |      



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Based on our June 30, 2004 balance sheet, the following table shows the impact of base rate changes in
interest rates assuming no changes in our investment and borrowing structure. The impact of an additional 100 basis point increase is different from the first 100 basis point increase due to the imposition of LIBOR floors.



(dollars in millions)



|                   |  |                 |      |   |                  |   |      |            |  |   |      |  
|------------------ |  | --------------- | ---- | - | ---------------- | - | ---- | ---------- |  | - | ---- | -
|Basis Point Change |  | Interest Income |      |   | Interest Expense |   |      | Net Income | 
|(100)              |  | $               | (3.4 | ) |                  | $ | (3.2 | )          |  | $ | (0.2 | )
|100                |  | $               | 4.4  |   |                  | $ | 3.2  |            |  | $ | 1.2  |  
|200                |  | $               | 10.8 |   |                  | $ | 6.5  |            |  | $ | 4.3  |  
|300                |  | $               | 17.6 |   |                  | $ | 9.7  |            |  | $ | 7.9  |  



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



Item 4.    Controls and Procedures



| | (a) |  | As of the end of the period covered by this report, MCG carried out an evaluation, under the supervision and with the participation of MCGs management, including MCGs
Chief Executive Officer, President and Chief Operating Officer, Chief Financial Officer and Chief Accounting 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, the Chief Financial Officer and Chief Accounting 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 by MCG in the reports it files or submits under the Securities Exchange Act of 1934.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | There have been no changes in MCGs internal control over financial reporting that occurred during the quarter ended June 30, 2004 that have materially affected, or are
reasonably likely to materially affect, MCGs internal control over financial reporting.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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PART II.    OTHER INFORMATION



Item 1.    Legal Proceedings



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



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



Item 2.    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities



During the six months ended June 30, 2004, MCG issued a total of 2,806 shares of common stock under its dividend reinvestment plan pursuant to an
exemption from the registration requirements of the Securities Act of 1933. The aggregate offering proceeds for the shares of common stock sold under the dividend reinvestment plan were approximately $50 thousand.



We did not repurchase any shares of our common stock during the six months
ended June 30, 2004.



Item 3.    Defaults Upon Senior Securities



Not Applicable.



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



On May 19, 2004, 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, 2004



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



1. Election of Directors:



|                    |  |            |  |          
|------------------- |  | ---------- |  | ---------
|Director            |  | For        |  | Withheld 
|Joseph H. Gleberman |  | 33,548,315 |  | 3,594,359
|Steven F. Tunney    |  | 33,548,567 |  | 3,594,157
|Norman W. Alpert    |  | 36,600,592 |  | 542,132  



Continuing Directors
whose terms did not expire at the annual meeting were as follows: Bryan J. Mitchell, Robert J. Merrick, Wallace B. Millner, III, Jeffrey M. Bucher, Kenneth J. OKeefe, and Michael A. Pruzan.



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



|           |  |         |  |        
|---------- |  | ------- |  | -------
|For        |  | Against |  | Abstain
|37,053,171 |  | 57,509  |  | 32,044 



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



Item 5.    Other Information



Not Applicable.



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Item 6.    Exhibits and Reports on Form 8-K



(a)    Exhibits



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



|              |  |                                                                                                                                     
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                             
|              | 
|10.65*        |  | Employment Agreement between the Company and Michael R. McDonnell, dated July 14, 2004.                                             
|              | 
|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.                      
|              | 
|31.4*         |  | Certification of Chief Accounting 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).              
|              | 
|32.4*         |  | Certification of Chief Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).               



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



(b)    Reports on Form 8-K



On April 27, 2004, 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 June 30, 2004 and our financial results for the three months ended March 31, 2004.



On July 23, 2004, we filed a current report on Form 8-K, pursuant to Item 5, reporting the issuance of a press release announcing we have named Michael R.
McDonnell, CPA as Executive Vice President and Chief Financial Officer, and that McDonnell will start with MCG on September 1, 2004.



On July 28, 2004, 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, 2004.



On August 4, 2004, we filed a current report on Form 8-K, pursuant to Item 5 reporting the issuance of a press release announcing Kim D. Kelly as a new Independent Director of MCG, effective August 1, 2004.



On August 4, 2004, we filed a current report on Form 8-K, pursuant to Item
12, reporting the issuance of a press release announcing our financial results for the three and six months ended June 30, 2004.



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SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on August 6, 2004.



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




By:

/s/    JOHN C. WELLONSJohn C. Wellons Chief Accounting Officer




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