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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



| 
|-
|x
| 
| 
| 
| ̈
| 
| 



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 ̈



Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest practicable date. The number of shares of the issuers Common Stock, $.01 par value, outstanding as of May 6, 2003 was 31,259,462.



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##### Table of Contents

MCG CAPITAL CORPORATION



FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2003



TABLE OF CONTENTS



|              
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|PART I        
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|              
|Item 1.       
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|Item 2.       
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|Item 3.       
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|Item 4.       
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|PART II       
|              
|Item 1.       
|              
|Item 2.       
|              
|Item 3.       
|              
|Item 4.       
|              
|Item 5.       
|              
|Item 6.       
|              
|Signatures    
|              
|Certifications



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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 subsidiaries and its
affiliated securitization trusts unless the context otherwise requires.



Selected Consolidated Financial and Other Data



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



|                                                                                           |  | Three Months Ended March 31,
|------------------------------------------------------------------------------------------ |  | ----------------------------
|(dollars in thousands except per share data)                                               |  | 2003                        
|Income Statement Data:                                                                     |  |                             
|Operating income                                                                           |  | $                           
|Net operating income before investment gains and losses                                    |  |                             
|Net income/Net increase in stockholders equity resulting from earnings                    |  |                             
|                                                                                          
|Per Common Share Data:                                                                     |  |                             
|Earnings per common share basic and diluted                                                |  | $                           
|Net operating income before investment gains and losses per common share basic and
diluted |  |                             
|Net asset value per common share (a)                                                       |  |                             
|Dividends declared per common share                                                        |  |                             
|                                                                                          
|Selected Period-End Balances:                                                              |  |                             
|Total investment portfolio                                                                 |  | $                           
|Total assets                                                                               |  |                             
|Borrowings                                                                                 |  |                             
|                                                                                          
|Other data:                                                                                |  |                             
|Number of portfolio companies                                                              |  |                             
|Number of employees                                                                        |  |                             



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



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##### Table of Contents

Item 1.    Financial Statements (unaudited)



MCG Capital Corporation

Consolidated Balance Sheets

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



|                                                                                                                              |  | March 31, 2003 |         |   | December 31, 2002 |  
|----------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ----------------- | -
|                                                                                                                              |  |                |        
|Assets                                                                                                                        |  |                |         |   |                   |  
|Cash and cash equivalents                                                                                                     |  | $              | 37,604  |   |                   | $
|Cash, securitization accounts                                                                                                 |  |                | 28,986  |   |                   |  
|Investments:                                                                                                                  |  |                |         |   |                   |  
|Commercial loans, at fair value (cost of $631,950 and $694,977)                                                               |  |                | 624,142 |   |                   |  
|Investments in equity securities, at fair value (cost of $53,245 and
$37,014)                                                 |  |                | 35,579  |   |                   |  
|Unearned income on commercial loans                                                                                           |  |                | (11,299 | ) |                   |  
|                                                                                                                              |  |                |        
|Total investments                                                                                                             |  |                | 648,422 |   |                   |  
|Interest receivable                                                                                                           |  |                | 6,497   |   |                   |  
|Other assets                                                                                                                  |  |                | 10,072  |   |                   |  
|                                                                                                                              |  |                |        
|Total assets                                                                                                                  |  | $              | 731,581 |   |                   | $
|                                                                                                                              |  |                |        
|Liabilities                                                                                                                   |  |                |         |   |                   |  
|Borrowings                                                                                                                    |  | $              | 354,908 |   |                   | $
|Interest payable                                                                                                              |  |                | 1,186   |   |                   |  
|Dividends payable                                                                                                             |  |                | 12,504  |   |                   |  
|Other liabilities                                                                                                             |  |                | 3,799   |   |                   |  
|                                                                                                                              |  |                |        
|Total liabilities                                                                                                             |  |                | 372,397 |   |                   |  
|                                                                                                                              |  |                |        
|Commitments and contingencies                                                                                                 |  |                |         |   |                   |  
|Stockholders Equity                                                                                                          |  |                |         |   |                   |  
|Preferred stock, par value $.01, authorized 1 share, none issued and
outstanding                                              |  |                |        |   |                   |  
|Common stock,par value $.01, authorized 100,000 shares, 31,259 issued and
outstanding on March 31, 2003 and December 31, 2002 |  |                | 313     |   |                   |  
|Paid-in capital                                                                                                               |  |                | 419,961 |   |                   |  
|Stockholder loans                                                                                                             |  |                | (5,498  | ) |                   |  
|Unearned compensationrestricted stock                                                                                        |  |                | (7,608  | ) |                   |  
|Distributions in excess of earnings                                                                                           |  |                | (22,510 | ) |                   |  
|Net unrealized depreciation on investments                                                                                    |  |                | (25,474 | ) |                   |  
|                                                                                                                              |  |                |        
|Total stockholders equity                                                                                                    |  |                | 359,184 |   |                   |  
|                                                                                                                              |  |                |        
|Total liabilities and stockholders equity                                                                                    |  | $              | 731,581 |   |                   | $
|                                                                                                                              |  |                |        



See notes to
consolidated financial statements.



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MCG Capital Corporation

Consolidated Statements of Operations (unaudited)

(in thousands, except per share amounts)



|                                                                        |  | Three Months Ended March 31, |        
|----------------------------------------------------------------------- |  | ---------------------------- | -------
|                                                                        |  | 2003                         |        
|                                                                        |  |                              |        
|Operating income                                                        |  |                              |        
|Interest and fees on commercial loans                                   |  | $                            | 17,828 
|Advisory fees and other income                                          |  |                              | 711    
|                                                                        |  |                              |        
|Total operating income                                                  |  |                              | 18,539 
|                                                                        |  |                              |        
|Operating expenses                                                      |  |                              |        
|Interest expense                                                        |  |                              | 2,447  
|Employee compensation:                                                  |  |                              |        
|Salaries and benefits                                                   |  |                              | 1,884  
|Long-term incentive compensation                                        |  |                              | 1,526  
|                                                                        |  |                              |        
|Total employee compensation                                             |  |                              | 3,410  
|General and administrative expense                                      |  |                              | 1,736  
|                                                                        |  |                              |        
|Total operating expenses                                                |  |                              | 7,593  
|                                                                        |  |                              |        
|Net operating income before investment gains and losses                 |  |                              | 10,946 
|                                                                        |  |                              |        
|Realized gains (losses) on investments                                  |  |                              | (19,696
|Net change in unrealized appreciation (depreciation) on investments     |  |                              | 17,647 
|                                                                        |  |                              |        
|Net investment gains and losses                                         |  |                              | (2,049 
|                                                                        |  |                              |        
|Net income/Net increase in stockholders equity resulting from earnings |  | $                            | 8,897  
|                                                                        |  |                              |        
|Earnings per common share basic and diluted                             |  | $                            | 0.30   
|Cash dividends declared per share                                       |  | $                            | 0.40   
|Weighted average common shares outstanding                              |  |                              | 30,067 
|Weighted average common shares outstandingdiluted                      |  |                              | 30,067 



See notes to
consolidated financial statements.



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MCG Capital Corporation

Consolidated Statement of Stockholders Equity (unaudited)

(in thousands, except per share
amounts)





|                                                                                          |  | Common Stock |   | Paid-in Capital |        |     | Stock-holder Loans |   |         | UnearnedCompen-sation
Restricted stock |  |   | Distributions (in excess of) less than
earnings |   |  | Net Unrealized Depreciation on Investments |         |   | Total Stockholders Equity |  
|----------------------------------------------------------------------------------------- |  | ------------ | - | --------------- | ------ | --- | ------------------ | - | ------- | --------------------------------------- |  | - | ----------------------------------------------- | - |  | ------------------------------------------ | ------- | - | -------------------------- | -
|                                                                                          |  | Shares       |   |                 | Amount |     |                    |   |         |                                         | 
|Balance December 31, 2001                                                                 |  | 28,287       |   |                 | $      | 283 |                    | $ | 370,087 |                                         |  | $ | (6,510                                          | ) |  | $                                          | (13,077 | ) |                            | $
|Net income/Net increase (decrease) in stockholders equity resulting from
earnings (loss) |  |              |   |                 |        |     |                    |   |         |                                         |  |   |                                                 |   |  |                                            |         |   |                            |  
|Dividends declared, $0.41 per share                                                       |  |              |   |                 |        |     |                    |   |         |                                         |  |   |                                                 |   |  |                                            |         |   |                            |  
|Dividend reinvestment                                                                     |  | 3            |   |                 |        |    |                    |   | 54      |                                         |  |   |                                                 |   |  |                                            |         |   |                            |  
|Amortization of restricted stock awards                                                   |  |              |   |                 |        |     |                    |   |         |                                         |  |   |                                                 |   |  |                                            | 860     |   |                            |  
|Payments on employee loans                                                                |  | (3           | ) |                 |        |     |                    |   | (44     | )                                       |  |   | 451                                             |   |  |                                            | 35      |   |                            |  
|                                                                                          |  |              |   |                 |        |     |                    |   |         |                                         |  |   |                                                 |   |  |                                            |         |   |                            |  
|Balance March 31, 2002                                                                    |  | 28,287       |   |                 | $      | 283 |                    | $ | 370,097 |                                         |  | $ | (6,059                                          | ) |  | $                                          | (12,182 | ) |                            | $
|                                                                                          |  |              |   |                 |        |     |                    |   |         |                                         |  |   |                                                 |   |  |                                            |         |   |                            |  
|                                                                                         
|Balance December 31, 2002                                                                 |  | 31,259       |   |                 | $      | 313 |                    | $ | 419,961 |                                         |  | $ | (5,513                                          | ) |  | $                                          | (8,566  | ) |                            | $
|Net income/Net increase (decrease) in stockholders equity resulting from
earnings (loss) |  |              |   |                 |        |     |                    |   |         |                                         |  |   |                                                 |   |  |                                            |         |   |                            |  
|Dividends declared, $0.40 per share                                                       |  |              |   |                 |        |     |                    |   |         |                                         |  |   |                                                 |   |  |                                            |         |   |                            |  
|Amortization of restricted stock awards                                                   |  |              |   |                 |        |     |                    |   |         |                                         |  |   |                                                 |   |  |                                            | 958     |   |                            |  
|Payments on employee loans                                                                |  |              |   |                 |        |     |                    |   |         |                                         |  |   | 15                                              |   |  |                                            |         |   |                            |  
|                                                                                          |  |              |   |                 |        |     |                    |   |         |                                         |  |   |                                                 |   |  |                                            |         |   |                            |  
|Balance March 31, 2003                                                                    |  | 31,259       |   |                 | $      | 313 |                    | $ | 419,961 |                                         |  | $ | (5,498                                          | ) |  | $                                          | (7,608  | ) |                            | $
|                                                                                          |  |              |   |                 |        |     |                    |   |         |                                         |  |   |                                                 |   |  |                                            |         |   |                            |  





See notes to consolidated financial statements.



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MCG Capital Corporation

Consolidated Statements of Cash Flows (unaudited)

(in thousands)



|                                                                                                                                               |  | Three Months Ended March 31, |        
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | -------
|                                                                                                                                               |  | 2003                         |        
|                                                                                                                                              
|Operating activities                                                                                                                           |  |                              |        
|Net income/Net increase in stockholders equity resulting from
earnings                                                                        |  | $                            | 8,897  
|Adjustments to reconcile net income/net increase in stockholders equity resulting
from earnings to net cash provided by operating activities: |  |                              |        
|Depreciation and amortization                                                                                                                  |  |                              | 130    
|Amortization of restricted stock awards                                                                                                        |  |                              | 958    
|Amortization of deferred debt issuance costs                                                                                                   |  |                              | 349    
|Realized losses on investments                                                                                                                 |  |                              | 19,696 
|Net change in unrealized depreciation (appreciation) on investments                                                                            |  |                              | (17,647
|(Increase) decrease in cashsecuritization accounts from interest
collections                                                                  |  |                              | 3,351  
|(Increase) decrease in interest receivable                                                                                                     |  |                              | (1,054 
|Increase in accrued payment-in-kind interest                                                                                                   |  |                              | (4,108 
|Increase (decrease) in unearned income                                                                                                         |  |                              | (1,192 
|(Increase) decrease in other assets                                                                                                            |  |                              | 397    
|Increase (decrease) in interest payable                                                                                                        |  |                              | (341   
|Increase (decrease) in other liabilities                                                                                                       |  |                              | (881   
|                                                                                                                                              
|Net cash provided by operating activities                                                                                                      |  |                              | 8,555  
|                                                                                                                                              
|Investing activities                                                                                                                           |  |                              |        
|Originations, draws and advances on loans                                                                                                      |  |                              | (1,494 
|Principal payments on loans                                                                                                                    |  |                              | 35,952 
|Net increase in equity investments                                                                                                             |  |                              | (3,167 
|Purchase of premises, equipment and software                                                                                                   |  |                              | (419   
|                                                                                                                                              
|Net cash provided by (used in) investing activities                                                                                            |  |                              | 30,872 
|                                                                                                                                              
|Financing activities                                                                                                                           |  |                              |        
|Net proceeds (payments) from borrowings                                                                                                        |  |                              | (8,674 
|(Increase) decrease in cashsecuritization cash accounts for paydown of principal
on debt                                                      |  |                              | 10,576 
|Payment of financing costs                                                                                                                     |  |                              |       
|Issuance of common stock, net of costs                                                                                                         |  |                              |       
|Dividends paid                                                                                                                                 |  |                              | (13,129
|Repayment of loans granted to officers/shareholders                                                                                            |  |                              | 15     
|                                                                                                                                              
|Net cash (used in) provided by financing activities                                                                                            |  |                              | (11,212
|                                                                                                                                              
|Increase (decrease) in cash and cash equivalents                                                                                               |  |                              | 28,215 
|Cash and cash equivalents at beginning of period                                                                                               |  |                              | 9,389  
|                                                                                                                                              
|Cash and cash equivalents at end of period                                                                                                     |  | $                            | 37,604 
|                                                                                                                                              
|Supplemental disclosures                                                                                                                       |  |                              |        
|Interest paid                                                                                                                                  |  | $                            | 2,440  
|Income taxes paid (received)                                                                                                                   |  |                              | 4      



See notes to
consolidated financial statements.



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MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|Portfolio Company                           |  | Title of Securities Held by the Company |                | Percentage of Class Held on a Fully
Diluted Basis (9) |                   |  |      |         |           
|------------------------------------------- |  | --------------------------------------- | -------------- | ----------------------------------------------------- | ----------------- |  | ---- | ------- | ----------
|                                            |  |                                         | March 31, 2003 |                                                       | December 31, 2002
|                                            |  |                                         | Cost           |                                                       | Fair Value        |  | Cost |         | Fair Value
|                                           
|Newspaper:                                  |  |                                         |                |                                                       |                   |  |      |         |           
|                                           
|21st Century Newspapers,                    |  | Subordinated Debt                       |                |                                                       |                   |  | $    | 21,276  |           
|Inc                                         |  | Common Stock                            |                | 1.0                                                   | %                 |  |      | 452     |           
|                                           
|American Consolidated Media Inc. (1)        |  | Senior Debt                             |                |                                                       |                   |  |      | 19,825  |           
|                                           
|Badoud Enterprises, Inc. (1)                |  | Senior Debt                             |                |                                                       |                   |  |      | 9,300   |           
|                                           
|Brookings Newspapers, L.L.C. (1)            |  | Senior Debt                             |                |                                                       |                   |  |      | 3,000   |           
|                                           
|Community Media Group, Inc. (1)             |  | Senior Debt                             |                |                                                       |                   |  |      | 11,326  |           
|                                           
|Country Media, Inc. (12)                    |  | Senior Debt                             |                |                                                       |                   |  |      | 7,463   |           
|                                            |  | Common Stock                            |                | 6.3                                                   | %                 |  |      | 100     |           
|                                           
|Creative Loafing, Inc. (1)                  |  | Senior Debt                             |                |                                                       |                   |  |      | 14,950  |           
|                                           
|Crescent Publishing Company LLC (1)         |  | Senior Debt                             |                |                                                       |                   |  |      | 14,192  |           
|                                           
|The Joseph F. Biddle Publishing Company (1) |  | Senior Debt                             |                |                                                       |                   |  |      | 11,505  |           
|                                           
|The Korea Times Los Angeles, Inc.           |  | Senior Debt                             |                |                                                       |                   |  |      | 11,217  |           
|                                           
|McGinnis-Johnson Consulting, LLC (1)        |  | Subordinated Debt                       |                |                                                       |                   |  |      | 9,463   |           
|                                           
|Minnesota Publishers, Inc. (1)              |  | Senior Debt                             |                |                                                       |                   |  |      | 14,250  |           
|                                           
|Murphy McGinnis Media, Inc. (1)             |  | Senior Debt                             |                |                                                       |                   |  |      | 20,759  |           
|                                           
|Pacific-Sierra Publishing, Inc.             |  | Senior Debt                             |                |                                                       |                   |  |      | 23,685  |           
|                                           
|Stonebridge Press, Inc. (1)                 |  | Senior Debt                             |                |                                                       |                   |  |      | 5,824   |           
|                                           
|Wyoming Newspapers, Inc. (1)                |  | Senior Debt                             |                |                                                       |                   |  |      | 11,531  |           
|                                           
|Total Newspaper                             |  |                                         |                |                                                       |                   |  |      | 210,118 |           
|                                           
|Publishing:                                 |  |                                         |                |                                                       |                   |  |      |         |           
|                                           
|Boucher Communications,                     |  | Senior Debt                             |                |                                                       |                   |  |      | 2,000   |           
|Inc. (1)                                    |  | Stock Appreciation Rights               |                |                                                       |                   |  |      |        |           
|                                           
|Canon Communications                        |  | Subordinated Debt                       |                |                                                       |                   |  |      | 16,250  |           
|LLC and Chemical Week Publishing L.L.C. (1) |  |                                         |                |                                                       |                   |  |      |         |           
|                                           
|Corporate Legal Times                       |  | Senior Debt                             |                |                                                       |                   |  |      | 4,958   |           
|L.L.C. (8) (10)                             |  | Subordinated Debt                       |                |                                                       |                   |  |      | 670     |           
|                                            |  | LLC Interest                            |                | 90.6                                                  | %                 |  |      | 313     |           
|                                           
|Dowden Health Media, Inc.                   |  | Senior Debt                             |                |                                                       |                   |  |      | 1,000   |           
|                                           



See notes to
consolidated financial statements.



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MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|Portfolio Company                |  | Title of Securities Held by the Company              |                | Percentage of Class Held on a Fully
Diluted Basis (9) |                   |  |      |        |           
|-------------------------------- |  | ---------------------------------------------------- | -------------- | ----------------------------------------------------- | ----------------- |  | ---- | ------ | ----------
|                                 |  |                                                      | March 31, 2003 |                                                       | December 31, 2002
|                                 |  |                                                      | Cost           |                                                       | Fair Value        |  | Cost |        | Fair Value
|                                
|Fawcette Technical               |  | Senior Debt                                          |                |                                                       |                   |  | $    | 18,700 |           
|Publications Holding (1)         |  | Warrants to purchase                                 |                |                                                       |                   |  |      |        |           
|(8)                              |  | Common Stock                                         |                | 38.9                                                  | %                 |  |      | 519    |           
|                                
|Miles Media Group,               |  | Senior Debt                                          |                |                                                       |                   |  |      | 7,841  |           
|Inc. (1)                         |  | Warrants to purchase Common Stock                    |                | 12.4                                                  | %                 |  |      | 20     |           
|                                
|Pfingsten Publishing, LLC (1)    |  | Senior Debt                                          |                |                                                       |                   |  |      |       |           
|                                
|Rising Tide Holdings LLC (1) (8) |  | Senior Debt Warrants to purchase membership interest |                |                                                       |                   |  |      | 3,085  |           
|                                 |  | in LLC                                               |                | 6.5                                                   | %                 |  |      |       |           
|                                
|Sabot Publishing, Inc. (1)       |  | Senior Debt                                          |                |                                                       |                   |  |      | 10,322 |           
|                                 |  | Warrants to purchase Common Stock                    |                | 1.8                                                   | %                 |  |      |       |           
|                                
|Sunshine Media                   |  | Senior Debt                                          |                |                                                       |                   |  |      | 12,253 |           
|Delaware,                        |  | Class A LLC Interest                                 |                | 12.8                                                  | %                 |  |      | 500    |           
|LLC (1) (12)                     |  | Warrants to purchase Class B LLC interest            |                | 100.0                                                 | %                 |  |      |       |           
|                                
|THE Journal, LLC (8)             |  | Senior Debt                                          |                |                                                       |                   |  |      | 3,266  |           
|                                
|UMAC, Inc. (8) (10)              |  | Common Stock                                         |                | 100.0                                                 | %                 |  |      | 10,579 |           
|                                
|VS&A-PBI Holding LLC             |  | Senior Debt                                          |                |                                                       |                   |  |      |       |           
|(1) (8)                          |  | LLC Interest                                         |                | 0.8                                                   | %                 |  |      | 500    |           
|                                
|Wiesner Publishing               |  | Senior Debt                                          |                |                                                       |                   |  |      | 5,900  |           
|Company, LLC (1)                 |  | Subordinated Debt                                    |                |                                                       |                   |  |      | 5,530  |           
|                                 |  | Warrants to purchase membership interest in LLC      |                | 15.0                                                  | %                 |  |      | 406    |           
|                                
|Witter Publishing                |  | Senior Debt                                          |                |                                                       |                   |  |      | 2,577  |           
|Co., Inc.                        |  | Warrants to purchase Common Stock                    |                | 10.5                                                  | %                 |  |      | 87     |           
|                                



See notes to
consolidated financial statements.



9



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|Portfolio Company                       |  | Title of Securities Held by the Company |                | Percentage of Class Held on a Fully
Diluted Basis (9) |                   |  |      |         |           
|--------------------------------------- |  | --------------------------------------- | -------------- | ----------------------------------------------------- | ----------------- |  | ---- | ------- | ----------
|                                        |  |                                         | March 31, 2003 |                                                       | December 31, 2002
|                                        |  |                                         | Cost           |                                                       | Fair Value        |  | Cost |         | Fair Value
|                                       
|Working Mother Media,                   |  | Senior Debt                             |                |                                                       |                   |  | $    | 6,991   |           
|Inc. (8) (10)                           |  | Class A Preferred Stock                 |                | 98.7                                                  | %                 |  |      | 7,315   |           
|                                        |  | Class B Preferred Stock                 |                | 100.0                                                 | %                 |  |      | 1       |           
|                                        |  | Class C Preferred Stock                 |                | 100.0                                                 | %                 |  |      | 1       |           
|                                        |  | Common Stock                            |                | 51.0                                                  | %                 |  |      | 1       |           
|                                       
|Total Publishing                        |  |                                         |                |                                                       |                   |  |      | 121,585 |           
|                                       
|                                        |  |                                         |                |                                                       |                   |  |      |         |           
|                                       
|Broadcasting:                           |  |                                         |                |                                                       |                   |  |      |         |           
|                                       
|Amalfi Coast, L.L.C. (1)                |  | Senior Debt                             |                |                                                       |                   |  |      | 13,000  |           
|                                       
|Costa De Oro Television, Inc.           |  | Senior Debt                             |                |                                                       |                   |  |      | 6,500   |           
|                                       
|Crystal Media Network, LLC (5) (8) (10) |  | LLC Interest                            |                | 100.0                                                 | %                 |  |      | 6,132   |           
|                                       
|dick clark productions,                 |  | Subordinated Debt                       |                |                                                       |                   |  |      | 15,656  |           
|inc.                                    |  | Warrants to purchaseCommon Stock        |                | 5.8                                                   | %                 |  |      | 858     |           
|                                        |  | Common Stock                            |                | 0.3                                                   | %                 |  |      | 113     |           
|                                       
|JMP Media, L.L.C. (1)                   |  | Senior Debt                             |                |                                                       |                   |  |      |        |           
|                                       
|NBG Radio Network,                      |  | Senior Debt                             |                |                                                       |                   |  |      |        |           
|Inc. (1) (5)                            |  | Warrants to purchase Common Stock       |                |                                                       |                   |  |      |        |           
|                                       
|New Vision Broadcasting, LLC (1)        |  | Senior Debt                             |                |                                                       |                   |  |      | 26,700  |           
|                                       
|New Northwest Broadcasters LLC (1)      |  | Senior Debt                             |                |                                                       |                   |  |      | 11,174  |           
|                                       
|Total Broadcasting                      |  |                                         |                |                                                       |                   |  |      | 80,133  |           
|                                       



See notes to
consolidated financial statements.



10



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|Portfolio Company                  |  | Title of Securities Held by the Company        |                | Percentage of Class Held on a Fully
Diluted Basis (9) |                   |  |      |        |           
|---------------------------------- |  | ---------------------------------------------- | -------------- | ----------------------------------------------------- | ----------------- |  | ---- | ------ | ----------
|                                   |  |                                                | March 31, 2003 |                                                       | December 31, 2002
|                                   |  |                                                | Cost           |                                                       | Fair Value        |  | Cost |        | Fair Value
|                                  
|Telecommunications:                |  |                                                |                |                                                       |                   |  |      |        |           
|                                  
|AMI Telecommunications             |  | Senior Debt                                    |                |                                                       |                   |  | $    | 3,100  |           
|Corporation (1) (8) (10)           |  | Common Stock                                   |                | 5.1                                                   | %                 |  |      | 200    |           
|                                   |  | Series A-1Preferred Stock                      |                | 82.3                                                  | %                 |  |      | 700    |           
|                                   |  | Series A-2Preferred Stock                      |                | 100.0                                                 | %                 |  |      | 1,995  |           
|                                   |  | Series A-3Preferred Stock                      |                | 37.5                                                  | %                 |  |      | 1,100  |           
|                                  
|Biznessonline.com,                 |  | Senior Debt                                    |                |                                                       |                   |  |      | 15,237 |           
|Inc. (1) (10)                      |  | Common Stock                                   |                | 2.0                                                   | %                 |  |      | 18     |           
|                                   |  | Preferred Stock                                |                | 100.0                                                 | %                 |  |      | 4,864  |           
|                                   |  | Warrants to purchase Common Stock              |                | 71.2                                                  | %                 |  |      | 253    |           
|                                  
|Bridgecom Holdings,                |  | Senior Debt                                    |                |                                                       |                   |  |      | 21,841 |           
|Inc. (1)                           |  | Warrants to purchase Common Stock              |                | 13.0                                                  | %                 |  |      |       |           
|                                  
|I-55 Internet Services,            |  | Senior Debt                                    |                |                                                       |                   |  |      | 2,877  |           
|Inc.                               |  | Warrants to purchase Common Stock              |                | 7.5                                                   | %                 |  |      | 103    |           
|                                  
|IDS Telcom LLC                     |  | Senior Debt                                    |                |                                                       |                   |  |      | 18,432 |           
|                                   |  | Warrants to purchase membership interestin LLC |                | 11.0                                                  | %                 |  |      | 375    |           
|                                  
|Joseph C. Millstone                |  | Senior Debt                                    |                |                                                       |                   |  |      | 500    |           
|                                  
|Manhattan                          |  | Senior Debt                                    |                |                                                       |                   |  |      | 25,142 |           
|Telecommunications Corporation (1) |  | Warrants to purchase Common Stock              |                | 17.5                                                  | %                 |  |      | 754    |           
|                                  
|Midwest Towers Partners, LLC (1)   |  | Senior Debt                                    |                |                                                       |                   |  |      | 17,135 |           
|                                  
|nii communications,                |  | Senior Debt                                    |                |                                                       |                   |  |      | 7,088  |           
|inc. (1)                           |  | Common Stock                                   |                | 3.1                                                   | %                 |  |      | 400    |           
|                                   |  | Warrants to purchase Common Stock              |                | 35.3                                                  | %                 |  |      | 1,095  |           
|                                  
|NOW Communications,                |  | Senior Debt                                    |                |                                                       |                   |  |      | 4,499  |           
|Inc. (1)                           |  | Warrants to purchase Common Stock              |                | 10.0                                                  | %                 |  |      |       |           
|                                  



See notes to
consolidated financial statements.



11



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|Portfolio Company                     |  | Title of Securities Held by the Company         |                | Percentage of Class Held on a Fully
Diluted Basis (9) |                   |  |      |         |           
|------------------------------------- |  | ----------------------------------------------- | -------------- | ----------------------------------------------------- | ----------------- |  | ---- | ------- | ----------
|                                      |  |                                                 | March 31, 2003 |                                                       | December 31, 2002
|                                      |  |                                                 | Cost           |                                                       | Fair Value        |  | Cost |         | Fair Value
|                                     
|Powercom Corporation                  |  | Senior Debt                                     |                |                                                       |                   |  | $    | 2,207   |           
|(1)                                   |  | Warrants to purchaseClass A Common Stock        |                | 18.6                                                  | %                 |  |      | 263     |           
|                                     
|Talk America Holdings,Inc. (1) (8)    |  | Common Stock Warrants to purchase               |                | 1.7                                                   | %                 |  |      | 1,150   |           
|                                      |  | Common Stock                                    |                | 0.8                                                   | %                 |  |      | 25      |           
|                                     
|Telecomm South, LLC                   |  | Senior Debt                                     |                |                                                       |                   |  |      | 3,584   |           
|(2) (8) (10)                          |  | LLC Interest                                    |                | 100.0                                                 | %                 |  |      | 10      |           
|                                     
|Tower Resource                        |  | Senior Debt                                     |                |                                                       |                   |  |      | 2,694   |           
|Management, Inc.                      |  | Warrants to purchase Common Stock               |                | 8.9                                                   | %                 |  |      |        |           
|                                     
|WirelessLines,                        |  | Senior Debt                                     |                |                                                       |                   |  |      | 6,150   |           
|Inc. (1) (8)                          |  | Warrants to purchase Common Stock               |                | 5.0                                                   | %                 |  |      |        |           
|                                     
|Total Telecommunications              |  |                                                 |                |                                                       |                   |  |      | 143,791 |           
|                                     
|                                      |  |                                                 |                |                                                       |                   |  |      |         |           
|                                     
|Information Services:                 |  |                                                 |                |                                                       |                   |  |      |         |           
|                                     
|Cambridge Information Group, Inc. (1) |  | Senior Debt                                     |                |                                                       |                   |  |      | 16,590  |           
|                                     
|Creatas, L.L.C. (1) (12)              |  | Senior Debt                                     |                |                                                       |                   |  |      | 12,481  |           
|                                      |  | LLC Interest                                    |                | 20.0                                                  | %                 |  |      | 100     |           
|                                     
|Eli Research, Inc. (1)                |  | Senior Debt                                     |                |                                                       |                   |  |      | 10,105  |           
|                                      |  | Warrants to purchase Common Stock               |                | 3.0                                                   | %                 |  |      |        |           
|                                     
|Images.com, Inc.                      |  | Senior Debt                                     |                |                                                       |                   |  |      | 3,046   |           
|                                     
|Information Today, Inc.               |  | Senior Debt                                     |                |                                                       |                   |  |      | 9,600   |           
|                                     
|R.R. Bowker LLC                       |  | Senior Debt                                     |                |                                                       |                   |  |      | 10,438  |           
|                                      |  | Warrants to purchase membership interest in LLC |                | 14.0                                                  | %                 |  |      | 882     |           
|                                     
|Robert N. Snyder                      |  | Senior Debt                                     |                |                                                       |                   |  |      | 1,300   |           
|                                     



See notes to
consolidated financial statements.



12



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|Portfolio Company                 |  | Title of Securities Held by the Company             |                | Percentage of Class Held on a Fully
Diluted Basis (9) |                   |  |      |        |           
|--------------------------------- |  | --------------------------------------------------- | -------------- | ----------------------------------------------------- | ----------------- |  | ---- | ------ | ----------
|                                  |  |                                                     | March 31, 2003 |                                                       | December 31, 2002
|                                  |  |                                                     | Cost           |                                                       | Fair Value        |  | Cost |        | Fair Value
|                                 
|TGI Group, LLC                    |  | Senior Debt                                         |                |                                                       |                   |  | $    | 6,279  |           
|                                  |  | Warrants to purchase membership interest in LLC     |                | 5.0                                                   | %                 |  |      | 126    |           
|                                 
|Unifocus, Inc.                    |  | Senior Debt                                         |                |                                                       |                   |  |      | 3,635  |           
|and Unifocus LLC (1)              |  | Warrants to purchase Common Stock and LLC interests |                | 20.0                                                  | %                 |  |      | 247    |           
|                                 
|Total Information Services        |  |                                                     |                |                                                       |                   |  |      | 74,829 |           
|                                 
|                                  |  |                                                     |                |                                                       |                   |  |      |        |           
|                                 
|Technology:                       |  |                                                     |                |                                                       |                   |  |      |        |           
|                                 
|The Adrenaline Group, Inc. (1)(8) |  | Common Stock                                        |                | 2.7                                                   | %                 |  |      |       |           
|                                 
|Dakota Imaging, Inc.              |  | Senior Debt                                         |                |                                                       |                   |  |      | 6,721  |           
|                                  |  | Warrants to purchase Common Stock                   |                | 9.4                                                   | %                 |  |      | 188    |           
|                                 
|FTI Technologies                  |  | Senior Debt                                         |                |                                                       |                   |  |      | 21,475 |           
|Holdings, Inc. (1)                |  | Warrants to purchase Common Stock                   |                | 4.2                                                   | %                 |  |      |       |           
|                                 
|Netplexus Corporation             |  | Senior Debt                                         |                |                                                       |                   |  |      | 2,036  |           
|(1) (12)                          |  | Preferred Stock                                     |                | 51.0                                                  | %                 |  |      | 766    |           
|                                  |  | Warrants to purchase Class A Common Stock           |                | 4.8                                                   | %                 |  |      |       |           
|                                 
|Systems Xcellence                 |  | Senior Debt                                         |                |                                                       |                   |  |      | 7,600  |           
|USA, Inc. (1)                     |  | Warrants to purchase Common Stock                   |                | 3.0                                                   | %                 |  |      |       |           
|                                 
|Total Technology                  |  |                                                     |                |                                                       |                   |  |      | 38,786 |           
|                                 



See notes to
consolidated financial statements.



13



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|Portfolio Company                       |  | Title of Securities Held by the Company         |                | Percentage of Class Held on a Fully
Diluted Basis (9) |                   |  |      |        |           
|--------------------------------------- |  | ----------------------------------------------- | -------------- | ----------------------------------------------------- | ----------------- |  | ---- | ------ | ----------
|                                        |  |                                                 | March 31, 2003 |                                                       | December 31, 2002
|                                        |  |                                                 | Cost           |                                                       | Fair Value        |  | Cost |        | Fair Value
|                                       
|Security Alarm:                         |  |                                                 |                |                                                       |                   |  |      |        |           
|                                       
|Barcom Electronic Inc.                  |  | Senior Debt                                     |                |                                                       |                   |  | $    | 3,658  |           
|                                       
|Copperstate                             |  | Senior Debt                                     |                |                                                       |                   |  |      | 980    |           
|Technologies, Inc. (3) (10)             |  | Class A Common Stock                            |                | 93.0                                                  | %                 |  |      | 2,000  |           
|                                        |  | Class B Common Stock                            |                | 0.1                                                   | %                 |  |      |       |           
|                                        |  | Warrants to purchase Class B Common Stock       |                | 99.9                                                  | %                 |  |      |       |           
|                                       
|Interactive Business                    |  | Senior Debt                                     |                |                                                       |                   |  |      | 75     |           
|Solutions, Inc. (4) (10)                |  | Common Stock                                    |                | 100.0                                                 | %                 |  |      | 2,750  |           
|                                       
|National Systems                        |  | Common Stock                                    |                | 46.0                                                  | %                 |  |      |       |           
|Integration, Inc.                       |  | Class B2                                       |                |                                                       |                   |  |      |        |           
|formerly Intellisec                     |  | Preferred Stock                                 |                | 100.0                                                 | %                 |  |      | 4,379  |           
|Holdings, Inc. (1) (3) (4) (7) (8) (11) |  | Debtor inPossessionFinancing                    |                |                                                       |                   |  |      |       |           
|                                        |  | Senior Debt                                     |                |                                                       |                   |  |      |       |           
|                                        |  | Warrants to purchase Common Stock               |                | 0.0                                                   | %                 |  |      |       |           
|                                       
|Total Security Alarm                    |  |                                                 |                |                                                       |                   |  |      | 13,842 |           
|                                       
|                                        |  |                                                 |                |                                                       |                   |  |      |        |           
|                                       
|Other:                                  |  |                                                 |                |                                                       |                   |  |      |        |           
|                                       
|CCG Consulting, LLC                     |  | Senior Debt                                     |                |                                                       |                   |  |      | 1,441  |           
|                                        |  | Warrants to purchase membership interest in LLC |                | 13.8                                                  | %                 |  |      |       |           
|                                        |  | Option to purchase additional LLCinterest       |                | 5.5                                                   | %                 |  |      |       |           
|                                       
|Connective Corp. (8)                    |  | Common Stock                                    |                | 0.2                                                   | %                 |  |      | 57     |           
|                                       
|The e-Media Club, LLC (8)               |  | LLC Interest                                    |                | 0.8                                                   | %                 |  |      | 90     |           
|                                       



See notes to
consolidated financial statements.



14



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedules of Investments (unaudited)



(dollars in thousands)



|Portfolio Company                            |  | Title of Securities Held by the Company |                | Percentage of Class Held on a Fully
Diluted Basis (9) |   |                   |         |         |      |   |        
|-------------------------------------------- |  | --------------------------------------- | -------------- | ----------------------------------------------------- | - | ----------------- | ------- | ------- | ---- | - | -------
|                                             |  |                                         | March 31, 2003 |                                                       |   | December 31, 2002 |        
|                                             |  |                                         | Cost           |                                                       |   | Fair Value        |         |         | Cost |   |        
|                                            
|Executive Enterprise Institute, LLC (8) (12) |  | LLC Interest                            |                | 10.0                                                  | % |                   | $       | 301     |      |   | $      
|                                            
|Jeffrey A. Stern (8)                         |  | Senior Debt                             |                |                                                       |   |                   |         | 65      |      |   |        
|                                            
|Marketron International, Inc. (6) (8)        |  | Warrants to purchase Common Stock       |                | 1.5                                                   | % |                   |         |        |      |   |        
|                                            
|New Century                                  |  | Common Stock                            |                | 2.7                                                   | % |                   |         | 157     |      |   |        
|Companies, Inc. (8)                          |  | Preferred Stock                         |                |                                                      |   |                   |         |        |      |   |        
|                                             |  | Warrants to purchase Common Stock       |                | 0.5                                                   | % |                   |         |        |      |   |        
|                                            
|Total Other                                  |  |                                         |                |                                                       |   |                   |         | 2,111   |      |   |        
|                                            
|Total Investments                            |  |                                         |                |                                                       |   |                   |         | 685,195 |      |   |        
|Unearned income                              |  |                                         |                |                                                       |   |                   |         | (11,299 | )    |   |        
|                                             |  |                                         |                |                                                       |   |                   |         |         |      |   |        
|Total Investments net of unearned income     |  | $                                       | 673,896        |                                                       |   | $                 | 648,422 |         |      | $ | 719,213
|                                             |  |                                         |                |                                                       |   |                   |         |         |      |   |        



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

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

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

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

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

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

|(7) |  | In March 2003, we converted $8,631 of senior debt and $1,262 of debtor in possession financing of one of our portfolio companies, Intellisec Holdings, Inc., to
equity. The debtor in possession financing portion of our Intellisec Holdings, Inc. investment was senior to the senior debt in bankruptcy proceedings. Also in March 2003, Intellisec Holdings, Inc. changed its name to National Systems Integration,
Inc.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Non-income producing at March 31, 2003.
|--- |  | ---------------------------------------

|(9) |  | The percentage of class held on a fully diluted basis represents the percentage of the class of security we may own assuming we exercise our warrants or
options (whether or not they are in-the-money) and assuming that warrants, options or convertible securities held by others are not converted. We have not included any security which is subject to significant vesting contingencies. Common stock,
preferred stock, warrants, options and equity interests are generally non-income producing and restricted. The percentage was calculated based on the most current outstanding share information available to us (i) in the case of private companies,
provided by that company, and (ii) in the case of public companies, provided by that companys most recent public filings with the SEC.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



15



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##### Table of Contents

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

|(11) |  | This is a controlled company. Controlled companies are generally defined under the Investment Company Act of 1940 as companies in which MCG owns more
than 25% but not more than 50% of the voting securities of the company.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) |  | This is an other affiliate. Other affiliates are generally defined under the Investment Company Act of 1940 as companies in which MCG owns at least 5%
but not more than 25% of the voting securities of the company.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See notes to consolidated financial statements.



16



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in thousands except share
and per share data)



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



MCG
Capital Corporation (MCG or the Company or we or us or our) is a solutions-focused financial services company that provides financing and advisory services to companies throughout the
United States in the communications, information services, media and technology industry sectors. The Company is a non-diversified internally managed, closed-end investment company that elected to be treated as a business development company under
the Investment Company Act of 1940, as amended.



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



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



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



Note 2.    Investments



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



|                                 |  | March 31, 2003 |         |   | December 31, 2002 |  
|-------------------------------- |  | -------------- | ------- | - | ----------------- | -
|                                 |  | Cost           |         |   | Fair Value        |  
|Commercial loans                 |  | $              | 631,950 |   |                   | $
|Investments in equity securities |  |                | 53,245  |   |                   |  
|Unearned income                  |  |                | (11,299 | ) |                   |  
|                                 |  |                |         |   |                   |  
|Total                            |  | $              | 673,896 |   |                   | $
|                                 |  |                |         |   |                   |  



MCGs customer base includes primarily small- and medium-sized private companies in the communications, information services, media and technology industry sectors. The proceeds of the loans to these



17



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in thousands except share and per share data)



companies are generally used for buyouts, growth, acquisitions, liquidity, refinancings and restructurings. In addition, we have occasionally
made loans to individuals who are principals in these companies where the proceeds are used for or in connection with the operations or capitalization of such companies. Our debt instruments generally provide for a contractual variable interest rate
generally ranging from approximately 300 to 1400 basis points above LIBOR, a portion of which may be deferred. At March 31, 2003, approximately 89% of loans in the portfolio were at variable rates determined on the basis of a benchmark LIBOR or
prime rate and approximately 11% were at fixed rates. In addition, approximately 29% of the loan portfolio has floors of between 2% and 3% on the LIBOR base index. The companys loans generally have stated maturities at origination that range
from 2 to 8 years. Customers typically pay an origination fee based on a percentage of the commitment amount. They also often pay a fee based on any undrawn commitments.



At March 31, 2003, over 50% of MCGs loans had associated detachable warrants or an option to purchase
warrants, appreciation rights or other equity interests or other provisions designed to provide the Company with an enhanced internal rate of return. These equity and equity-like instruments generally do not produce a current return, but are held
for potential investment appreciation and capital gains. The warrants and options to purchase warrants typically are exercisable immediately and typically remain exercisable for 10 years. The exercise prices on the warrants vary from nominal
exercise prices to exercise prices that are at or above the current fair market value of the equity for which we are receiving warrants. In some cases, some or all of the deferred interest may be exchanged as the exercise price for the option to
purchase warrants. The equity interests and warrants and options to purchase warrants often include registration rights, which allow MCG to register the securities after public offerings.



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



|                           |  | March 31, 2003      |         | December 31, 2002            
|-------------------------- |  | ------------------- | ------- | -----------------------------
|                           |  |                    
|                           |  | Investments at Cost |         | Percentage of Total Portfolio
|                           |  |                    
|Senior Debt                |  | $                   | 563,105 |                              
|Subordinated Debt          |  |                     | 68,845  |                              
|Equity                     |  |                     | 47,044  |                              
|Warrants to Acquire Equity |  |                     | 6,201   |                              
|Equity Appreciation Rights |  |                     |        |                              
|                           |  |                    
|Total                      |  | $                   | 685,195 |                              
|                           |  |                    



|                           |  | March 31, 2003            |         |                               | December 31, 2002 |  
|-------------------------- |  | ------------------------- | ------- | ----------------------------- | ----------------- | -
|                           |  |                           |        
|                           |  | Investments at Fair Value |         | Percentage of Total Portfolio |                   |  
|                           |  |                           |        
|Senior Debt                |  | $                         | 555,967 |                               | 84.3              | %
|Subordinated Debt          |  |                           | 68,175  |                               | 10.3              | %
|Equity                     |  |                           | 27,522  |                               | 4.2               | %
|Warrants to Acquire Equity |  |                           | 7,730   |                               | 1.2               | %
|Equity Appreciation Rights |  |                           | 327     |                               | 0.0               | %
|                           |  |                           |        
|Total                      |  | $                         | 659,721 |                               | 100.0             | %
|                           |  |                           |        



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in thousands except share and per share data)





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



|                     |  | March 31, 2003            |         |                               | December 31, 2002 |  
|-------------------- |  | ------------------------- | ------- | ----------------------------- | ----------------- | -
|                     |  |                           |        
|                     |  | Investments at Cost       |         | Percentage of Total Portfolio |                   |  
|                     |  |                           |        
|Media                |  |                           |         |                               |                   |  
|Newspaper            |  | $                         | 210,118 |                               | 30.7              | %
|Publishing           |  |                           | 121,585 |                               | 17.7              | %
|Broadcasting         |  |                           | 80,133  |                               | 11.7              | %
|Telecommunications   |  |                           | 143,791 |                               | 21.0              | %
|Information Services |  |                           | 74,829  |                               | 10.9              | %
|Technology           |  |                           | 38,786  |                               | 5.7               | %
|Security Alarm       |  |                           | 13,842  |                               | 2.0               | %
|Other                |  |                           | 2,111   |                               | 0.3               | %
|                     |  |                           |        
|Total                |  | $                         | 685,195 |                               | 100.0             | %
|                     |  |                           |        
|                    
|                     |  | March 31, 2003            |         |                               | December 31, 2002 |  
|                     |  |                           |        
|                     |  | Investments at Fair Value |         | Percentage of Total Portfolio |                   |  
|                     |  |                           |        
|Media                |  |                           |         |                               |                   |  
|Newspaper            |  | $                         | 210,478 |                               | 31.9              | %
|Publishing           |  |                           | 101,988 |                               | 15.5              | %
|Broadcasting         |  |                           | 80,131  |                               | 12.1              | %
|Telecommunications   |  |                           | 140,561 |                               | 21.3              | %
|Information Services |  |                           | 74,284  |                               | 11.2              | %
|Technology           |  |                           | 36,864  |                               | 5.6               | %
|Security Alarm       |  |                           | 13,633  |                               | 2.1               | %
|Other                |  |                           | 1,782   |                               | 0.3               | %
|                     |  |                           |        
|Total                |  | $                         | 659,721 |                               | 100.0             | %
|                     |  |                           |        



At March
31, 2003, there were $18,445 of loans greater than 60 days past due compared to $21,527 of loans at December 31, 2002. At March 31, 2003, including $8,123 of the loans greater than 60 days past due, there were $44,824 of loans on non-accrual. At
December 31, 2002, including all $21,527 of the loans greater than 60 days past due, there were $42,703 of loans on non-accrual.



Note 3.    Borrowings



As of June 1, 2000, we 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 March 31, 2003, $147,797 of the Series 20001 Notes were outstanding with one
investor and as of December 31, 2002, $123,718 were outstanding with one investor. As of March 31, 2003 and December 31, 2002, we had no notes outstanding under a swingline credit facility (the Swingline Notes), which is part of the
Revolving Credit Facility, that allows us to borrow up to $25,000 as part of the $200,000 total facility limit for a period of up to four days. The Swingline Notes are repaid through the issuance of Series 20001 Notes. The Revolving Credit
Facility was secured by $228,863 of commercial loans



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in thousands except share and per share data)



as of March 31, 2003 and $224,620 of commercial loans as of December 31, 2002. We are subject to certain limitations on the amount of Series
2000-1 Notes we may issue at any point in time including the requirement for a minimum amount of unleveraged loans that serve as collateral for the indebtedness. Such amount was a minimum of $30,000 (subject to increase upon occurrence of an event
of default) prior to July 8, 2002 and $75,000 as of July 8, 2002 and thereafter. We are also subject to limitations including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life,
collateral interests and investment ratings as well as regulatory restrictions on leverage which may affect the amount of Series 2000-1 notes we may issue from time to time. There are also certain requirements relating to portfolio performance,
including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in the early amortization of the facility and limit further advances under the facility, and in some cases could be an event
of default. Such limitations, requirements, and associated defined terms are as provided for in the documents governing the facility. The Series 2000-1 Notes bear interest based on a commercial paper rate plus 1.0% and interest is payable monthly.
This facility matures on July 7, 2005 or sooner (but not earlier than July 7, 2003), if Wachovia Bank does not renew the liquidity support that it provides to the commercial paper conduit, which is the lender under this facility.



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 of 3% or less. The amendment increased this ratio to 7% for any date prior to and including June 30, 2003 and decreased this ratio to 3% thereafter. This amendment also included a waiver with respect to the
applicability of the charged-off ratio for periods prior to February 2003. Additionally, this amendment required us to increase the amount of collateral held by the noteholders by pledging the MCG Commercial Loan Trust 2001-1 Class C Notes, which we
own.



On December 27, 2001, we established the
MCG Commercial Loan Trust 2001-1 (the Trust), which issued two classes of Series 2001-1 Notes to 15 institutional investors. The facility is secured by all of the Trusts existing assets, totaling $271,631 as of March 31, 2003 and
$295,470 as of December 31, 2002. This facility is scheduled to terminate on February 20, 2013 or sooner upon full repayment of the Class A and Class B Notes. The Class A and Class B Notes are scheduled to be repaid as we receive principal
collections on the underlying collateral.



The
Trust issued $229,860 of Class A Notes rated AAA/Aaa/AAA, and $35,363 of Class B Notes rated A/A2/A (the Series 2001-1 Class A Asset Backed Bonds and Series 2001-1 Class B Asset Backed Bonds) as rated by Standard & Poors,
Moodys and Fitch, respectively. As of March 31, 2003, $207,111 of the Series 2001-1 Notes were outstanding, of which $171,748 were Class A Notes and $35,363 were Class B Notes. As of December 31, 2002, $240,120 of the Series 2001-1 Notes were
outstanding, of which $204,757 were Class A Notes and $35,363 were Class B Notes. The Series 2001-1 Class A Asset Backed Bonds bear interest of LIBOR plus 0.60% and Series 2001-1 Class B Asset Backed Bonds bear interest of LIBOR plus 1.75%, and
interest on both is payable quarterly.



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



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in thousands except share and per share data)





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



|             |  | March 31, 2003 |  | December 31, 2002
|------------ |  | -------------- |  | -----------------
|90-day LIBOR |  | $207,111       |  | $240,120         
|CP Rate      |  | 147,797        |  | 123,718          
|             |  |                |  |                  
|             |  | $354,908       |  | $363,838         
|             |  |                |  |                  



The
maximum outstandings under the Notes issued by the Revolving Credit Facility during the three months ended March 31, 2003 and 2002 were $148,325 and $54,563, respectively, and the average outstandings were $135,388, and $24,168, respectively. The
weighted average interest rates, excluding the amortization of deferred financing costs, for the three months ended March 31, 2003 and 2002 were 2.6% and 4.5%, respectively, and the interest rates at March 31, 2003 and 2002 were 2.5% and 3.5%,
respectively.



There were no outstandings under
the Swingline Notes during the three months ended March 31, 2003. The maximum outstandings under the Swingline Notes during the three months ended March 31, 2002 was $22,900 and the average outstandings were $763. The weighted average interest rate
for the three months ended March 31, 2002 was 2.8%, and the interest rate at March 31, 2002 was 2.8%.



The maximum outstandings under the Notes issued by the Trust during the three months ended March 31, 2003 and 2002 was $240,120 and
$265,223, respectively, and the average outstandings were $214,447 and $262,263, respectively. The weighted average interest rate, excluding the amortization of deferred financing costs, for the three months ended March 31, 2003 and 2002 was 2.3%
and 2.6%, respectively. The interest rates at March 31, 2003 and 2002 were 2.2% and 2.6%, respectively.



Subject to certain minimum equity restrictions and other covenants, including restrictions on which loans the Company may leverage as
collateral, the unused amount under the Revolving Credit Facility totaled $52,203 and $76,282 at March 31, 2003 and December 31, 2002, respectively.



Note 4.    Earnings Per Share



The following table sets forth the computation of basic and diluted earnings per common share for the three months ended March 31, 2003
and 2002:



|                                                                                   |  | Three Months Ended March 31,
|---------------------------------------------------------------------------------- |  | ----------------------------
|(in thousands except per share amounts)                                            |  | 2003                        
|Basic                                                                              |  |                             
|Net income/Net increase in stockholders equity resulting from earnings            |  | $                           
|Weighted average common shares outstanding                                         |  |                             
|Earnings per common share-basic                                                    |  | $                           
|Diluted                                                                            |  |                             
|Net income/Net increase in stockholders equity resulting from earnings            |  | $                           
|Weighted average common shares outstanding                                         |  |                             
|Dilutive effect of restricted stock on which forfeiture provisions have not
lapsed |  |                             
|                                                                                   |  |                             
|Weighted average common shares outstandingdiluted                                 |  |                             
|                                                                                   |  |                             
|Earnings per common share-diluted                                                  |  | $                           



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in thousands except share and per share data)





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.    Financial Highlights



The following is a schedule of financial
highlights for the three months ended March 31, 2003 and 2002:



|                                                                                |  | Three Months Ended March 31, |        
|------------------------------------------------------------------------------- |  | ---------------------------- | -------
|                                                                                |  | 2003                         |        
|Per Share Data (1):                                                             |  |                              |        
|Net asset value at beginning of period                                          |  | $                            | 11.56  
|Net operating income before investment gains and losses                         |  |                              | 0.35   
|Realized losses on investments                                                  |  |                              | (0.63  
|Increase in unrealized appreciation (depreciation) on investments               |  |                              | 0.56   
|                                                                                |  |                              |        
|Net income/ Net increase in stockholders equity resulting from earnings        |  |                              | 0.28   
|Dividends declared                                                              |  |                              | (0.40  
|Antidilutive effect of distributions recorded as compensation expense           |  |                              | 0.02   
|                                                                                |  |                              |        
|Net decrease in stockholders equity resulting from distributions               |  |                              | (0.38  
|Net increase in shareholders equity resulting from reduction in employee loans |  |                              |       
|Net increase in shareholders equity from restricted stock amortization         |  |                              | 0.03   
|                                                                                |  |                              |        
|Net increase in stockholders equity relating to share issuances                |  |                              | 0.03   
|                                                                                |  |                              |        
|Net asset value at end of period                                                |  | $                            | 11.49  
|                                                                                |  |                              |        
|Per share market value at end of period                                         |  | $                            | 9.99   
|Total return (2)                                                                |  |                              | (3.34  
|Shares outstanding at end of period                                             |  |                              | 31,259 
|Ratio/Supplemental Data:                                                        |  |                              |        
|Net assets at end of period                                                     |  | $                            | 359,184
|Ratio of operating expenses to average net assets (annualized)                  |  |                              | 8.28   
|Ratio of net operating income to average net assets (annualized)                |  |                              | 11.94  



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

|(2) |  | For 2003, total return equals the decrease of the ending market value over the December 31, 2002 price of $10.77 per share plus dividends paid ($0.42 per share),
divided by the beginning price. For 2002, total return equals the increase of the ending market value over the December 31, 2001 price of $17.80 per share plus dividends paid ($0.86 per share), divided by the beginning price. Total return is not
annualized.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in thousands except share and per share data)





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



The following table summarizes MCGs income and assets held from Majority Owned Companies, Controlled Companies and Other Affiliates:



|                                                                    |  | March 31, 2003               |        |   | December 31, 2002 |  
|------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ----------------- | -
|Assets Held:                                                        |  |                              |        |   |                   |  
|Majority Owned Companies (a):                                       |  |                              |        |   |                   |  
|Loans at fair value                                                 |  | $                            | 34,159 |   |                   | $
|Non-accrual loans at fair value included above                      |  |                              | 18,000 |   |                   |  
|Equity Investments at fair value                                    |  |                              | 18,447 |   |                   |  
|Controlled Companies (b):                                           |  |                              |        |   |                   |  
|Loans at fair value                                                 |  |                              |       |   |                   |  
|Non-accrual loans at fair value included above                      |  |                              |       |   |                   |  
|Equity Investments at fair value                                    |  |                              | 4,062  |   |                   |  
|Other Affiliates (c):                                               |  |                              |        |   |                   |  
|Loans at fair value                                                 |  |                              | 33,214 |   |                   |  
|Non-accrual loans included above                                    |  |                              |       |   |                   |  
|Equity Investments at fair value                                    |  |                              | 495    |   |                   |  
|                                                                   
|                                                                    |  | Three Months Ended March 31, |       
|                                                                    |  | 2003                         |        |   | 2002              |  
|Income Recognized:                                                  |  |                              |        |   |                   |  
|From Majority Owned Companies (a):                                  |  |                              |        |   |                   |  
|Interest and fee income                                             |  | $                            | 548    |   |                   | $
|Net change in unrealized appreciation (depreciation) on investments |  |                              | 2,711  |   |                   |  
|Realized losses on investments                                      |  |                              | (5,585 | ) |                   |  
|From Controlled Companies (b):                                      |  |                              |        |   |                   |  
|Interest and fee income                                             |  |                              |       |   |                   |  
|Net change in unrealized appreciation (depreciation) on investments |  |                              | (317   | ) |                   |  
|Realized losses on investments                                      |  |                              | (5,812 | ) |                   |  
|From Other Affiliates (c):                                          |  |                              |        |   |                   |  
|Interest and fee income                                             |  |                              | 955    |   |                   |  
|Net change in unrealized appreciation (depreciation) on investments |  |                              | 174    |   |                   |  
|Realized losses on investments                                      |  |                              |       |   |                   |  



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

|(b) |  | Controlled companies are generally defined under the Investment Company Act of 1940 as companies in which MCG owns more than 25% but not more than 50% of the voting
securities of the company.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in thousands except share and per share data)





Note
7.    Contingencies



On
January 29, 2003, a purported securities class action lawsuit was filed in the United States District Court for the Eastern District of Virginia against us, certain of our officers and the underwriters of our initial public offering. The complaint
alleges that the defendants made certain misstatements in violation of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b), Rule 10b-5 and Section 20(a) of the Securities Exchange Act of 1934. Specifically, the complaint
asserts that members of the plaintiff class purchased our common stock at purportedly inflated prices during the period from November 28, 2001 to November 1, 2002 as a result of certain misstatements regarding the academic degree of our chief
executive officer. The complaint seeks unspecified compensatory and other damages, along with costs and expenses. We intend to defend this lawsuit vigorously.



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



Note 8.    Subsequent
Event



In April 2003, we completed a
transaction to acquire the assets of one of our portfolio companies, Rising Tide Holdings LLC, in satisfaction of debt. The assets acquired were then immediately sold to a third party. Our investment had a fair value of $350 and unrealized
depreciation of $2,735 as of March 31, 2003. In conjunction with this transaction, we expect to realize this loss in the second quarter of 2003 and expect this realized loss to offset the reversal of the unrealized depreciation. Accordingly, we
expect no material impact to our overall earnings in the second quarter of 2003 as a result of this transaction.



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##### Table of Contents

Independent Accountants Review Report



Board of Directors and Shareholders

MCG Capital Corporation



We have reviewed the accompanying consolidated balance sheet of MCG Capital Corporation as of March 31, 2003, including the
consolidated schedule of investments, and the related consolidated statements of operations, stockholders equity and cash flows for the three-month periods ended March 31, 2003 and 2002. These financial statements are the responsibility of the
Companys management.



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



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



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



/s/
ERNST & YOUNG LLP



McLean, Virginia

April 28, 2003



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##### Table of Contents

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



The information contained in this section should be read in conjunction with the Selected Consolidated Financial and Other Data, the
Selected Operating Data and our Consolidated Financial Statements and notes thereto appearing elsewhere in this Quarterly Report. This Quarterly Report, including the Managements Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our industry,
our beliefs, and our assumptions. Words such as anticipates, expects, intends, plans, believes, seeks, and estimates and variations of these words and similar
expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and
could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements including without limitation (1) the current economic downturn is impairing and any future economic downturn could impair our
customers ability to repay our loans and increase our non-performing assets, (2) the current economic downturn is disproportionately impacting certain sectors in which we concentrate, such as certain areas within publishing and
telecommunications, and any future economic downturn could disproportionately impact the communications, information services, media and technology industries in which we concentrate causing us to suffer losses in our portfolio and experience
diminished demand for capital in these industry sectors, (3) a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities, (4) interest rate volatility could adversely affect
our results, (5) the risks associated with the possible disruption in the Companys operations due to terrorism and (6) the risks, uncertainties and other factors we identify from time to time in our filings with the Securities and Exchange
Commission, including our Form 10-Ks, Form 10-Qs and Form 8-Ks. Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the
forward-looking statements based on those assumptions also could be incorrect. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report should not be regarded as a representation
by us that our plans and objectives will be achieved. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report.



Overview



MCG Capital Corporation is a solutions-focused financial services company providing financing and advisory services to small and
medium-sized companies throughout the United States in the communications, information services, media and technology industry sectors. On December 4, 2001, we completed an initial public offering of 13,375,000 shares of our common stock and a
concurrent private offering of 625,000 shares of our common stock with gross proceeds totaling $237.3 million. Upon completion of these offerings, we became an internally managed, non-diversified, closed-end investment company that elected to be
treated as a business development company under the Investment Company Act of 1940. MCG Capital Corporation will elect to be treated for federal income tax purposes as a regulated investment company under the Internal Revenue Code with the filing of
its federal corporate income tax return for 2002, which election will be effective as of January 1, 2002. Pursuant to this election, we generally will not have to pay corporate-level taxes on any income we distribute to our stockholders as
dividends, allowing us to substantially reduce or eliminate our corporate-level tax liability. On June 17, 2002, MCG raised $54.0 million of gross proceeds in an additional public offering by selling 3,000,000 shares of common stock at an offering
price of $18 per share.



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



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##### Table of Contents



Portfolio
Composition and Asset Quality



Our primary
business is lending to and investing in businesses, primarily in the communications, information services, media, and technology industry sectors, through investments in senior debt, subordinated debt and equity-based investments, including warrants
and equity appreciation rights. The increase in investments during 2002 was primarily attributable to originated debt securities, including $55.5 million of subordinated debt to four companies. Though we intend to increase our level of subordinated
debt and equity-based investments, we expect a substantial majority of our portfolio will continue to consist of investments in senior secured commercial loans. The total portfolio value of investments in publicly traded and non-publicly traded
securities was $659.7 million and $688.9 million at March 31, 2003 and December 31, 2002, respectively (exclusive of unearned income).



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



|(dollars in millions)                        |  | Three Months EndedMarch 31, 2003 |       |   | Year Ended December 31, 2002 |  
|-------------------------------------------- |  | -------------------------------- | ----- | - | ---------------------------- | -
|Beginning Portfolio                          |  | $                                | 688.9 |   |                              | $
|Originations/Draws/Advances on Loans         |  |                                  | 6.2   |   |                              |  
|Originations/Warrants Received on Equity (a) |  |                                  | 16.2  |   |                              |  
|Gross Payments/Reductions (a)                |  |                                  | (22.2 | ) |                              |  
|Early Pay-offs/Sales of Securities           |  |                                  | (27.3 | ) |                              |  
|Realized Gains on Investments                |  |                                  |      |   |                              |  
|Realized Losses on Investments               |  |                                  | (19.7 | ) |                              |  
|Unrealized Appreciation in Investments       |  |                                  | 21.4  |   |                              |  
|Unrealized Depreciation in Investments       |  |                                  | (3.8  | ) |                              |  
|                                             |  |                                  |       |   |                              |  
|Ending Portfolio                             |  | $                                | 659.7 |   |                              | $
|                                             |  |                                  |       |   |                              |  



|a) |  | Included in these amounts is the conversion of $12.9 million and $5.4 million of debt to equity in connection with certain restructurings for the three months ended
March 31, 2003 and year ended December 31, 2002, respectively.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Business activity for the three months ended March 31, 2003 included restructuring several portfolio investments. MCG maintained an active pipeline of new investment opportunities, however, there were
no investments in new portfolio companies during the quarter.



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



|                           |  | March 31, 2003            |       |                               | December 31, 2002 |  
|-------------------------- |  | ------------------------- | ----- | ----------------------------- | ----------------- | -
|                           |  |                           |      
|(dollars in millions)      |  | Investments at Fair Value |       | Percentage of Total Portfolio |                   |  
|                           |  |                           |      
|Senior Debt                |  | $                         | 556.0 |                               | 84.3              | %
|Subordinated Debt          |  |                           | 68.2  |                               | 10.3              | %
|Equity                     |  |                           | 27.5  |                               | 4.2               | %
|Warrants to Acquire Equity |  |                           | 7.7   |                               | 1.2               | %
|Equity Appreciation Rights |  |                           | 0.3   |                               | 0.0               | %
|                           |  |                           |      
|                           |  | $                         | 659.7 |                               | 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 March 31, 2003 and December 31, 2002:



|                      |  | March 31, 2003            |       |                               | December 31, 2002 |  
|--------------------- |  | ------------------------- | ----- | ----------------------------- | ----------------- | -
|                      |  |                           |      
|(dollars in millions) |  | Investments at Fair Value |       | Percentage of Total Portfolio |                   |  
|                      |  |                           |      
|Media                 |  |                           |       |                               |                   |  
|Newspaper             |  | $                         | 210.5 |                               | 31.9              | %
|Publishing            |  |                           | 102.0 |                               | 15.5              | %
|Broadcasting          |  |                           | 80.1  |                               | 12.1              | %
|Telecommunications    |  |                           | 140.5 |                               | 21.3              | %
|Information Services  |  |                           | 74.3  |                               | 11.2              | %
|Technology            |  |                           | 36.9  |                               | 5.6               | %
|Security Alarm        |  |                           | 13.6  |                               | 2.1               | %
|Other                 |  |                           | 1.8   |                               | 0.3               | %
|                      |  |                           |      
|                      |  | $                         | 659.7 |                               | 100.0             | %
|                      |  |                           |      



The
following table summarizes MCGs assets held and income from Majority Owned Companies, Controlled Companies and Other Affiliates:



|(dollars in thousands)                         |  | March 31, 2003 |        | December 31, 2002
|---------------------------------------------- |  | -------------- | ------ | -----------------
|Assets Held:                                   |  |                |        |                  
|Majority Owned Companies (a):                  |  |                |        |                  
|Loans at fair value                            |  | $              | 34,159 |                  
|Non-accrual loans at fair value included above |  |                | 18,000 |                  
|Equity Investments at fair value               |  |                | 18,447 |                  
|Controlled Companies (b):                      |  |                |        |                  
|Loans at fair value                            |  |                |       |                  
|Non-accrual loans at fair value included above |  |                |       |                  
|Equity Investments at fair value               |  |                | 4,062  |                  
|Other Affiliates (c):                          |  |                |        |                  
|Loans at fair value                            |  |                | 33,214 |                  
|Non-accrual loans included above               |  |                |       |                  
|Equity Investments at fair value               |  |                | 495    |                  



|                                                                    |  | Three Months Ended March 31, |       
|------------------------------------------------------------------- |  | ---------------------------- | ------
|(dollars in thousands)                                              |  | 2003                         |       
|Income Recognized:                                                  |  |                              |       
|From Majority Owned Companies (a):                                  |  |                              |       
|Interest and fee income                                             |  | $                            | 548   
|Net change in unrealized appreciation (depreciation) on investments |  |                              | 2,711 
|Realized losses on investments                                      |  |                              | (5,585
|From Controlled Companies (b):                                      |  |                              |       
|Interest and fee income                                             |  |                              |      
|Net change in unrealized appreciation (depreciation) on investments |  |                              | (317  
|Realized losses on investments                                      |  |                              | (5,812
|From Other Affiliates (c):                                          |  |                              |       
|Interest and fee income                                             |  |                              | 955   
|Net change in unrealized appreciation (depreciation) on investments |  |                              | 174   
|Realized losses on investments                                      |  |                              |      



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



|(b) |  | Controlled companies are generally defined under the Investment Company Act of 1940 as companies in which MCG owns more than 25% but not more than 50% of the voting
securities of the company.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Asset
Quality



Asset quality is generally a
function of our underwriting and ongoing management of our investment portfolio. As a business development company, our loans and equity investments are carried at market value or, in the absence of market value, at fair value as determined by our
board of directors in good faith on a quarterly basis. As of March 31, 2003 and December 31, 2002, unrealized depreciation on investments totaled $25.5 million and $43.1 million, respectively. For additional information on the change in unrealized
depreciation on investments, see the section entitled Reconciliation of Net Operating Income to Net Increase (Decrease) in Stockholders Equity from Earnings.



In addition to various risk management and monitoring tools, we also use an investment rating system to
characterize and monitor our expected level of returns on each investment in our portfolio. We use the following 1 to 5 investment rating scale. Below is a description of the conditions associated with each investment rating:



|Investment Rating |  | Summary
Description                                                                                                                                            
|----------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|1                 |  | Capital gain expected                                                                                                                                          
|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 March 31, 2003 and December 31, 2002:



|(dollars in millions) |  |                           |       |                               |                   |  
|--------------------- |  | ------------------------- | ----- | ----------------------------- | ----------------- | -
|                      |  | March 31, 2003            |       |                               | December 31, 2002 |  
|                      |  |                           |      
|Investment Rating     |  | Investments at Fair Value |       | Percentage of Total Portfolio |                   |  
|                      | 
|1                     |  | $                         | 112.0 |                               | 17.0              | %
|2                     |  |                           | 273.1 |                               | 41.4              | %
|3                     |  |                           | 206.1 |                               | 31.2              | %
|4                     |  |                           | 54.6  |                               | 8.3               | %
|5                     |  |                           | 13.9  |                               | 2.1               | %
|                      |  |                           |      
|                      |  | $                         | 659.7 |                               | 100.0             | %
|                      |  |                           |      



We
monitor loan concentrations in our portfolio, both on an individual loan basis and on a sector or industry basis, to manage overall portfolio performance due to specific customer issues or specific industry issues. At March 31, 2003, of the
investments with a 5 rating, $6.6 million are loans, all of which are on non-accrual. Of the investments with a 4 rating, $50.3 million are loans, of which $32.0 million are on non-accrual. At December 31, 2002, of the investments with a 5 rating,
$18.0 million were loans, of which $16.9 million were on non-accrual. Of the investments with a 4 rating, $35.4 million were loans, of which $19.6 million were on non-accrual.



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



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



At March 31, 2003 and December 31, 2002, there were $18.4 million and $21.5 million, respectively, of loans, or approximately 2.8% or
3.1%, respectively, of the investment portfolio, greater than 60 days past due. At March 31, 2003, including $8.2 million of the loans greater than 60 days past due, there were $44.8 million of loans, or approximately 6.8% of the investment
portfolio, on non-accrual status. At December 31, 2002, including all $21.5 million of the loans greater than 60 days past due, there were $42.7 million of loans on non-accrual status representing 6.2% of the investment portfolio. The non-accrual
and past due loans primarily represented borrowers in the publishing, telecommunications and paging businesses. Portions of the trade publishing industry which are dependent on financial, technology or telecommunications advertising, continue to
experience sluggish advertising revenue. Certain companies in the telecommunications industry have suffered from competitive pressure from low cost and prepaid cellular calling plans. Of the loans to our majority owned companies, $18.0 million and
$10.2 million were on non-accrual status at March 31, 2003 and December 31, 2002, respectively. As of March 31, 2003, there were no loans to controlled companies. At December 31, 2002, $10.3 million of the loans to our controlled companies were on
non-accrual status. As of March 31, 2003 and December 31, 2002, none of the loans to our other affiliates were on non-accrual status.



When principal and interest on a loan is not paid within the applicable grace period, we will contact the customer for collection. At that
time, we will make a determination as to the extent of the problem, if any. We will then pursue a commitment for immediate payment and will begin to more actively monitor the investment. We will formulate strategies to optimize the resolution
process and will begin the process of restructuring the investment to better reflect the current financial performance of the customer. Such a restructuring may involve deferring payments of principal and interest, adjusting interest rates or
warrant positions, imposing additional fees, amending financial or operating covenants or converting debt to equity. In general, in order to compensate us for any enhanced risk, we receive appropriate 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 Months Ended March 31, 2003 and 2002



Operating Income



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



The change in operating income from the three months ended March 31, 2002 compared to the same period in 2003 is attributable to the
following items:



|                                 |  | Three Months Ended      |      
|-------------------------------- |  | ----------------------- | -----
|(dollars in thousands)           |  | March 31, 2003 vs. 2002 |      
|Change due to:                   |  |                         |      
|Asset growth (a)                 |  | $                       | 1,509
|Change in LIBOR (a)              |  |                         | (848 
|Change in spread (a)             |  |                         | 1,544
|Increase in fee income           |  |                         | 34   
|Advisory and other income        |  |                         | (754 
|                                 |  |                         |      
|Total change in operating income |  | $                       | 1,485
|                                 |  |                         |      



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



Total operating income for the three months ended March 31, 2003 increased $1.4 million, or 8.7%, to $18.5
million from $17.1 million for the three months ended March 31, 2002. Loan interest increased by $2.2 million for the three months ended March 31, 2003 as compared to the three months ended March 31, 2002. Average three month LIBOR decreased 58
basis points over these periods from 1.91% to 1.33%, decreasing income by $0.8 million. Average commercial loans increased 10.5% for the three months ended March 31, 2003 when compared to the three months ended March 31, 2002, contributing a $1.5
million increase in income. The coupon spread increased 100 basis points for the three months ended March 31, 2003 when compared to the three months ended March 31, 2002, resulting in a $1.5 million increase in income. Advisory and other income for
the three months ended March 31, 2003 decreased $0.8 million to $0.7 million from $1.5 million for the three months ended March 31, 2002 as a greater number of financial advisory projects were completed during the first quarter of 2002. The loan
growth and increase in weighted average spreads more than offset the affects of the decreases in LIBOR rates and decline in advisory and other income from the three months ended March 31, 2002 to the same period in 2003.



Operating Expenses



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



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The change in
operating expenses from the three months ended March 31, 2002 compared to the same period in 2003 is attributable to the following items:



|                                   |  | Three Months Ended      |     
|---------------------------------- |  | ----------------------- | ----
|(dollars in thousands)             |  | March 31, 2003 vs. 2002 |     
|Change due to:                     |  |                         |     
|Increase in borrowings (a)         |  | $                       | 409 
|Change in LIBOR (a)                |  |                         | (434
|Change in spread (a)               |  |                         | 128 
|Debt cost amortization             |  |                         | (152
|Salaries and benefits              |  |                         | (137
|General and administrative expense |  |                         | 680 
|                                   |  |                         |     
|Total change in operating expense  |  | $                       | 494 
|                                   |  |                         |     



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



Total operating expenses for the three months ended March 31,
2003 increased $0.5 million, or 7.0%, to $7.6 million from $7.1 million for the three months ended March 31, 2002. Borrowing costs decreased slightly from $2.5 million for the three months ended March 31, 2002 to $2.4 million for the three months
ended March 31, 2003. Average three month LIBOR decreased 58 basis points over these periods from 1.91% to 1.33%, which caused interest expense to decline by $0.4 million. Average borrowings increased 21.8%, increasing interest expense by $0.4
million. The increase in spreads caused interest expense to rise by $0.1 million. Salaries and benefits declined $0.1 million. Long-term incentive compensation related to the amortization of restricted stock awards and the treatment of dividends on
certain shares of common stock securing employee loans as compensation was constant quarter to quarter. General and administrative expenses increased $0.7 million for the three months ended March 31, 2003 as compared to the same period in 2002
primarily due to higher expenses related to servicing and restructuring the credit challenged portion of our portfolio as well as an increase in certain general and administrative expenses associated with MCGs expanded operations.



Net Operating Income



Net operating income before investment gains and losses (NOI)
for the quarter ended March 31, 2003 totaled $10.9 million compared with $10.0 million for the quarter ended March 31, 2002.



Net Investment Gains and Losses



Realized losses for the three months ended March 31, 2003 totaled $19.7 million substantially offset by a reversal of unrealized
depreciation of $18.9 million related to transactions involving four of our portfolio companies.



In January 2003, we completed a transaction to sell the debt securities of one of our portfolio companies, VS&A-PBI Holding LLC, at a price below par. The sale was the result of an agreement
between the senior lending syndicate and the equity sponsor. In conjunction with this transaction, we realized a loss of $7.9 million. In February 2003, we completed a transaction to acquire the assets of one of our portfolio companies, NBG Radio
Networks, Inc., in satisfaction of debt. The assets are held and operated through a separate portfolio company, Crystal Media Network, Inc., controlled by us. In conjunction with this transaction, we realized a loss of $0.4 million. Also in February
2003, we converted $7.5 million of the senior debt of one of our portfolio companies, AMI Telecommunications, Inc., to equity and realized a loss of $5.6 million. In March 2003, we



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converted $8.6 million of senior debt and $1.3 million of debtor in possession financing of one of our portfolio companies, Intellisec
Holdings, Inc., to equity and realized a loss of $5.8 million. The name of the company was also changed from Intellisec Holdings, Inc. to National Systems Integration, Inc.



There were no realized gains or losses for the three months ended March 31, 2002.



The net change in unrealized depreciation on investments of
$17.6 million for the three months ended March 31, 2003 consisted of $2.5 million of gross appreciation, $3.8 million of gross depreciation and $18.9 million of unrealized depreciation reversed and recorded as realized losses (as discussed above).
Over 60% of the appreciation is related to equity investments in two UNE-P CLEC (unbundled network elements-platform competitive local exchange carrier) telecommunications companies and more than 60% of the depreciation is related an equity
investment in a controlled portfolio company, Biznessonline.com, Inc., which recently completed an acquisition.



The net change in unrealized depreciation on investments for the three months ended March 31, 2002 of $6.2 million, reflects the change in
fair value primarily for assets in the telecommunications, security alarm and publishing sectors. The net decrease (increase) in unrealized depreciation on investments for the three months ended March 31, 2002 consisted of $1.0 million of gross
appreciation and $7.2 million of gross depreciation.



The following table summarizes our realized gains and losses on investments for the three months ended March 31, 2003. There were no realized gains and losses for the three months ended March 31, 2002:



MCG Capital Corporation

Summary of Realized Gains and Losses on Investments

(dollars in thousands)



|                                              |  |                    |  | Three Months Ended March 31,
|--------------------------------------------- |  | ------------------ |  | ----------------------------
|Portfolio Company                             |  | Sector             |  | 2003                        
|                                             
|Realized gains (losses) on loans              |  |                    |  |                             
|VS&A-PBI Holding LLC                          |  | Publishing         |  | $                           
|National Systems Integration                  |  | Security Alarm     |  |                             
|AMI Telecommunications Corporation            |  | Telecommunications |  |                             
|NBG Radio Network, Inc.                       |  | Broadcasting       |  |                             
|                                              |  |                    |  |                             
|                                              |  |                    |  |                             
|                                              |  |                    |  |                             
|Realized gains (losses) on equity investments |  |                    |  |                             
|None                                          |  |                    |  |                             
|                                              |  |                    |  |                             
|                                              |  |                    |  |                             
|                                              |  |                    |  |                             
|Realized gains (losses) on investments        |  |                    |  | $                           
|                                              |  |                    |  |                             



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The following
table summarizes the net change in our unrealized appreciation and depreciation on investments for the three months ended March 31, 2003 and 2002:



MCG Capital Corporation

Summary of Net Change in Unrealized Appreciation and Depreciation on Investments

(dollars in
thousands)



|                                                                    |  |                      |        | Three Months Ended March 31, |       
|------------------------------------------------------------------- |  | -------------------- | ------ | ---------------------------- | ------
|Portfolio Company                                                   |  | Sector               |        | 2003                         |       
|                                                                   
|Unrealized appreciation on loans                                    |  |                      |        |                              |       
|Other                                                               |  |                      |        | $                            | 46    
|                                                                    |  |                      |        |                              |       
|Unrealized appreciation on equity investments                       |  |                      |        |                              |       
|Talk America Holdings, Inc.                                         |  | Telecommunications   |        |                              | 834   
|Bridgecom Holdings, Inc.                                            |  | Telecommunications   |        |                              | 690   
|Manhattan Telecommunications Corporation                            |  | Telecommunications   |        |                              |      
|Other                                                               |  |                      |        |                              | 996   
|                                                                    |  |                      |        |                              |       
|                                                                    |  |                      |        |                              | 2,520 
|                                                                    |  |                      |        |                              |       
|Unrealized appreciation on investments                              |  |                      | 2,566  |                              |       
|                                                                    |  |                      |        |                              |       
|Unrealized depreciation on loans                                    |  |                      |        |                              |       
|Images.com, Inc.                                                    |  | Information Services |        |                              | (384  
|National Systems Integration, Inc.                                  |  | Security Alarm       |        |                              |      
|Other                                                               |  |                      |        |                              | (190  
|                                                                    |  |                      |        |                              |       
|                                                                    |  |                      |        |                              | (574  
|                                                                    |  |                      |        |                              |       
|Unrealized depreciation on equity investments                       |  |                      |        |                              |       
|Biznessonline.com, Inc.                                             |  | Telecommunications   |        |                              | (2,001
|National Systems Integration, Inc.                                  |  | Security Alarm       |        |                              | (317  
|Working Mother Media, Inc.                                          |  | Publishing           |        |                              | (497  
|UMAC, Inc.                                                          |  | Publishing           |        |                              |      
|nii communications, inc.                                            |  | Telecommunications   |        |                              |      
|Other                                                               |  |                      |        |                              | (424  
|                                                                    |  |                      |        |                              |       
|                                                                    |  |                      |        |                              | (3,239
|                                                                    |  |                      |        |                              |       
|Unrealized depreciation on investments                              |  |                      | (3,813 | )                            |       
|Reversal of unrealized depreciation*                                |  |                      |        |                              |       
|VS&A-PBI Holding LLC                                                |  | Publishing           |        |                              | 7,901 
|National Systems Integration, Inc.                                  |  | Security Alarm       |        |                              | 5,276 
|AMI Telecommunications Corporation                                  |  | Telecommunications   |        |                              | 5,143 
|NBG Radio Network, Inc.                                             |  | Broadcasting         |        |                              | 574   
|                                                                    |  |                      |        |                              |       
|Total reversal of unrealized depreciation                           |  |                      | 18,894 |                              |       
|                                                                    |  |                      |        |                              |       
|Net change in unrealized appreciation (depreciation) on
investments |  | $                    | 17,647 |                              |       
|                                                                    |  |                      |        |                              |       



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



Income Taxes



Through
December 31, 2001, we were taxed under Subchapter C of the Internal Revenue Code. We will elect to be a regulated investment company under Subchapter M of the Internal Revenue Code with the filing of our federal corporate income tax return for 2002,
which election will be effective as of January 1, 2002, and will not be subject to taxation of income to the extent such income is distributed to stockholders and we meet certain minimum dividend distribution and other requirements.



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Net Income



Net income totaled $8.9 million for the
quarter ended March 31, 2003 compared to $3.7 for the quarter ended March 31, 2002.



Financial Condition, Liquidity and Capital Resources



Cash, Cash Equivalents and Cash, Securitization Accounts



At March 31, 2003 and December 31, 2002, we had $37.6 million and $9.4 million, respectively, in cash and cash equivalents. In addition,
at March 31, 2003 and December 31, 2002, we had $29.0 million and $43.2 million, respectively, in cash, securitization accounts. We invest cash on hand in interest bearing deposit accounts with daily sweep features. Cash, securitization accounts
includes amounts held in designated bank accounts representing payments received on securitized loans. We are required to use a portion of these amounts to pay interest expense, reduce borrowings, or pay other amounts in accordance with the related
securitization agreements. Our objective is to maintain sufficient cash on hand to cover current funding requirements and operations.



Liquidity and Capital Resources



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



As of March 31, 2003, we had unused commitments
to extend credit to our customers of $16.0 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 amount of Series 2000-1 Notes we may issue
from time to time, the unused portion of our borrowing facility totaled $52.2 million. See Borrowings section below for discussion of our borrowing facilities.



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



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



(a) This excludes the
unused commitments to extend credit to our customers of 16.0 million as discussed above.



(b) Borrowings under the Revolving Credit Facility are listed based on the contractual maturity of the facility. Repayments of the Series 2001-1 Notes are based on the contractual principal collections of the loans which
comprise the collateral. Actual repayments could differ significantly due to prepayments by our borrowers and modifications of our borrowers existing loan agreements.



In order to satisfy the requirements applicable to a regulated investment company, we intend to distribute to
our stockholders all of our income except for certain net capital gains and adjustments for long-term incentive compensation. In addition, as a business development company, we generally will be required to meet a coverage



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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 March 31, 2003, this ratio was 205%. This requirement limits the amount that we may borrow. To fund growth in our investment portfolio, we anticipate needing to raise additional capital from various sources, including the public
and private equity markets and the securitization or other debt-related markets.



Borrowings



On December
27, 2001, we established the MCG Commercial Loan Trust 20011 (the Trust), which issued two classes of Series 20011 Notes to 15 institutional investors. The facility is secured by all of the Trusts existing assets which
were contributed by us and totaled $271.6 million as of March 31, 2003 and $295.5 million as of December 31, 2002. This facility is scheduled to terminate on February 20, 2013 or sooner upon full repayment of the Class A and Class B Notes. The Class
A and Class B Notes are scheduled to be repaid as we receive principal collections on the underlying collateral.



The Trust issued $229.8 million of Class A Notes rated AAA/Aaa/AAA, and $35.4 million of Class B Notes rated A/A2/A (the Series
20011 Class A Asset Backed Bonds and Series 20011 Class B Asset Backed Bonds) as rated by Standard & Poors, Moodys and Fitch, respectively. As of March 31, 2003, $207.1 million of the Series 20011 Notes
were outstanding and $240.1 million were outstanding as of December 31, 2002. The Series 20011 Class A Asset Backed Bonds bear interest of LIBOR plus 0.60% and Series 20011 Class B Asset Backed Bonds bear interest of LIBOR plus 1.75%,
and interest on both is payable quarterly.



As of
June 1, 2000, we, through MCG Master Trust, established a revolving credit facility (the Revolving Credit Facility), which allows us to issue up to $200.0 million of Series 20001 Class A Notes (the Series 20001
Notes or Series 20001 Class A Asset Backed Securities). As of March 31, 2003, $147.8 million of the Series 20001 Notes were outstanding with one investor and, as of December 31, 2002, $123.7 million were outstanding
with one investor. As of March 31, 2003 and December 31, 2002, we had no notes outstanding under a swingline credit facility (the Swingline Notes), which is part of the Revolving Credit Facility, that allows us to borrow up to $25.0
million as part of the $200.0 million total facility limit for a period of up to four days. The Swingline Notes are repaid through the issuance of Series 20001 Notes. The Revolving Credit Facility was secured by $228.9 million of commercial
loans as of March 31, 2003 and $224.6 million of commercial loans as of December 31, 2002. We are subject to certain limitations on the amount of Series 20001 Notes we may issue at any point in time including the requirement for a minimum
amount of unleveraged loans that serve as collateral for the indebtedness. Such amount was a minimum of $30.0 million (subject to increase upon occurrence of an event of default) prior to July 8, 2002 and $75.0 million as of July 8, 2002 and
thereafter. We are also subject to limitations including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life, collateral interests and investment ratings as well as regulatory
restrictions on leverage which may affect the amount of Series 20001 notes we may issue from time to time. There are also certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on
delinquencies and charge-offs, violation of which could result in the early amortization of the facility, and limit further advances under the facility, and in some cases could be an event of default. Such limitations, requirements, and associated
defined terms are as provided for in the documents governing the facility. The Series 20001 Notes bear interest based on a commercial paper rate plus 1.0% and interest is payable monthly. This facility matures on July 7, 2005 or sooner (but
not earlier than July 7, 2003), if Wachovia Bank does not renew the liquidity support that it provides to the commercial paper conduit, which is the lender under this facility.



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 of 3% or
less. The amendment increased this ratio to 7% for any date



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prior to and including June 30, 2003 and decreased this ratio to 3% thereafter. This amendment also included a waiver with respect to the
applicability of the charge-off ratio for periods prior to February 2003. Additionally, this amendment required us to increase the amount of collateral held by the noteholders by pledging the MCG Commercial Loan Trust 2001-1 Class C Notes, which we
own.



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



At March 31, 2003, we had aggregate outstanding borrowings of $354.9 million. The following table shows the
facility amounts and outstanding borrowings at March 31, 2003:



|(dollars in millions)                         |  | Facility amount |       | Amount outstanding |   | Interest Rate (a) | 
|--------------------------------------------- |  | --------------- | ----- | ------------------ | - | ----------------- | 
|Series 2001-1 Class A Asset Backed Bonds      |  | $               | 171.7 |                    | $ | 171.7             | 
|Series 2001-1 Class B Asset Backed Bonds      |  |                 | 35.4  |                    |   | 35.4              | 
|Series 2000-1 Class A Asset Backed Securities |  |                 | 200.0 |                    |   | 147.8             | 
|                                              |  |                 |       |                    |   |                   | 
|Total borrowings                              |  | $               | 407.1 |                    | $ | 354.9             | 
|                                              |  |                 |       |                    |   |                   | 



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



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



|(dollars in millions)                         |  | Facility amount |       | Amount outstanding |   | Interest Rate (a) | 
|--------------------------------------------- |  | --------------- | ----- | ------------------ | - | ----------------- | 
|Series 2001-1 Class A Asset Backed Bonds      |  | $               | 204.7 |                    | $ | 204.7             | 
|Series 2001-1 Class B Asset Backed Bonds      |  |                 | 35.4  |                    |   | 35.4              | 
|Series 2000-1 Class A Asset Backed Securities |  |                 | 200.0 |                    |   | 123.7             | 
|                                              |  |                 |       |                    |   |                   | 
|Total borrowings                              |  | $               | 440.1 |                    | $ | 363.8             | 
|                                              |  |                 |       |                    |   |                   | 



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



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



Dividends



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



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



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The following
table summarizes our dividends declared to date:



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



The
aggregate dividend of $0.86 per share in December 2001 consisted of a dividend of $0.25 per share for the fourth quarter of 2001 and an additional dividend of $0.61 per share representing the distribution of substantially all of our earnings and
profits since inception through December 31, 2001. The aggregate dividend of $0.46 declared in September 2002 consisted of a dividend of $0.43 per share for the third quarter of 2002 and an additional dividend of $0.03 per share which represented
the remaining distribution of our earnings and profits since inception through December 31, 2001. The aggregate dividend declared in December 2001 along with the $0.03 dividend declared in September, 2002 were required for us to qualify as a
regulated investment company. Dividends are paid on all shares including restricted stock.



Critical Accounting Policies



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



Income Recognition



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



In accordance with GAAP, we include in income certain amounts that we have not yet received in cash, such as contractual payment-in-kind
(PIK) interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term. However, in certain cases, a customer makes principal payments on its loan prior to making payments to
reduce the PIK loan balances and, therefore, the PIK portion of a customers loan can increase while the total outstanding amount of the loan to that customer may stay the same or decrease. PIK loans represented $29.0 million or 4.4% of our
portfolio of investments as of March 31, 2003 and $27.2 million or 4.0% of our portfolio of investments as of December 31, 2002.



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PIK related
activity for the three months ended March 31, 2003 and year ended December 31, 2002 was as follows:



|(in millions)                              |  | Three Months Ended March 31, 2003 |      |   | Year Ended December 31, 2002 |  
|------------------------------------------ |  | --------------------------------- | ---- | - | ---------------------------- | -
|Beginning PIK loan balance                 |  | $                                 | 27.2 |   |                              | $
|PIK interest earned during the period      |  |                                   | 4.8  |   |                              |  
|Change in interest receivable on PIK loans |  |                                   | 0.1  |   |                              |  
|Principal payments of cash on PIK loans    |  |                                   | (0.7 | ) |                              |  
|PIK loan converted to equity               |  |                                   | (2.4 | ) |                              |  
|                                           |  |                                   |      |   |                              |  
|Ending PIK loan balance                    |  | $                                 | 29.0 |   |                              | $
|                                           |  |                                   |      |   |                              |  



As noted
above, in certain cases, a customer may make principal payments on its loan that are contractually applied first to the non-PIK loan balance instead of the PIK loan balance. Had all principal payments from these customers been applied first to any
outstanding PIK loan balance outstanding at the time of the payment, and any remainder applied to the non-PIK loan balance, an additional $6.3 million of payments would have been applied against the March 31, 2003 PIK loan balance of $29.0 million
and an additional $6.3 million of payments would have been applied against the December 31, 2002 PIK loan balance of $27.2 million.



As of March 31, 2003, 94.2% of the $29.0 million of PIK loans outstanding had an investment rating of 3 or better and as of December 31,
2002, 87.8% of the $27.2 million of PIK loans outstanding had an investment rating of 3 or better. The net increase in loan balances as a result of contracted PIK arrangements are separately identified on our consolidated statements of cash flows.



Loan origination fees are deferred and amortized
as adjustments to the related loans yield over the contractual life of the loan. In certain loan arrangements, warrants or other equity interests are received from the borrower as additional origination fees. The borrowers granting these
interests are typically non-publicly traded companies. We record the financial instruments received at estimated 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 $11.3 million and $12.8 million of unearned fees as of March 31, 2003 and December
31, 2002, respectively. We recognized $1.2 million of these fees in income during the first three months of 2003 and $1.1 million of these fees in income during the first three months of 2002.



Valuation of Investments



At March 31, 2003, approximately 90% of our total assets
represented investments recorded at fair value. Value, as defined in Section 2(a)(41) of 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair
value is as determined in good faith by the board of directors. Since there is typically no readily ascertainable market value for the investments in our portfolio, we value substantially all of our investments at fair value as determined in good
faith by the board of directors pursuant to a valuation policy and a consistent valuation process. Because of the inherent uncertainty of determining the fair value of investments that do not have a readily ascertainable market value, the fair value
of our investments determined in good faith by the board of directors may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.



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



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banks, we are not permitted to provide a general reserve for anticipated loan losses. Instead, we must determine the fair value of each
individual investment on a quarterly basis. We will record unrealized depreciation on investments when we believe that an investment has become impaired, including where collection of a loan or realization of an equity security is doubtful.
Conversely, we will record unrealized appreciation if we believe that the underlying portfolio company has appreciated in value and, therefore, our investment has also appreciated in value, where appropriate.



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



Valuation of Loans and Debt Securities



As a general rule, we do not value our loans or debt securities above cost, but loans and debt securities
will be subject to fair value write-downs when the asset is considered impaired. In many cases, our loan agreements allow for increases in the spread to the base index rate if the financial or operational performance of the customer deteriorates or
shows negative variances from the customers business plan and, in some cases, allow for decreases in the spread if financial or operational performance improves or exceeds the customers plan.



Valuation of Equity Securities



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



Securitization Transactions



Periodically, we transfer pools of loans to
special purpose entities (SPEs) for use in securitization transactions. These on-balance sheet securitization transactions comprise a significant source of our overall funding, with the total face amount of the outstanding loans and equity
investments assumed by third parties equaling $500.5 million at March 31, 2003 and $520.1 million at December 31, 2002. On April 1, 2001, the Company adopted the requirements of SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, which applies prospectively to all securitization transactions occurring after March 31, 2001. Adoption of SFAS No. 140 did not have a material impact on our operations or financial
position. Transfers of loans have not met the requirements of SFAS No. 140 for sales treatment and are, therefore, treated as secured borrowings, with the transferred loans remaining in investments and the related liability recorded in borrowings.



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Recent
Development



In April 2003, we completed a
transaction to acquire the assets of one of our portfolio companies, Rising Tide Holdings LLC, in satisfaction of debt. The assets acquired were then immediately sold to a third party. Our investment had a fair value of $0.4 million and unrealized
depreciation of $2.7 million as of March 31, 2003. In conjunction with this transaction, we expect to realize this loss in the second quarter of 2003 and expect this realized loss to offset the reversal of the unrealized depreciation. Accordingly,
we expect no material impact to our overall earnings in the second quarter of 2003 as a result of this transaction.



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 81% 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 29% of our loan portfolio has a LIBOR floor, at various levels. Our interest rates on our borrowings are based on LIBOR and commercial paper rates, with the majority based on LIBOR.



We regularly measure exposure to interest rate risk. We have
interest rate risk exposure mainly from the portion of the commercial loan portfolio funded using stockholders equity. Our board of directors assesses interest rate risk and we manage our interest rate exposure on an ongoing basis. The
following table shows a comparison of the interest rate base for our outstanding commercial loans and our outstanding borrowings at March 31, 2003 and December 31, 2002:



|                      |  | March 31, 2003   |       | December 31, 2002
|--------------------- |  | ---------------- | ----- | -----------------
|                      |  |                 
|(dollars in millions) |  | Commercial Loans |       | Borrowings       
|                      |  |                 
|Prime Rate            |  | $                | 47.9  |                  
|30-Day LIBOR          |  |                  | 29.7  |                  
|60-Day LIBOR          |  |                  |      |                  
|90-Day LIBOR          |  |                  | 477.5 |                  
|Commercial Paper Rate |  |                  |      |                  
|Fixed Rate            |  |                  | 69.0  |                  
|                      |  |                  |       |                  
|Total                 |  | $                | 624.1 |                  
|                      |  |                  |       |                  



Based on
our March 31, 2003 balance sheet, for a 100 basis point increase in interest rates, our annual interest income would increase by $3.9 million and our annual interest expense would increase by $3.6 million resulting in an increase in annual net
income of $0.3 million, assuming no changes in our investments or borrowing structure. Due to the imposition of LIBOR floors, the impact of an additional 100 basis point increase is different from the first 100 basis point change discussed in the
preceding sentence. For that additional 100 basis point increase in interest rates, our annual interest income would increase an additional $4.5 million resulting in an increase in annual net income of an additional $1.0 million, assuming no changes
in our investments or borrowing structure. For a 100 basis point decrease in interest rates, our annual interest income would decrease by $3.8 million and our annual interest expense would decrease by $3.5 million, resulting in a decrease in annual
net income of $0.3 million, assuming no changes in our investment and borrowing structure.



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



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



Item 4.    Controls and Procedures



| | (a) |  | Within the 90 days prior to the date of this report, MCG carried out an evaluation, under the supervision and with the participation of MCGs management,
including MCGs Chief Executive Officer, President and Chief Operating Officer and Chief Financial Officer, of the effectiveness of the design and operation of MCGs disclosure controls and procedures (as defined in Rule 13a-14 of the
Securities Exchange Act of 1934). Based on that evaluation, the Chief Executive Officer, the President and Chief Operating Officer and the Chief Financial Officer have concluded that MCGs current disclosure controls and procedures are
effective in timely alerting them of material information relating to MCG that is required to be disclosed in MCGs SEC filings.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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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 alleges that the defendants made certain misstatements in violation of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b), Rule 10b-5 and Section 20(a) of the
Securities Exchange Act of 1934. Specifically, the complaint asserts that members of the plaintiff class purchased our common stock at purportedly inflated prices during the period from November 28, 2001 to November 1, 2002 as a result of certain
misstatements regarding the academic degree of our chief executive officer. The complaint seeks unspecified compensatory and other damages, along with costs and expenses. We intend to defend this lawsuit vigorously.



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



Item 2.    Changes in Securities and Use of Proceeds



Not Applicable.



Item 3.    Defaults Upon Senior Securities



Not Applicable.



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



Not Applicable.



Item 5.    Other Information



Not Applicable.



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):



|Exhibit Number |  | Description of Document                                                                                                             
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------
|              
|99.1           |  | Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350).              
|              
|99.2           |  | Certification of President and Chief Operating Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350).
|              
|99.3           |  | Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350).              



(b) Form
8-KOn April 30, 2003, we filed a current report on Form 8-K, which furnished a press release dated April 30, 2003, announcing our earnings for the quarter ended March 31, 2003.



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SIGNATURES



Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 7, 2003.



MCG CAPITAL CORPORATIONBy:

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


By:

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


By:

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




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CERTIFICATION OF CHIEF EXECUTIVE OFFICER



I, Bryan J. Mitchell, Chief Executive Officer of MCG Capital Corporation, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of MCG Capital Corporation;
|-- |  | ------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of the registrants board of directors (or persons performing the equivalent function):
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Dated this 7th day of May, 2003



/s/ Bryan J. Mitchell

Bryan J. Mitchell

Chief Executive Officer



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CERTIFICATION OF PRESIDENT AND CHIEF OPERATING OFFICER



I, Steven F. Tunney, President and Chief Operating Officer of MCG Capital
Corporation, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of MCG Capital Corporation;
|-- |  | ------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | f) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of the registrants board of directors (or persons performing the equivalent function):
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Dated this 7th day of May, 2003



/s/ Steven F. Tunney

Steven F. Tunney

President and Chief
Operating Officer



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CERTIFICATION OF CHIEF FINANCIAL OFFICER



I, Janet C. Perlowski, Chief Financial Officer of MCG Capital Corporation,
certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of MCG Capital Corporation;
|-- |  | ------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of the registrants board of directors (or persons performing the equivalent function):
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
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| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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Dated this 7th day of May, 2003



/s/ Janet C. Perlowski

Janet C. Perlowski

Chief Financial Officer



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