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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



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



For the Quarter Ended March 31, 2005.



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



Commission File Number: 0-33377



MCG CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)



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



(703) 247-7500

(Registrants telephone number, including area code)



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



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



The number of shares of the
registrants Common Stock, $.01 par value, outstanding as of May 4, 2005 was 47,344,927.



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##### Table of Contents

MCG CAPITAL CORPORATION



FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2005



TABLE OF CONTENTS



|           |  |                                                                                                    |  |   
|---------- |  | -------------------------------------------------------------------------------------------------- |  | --
|PART I     |  | FINANCIAL INFORMATION                                                                              |  | 3 
|           |  |                                                                                                   
|           |  | Selected Financial Data                                                                            |  | 3 
|           |  |                                                                                                   
|Item 1.    |  | Financial Statements (Unaudited)                                                                   |  | 4 
|           |  |                                                                                                   
|           |  | Consolidated Balance Sheets  March 31, 2005 and December 31, 2004                                 |  | 4 
|           |  |                                                                                                   
|           |  | Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004           |  | 5 
|           |  |                                                                                                   
|           |  | Consolidated Statements of Stockholders Equity for the three months ended March 31, 2005 and 2004 |  | 6 
|           |  |                                                                                                   
|           |  | Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004           |  | 7 
|           |  |                                                                                                   
|           |  | Consolidated Schedule of Investments as of March 31, 2005                                          |  | 8 
|           |  |                                                                                                   
|           |  | Consolidated Schedule of Investments as of December 31, 2004                                       |  | 17
|           |  |                                                                                                   
|           |  | Notes to Consolidated Financial Statements                                                         |  | 28
|           |  |                                                                                                   
|           |  | Independent Accountants Review Report                                                             |  | 36
|           |  |                                                                                                   
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations              |  | 37
|           |  |                                                                                                   
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  | 63
|           |  |                                                                                                   
|Item 4.    |  | Controls and Procedures                                                                            |  | 63
|           |  |                                                                                                   
|PART II    |  | OTHER INFORMATION                                                                                  |  | 64
|           |  |                                                                                                   
|Item 1.    |  | Legal Proceedings                                                                                  |  | 64
|           |  |                                                                                                   
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                        |  | 64
|           |  |                                                                                                   
|Item 3.    |  | Defaults upon Senior Securities                                                                    |  | 64
|           |  |                                                                                                   
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                |  | 64
|           |  |                                                                                                   
|Item 5.    |  | Other Information                                                                                  |  | 64
|           |  |                                                                                                   
|Item 6.    |  | Exhibits                                                                                           |  | 64
|           | 
|Signatures |  | 65                                                                                                



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PART I.    FINANCIAL INFORMATION



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



Selected Financial Data



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



|                                                                                           |  |                             |           |      |   |        
|------------------------------------------------------------------------------------------ |  | --------------------------- | --------- | ---- | - | -------
|                                                                                           |  | Three Months EndedMarch 31,
|(dollars in thousands except per share and other data)                                     |  | 2005                        |           | 2004
|Income Statement Data:                                                                     |  |                             |           |      |   |        
|Operating income                                                                           |  | $                           | 28,115    |      | $ | 22,205 
|Net operating income before investment gains and losses                                    |  |                             | 14,491    |      |   | 9,841  
|Net income                                                                                 |  |                             | 13,058    |      |   | 2,097  
|                                                                                           |  |                            
|Per Common Share Data:                                                                     |  |                             |           |      |   |        
|Earnings per common sharebasic and diluted                                                |  |                             | 0.29      |      |   | 0.06   
|Net operating income before investment gains and losses per common share basic and diluted |  |                             | 0.32      |      |   | 0.26   
|Net asset value per common share (a)                                                       |  |                             | 12.25     |      |   | 11.76  
|Cash dividends declared per common share                                                   |  |                             | 0.42      |      |   | 0.42   
|                                                                                           |  |                            
|Selected Period-End Balances:                                                              |  |                             |           |      |   |        
|Total investment portfolio                                                                 |  | $                           | 888,563   |      | $ | 684,573
|Total assets                                                                               |  |                             | 1,063,720 |      |   | 767,499
|Borrowings                                                                                 |  |                             | 453,824   |      |   | 289,235
|                                                                                           |  |                            
|Other data (at period-end):                                                                |  |                             |           |      |   |        
|Number of portfolio companies                                                              |  |                             | 97        |      |   | 83     
|Number of employees                                                                        |  |                             | 116       |      |   | 88     



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



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Item 1.    Financial Statements (unaudited)



MCG Capital Corporation

Consolidated Balance Sheets (unaudited)

(in thousands, except per share amounts)



|                                                                                                                                                               |  |               |           |   |                  |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                               |  | March 31,2005 |           |   | December 31,2004 |  
|Assets                                                                                                                                                         |  |               |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                                                      |  | $             | 50,826    |   |                  | $ | 82,732    |  
|Cash, securitization accounts                                                                                                                                  |  |               | 108,986   |   |                  |   | 79,473    |  
|Cash, restricted                                                                                                                                               |  |               | 1,965     |   |                  |   |          |  
|Investments at fair value                                                                                                                                      |  |               |           |   |                  |   |           |  
|Commercial loans, (cost of $778,880 and $767,282, respectively)                                                                                                |  |               | 769,722   |   |                  |   | 760,489   |  
|Investments in equity securities, (cost of $147,758 and $131,472, respectively)                                                                                |  |               | 118,841   |   |                  |   | 119,911   |  
|Unearned income on commercial loans                                                                                                                            |  |               | (10,735   | ) |                  |   | (12,529   | )
|                                                                                                                                                               |  |               |           |   |                  |   |           |  
|Total investments                                                                                                                                              |  |               | 877,828   |   |                  |   | 867,871   |  
|Interest receivable                                                                                                                                            |  |               | 7,181     |   |                  |   | 5,729     |  
|Other assets                                                                                                                                                   |  |               | 16,934    |   |                  |   | 17,706    |  
|                                                                                                                                                               |  |               |           |   |                  |   |           |  
|Total assets                                                                                                                                                   |  | $             | 1,063,720 |   |                  | $ | 1,053,511 |  
|                                                                                                                                                               |  |               |           |   |                  |   |           |  
|Liabilities                                                                                                                                                    |  |               |           |   |                  |   |           |  
|Borrowings                                                                                                                                                     |  | $             | 453,824   |   |                  | $ | 467,400   |  
|Interest payable                                                                                                                                               |  |               | 3,029     |   |                  |   | 2,925     |  
|Dividends payable                                                                                                                                              |  |               | 19,044    |   |                  |   | 19,043    |  
|Other liabilities                                                                                                                                              |  |               | 7,889     |   |                  |   | 9,930     |  
|                                                                                                                                                               |  |               |           |   |                  |   |           |  
|Total liabilities                                                                                                                                              |  |               | 483,786   |   |                  |   | 499,298   |  
|                                                                                                                                                               |  |               |           |   |                  |   |           |  
|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, 47,343 issued and outstanding on March 31, 2005 and 45,342 issued and outstanding
onDecember 31, 2004 |  |               | 473       |   |                  |   | 453       |  
|Paid-in capital                                                                                                                                                |  |               | 670,877   |   |                  |   | 640,879   |  
|Distributions in excess of earnings:                                                                                                                           |  |               |           |   |                  |   |           |  
|Paid-in Capital                                                                                                                                                |  |               | (28,998   | ) |                  |   | (28,998   | )
|Other                                                                                                                                                          |  |               | (13,504   | ) |                  |   | (27,780   | )
|Net unrealized depreciation on investments                                                                                                                     |  |               | (38,075   | ) |                  |   | (18,354   | )
|Stockholder loans                                                                                                                                              |  |               | (4,595    | ) |                  |   | (4,601    | )
|Unearned compensationrestricted stock                                                                                                                         |  |               | (6,244    | ) |                  |   | (7,386    | )
|                                                                                                                                                               |  |               |           |   |                  |   |           |  
|Total stockholders equity                                                                                                                                     |  |               | 579,934   |   |                  |   | 554,213   |  
|                                                                                                                                                               |  |               |           |   |                  |   |           |  
|                                                                                                                                                               |  |               |           |   |                  |   |           |  
|Total liabilities and stockholders equity                                                                                                                     |  | $             | 1,063,720 |   |                  | $ | 1,053,511 |  
|                                                                                                                                                               |  |               |           |   |                  |   |           |  



See
notes to consolidated financial statements (unaudited).



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MCG Capital Corporation

Consolidated Statements of Operations (unaudited)

(in thousands, except per share amounts)



|                                                                                 |  |                             |         |   |      |   |        |  
|-------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                 |  | Three Months EndedMarch 31, |        
|                                                                                 |  | 2005                        |         |   | 2004 |  
|Operating income                                                                 |  |                             |         |   |      |   |        |  
|Interest and dividend income                                                     |  |                             |         |   |      |   |        |  
|Non-affiliate investments (less than 5% owned)                                   |  | $                           | 14,234  |   |      | $ | 12,320 |  
|Affiliate investments (5% to 25% owned)                                          |  |                             | 1,377   |   |      |   | 885    |  
|Control investments (more than 25% owned)                                        |  |                             | 8,982   |   |      |   | 5,284  |  
|                                                                                 |  |                             |         |   |      |   |        |  
|Total interest and dividend income                                               |  |                             | 24,593  |   |      |   | 18,489 |  
|Advisory fees and other income                                                   |  |                             |         |   |      |   |        |  
|Non-affiliate investments (less than 5% owned) and other income                  |  |                             | 3,237   |   |      |   | 1,619  |  
|Control investments (more than 25% owned)                                        |  |                             | 285     |   |      |   | 2,097  |  
|                                                                                 |  |                             |         |   |      |   |        |  
|Total advisory fees and other income                                             |  |                             | 3,522   |   |      |   | 3,716  |  
|                                                                                 |  |                             |         |   |      |   |        |  
|Total operating income                                                           |  |                             | 28,115  |   |      |   | 22,205 |  
|                                                                                 |  |                             |         |   |      |   |        |  
|Operating expenses                                                               |  |                             |         |   |      |   |        |  
|Interest expense                                                                 |  |                             | 4,684   |   |      |   | 2,103  |  
|Employee compensation:                                                           |  |                             |         |   |      |   |        |  
|Salaries and benefits                                                            |  |                             | 4,756   |   |      |   | 2,885  |  
|Long-term incentive compensation                                                 |  |                             | 1,682   |   |      |   | 5,551  |  
|                                                                                 |  |                             |         |   |      |   |        |  
|Total employee compensation                                                      |  |                             | 6,438   |   |      |   | 8,436  |  
|General and administrative expense                                               |  |                             | 2,502   |   |      |   | 1,825  |  
|                                                                                 |  |                             |         |   |      |   |        |  
|Total operating expenses                                                         |  |                             | 13,624  |   |      |   | 12,364 |  
|                                                                                 |  |                             |         |   |      |   |        |  
|Net operating income before investment gains and losses                          |  |                             | 14,491  |   |      |   | 9,841  |  
|                                                                                 |  |                             |         |   |      |   |        |  
|Net realized gains (losses) on investments                                       |  |                             |         |   |      |   |        |  
|Non-affiliate investments (less than 5% owned)                                   |  |                             | 101     |   |      |   | 1,904  |  
|Affiliate investments (5% to 25% owned)                                          |  |                             | (190    | ) |      |   |       |  
|Control investments (more than 25% owned)                                        |  |                             | 18,377  |   |      |   |       |  
|                                                                                 |  |                             |         |   |      |   |        |  
|Total net realized gains (losses) on investments                                 |  |                             | 18,288  |   |      |   | 1,904  |  
|Net change in unrealized appreciation (depreciation) on investments              |  |                             |         |   |      |   |        |  
|Non-affiliate investments (less than 5% owned)                                   |  |                             | 955     |   |      |   | (3,493 | )
|Affiliate investments (5% to 25% owned)                                          |  |                             | 730     |   |      |   | (1,420 | )
|Control investments (more than 25% owned)                                        |  |                             | (21,406 | ) |      |   | (4,735 | )
|                                                                                 |  |                             |         |   |      |   |        |  
|Total net change in unrealized appreciation (depreciation) on investments        |  |                             | (19,721 | ) |      |   | (9,648 | )
|                                                                                 |  |                             |         |   |      |   |        |  
|Net investment gains (losses)                                                    |  |                             | (1,433  | ) |      |   | (7,744 | )
|                                                                                 |  |                             |         |   |      |   |        |  
|Net income                                                                       |  | $                           | 13,058  |   |      | $ | 2,097  |  
|                                                                                 |  |                             |         |   |      |   |        |  
|Earnings per common share basic and diluted                                      |  | $                           | 0.29    |   |      | $ | 0.06   |  
|Cash dividends declared per common share                                         |  | $                           | 0.42    |   |      | $ | 0.42   |  
|Weighted average common shares outstanding                                       |  |                             | 45,108  |   |      |   | 37,823 |  
|Weighted average common shares outstanding and dilutive common stock equivalents |  |                             | 45,149  |   |      |   | 37,928 |  



See notes to consolidated financial
statements (unaudited).





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MCG Capital Corporation

Consolidated Statements of Stockholders Equity (unaudited)

(in thousands, except per share amounts)



|                                             |  |              |  |                 |     |                    |   |         |                                          |   |        |                                    |  |   |                                           |   |  |                            |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|-------------------------------------------- |  | ------------ |  | --------------- | --- | ------------------ | - | ------- | ---------------------------------------- | - | ------ | ---------------------------------- |  | - | ----------------------------------------- | - |  | -------------------------- | ------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                             |  | Common stock |  | Paid-in Capital |     | Stock-holder Loans |   |         | Unearned Compen- sationRestricted stock |   |        | Distributions in Excess ofEarnings |  |   | Net Unrealized Depreciation onInvestments |   |  | Total Stockholders Equity |        
|                                             |  | Shares       |  | Amount          |     |                    |   |         | Paid-in Capital                          |   |        | Other                              |  |   |                                          
|Balance December 31, 2003                    |  | 38,732       |  | $               | 387 |                    | $ | 529,168 |                                          | $ | (5,293 | )                                  |  | $ | (4,911                                    | ) |  | $                          | (7,811  | ) |  | $ | (18,429 | ) |  | $ | (29,161 | ) |  | $ | 463,950 |  
|Net income                                   |  |              |  |                 |     |                    |   |         |                                          |   |        |                                    |  |   |                                           |   |  |                            |         |   |  |   | 11,745  |   |  |   | (9,648  | ) |  |   | 2,097   |  
|Dividends declared, $0.42 per share:         |  |              |  |                 |     |                    |   |         |                                          |   |        |                                    |  |   |                                           |   |  |                            |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Distributions from net investment income     |  |              |  |                 |     |                    |   |         |                                          |   |        |                                    |  |   |                                           |   |  |                            |         |   |  |   | (15,695 | ) |  |   |         |   |  |   | (15,695 | )
|Distributions from capital gains             |  |              |  |                 |     |                    |   |         |                                          |   |        |                                    |  |   |                                           |   |  |                            |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Return of capital distribution               |  |              |  |                 |     |                    |   |         |                                          |   |        |                                    |  |   |                                           |   |  |                            |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Dividend reinvestment                        |  | 1            |  |                 |    |                    |   | 28      |                                          |   |        |                                    |  |   |                                           |   |  |                            |         |   |  |   |         |   |  |   |         |   |  |   | 28      |  
|Amortization of restricted stock awards      |  |              |  |                 |     |                    |   |         |                                          |   |        |                                    |  |   | 4,977                                     |   |  |                            |         |   |  |   |         |   |  |   |         |   |  |   | 4,977   |  
|Change in vesting of restricted stock awards |  |              |  |                 |     |                    |   | 11,570  |                                          |   |        |                                    |  |   | (11,570                                   | ) |  |                            |         |   |  |   |         |   |  |   |         |   |  |   |        |  
|Reduction in employee loans                  |  |              |  |                 |     |                    |   |         |                                          |   | 140    |                                    |  |   |                                           |   |  |                            |         |   |  |   |         |   |  |   |         |   |  |   | 140     |  
|                                             |  |              |  |                 |     |                    |   |         |                                          |   |        |                                    |  |   |                                           |   |  |                            |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Balance March 31, 2004                       |  | 38,733       |  | $               | 387 |                    | $ | 540,766 |                                          | $ | (5,153 | )                                  |  | $ | (11,504                                   | ) |  | $                          | (7,811  | ) |  | $ | (22,379 | ) |  | $ | (38,809 | ) |  | $ | 455,497 |  
|                                             |  |              |  |                 |     |                    |   |         |                                          |   |        |                                    |  |   |                                           |   |  |                            |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Balance December 31, 2004                    |  | 45,342       |  | $               | 453 |                    | $ | 640,879 |                                          | $ | (4,601 | )                                  |  | $ | (7,386                                    | ) |  | $                          | (28,998 | ) |  | $ | (27,780 | ) |  | $ | (18,354 | ) |  | $ | 554,213 |  
|Net income                                   |  |              |  |                 |     |                    |   |         |                                          |   |        |                                    |  |   |                                           |   |  |                            |         |   |  |   | 32,779  |   |  |   | (19,721 | ) |  |   | 13,058  |  
|Issuance of common shares, net of costs      |  | 2,000        |  |                 | 20  |                    |   | 29,974  |                                          |   |        |                                    |  |   |                                           |   |  |                            |         |   |  |   |         |   |  |   |         |   |  |   | 29,994  |  
|Dividends declared, $0.42 per share:         |  |              |  |                 |     |                    |   |         |                                          |   |        |                                    |  |   |                                           |   |  |                            |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Distributions from net investment income     |  |              |  |                 |     |                    |   |         |                                          |   |        |                                    |  |   |                                           |   |  |                            |         |   |  |   | (18,503 | ) |  |   |         |   |  |   | (18,503 | )
|Distributions from capital gains             |  |              |  |                 |     |                    |   |         |                                          |   |        |                                    |  |   |                                           |   |  |                            |         |   |  |   |         |   |  |   |         |   |  |   |        |  
|Return of capital distribution               |  |              |  |                 |     |                    |   |         |                                          |   |        |                                    |  |   |                                           |   |  |                            |         |   |  |   |         |   |  |   |         |   |  |   |        |  
|Dividend reinvestment                        |  | 1            |  |                 |    |                    |   | 24      |                                          |   |        |                                    |  |   |                                           |   |  |                            |         |   |  |   |         |   |  |   |         |   |  |   | 24      |  
|Amortization of restricted stock awards      |  |              |  |                 |     |                    |   |         |                                          |   |        |                                    |  |   | 1,142                                     |   |  |                            |         |   |  |   |         |   |  |   |         |   |  |   | 1,142   |  
|Change in vesting of restricted stock awards |  |              |  |                 |     |                    |   |         |                                          |   |        |                                    |  |   |                                           |   |  |                            |         |   |  |   |         |   |  |   |         |   |  |   |        |  
|Reduction in employee loans                  |  |              |  |                 |     |                    |   |         |                                          |   | 6      |                                    |  |   |                                           |   |  |                            |         |   |  |   |         |   |  |   |         |   |  |   | 6       |  
|                                             |  |              |  |                 |     |                    |   |         |                                          |   |        |                                    |  |   |                                           |   |  |                            |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Balance March 31, 2005                       |  | 47,343       |  | $               | 473 |                    | $ | 670,877 |                                          | $ | (4,595 | )                                  |  | $ | (6,244                                    | ) |  | $                          | (28,998 | ) |  | $ | (13,504 | ) |  | $ | (38,075 | ) |  | $ | 579,934 |  
|                                             |  |              |  |                 |     |                    |   |         |                                          |   |        |                                    |  |   |                                           |   |  |                            |         |   |  |   |         |   |  |   |         |   |  |   |         |  



See
notes to consolidated financial statements (unaudited).





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##### Table of Contents

MCG Capital Corporation

Consolidated Statements of Cash Flows (unaudited)

(in thousands)



|                                                                                     |  |                             |          |   |      |   |         |  
|------------------------------------------------------------------------------------ |  | --------------------------- | -------- | - | ---- | - | ------- | -
|                                                                                     |  | Three Months EndedMarch 31, |         
|                                                                                     |  | 2005                        |          |   | 2004 |  
|Operating activities                                                                 |  |                             |          |   |      |   |         |  
|Net income                                                                           |  | $                           | 13,058   |   |      | $ | 2,097   |  
|Adjustments to reconcile net income to net cash provided by operating activities:    |  |                             |          |   |      |   |         |  
|Depreciation and amortization                                                        |  |                             | 230      |   |      |   | 191     |  
|Amortization of restricted stock awards                                              |  |                             | 1,142    |   |      |   | 4,977   |  
|Amortization of deferred debt issuance costs                                         |  |                             | 640      |   |      |   | 337     |  
|Net realized (gains) losses on investments                                           |  |                             | (18,288  | ) |      |   | (1,904  | )
|Net change in unrealized depreciation (appreciation) on investments                  |  |                             | 19,721   |   |      |   | 9,648   |  
|Decrease in cashsecuritization accounts from interest collections                   |  |                             | 4,765    |   |      |   | 1,201   |  
|Increase in interest receivable                                                      |  |                             | (1,492   | ) |      |   | (97     | )
|(Increase) decrease in accrued payment-in-kind interest and dividends                |  |                             | (3,210   | ) |      |   | 3,373   |  
|Decrease in unearned income                                                          |  |                             | (1,732   | ) |      |   | (2,008  | )
|Decrease in other assets                                                             |  |                             | 266      |   |      |   | (4,127  | )
|Increase (decrease) in interest payable                                              |  |                             | 104      |   |      |   | (298    | )
|Increase (decrease) in other liabilities                                             |  |                             | (1,499   | ) |      |   | 803     |  
|                                                                                     |  |                             |          |   |      |   |         |  
|Net cash provided by operating activities                                            |  |                             | 13,705   |   |      |   | 14,193  |  
|                                                                                     |  |                             |          |   |      |   |         |  
|Investing activities                                                                 |  |                             |          |   |      |   |         |  
|Originations, draws and advances on loans                                            |  |                             | (104,019 | ) |      |   | (58,763 | )
|Principal payments on loans                                                          |  |                             | 92,840   |   |      |   | 50,090  |  
|Purchase of equity investments                                                       |  |                             | (4,800   | ) |      |   | (7,261  | )
|Proceeds from sales of equity investments                                            |  |                             | 7,493    |   |      |   | 4,281   |  
|Purchase of premises, equipment and software                                         |  |                             | (75      | ) |      |   | (186    | )
|                                                                                     |  |                             |          |   |      |   |         |  
|Net cash used in investing activities                                                |  |                             | (8,561   | ) |      |   | (11,839 | )
|                                                                                     |  |                             |          |   |      |   |         |  
|Financing activities                                                                 |  |                             |          |   |      |   |         |  
|Net proceeds (payments) from borrowings                                              |  |                             | 23,978   |   |      |   | (14,851 | )
|(Increase) decrease in cashsecuritization accounts for paydown of principal on debt |  |                             | (71,834  | ) |      |   | 7,431   |  
|Payment of financing costs                                                           |  |                             | (174     | ) |      |   | (1,045  | )
|Dividends paid                                                                       |  |                             | (19,044  | ) |      |   | (16,267 | )
|Issuance of common stock, net of costs                                               |  |                             | 30,018   |   |      |   | 28      |  
|Repayment of loans to officers/shareholders                                          |  |                             | 6        |   |      |   | 140     |  
|                                                                                     |  |                             |          |   |      |   |         |  
|Net cash used in financing activities                                                |  |                             | (37,050  | ) |      |   | (24,564 | )
|                                                                                     |  |                             |          |   |      |   |         |  
|Increase in cash and cash equivalents                                                |  |                             | (31,906  | ) |      |   | (22,210 | )
|Cash and cash equivalents at beginning of period                                     |  |                             | 82,732   |   |      |   | 60,072  |  
|                                                                                     |  |                             |          |   |      |   |         |  
|Cash and cash equivalents at end of period                                           |  | $                           | 50,826   |   |      | $ | 37,862  |  
|                                                                                     |  |                             |          |   |      |   |         |  
|Supplemental disclosures                                                             |  |                             |          |   |      |   |         |  
|Interest paid                                                                        |  | $                           | 3,940    |   |      | $ | 2,064   |  
|Income taxes paid                                                                    |  |                             | 3        |   |      |   | 2       |  



See notes to consolidated financial
statements (unaudited).



7



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

March 31, 2005



(Dollars in thousands)



|                                                |  |                        |  |                                                                     |  |                                                   |  |                |             |  |   |            
|----------------------------------------------- |  | ---------------------- |  | ------------------------------------------------------------------- |  | ------------------------------------------------- |  | -------------- | ----------- |  | - | -----------
|Portfolio Company                               |  | Industry               |  | Title of Securities Held by the Company(11)                         |  | Percentage ofClass Held ona FullyDiluted Basis(1) |  | March 31, 2005
|                                                |  |                        |  | Cost                                                                |  | Fair Value                                       
|Non-affiliate investments (less than 5% owned): |  |                        |  |                                                                     |  |                                                   |  |               
|Allens TV Cable Service, Inc.                  |  | Cable                  |  | Senior Debt (10.8%, Due 6/11) Subordinated Debt (12.1%, Due 6/11)   |  |                                                   |  | $              | 7,1301,600  |  | $ | 7,1301,600 
|Archway Broadcasting Group, LLC                 |  | Broadcasting           |  | Senior Debt (9.6%, Due 12/08)                                       |  |                                                   |  |                | 4,000       |  |   | 4,000      
|Auto Europe, LLC                                |  | Equipment Leasing      |  | Senior Debt (11.8%, Due 12/07)                                      |  |                                                   |  |                | 5,207       |  |   | 5,207      
|Badoud Enterprises, Inc. (2)                    |  | Newspaper              |  | Senior Debt (9.4%, Due 9/11)                                        |  |                                                   |  |                | 5,899       |  |   | 5,899      
|BLI Holdings, Inc. (2)                          |  | Drugs                  |  | Subordinated Debt (10.8%, Due 3/10)                                 |  |                                                   |  |                | 10,000      |  |   | 10,000     
|Boucher Communications, Inc. (2)                |  | Publishing             |  | Senior Debt (8.4%, Due 6/07) Stock Appreciation
Rights              |  | 5.0%                                              |  |                | 900        |  |   | 900410     
|Builders First Source, Inc.                     |  | Building & Development |  | Senior Debt (5.4%, Due 8/11)                                        |  |                                                   |  |                | 5,000       |  |   | 5,084      
|Cambridge Information Group, Inc. (2)           |  | Information Services   |  | Senior Debt (7.3%, Due 6/07-6/10)                                   |  |                                                   |  |                | 19,170      |  |   | 19,170     
|CCG Consulting, LLC                             |  | Business Services      |  | Senior Debt (15.0%, Due 6/05)                                       |  |                                                   |  |                | 1,409       |  |   | 944        
|                                                |  |                        |  | Warrants to purchase Common Stock                                   |  | 21.4%                                             |  |                |            |  |   |           
|CEI Holdings, Inc.                              |  | Cosmetics/Toiletries   |  | Subordinated Debt (9.57%, Due 12/11)                                |  |                                                   |  |                | 2,000       |  |   | 2,015      
|Communications & Power Industries, Inc.         |  | Aerospace & Defense    |  | Senior Debt (5.1%, Due 7/10)                                        |  |                                                   |  |                | 1,778       |  |   | 1,806      
|Community Media Group, Inc. (2)                 |  | Newspaper              |  | Senior Debt (7.9%, Due 9/10)                                        |  |                                                   |  |                | 23,346      |  |   | 23,346     
|Creative Loafing, Inc. (2)                      |  | Newspaper              |  | Senior Debt (9.6%, Due 6/10)                                        |  |                                                   |  |                | 19,400      |  |   | 19,400     
|Crescent Publishing Company LLC (2)             |  | Newspaper              |  | Senior Debt (12.3%, Due 3/09-6/10)                                  |  |                                                   |  |                | 10,205      |  |   | 10,205     
|Cruz Bay Publishing, Inc. (2)                   |  | Publishing             |  | Senior Debt (10.6%, Due 12/06) Subordinated Debt (14.6%,
Due 12/06) |  |                                                   |  |                | 6,39010,862 |  |   | 6,39010,862



See notes to consolidated financial
statements (unaudited).







8



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

March 31, 2005



(dollars in thousands)



|                                   |  |                      |  |                                                                                                     |  |                                                   |   |  |                |              |  |   |            
|---------------------------------- |  | -------------------- |  | --------------------------------------------------------------------------------------------------- |  | ------------------------------------------------- | - |  | -------------- | ------------ |  | - | -----------
|Portfolio Company                  |  | Industry             |  | Title of Securities Held by the Company(11)                                                         |  | Percentage ofClass Held ona FullyDiluted Basis(1) |   |  | March 31, 2005
|                                   |  |                      |  | Cost                                                                                                |  | Fair Value                                       
|D&B Towers, LLC                    |  | Telecommunications   |  | Senior Debt (12.7%, Due 6/08)                                                                       |  |                                                   |   |  | $              | 4,713        |  | $ | 4,713      
|dick clark productions, Inc.       |  | Broadcasting         |  | Subordinated Debt (18.3%, Due 7/08) Warrants to purchase
Common Stock Common Stock (235,700 shares) |  | 5.3%0.5%                                          |   |  |                | 18,238858210 |  |   | 18,23881684
|The e-Media Club, LLC (6)          |  | Investment Fund      |  | LLC Interest                                                                                        |  | 0.8%                                              |   |  |                | 88           |  |   | 37         
|Equibrand Holding Corporation (2)  |  | Leisure Activities   |  | Senior Debt (8.5%, Due 3/10-9/10) Subordinated Debt
(12.0%, Due 3/11)                               |  |                                                   |   |  |                | 13,0008,500  |  |   | 13,0008,500
|GoldenSource Holdings Inc. (2)(12) |  | Technology           |  | Senior Debt (7.3%, Due 9/08) Warrants to purchase Common
Stock                                      |  | 4.2%                                              |   |  |                | 17,000      |  |   | 17,000    
|Flexsol Packaging Corp.            |  | Chemicals/Plastics   |  | Subordinated Debt (9.9%, Due 12/12)                                                                 |  |                                                   |   |  |                | 5,000        |  |   | 5,019      
|GCA Services Group, Inc.           |  | Commercial Services  |  | Subordinated Debt (10.9%, Due 11/09)                                                                |  |                                                   |   |  |                | 10,000       |  |   | 10,000     
|Graycom, LLC (6)                   |  | Telecommunications   |  | Warrants to purchase membership interest in LLC                                                     |  | 27.8                                              | % |  |                | 71           |  |   | 106        
|The Hillman Group, Inc.            |  | Home Furnishings     |  | Senior Debt (5.5%, Due 3/11)                                                                        |  |                                                   |   |  |                | 5,940        |  |   | 6,014      
|Home Interiors & Gifts, Inc.       |  | Home Furnishings     |  | Senior Debt (8.4%, Due 3/11)                                                                        |  |                                                   |   |  |                | 4,844        |  |   | 4,709      
|Hometown Telephone,LLC (6)         |  | Telecommunications   |  | Warrants to purchase membership interest in LLC                                                     |  | 27.8                                              | % |  |                |             |  |   |           
|I-55 Internet Services, Inc.       |  | Telecommunications   |  | Senior Debt (16.1%, Due 12/06) Warrants to purchase Common Stock                                    |  | 20.0                                              | % |  |                | 1,913366     |  |   | 1,913269   
|IDS Telcom LLC                     |  | Telecommunications   |  | Senior Debt (13.1%, Due 6/06)                                                                       |  |                                                   |   |  |                | 18,823       |  |   | 18,823     
|                                   |  |                      |  | Warrants to purchase membership interest in LLC                                                     |  | 27.8                                              | % |  |                | 2,693        |  |   | 2,110      
|Images.com, Inc.                   |  | Information Services |  | Senior Debt (15.1%, Due 12/07)                                                                      |  |                                                   |   |  |                | 3,076        |  |   | 3,076      



See notes to consolidated financial
statements (unaudited).







9



---

##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

March 31, 2005



(dollars in thousands)



|                                            |  |                      |  |                                                                 |  |                                                   |   |  |                |            |  |   |           
|------------------------------------------- |  | -------------------- |  | --------------------------------------------------------------- |  | ------------------------------------------------- | - |  | -------------- | ---------- |  | - | ----------
|Portfolio Company                           |  | Industry             |  | Title of Securities Held by the Company(11)                     |  | Percentage ofClass Held ona FullyDiluted Basis(1) |   |  | March 31, 2005
|                                            |  |                      |  | Cost                                                            |  | Fair Value                                       
|Information Today, Inc. (2)                 |  | Information Services |  | Senior Debt (12.1%, Due 9/08)                                   |  |                                                   |   |  | $              | 8,022      |  | $ | 8,022     
|Instant Web, Inc.                           |  | Technology           |  | Senior Debt (6.0%, Due 2/11)                                    |  |                                                   |   |  |                | 5,000      |  |   | 5,063     
|International Media Group, Inc.             |  | Broadcasting         |  | Senior Debt (7.9%, Due 8/09)                                    |  |                                                   |   |  |                | 7,960      |  |   | 7,960     
|Jeffrey A. Stern (6)                        |  | Other                |  | Senior Debt (0.0%, Due 4/06)                                    |  |                                                   |   |  |                | 40         |  |   | 40        
|Jenzabar, Inc. (2)                          |  | Technology           |  | Senior Debt (11.1%, Due 4/09)                                   |  |                                                   |   |  |                | 12,000     |  |   | 12,000    
|                                            |  |                      |  | Subordinated Debt (18.0%, Due 4/12)                             |  |                                                   |   |  |                | 7,244      |  |   | 7,244     
|                                            |  |                      |  | Senior Preferred Stock (5,000 shares)                           |  | 100.0                                             | % |  |                | 5,419      |  |   | 5,422     
|                                            |  |                      |  | Subordinated Preferred Stock (109,800 shares)                   |  | 100.0                                             | % |  |                | 1,098      |  |   | 1,098     
|                                            |  |                      |  | Warrants to purchase Common Stock                               |  | 18.0                                              | % |  |                | 422        |  |   | 1,124     
|The Joseph F. Biddle Publishing Company (2) |  | Newspaper            |  | Senior Debt (6.4%, Due 12/11)                                   |  |                                                   |   |  |                | 8,375      |  |   | 8,375     
|Joseph C. Millstone                         |  | Telecommunications   |  | Senior Debt (9.1%, Due 7/05)                                    |  |                                                   |   |  |                | 500        |  |   | 500       
|Jupitermedia Corporation (10)               |  | Information Services |  | Common Stock (866,600 shares)                                   |  | 2.6                                               | % |  |                | 12,349     |  |   | 12,788    
|Knowledge Learning Corporation              |  | Healthcare           |  | Senior Debt (5.4%, Due 1/12)                                    |  |                                                   |   |  |                | 5,756      |  |   | 5,815     
|The Korea Times Los Angeles, Inc.           |  | Newspaper            |  | Senior Debt (7.5%, Due 5/05)                                    |  |                                                   |   |  |                | 9,747      |  |   | 9,747     
|Lakeland Finance, LLC                       |  | Leisure Activities   |  | Senior Debt (6.9%, Due 9/09) Subordinated Debt (11.2%,Due 9/10) |  |                                                   |   |  |                | 3,0291,500 |  |   | 3,0291,500
|Le-Natures, Inc.                           |  | Beverage and Tobacco |  | Senior Debt (6.7%, Due 6/10)                                    |  |                                                   |   |  |                | 2,977      |  |   | 3,044     
|Maidenform, Inc.                            |  | Clothing/Textiles    |  | Senior Debt (5.7%, Due 5/10)                                    |  |                                                   |   |  |                | 4,831      |  |   | 4,904     
|                                            |  |                      |  | Subordinated Debt (10.2%,Due 5/11)                              |  |                                                   |   |  |                | 1,808      |  |   | 1,844     
|Majesco Holdings Inc. (6)                   |  | Leisure Goods        |  | Common Stock (3,641 shares)                                     |  | 0.0                                               | % |  |                | 57         |  |   | 30        
|Managed Health Care Associates, Inc.        |  | Drugs                |  | Senior Debt (8.7%, Due 6/09-6/10)                               |  |                                                   |   |  |                | 5,131      |  |   | 5,131     



See notes to consolidated financial
statements (unaudited).





10



---

##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

March 31, 2005



(dollars in thousands)



|                                                    |  |                        |  |                                                                       |  |                                                   |    |  |                |              |  |   |             
|--------------------------------------------------- |  | ---------------------- |  | --------------------------------------------------------------------- |  | ------------------------------------------------- | -- |  | -------------- | ------------ |  | - | ------------
|Portfolio Company                                   |  | Industry               |  | Title of Securities Held by the Company(11)                           |  | Percentage ofClass Held ona FullyDiluted Basis(1) |    |  | March 31, 2005
|                                                    |  |                        |  | Cost                                                                  |  | Fair Value                                       
|Metropolitan Telecommunications Holding Company (2) |  | Telecommunications     |  | Senior Debt (10.7%, Due 10/06) Subordinated Debt
(10.7%, Due 10/06)   |  |                                                   |    |  | $              | 13,92512,328 |  | $ | 13,92512,328
|                                                    |  |                        |  | Preferred Stock (18,000 shares)                                       |  | 100.0                                             | %  |  |                | 2,073        |  |   | 2,129       
|                                                    |  |                        |  | Warrants to purchase Common Stock                                     |  | 28.0                                              | %  |  |                | 2,805        |  |   | 5,526       
|MedAssets, Inc.                                     |  | Healthcare             |  | Senior Debt (7.6%, Due 3/07)                                          |  |                                                   |    |  |                | 3,461        |  |   | 3,509       
|                                                    |  |                        |  | Subordinated Debt (12.9%, Due 3/08)                                   |  |                                                   |    |  |                | 2,500        |  |   | 2,550       
|The Meow Mix Company                                |  | Food Products          |  | Senior Debt (7.0%, Due 10/09)                                         |  |                                                   |    |  |                | 3,735        |  |   | 3,744       
|Michael May                                         |  | Security Alarm         |  | Senior Debt (12.0%, Due 2/08)                                         |  |                                                   |    |  |                | 450          |  |   | 450         
|MicroCal Holdings, LLC (2)                          |  | Laboratory Instruments |  | Senior Debt (7.6%, Due 3/10-9/10) Subordinated Debt (12.0%, Due 3/11) |  |                                                   |    |  |                | 14,5009,000  |  |   | 14,5009,000 
|Miles Media Holding,Inc. (2)                        |  | Publishing             |  | Senior Debt (12.0%, Due 6/07) Warrants to purchase Common Stock       |  | 12.1                                              | %  |  |                | 7,16120      |  |   | 7,161293    
|Minnesota Publishers,Inc. (2)                       |  | Newspaper              |  | Senior Debt (5.5%, Due 12/09)                                         |  |                                                   |    |  |                | 14,250       |  |   | 14,250      
|Monotype Imaging Holdings Corp.(2)                  |  | Technology             |  | Senior Debt (6.7%, Due 11/09)                                         |  |                                                   |    |  |                | 4,800        |  |   | 4,800       
|MultiPlan, Inc.                                     |  | Insurance              |  | Senior Debt (5.9%, Due 3/09)                                          |  |                                                   |    |  |                | 4,028        |  |   | 4,073       
|Nalco Company                                       |  | Ecological Services    |  | Senior Debt (5.0%, Due 11/10)                                         |  |                                                   |    |  |                | 4,162        |  |   | 4,234       
|New Century Companies, Inc. (6)                     |  | Industrial Equipment   |  | Common Stock (160,000 shares) Warrants to purchase Common Stock       |  | 2.20.4                                            | %% |  |                | 157         |  |   | 24         
|New Vision Broadcasting, LLC (2)                    |  | Broadcasting           |  | Senior Debt (9.8%, Due 9/09)                                          |  |                                                   |    |  |                | 3,170        |  |   | 3,170       
|nii communications, Inc. (2)                        |  | Telecommunications     |  | Senior Debt (14.0%, Due 7/05) Common Stock (100,000 shares)           |  | 2.9                                               | %  |  |                | 7,857400     |  |   | 7,857212    
|                                                    |  |                        |  | Warrants to purchase Common Stock                                     |  | 35.5                                              | %  |  |                | 1,218        |  |   | 2,325       



See notes to consolidated financial
statements (unaudited).





11



---

##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

March 31, 2005



(dollars in thousands)



|                                      |  |                      |  |                                                                          |  |                                                   |    |  |                |             |  |   |            
|------------------------------------- |  | -------------------- |  | ------------------------------------------------------------------------ |  | ------------------------------------------------- | -- |  | -------------- | ----------- |  | - | -----------
|Portfolio Company                     |  | Industry             |  | Title of Securities Held by the Company(11)                              |  | Percentage ofClass Held ona FullyDiluted Basis(1) |    |  | March 31, 2005
|                                      |  |                      |  | Cost                                                                     |  | Fair Value                                       
|OMP, Inc.                             |  | Drugs                |  | Senior Debt (8.1%, Due 1/10-1/11)                                        |  |                                                   |    |  | $              | 8,375       |  | $ | 8,375      
|PartMiner, Inc. (2)                   |  | Information Services |  | Senior Debt (13.5%, Due 6/09)                                            |  |                                                   |    |  |                | 6,100       |  |   | 6,100      
|Powercom Corporation (2)              |  | Telecommunications   |  | Senior Debt (10.0%, Due 12/06) Warrants to purchase Class A Common Stock |  | 22.4                                              | %  |  |                | 2,018278    |  |   | 2,018121   
|Professional Paint, Inc.              |  | Chemicals/Plastics   |  | Senior Debt (6.0%, Due 9/10-9/11)                                        |  |                                                   |    |  |                | 3,413       |  |   | 3,464      
|R.R. Bowker, LLC (2)                  |  | Information Services |  | Senior Debt (10.0%, Due 12/09)                                           |  |                                                   |    |  |                | 14,950      |  |   | 14,950     
|Republic National Cabinet Corporation |  | Cabinet Maker        |  | Subordinated Debt (13.3%, Due 6/09)                                      |  |                                                   |    |  |                | 5,000       |  |   | 5,000      
|Sagamore Hill Broadcasting, LLC (2)   |  | Broadcasting         |  | Senior Debt (10.4%, Due 11/09)                                           |  |                                                   |    |  |                | 12,000      |  |   | 12,000     
|Sheridan Healthcare, Inc.             |  | Healthcare           |  | Senior Debt (6.0%, Due 11/10)                                            |  |                                                   |    |  |                | 2,963       |  |   | 3,025      
|Sterigenics International, Inc.       |  | Healthcare           |  | Senior Debt (6.0%, Due 6/11)                                             |  |                                                   |    |  |                | 4,963       |  |   | 5,025      
|Stonebridge Press, Inc. (2)           |  | Newspaper            |  | Senior Debt (7.4%, Due 9/09)                                             |  |                                                   |    |  |                | 5,207       |  |   | 5,207      
|SXC Health Solutions,Inc. (2)         |  | Technology           |  | Senior Debt (11.6%, Due 12/10) Common Stock (1,111,111 shares)           |  | 1.9                                               | %  |  |                | 13,6001,235 |  |   | 13,6001,346
|Talk America Holdings,Inc. (6)        |  | Telecommunications   |  | Common Stock (215,644 shares) Warrants to purchase Common Stock          |  | 0.80.7                                            | %% |  |                | 49925       |  |   | 1,391220   
|Team Express, Inc.                    |  | Specialty Retail     |  | Senior Debt (9.2%, 12/09-12/10)                                          |  |                                                   |    |  |                | 14,625      |  |   | 14,625     
|                                      |  |                      |  | Subordinated Debt (15.0%, Due 6/11)                                      |  |                                                   |    |  |                | 7,067       |  |   | 7,067      
|Tippmann Sports, LLC                  |  | Leisure Goods        |  | Senior Debt (8.8%, Due 6/09)                                             |  |                                                   |    |  |                | 7,805       |  |   | 7,805      



See notes to consolidated financial
statements (unaudited).





12



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

March 31, 2005



(dollars in thousands)



|                                     |  |                    |  |                                                       |  |                                                   |   |  |                |         |  |   |        
|------------------------------------ |  | ------------------ |  | ----------------------------------------------------- |  | ------------------------------------------------- | - |  | -------------- | ------- |  | - | -------
|Portfolio Company                    |  | Industry           |  | Title of Securities Held by the Company(11)           |  | Percentage ofClass Held ona FullyDiluted Basis(1) |   |  | March 31, 2005
|                                     |  |                    |  | Cost                                                  |  | Fair Value                                       
|U. S. I. Holdings Corporation        |  | Insurance          |  | Senior Debt (6.6%, Due 8/08)                          |  |                                                   |   |  | $              | 2,992   |  | $ | 3,008  
|VS&A-PBI Holding LLC (6)             |  | Publishing         |  | LLC Interest                                          |  | 0.8                                               | % |  |                | 500     |  |   |       
|Waddington North America, Inc.       |  | Containers & Glass |  | Senior Debt (7.3%, Due 4/11)                          |  |                                                   |   |  |                | 4,800   |  |   | 4,664  
|Wicks Business Information, LLC      |  | Publishing         |  | Unsecured Notes (6.5%, Due 4/06-2/08)                 |  |                                                   |   |  |                | 402     |  |   | 402    
|Wiesner Publishing Company, LLC (2)  |  | Publishing         |  | Senior Debt (10.5%, Due 6/09-12/10)                   |  |                                                   |   |  |                | 6,584   |  |   | 6,584  
|                                     |  |                    |  | Subordinated Debt (18.0%,Due 12/10)                   |  |                                                   |   |  |                | 4,093   |  |   | 4,093  
|                                     |  |                    |  | Warrants to purchase membership interest in LLC       |  | 15.0                                              | % |  |                | 406     |  |   | 1,757  
|WirelessLines II, Inc.               |  | Telecommunications |  | Senior Debt (8.0%, Due 4/07)                          |  |                                                   |   |  |                | 290     |  |   | 290    
|Witter Publishing Co., Inc.          |  | Publishing         |  | Senior Debt (10.0%, Due 12/05)                        |  |                                                   |   |  |                | 1,278   |  |   | 550    
|                                     |  |                    |  | Warrants to purchase Common Stock                     |  | 20.0                                              | % |  |                | 146     |  |   |       
|Wyoming Newspapers, Inc. (2)         |  | Newspaper          |  | Senior Debt (10.0%, Due 12/12)                        |  |                                                   |   |  |                | 15,000  |  |   | 15,000 
|Total Non-affiliate investments      |  |                    |  |                                                       |  |                                                   |   |  |                | 611,508 |  |   | 617,222
|                                     |  |                    |  |                                                       |  |                                                   |   |  |                |         |  |   |        
|Affiliate investments (3):           |  |                    |  |                                                       |  |                                                   |   |  |                |         |  |   |        
|All Island Media, Inc.               |  | Newspaper          |  | Senior Debt (14.0%, Due 9/08)                         |  |                                                   |   |  |                | 6,694   |  |   | 6,694  
|                                     |  |                    |  | Common Stock (500 shares)                             |  | 8.6                                               | % |  |                | 500     |  |   | 500    
|Interactive Business Solutions, Inc. |  | Security Alarm     |  | Senior Debt (8.0%, Due 4/06) Common Stock (20 shares) |  | 20.0                                              | % |  |                | 75550   |  |   | 7558   
|On Target Media, LLC                 |  | Publishing         |  | Senior Debt (9.1%, Due 9/09)                          |  |                                                   |   |  |                | 20,000  |  |   | 20,000 
|                                     |  |                    |  | Subordinated Debt (15.6%, Due 3/10)                   |  |                                                   |   |  |                | 10,486  |  |   | 10,486 
|                                     |  |                    |  | Class A LLC Interest                                  |  | 6.8                                               | % |  |                | 1,507   |  |   | 1,502  
|                                     |  |                    |  | Class B LLC Interest                                  |  | 16.9                                              | % |  |                |        |  |   |       



See notes to consolidated financial
statements (unaudited).





13



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

March 31, 2005



(dollars in thousands)



|                                              |  |                    |  |                                                                          |  |                                                   |   |        |                |             |        |   |            
|--------------------------------------------- |  | ------------------ |  | ------------------------------------------------------------------------ |  | ------------------------------------------------- | - | ------ | -------------- | ----------- | ------ | - | -----------
|Portfolio Company                             |  | Industry           |  | Title of Securities Held by the Company(11)                              |  | Percentage ofClass Held ona FullyDiluted Basis(1) |   |        | March 31, 2005
|                                              |  |                    |  | Cost                                                                     |  | Fair Value                                       
|Sunshine Media Delaware, LLC (2)              |  | Publishing         |  | Senior Debt (12.4%, Due 12/07)                                           |  |                                                   |   |        | $              | 12,439      |        | $ | 8,984      
|                                              |  |                    |  | Class A LLC Interest                                                     |  | 12.8                                              | % |        |                | 564         |        |   |           
|                                              |  |                    |  | Warrants to purchase Class B LLC interest                                |  | 100.0                                             | % |        |                |            |        |   |           
|ViewTrust Technology,Inc. (6)                 |  | Technology         |  | Common Stock (75 shares)                                                 |  | 7.5                                               | % |        |                | 1           |        |   | 3          
|Total Affiliate investments                   |  |                    |  |                                                                          |  |                                                   |   | 52,816 |                |             | 48,302
|Control investments: Non-majority owned (4):  |  |                    |  |                                                                          |  |                                                   |   |        |               
|ETC Group, LLC                                |  | Publishing         |  | Senior Debt (8.6%, Due 6/08)                                             |  |                                                   |   |        |                | 1,257       |        |   | 1,257      
|                                              |  |                    |  | Series A LLC Interest                                                    |  | 100.0                                             | % |        |                | 650         |        |   | 444        
|                                              |  |                    |  | Series C LLC Interest                                                    |  | 100.0                                             | % |        |                | 100         |        |   |           
|Fawcette Technical Publications Holding
(2)   |  | Publishing         |  | Senior Debt (13.1%, Due 12/06) Subordinated Debt (13.1%, Due 12/06)      |  |                                                   |   |        |                | 12,5453,940 |        |   | 12,5451,779
|                                              |  |                    |  | Series A Preferred Stock (8,473 shares)                                  |  | 100.0                                             | % |        |                | 2,569       |        |   |           
|                                              |  |                    |  | Common Stock (5,010,379 shares)                                          |  | 36.0                                              | % |        |                |            |        |   |           
|National Systems Integration, Inc. (6) (7)    |  | Security Alarm     |  | Senior Debt (8.5%, Due 12/06) Class B-2 Preferred Stock (500,000 shares) |  | 100.0                                             | % |        |                | 9104,409    |        |   |          
|                                              |  |                    |  | Common Stock (460,000 shares)                                            |  | 46.0                                              | % |        |                |            |        |   |           
|Platinum Wireless, Inc.                       |  | Telecommunications |  | Senior Debt (8.0%, Due 6/06) Common Stock (2,937 shares)                 |  | 37.0                                              | % |        |                | 7004,640    |        |   | 7004,168   
|                                              |  |                    |  | Option to purchase Common Stock                                          |  | 1.5                                               | % |        |                | 272         |        |   | 54         
|Total Control investments: Non-majority-owned |  |                    |  |                                                                          |  | 31,992                                            |   |        | 20,947        



See notes to consolidated financial
statements (unaudited).



14



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

March 31, 2005



(dollars in thousands)



|                                          |  |                    |  |                                                             |  |                                                   |   |  |   |                |  |   |       
|----------------------------------------- |  | ------------------ |  | ----------------------------------------------------------- |  | ------------------------------------------------- | - |  | - | -------------- |  | - | ------
|Portfolio Company                         |  | Industry           |  | Title of Securities Held by the Company                     |  | Percentage ofClass Held ona FullyDiluted Basis(1) |   |  |   | March 31, 2005
|                                          |  |                    |  | Cost                                                        |  | Fair Value                                       
|Control investments: Majority-owned (5):  |  |                    |  |                                                             |  |                                                   |   |  |  
|Broadview Networks Holdings, Inc. (2)
(9) |  | Telecommunications |  | Subordinated Debt (12.0%, Due 12/09)                        |  |                                                   |   |  | $ | 34,523         |  | $ | 34,523
|                                          |  |                    |  | Preferred Stock (87,254 shares)                             |  | 97.9                                              | % |  |   | 43,839         |  |   | 43,839
|                                          |  |                    |  | Common Stock (2,181,437 shares)                             |  | 33.1                                              | % |  |   |               |  |   |      
|ClearTel Communications, Inc. (2)         |  | Telecommunications |  | Senior Debt (11.8%, Due 7/05)                               |  |                                                   |   |  |   | 24,457         |  |   | 24,457
|                                          |  |                    |  | Subordinated Debt (11.8%, Due 7/05)                         |  |                                                   |   |  |   | 2,863          |  |   | 2,863 
|                                          |  |                    |  | Preferred Stock (120,000 shares)                            |  | 100.0                                             | % |  |   | 9,195          |  |   | 3,067 
|                                          |  |                    |  | Common Stock (3,809 shares)                                 |  | 100.0                                             | % |  |   | 4,340          |  |   |      
|                                          |  |                    |  | Guaranty ($115)                                             |  |                                                   |   |  |   |                |  |   |       
|Copperstate Technologies, Inc.            |  | Security Alarm     |  | Senior Debt (11.0%, Due 9/05)                               |  |                                                   |   |  |   | 1,160          |  |   | 1,160 
|                                          |  |                    |  | Class A Common Stock (20,000 shares)                        |  | 93.0                                              | % |  |   | 2,000          |  |   | 2,293 
|                                          |  |                    |  | Class B Common Stock (10 shares)                            |  | 0.0                                               | % |  |   |               |  |   |      
|                                          |  |                    |  | Warrants to purchase Class B Common Stock Guaranty ($1,000) |  | 93.7                                              | % |  |   |               |  |   |      
|Crystal Media Network, LLC (6)            |  | Broadcasting       |  | Senior Debt (9.8%, Due 5/06)                                |  |                                                   |   |  |   | 1,034          |  |   | 1,034 
|                                          |  |                    |  | LLC Interest                                                |  | 100.0                                             | % |  |   | 6,132          |  |   | 4,802 
|Midwest Tower Partners, LLC (2)           |  | Telecommunications |  | Subordinated Debt (14.0%, Due 2/07)                         |  |                                                   |   |  |   | 16,305         |  |   | 16,305
|                                          |  |                    |  | Preferred LLC Interest                                      |  | 91.0                                              | % |  |   | 1,910          |  |   | 1,910 
|                                          |  |                    |  | Common LLC Interest                                         |  | 79.2                                              | % |  |   | 201            |  |   | 1,583 
|Superior Publishing Corporation (2)       |  | Newspaper          |  | Senior Debt (7.6%, Due 12/06)                               |  |                                                   |   |  |   | 20,759         |  |   | 20,759
|                                          |  |                    |  | Subordinated Debt (20.0%, Due 12/06)                        |  |                                                   |   |  |   | 20,358         |  |   | 20,358
|                                          |  |                    |  | Preferred Stock (7,999 shares)                              |  | 100.0                                             | % |  |   | 7,999          |  |   | 9,214 
|                                          |  |                    |  | Common Stock (100 shares)                                   |  | 100.0                                             | % |  |   | 365            |  |   | 983   
|Telecomm South, LLC (6)                   |  | Telecommunications |  | Senior Debt (12.0%, Due 7/05)                               |  |                                                   |   |  |   | 2,734          |  |   | 633   
|                                          |  |                    |  | LLC Interest                                                |  | 100.0                                             | % |  |   | 11             |  |   |      
|UMAC, Inc. (6)                            |  | Publishing         |  | Common Stock (100 shares)                                   |  | 100.0                                             | % |  |   | 10,111         |  |   | 26    



See notes to consolidated financial
statements (unaudited).



15



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

March 31, 2005



(Dollars in thousands)



|                                          |  |            |  |                                        |   |                                                   |            |  |   |                |   |  |   |         |  
|----------------------------------------- |  | ---------- |  | -------------------------------------- | - | ------------------------------------------------- | ---------- |  | - | -------------- | - |  | - | ------- | -
|Portfolio Company                         |  | Industry   |  | Title of SecuritiesHeld by theCompany  |   | Percentage ofClass Held ona FullyDiluted Basis(1) |            |  |   | March 31, 2005 |  
|                                          |  |            |  | Cost                                   |   |                                                   | Fair Value | 
|Working Mother Media, Inc. (6)            |  | Publishing |  | Senior Debt (6.1%,Due 12/05)           |   |                                                   |            |  | $ | 7,526          |   |  | $ | 7,526   |  
|                                          |  |            |  | Class A Preferred Stock(12,497 shares) |   | 99.2                                              | %          |  |   | 12,497         |   |  |   | 4,757   |  
|                                          |  |            |  | Class B PreferredStock (1 share)       |   | 100.0                                             | %          |  |   | 1              |   |  |   |        |  
|                                          |  |            |  | Class C PreferredStock (1 share)       |   | 100.0                                             | %          |  |   | 1              |   |  |   |        |  
|                                          |  |            |  | Common Stock (510shares)               |   | 51.0                                              | %          |  |   | 1              |   |  |   |        |  
|                                          |  |            |  | Guaranty ($1,101)                      |   |                                                   |            |  |   |                |   |  |   |         |  
|Total Control investments: Majority-owned |  |            |  |                                        |   | 230,322                                           |            |  |   | 202,092        |  
|Total Investments                         |  |            |  |                                        |   |                                                   |            |  |   | 926,638        |   |  |   | 888,563 |  
|Unearned income                           |  |            |  |                                        |   |                                                   |            |  |   | (10,735        | ) |  |   | (10,735 | )
|Total Investments net of unearned income  |  |            |  |                                        | $ | 915,903                                           |            |  | $ | 877,828        |  



See notes to consolidated financial
statements (unaudited).



16



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

December 31, 2004



(dollars in thousands)



|                                                |  |                        |  |                                             |  |                                                   |   |  |   |                   |  |   |       
|----------------------------------------------- |  | ---------------------- |  | ------------------------------------------- |  | ------------------------------------------------- | - |  | - | ----------------- |  | - | ------
|Portfolio Company                               |  | Industry               |  | Title of Securities Held by the Company(11) |  | Percentage ofClass Held ona FullyDiluted Basis(1) |   |  |   | December 31, 2004
|                                                |  |                        |  | Cost                                        |  | Fair Value                                       
|Non-affiliate investments (less than 5% owned): |  |                        |  |                                             |  |                                                   |   |  |  
|Allens TV Cable Service, Inc.                  |  | Cable                  |  | Senior Debt (9.8%, Due 6/11)                |  |                                                   |   |  | $ | 7,130             |  | $ | 7,130 
|                                                |  |                        |  | Subordinated Debt (11.6%, Due 6/11)         |  |                                                   |   |  |   | 1,300             |  |   | 1,300 
|Ames True Temper, Inc.                          |  | Industrial Equipment   |  | Senior Debt (5.4%, Due 6/11)                |  |                                                   |   |  |   | 995               |  |   | 1,008 
|Archway Broadcasting Group, LLC                 |  | Broadcasting           |  | Senior Debt (9.1%, Due 12/08)               |  |                                                   |   |  |   | 4,000             |  |   | 4,000 
|Auto Europe, LLC                                |  | Equipment Leasing      |  | Senior Debt (11.3%, Due 12/07)              |  |                                                   |   |  |   | 5,819             |  |   | 5,819 
|Badoud Enterprises, Inc. (2)                    |  | Newspaper              |  | Senior Debt (8.0%, Due 9/11)                |  |                                                   |   |  |   | 6,049             |  |   | 6,049 
|Boucher Communications, Inc. (2)                |  | Publishing             |  | Senior Debt (7.9%, Due 6/07)                |  |                                                   |   |  |   | 1,000             |  |   | 1,000 
|                                                |  |                        |  | Stock Appreciation Rights                   |  | 5.0                                               | % |  |   |                  |  |   | 402   
|Builders First Source, Inc.                     |  | Building & Development |  | Senior Debt (5.4%, Due 2/10)                |  |                                                   |   |  |   | 4,963             |  |   | 5,018 
|                                                |  |                        |  | Subordinated Debt (10.9%, Due 2/10)         |  |                                                   |   |  |   | 2,000             |  |   | 2,033 
|Cambridge Information Group, Inc. (2)           |  | Information Services   |  | Senior Debt (6.8%, Due 6/07-6/10)           |  |                                                   |   |  |   | 19,625            |  |   | 19,625
|CCG Consulting, LLC                             |  | Business Services      |  | Senior Debt (14.4%, Due 6/05)               |  |                                                   |   |  |   | 1,428             |  |   | 1,428 
|                                                |  |                        |  | Warrants to purchase Common Stock           |  | 19.9                                              | % |  |   |                  |  |   |      
|CEI Holdings, Inc.                              |  | Cosmetics/Toiletries   |  | Subordinated Debt (9.1%, Due 12/11)         |  |                                                   |   |  |   | 2,000             |  |   | 2,025 
|Communications & Power Industries, Inc.         |  | Aerospace & Defense    |  | Senior Debt (6.8%, Due 7/10)                |  |                                                   |   |  |   | 1,904             |  |   | 1,931 
|Community Media Group, Inc. (2)                 |  | Newspaper              |  | Senior Debt (7.4%, Due 9/10)                |  |                                                   |   |  |   | 23,346            |  |   | 23,346
|Creative Loafing, Inc. (2)                      |  | Newspaper              |  | Senior Debt (9.1%, Due 6/10)                |  |                                                   |   |  |   | 19,500            |  |   | 19,500



See notes to consolidated financial
statements (unaudited).





17



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

December 31, 2004



(dollars in thousands)



|                                         |  |                     |  |                                                 |  |                                                   |   |  |   |                   |  |   |       
|---------------------------------------- |  | ------------------- |  | ----------------------------------------------- |  | ------------------------------------------------- | - |  | - | ----------------- |  | - | ------
|Portfolio Company                        |  | Industry            |  | Title of Securities Held by the Company(11)     |  | Percentage ofClass Held ona FullyDiluted Basis(1) |   |  |   | December 31, 2004
|                                         |  |                     |  | Cost                                            |  | Fair Value                                       
|Crescent Publishing Company LLC (2)      |  | Newspaper           |  | Senior Debt (11.2%, Due 3/09-6/10)              |  |                                                   |   |  | $ | 10,478            |  | $ | 10,478
|Cruz Bay Publishing, Inc. (2)            |  | Publishing          |  | Senior Debt (9.1%, Due 12/06)                   |  |                                                   |   |  |   | 6,389             |  |   | 6,389 
|                                         |  |                     |  | Subordinated Debt (14.1%, Due 12/06)            |  |                                                   |   |  |   | 10,723            |  |   | 10,723
|dick clark productions, inc.             |  | Broadcasting        |  | Subordinated Debt (18.3%, Due 7/08)             |  |                                                   |   |  |   | 17,854            |  |   | 17,854
|                                         |  |                     |  | Warrants to purchase Common Stock               |  | 5.3                                               | % |  |   | 858               |  |   | 721   
|                                         |  |                     |  | Common Stock (235,700 shares)                   |  | 0.5                                               | % |  |   | 210               |  |   | 111   
|The e-Media Club, LLC (6)                |  | Investment Fund     |  | LLC Interest                                    |  | 0.8                                               | % |  |   | 88                |  |   | 37    
|FTI Technologies Holdings, Inc. (2) (12) |  | Technology          |  | Senior Debt (6.6%, Due 9/08)                    |  |                                                   |   |  |   | 17,000            |  |   | 17,000
|                                         |  |                     |  | Warrants to purchase Common Stock               |  | 4.2                                               | % |  |   |                  |  |   |      
|Flexsol Packaging Corp.                  |  | Chemicals/Plastics  |  | Subordinated Debt (9.5%, Due 12/12)             |  |                                                   |   |  |   | 5,000             |  |   | 5,025 
|GCA Services Group, Inc.                 |  | Commercial Services |  | Subordinated Debt (10.0%, Due 11/09)            |  |                                                   |   |  |   | 10,000            |  |   | 10,000
|Graycom, LLC (6)                         |  | Telecommunications  |  | Warrants to purchase membership interest in LLC |  | 27.8                                              | % |  |   | 71                |  |   | 80    
|The Hillman Group, Inc.                  |  | Home Furnishings    |  | Senior Debt (5.5%, 3/11)                        |  |                                                   |   |  |   | 5,955             |  |   | 6,037 
|Home Interiors & Gifts, Inc.             |  | Home Furnishings    |  | Senior Debt (7.2%, Due 3/11)                    |  |                                                   |   |  |   | 4,883             |  |   | 4,677 
|Hometown Telephone, LLC (6)              |  | Telecommunications  |  | Warrants to purchase membership interest in LLC |  | 27.8                                              | % |  |   |                  |  |   |      
|I-55 Internet Services, Inc.             |  | Telecommunications  |  | Senior Debt (15.6%, Due 12/06)                  |  |                                                   |   |  |   | 2,013             |  |   | 2,013 
|                                         |  |                     |  | Warrants to purchase Common Stock               |  | 20.0                                              | % |  |   | 366               |  |   | 194   



See notes to consolidated financial
statements (unaudited).





18



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

December 31, 2004



(dollars in thousands)



|                                            |  |                      |  |                                                 |  |                                                   |   |  |   |                   |  |   |       
|------------------------------------------- |  | -------------------- |  | ----------------------------------------------- |  | ------------------------------------------------- | - |  | - | ----------------- |  | - | ------
|Portfolio Company                           |  | Industry             |  | Title of Securities Held by the Company(11)     |  | Percentage ofClass Held ona FullyDiluted Basis(1) |   |  |   | December 31, 2004
|                                            |  |                      |  | Cost                                            |  | Fair Value                                       
|IDS Telcom LLC                              |  | Telecommunications   |  | Senior Debt (12.6%, Due 6/06)                   |  |                                                   |   |  | $ | 18,823            |  | $ | 18,823
|                                            |  |                      |  | Warrants to purchase membership interest in LLC |  | 27.8                                              | % |  |   | 2,693             |  |   | 2,801 
|Images.com, Inc.                            |  | Information Services |  | Senior Debt (14.6%, Due 12/07)                  |  |                                                   |   |  |   | 3,118             |  |   | 3,118 
|Information Today, Inc. (2)                 |  | Information Services |  | Senior Debt (12.0%, Due 9/08)                   |  |                                                   |   |  |   | 8,792             |  |   | 8,792 
|International Media Group, Inc.             |  | Broadcasting         |  | Senior Debt (7.0%, Due 8/09)                    |  |                                                   |   |  |   | 7,980             |  |   | 7,980 
|Jeffrey A. Stern (6)                        |  | Other                |  | Senior Debt (0.0%, Due 4/06)                    |  |                                                   |   |  |   | 45                |  |   | 45    
|Jenzabar, Inc. (2)                          |  | Technology           |  | Senior Debt (10.5%, Due 4/09)                   |  |                                                   |   |  |   | 12,000            |  |   | 12,000
|                                            |  |                      |  | Subordinated Debt (14.0%, Due 4/12)             |  |                                                   |   |  |   | 7,172             |  |   | 7,172 
|                                            |  |                      |  | Senior Preferred Stock (5,000 shares)           |  | 100.0                                             | % |  |   | 5,281             |  |   | 5,281 
|                                            |  |                      |  | Subordinated Preferred Stock (109,800 shares)   |  | 100.0                                             | % |  |   | 1,098             |  |   | 1,098 
|                                            |  |                      |  | Warrants to purchase Common Stock               |  | 18.0                                              | % |  |   | 422               |  |   | 1,124 
|The Joseph F. Biddle Publishing Company (2) |  | Newspaper            |  | Senior Debt (5.9%, Due 12/11)                   |  |                                                   |   |  |   | 8,705             |  |   | 8,705 
|Joseph C. Millstone                         |  | Telecommunications   |  | Senior Debt (8.6%, Due 7/05)                    |  |                                                   |   |  |   | 500               |  |   | 500   
|Knowledge Learning Corporation              |  | Healthcare           |  | Senior Debt (7.0%, Due 12/10)                   |  |                                                   |   |  |   | 7,068             |  |   | 7,112 
|The Korea Times Los Angeles, Inc.           |  | Newspaper            |  | Senior Debt (7.1%, Due 5/05)                    |  |                                                   |   |  |   | 9,747             |  |   | 9,747 
|LaGrange Acquisition LP                     |  | Oil and Gas          |  | Senior Debt (5.4%, Due 1/08)                    |  |                                                   |   |  |   | 5,000             |  |   | 5,091 
|Lakeland Finance, LLC                       |  | Leisure Activities   |  | Senior Debt (6.4%, Due 9/09)                    |  |                                                   |   |  |   | 3,875             |  |   | 3,875 
|                                            |  |                      |  | Subordinated Debt (9.2%, Due 9/10)              |  |                                                   |   |  |   | 1,500             |  |   | 1,500 



See notes to consolidated financial
statements (unaudited).





19



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

December 31, 2004



(dollars in thousands)



|                                                    |  |                      |  |                                                                                                     |  |                                                   |   |  |   |                   |  |   |                  
|--------------------------------------------------- |  | -------------------- |  | --------------------------------------------------------------------------------------------------- |  | ------------------------------------------------- | - |  | - | ----------------- |  | - | -----------------
|Portfolio Company                                   |  | Industry             |  | Title of Securities Held by the Company(11)                                                         |  | Percentage ofClass Held ona FullyDiluted Basis(1) |   |  |   | December 31, 2004
|                                                    |  |                      |  | Cost                                                                                                |  | Fair Value                                       
|Le-Natures, Inc.                                   |  | Beverage and Tobacco |  | Senior Debt (6.5%, Due 6/10)                                                                        |  |                                                   |   |  | $ | 2,985             |  | $ | 3,030            
|Maidenform, Inc.                                    |  | Clothing/Textiles    |  | Senior Debt (5.4%, Due 5/10)                                                                        |  |                                                   |   |  |   | 4,887             |  |   | 4,973            
|                                                    |  |                      |  | Subordinated Debt (10.2%, Due 5/11)                                                                 |  |                                                   |   |  |   | 1,808             |  |   | 1,853            
|Majesco Holdings Inc. (6)                           |  | Leisure Goods        |  | Common Stock (3,641 shares)                                                                         |  | 0.02                                              | % |  |   | 57                |  |   | 38               
|Managed Health Care Associates, Inc.                |  | Drugs                |  | Senior Debt (8.0%, Due 6/09-6/10)                                                                   |  |                                                   |   |  |   | 5,811             |  |   | 5,811            
|Metropolitan Telecommunications Holding Company
(2) |  | Telecommunications   |  | Senior Debt (10.5%, Due 10/06) Subordinated Debt (10.5%,
Due 10/06) Preferred Stock (18,000 shares) |  | 100.0                                             | % |  |   | 13,92512,3282,019 |  |   | 13,92512,3282,075
|                                                    |  |                      |  | Warrants to purchase Common Stock                                                                   |  | 28.0                                              | % |  |   | 2,805             |  |   | 5,258            
|MedAssets, Inc.                                     |  | Healthcare           |  | Senior Debt (7.3%, Due 3/07)                                                                        |  |                                                   |   |  |   | 4,073             |  |   | 4,129            
|                                                    |  |                      |  | Subordinated Debt (12.6%, Due 3/08)                                                                 |  |                                                   |   |  |   | 2,500             |  |   | 2,550            
|The Meow Mix Company                                |  | Food Products        |  | Senior Debt (6.9%, Due 10/09)                                                                       |  |                                                   |   |  |   | 3,760             |  |   | 3,736            
|Miles Media Holding, Inc. (2)                       |  | Publishing           |  | Senior Debt (13.3%, Due 6/07) Warrants to purchase Common Stock                                     |  | 12.1                                              | % |  |   | 7,37620           |  |   | 7,376279         
|Minnesota Publishers, Inc. (2)                      |  | Newspaper            |  | Senior Debt (4.9%, Due 12/09)                                                                       |  |                                                   |   |  |   | 14,250            |  |   | 14,250           
|Monotype Imaging Holdings Corp.                     |  | Technology           |  | Senior Debt (5.8%, Due 11/09)                                                                       |  |                                                   |   |  |   | 4,950             |  |   | 4,950            
|MultiPlan, Inc.                                     |  | Insurance            |  | Senior Debt (5.3%, Due 3/09)                                                                        |  |                                                   |   |  |   | 4,444             |  |   | 4,494            
|Nalco Company                                       |  | Ecological Services  |  | Senior Debt (4.3%, Due 11/10)                                                                       |  |                                                   |   |  |   | 4,162             |  |   | 4,219            



See notes to consolidated financial
statements (unaudited).





20



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

December 31, 2004



(dollars in thousands)



|                                    |  |                          |  |                                                                 |  |                                                   |    |  |   |                   |  |   |         
|----------------------------------- |  | ------------------------ |  | --------------------------------------------------------------- |  | ------------------------------------------------- | -- |  | - | ----------------- |  | - | --------
|Portfolio Company                   |  | Industry                 |  | Title of Securities Held by the Company(11)                     |  | Percentage ofClass Held ona FullyDiluted Basis(1) |    |  |   | December 31, 2004
|                                    |  |                          |  | Cost                                                            |  | Fair Value                                       
|New Century Companies, Inc. (6)     |  | Industrial Equipment     |  | Common Stock (160,000 shares) Warrants to purchase Common Stock |  | 2.30.4                                            | %% |  | $ | 157              |  | $ | 46     
|New Vision Broadcasting, LLC (2)    |  | Broadcasting             |  | Senior Debt (9.8%, Due 9/09)                                    |  |                                                   |    |  |   | 16,033            |  |   | 16,033  
|New Wave Communications, LLC (2)    |  | Cable                    |  | Senior Debt (11.5%, Due 9/10)                                   |  |                                                   |    |  |   | 11,406            |  |   | 11,406  
|nii communications, inc. (2)        |  | Telecommunications       |  | Senior Debt (13.0%, Due 1/05) Common Stock (100,000
shares)     |  | 2.8                                               | %  |  |   | 7,749400          |  |   | 7,749214
|                                    |  |                          |  | Warrants to purchase Common Stock                               |  | 36.5                                              | %  |  |   | 1,218             |  |   | 2,349   
|PartMiner, Inc. (2)                 |  | Information Services     |  | Senior Debt (13.1%, Due 6/09)                                   |  |                                                   |    |  |   | 6,055             |  |   | 6,055   
|Powercom Corporation (2)            |  | Telecommunications       |  | Senior Debt (10.0%, Due 12/06)                                  |  |                                                   |    |  |   | 2,050             |  |   | 2,050   
|                                    |  |                          |  | Warrants to purchase Class A Common Stock                       |  | 20.0                                              | %  |  |   | 278               |  |   | 104     
|Professional Paint Inc.             |  | Chemicals/Plastics       |  | Senior Debt (5.7%, Due 9/10-9/11)                               |  |                                                   |    |  |   | 3,456             |  |   | 3,504   
|R.R. Bowker LLC (2)                 |  | Information Services     |  | Senior Debt (8.2%, Due 12/08-12/09)                             |  |                                                   |    |  |   | 15,700            |  |   | 15,700  
|Refco Group Ltd., LLC               |  | Financial Intermediaries |  | Senior Debt (5.2%, Due 8/11)                                    |  |                                                   |    |  |   | 4,988             |  |   | 5,036   
|Sagamore Hill Broadcasting, LLC (2) |  | Broadcasting             |  | Senior Debt (9.9%, Due 11/09)                                   |  |                                                   |    |  |   | 12,000            |  |   | 12,000  
|Sheridan Healthcare, Inc.           |  | Healthcare               |  | Senior Debt (5.5%, Due 11/10)                                   |  |                                                   |    |  |   | 3,000             |  |   | 3,058   
|Solo Cup Company                    |  | Containers & Glass       |  | Senior Debt (4.9%, Due 2/11)                                    |  |                                                   |    |  |   | 4,966             |  |   | 5,050   
|Sterigenics International, Inc.     |  | Healthcare               |  | Senior Debt (4.9%, Due 6/11)                                    |  |                                                   |    |  |   | 4,975             |  |   | 5,037   
|Stonebridge Press, Inc. (2)         |  | Newspaper                |  | Senior Debt (6.9%, Due 9/09)                                    |  |                                                   |    |  |   | 4,940             |  |   | 4,940   



See notes to consolidated financial
statements (unaudited).





21



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

December 31, 2004



(dollars in thousands)



|                                    |  |                       |  |                                                 |  |                                                   |   |  |   |                   |  |   |       
|----------------------------------- |  | --------------------- |  | ----------------------------------------------- |  | ------------------------------------------------- | - |  | - | ----------------- |  | - | ------
|Portfolio Company                   |  | Industry              |  | Title of Securities Held by the Company(11)     |  | Percentage ofClass Held ona FullyDiluted Basis(1) |   |  |   | December 31, 2004
|                                    |  |                       |  | Cost                                            |  | Fair Value                                       
|SXC Health Solutions, Inc. (2)      |  | Technology            |  | Senior Debt (11.0%, Due 12/10)                  |  |                                                   |   |  | $ | 13,600            |  | $ | 13,600
|                                    |  |                       |  | Common Stock (1,111,111 shares)                 |  | 1.9                                               | % |  |   | 1,235             |  |   | 1,288 
|Talk America Holdings, Inc. (6)     |  | Telecommunications    |  | Common Stock (215,644 shares)                   |  | 0.8                                               | % |  |   | 499               |  |   | 1,428 
|                                    |  |                       |  | Warrants to purchase Common Stock               |  | 0.7                                               | % |  |   | 25                |  |   | 229   
|Team Express, Inc.                  |  | Specialty Retail      |  | Senior Debt (8.6%, 12/09-12/10)                 |  |                                                   |   |  |   | 16,000            |  |   | 16,000
|                                    |  |                       |  | Subordinated Debt (15.0%, Due 6/11)             |  |                                                   |   |  |   | 7,015             |  |   | 7,015 
|Tippmann Sports, LLC                |  | Leisure Goods         |  | Senior Debt (8.3%, Due 6/09)                    |  |                                                   |   |  |   | 8,083             |  |   | 8,083 
|United Industries Corporation       |  | Farming & Agriculture |  | Senior Debt (4.7%, Due 4/11)                    |  |                                                   |   |  |   | 2,981             |  |   | 3,032 
|U. S. I. Holdings Corporation       |  | Insurance             |  | Senior Debt (4.6%, Due 8/08)                    |  |                                                   |   |  |   | 995               |  |   | 1,000 
|VS&A-PBI Holding LLC (6)            |  | Publishing            |  | LLC Interest                                    |  | 0.8                                               | % |  |   | 500               |  |   |      
|Waddington North America, Inc.      |  | Containers & Glass    |  | Senior Debt (4.6%, Due 4/11)                    |  |                                                   |   |  |   | 4,850             |  |   | 4,785 
|Wicks Business Information, LLC     |  | Publishing            |  | Unsecured Note (4.0%, Due 4/06)                 |  |                                                   |   |  |   | 200               |  |   | 200   
|Wiesner Publishing Company, LLC (2) |  | Publishing            |  | Senior Debt (10.5%, Due 6/09-12/10)             |  |                                                   |   |  |   | 6,763             |  |   | 6,763 
|                                    |  |                       |  | Subordinated Debt (18.0%, Due 12/10)            |  |                                                   |   |  |   | 4,141             |  |   | 4,141 
|                                    |  |                       |  | Warrants to purchase membership interest in LLC |  | 15.0                                              | % |  |   | 406               |  |   | 209   
|WirelessLines II, Inc.              |  | Telecommunications    |  | Senior Debt (8.0%, Due 4/07)                    |  |                                                   |   |  |   | 321               |  |   | 321   



See notes to consolidated financial
statements (unaudited).





22



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

December 31, 2004



(dollars in thousands)



|                                             |  |                      |  |                                                     |  |                                                   |   |        |         |                   |        |   |       
|-------------------------------------------- |  | -------------------- |  | --------------------------------------------------- |  | ------------------------------------------------- | - | ------ | ------- | ----------------- | ------ | - | ------
|Portfolio Company                            |  | Industry             |  | Title of Securities Held by the Company(11)         |  | Percentage ofClass Held ona FullyDiluted Basis(1) |   |        |         | December 31, 2004
|                                             |  |                      |  | Cost                                                |  | Fair Value                                       
|Witter Publishing Co., Inc.                  |  | Publishing           |  | Senior Debt (12.1%, Due 12/07)                      |  |                                                   |   |        | $       | 2,601             |        | $ | 2,000 
|                                             |  |                      |  | Warrants to purchase Common Stock                   |  | 20.0                                              | % |        |         | 146               |        |   |      
|Wyoming Newspapers, Inc. (2)                 |  | Newspaper            |  | Senior Debt (9.4%, Due 12/12)                       |  |                                                   |   |        |         | 15,000            |        |   | 15,000
|Total Non-affiliate investments              |  |                      |  |                                                     |  | 573,658                                           |   |        | 578,416
|Affiliate investments (3):                   |  |                      |  |                                                     |  |                                                   |   |        |         |                   |        |   |       
|All Island Media, Inc.                       |  | Newspaper            |  | Senior Debt (13.5%, Due 9/08)                       |  |                                                   |   |        |         | 6,800             |        |   | 6,800 
|                                             |  |                      |  | Common Stock (500 shares)                           |  | 8.6                                               | % |        |         | 500               |        |   | 500   
|Executive Enterprise Institute, LLC (6)      |  | Business Services    |  | LLC Interest                                        |  | 10.0                                              | % |        |         | 301               |        |   | 111   
|On Target Media, LLC                         |  | Publishing           |  | Senior Debt (8.6%, Due 9/09)                        |  |                                                   |   |        |         | 20,000            |        |   | 20,000
|                                             |  |                      |  | Subordinated Debt(15.1%, Due 3/10)                  |  |                                                   |   |        |         | 10,243            |        |   | 10,243
|                                             |  |                      |  | Class A LLC Interest                                |  | 6.8                                               | % |        |         | 1,508             |        |   | 1,508 
|                                             |  |                      |  | Class B LLC Interest                                |  | 16.9                                              | % |        |         |                  |        |   |      
|Sunshine Media Delaware, LLC (2)             |  | Publishing           |  | Senior Debt (12.0%, Due 12/07) Class A LLC
Interest |  | 12.8                                              | % |        |         | 12,563564         |        |   | 8,563
|                                             |  |                      |  | Warrants to purchase Class B LLC interest           |  | 100.0                                             | % |        |         |                  |        |   |      
|ViewTrust Technology, Inc. (6)               |  | Technology           |  | Common Stock (75 shares)                            |  | 7.5                                               | % |        |         | 1                 |        |   | 3     
|Total Affiliate investments                  |  |                      |  |                                                     |  |                                                   |   | 52,480 |         |                   | 47,728
|Control investments: Non-majority owned (4): |  |                      |  |                                                     |  |                                                   |   |        |        
|Creatas, L.L.C. (2) (10)                     |  | Information Services |  | Senior Debt (8.3%, Due 3/08)                        |  |                                                   |   |        |         | 19,331            |        |   | 19,331
|                                             |  |                      |  | Investor Class LLC Interest                         |  | 100.0                                             | % |        |         | 1,273             |        |   | 23,411
|                                             |  |                      |  | Guaranty ($501)                                     |  |                                                   |   |        |         |                   |        |   |       



See notes to consolidated financial
statements (unaudited).





23



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

December 31, 2004



(dollars in thousands)



|                                              |  |                    |  |                                                                          |  |                                                   |   |  |        |                   |  |   |              
|--------------------------------------------- |  | ------------------ |  | ------------------------------------------------------------------------ |  | ------------------------------------------------- | - |  | ------ | ----------------- |  | - | -------------
|Portfolio Company                             |  | Industry           |  | Title of Securities Held by the Company(11)                              |  | Percentage ofClass Held ona FullyDiluted Basis(1) |   |  |        | December 31, 2004
|                                              |  |                    |  | Cost                                                                     |  | Fair Value                                       
|ETC Group, LLC                                |  | Publishing         |  | Senior Debt (9.0%, Due 6/08)                                             |  |                                                   |   |  | $      | 1,200             |  | $ | 1,200        
|                                              |  |                    |  | Series A LLC Interest                                                    |  | 100.0                                             | % |  |        | 650               |  |   |             
|                                              |  |                    |  | Series C LLC Interest                                                    |  | 100.0                                             | % |  |        | 100               |  |   |             
|Fawcette Technical Publications Holding
(2)   |  | Publishing         |  | Senior Debt (12.6%, Due 12/06) Subordinated
Debt(12.6%, Due 12/06)       |  |                                                   |   |  |        | 12,545  3,940     |  |   | 12,545  3,940
|                                              |  |                    |  | Series A Preferred Stock(8,473 shares)                                   |  | 100.0                                             | % |  |        | 2,569             |  |   |             
|                                              |  |                    |  | Common Stock(5,010,379 shares)                                           |  | 36.0                                              | % |  |        |                  |  |   |             
|National Systems Integration, Inc. (6)
(7)    |  | Security Alarm     |  | Senior Debt (8.5%, Due 12/06) Class B-2 Preferred Stock
(500,000 shares) |  | 100.0                                             | % |  |        | 9104,409          |  |   |            
|                                              |  |                    |  | Common Stock (460,000 shares)                                            |  | 46.0                                              | % |  |        |                  |  |   |             
|Platinum Wireless, Inc.                       |  | Telecommunications |  | Senior Debt (8.0%, Due 6/06)                                             |  |                                                   |   |  |        | 777               |  |   | 777          
|                                              |  |                    |  | Common Stock (2,937 shares)                                              |  | 37.0                                              | % |  |        | 4,640             |  |   | 4,168        
|                                              |  |                    |  | Option to purchase Common Stock                                          |  | 1.5                                               | % |  |        | 272               |  |   | 84           
|Total Control investments: Non-majority-owned |  |                    |  |                                                                          |  | 52,616                                            |   |  | 65,456
|Control investments: Majority-owned (5):      |  |                    |  |                                                                          |  |                                                   |   |  |       
|Bridgecom Holdings, Inc. (2) (8) (9)          |  | Telecommunications |  | Senior Debt (11.7%,
Due 8/05-8/07)                                       |  |                                                   |   |  |        | 23,634            |  |   | 23,634       
|                                              |  |                    |  | Preferred Stock (36,444 shares)                                          |  | 100.0%                                            |   |  |        | 40,923            |  |   | 41,420       
|                                              |  |                    |  | Common Stock (947,880 shares)                                            |  | 100.0%                                            |   |  |        |                  |  |   |             



See notes to consolidated financial
statements (unaudited).





24



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

December 31, 2004



(dollars in thousands)



|                                     |  |                    |  |                                                                   |  |                                                   |  |   |                   |  |   |             
|------------------------------------ |  | ------------------ |  | ----------------------------------------------------------------- |  | ------------------------------------------------- |  | - | ----------------- |  | - | ------------
|Portfolio Company                    |  | Industry           |  | Title of Securities Held by the Company(11)                       |  | Percentage ofClass Held ona FullyDiluted Basis(1) |  |   | December 31, 2004
|                                     |  |                    |  | Cost                                                              |  | Fair Value                                       
|ClearTel Communications,Inc. (2)     |  | Telecommunications |  | Senior Debt (11.3%, Due7/05) Subordinated Debt(11.3%, Due 7/05)   |  |                                                   |  | $ | 23,7232,863       |  | $ | 23,7232,863 
|                                     |  |                    |  | Preferred Stock (120,000 shares)                                  |  | 100.0%                                            |  |   | 9,196             |  |   |            
|                                     |  |                    |  | Common Stock (9 shares)                                           |  | 100.0%                                            |  |   | 540               |  |   |            
|                                     |  |                    |  | Guaranty ($158)                                                   |  |                                                   |  |   |                   |  |   |             
|Copperstate                          |  | Security Alarm     |  | Senior Debt (11.0%, Due 9/05)                                     |  |                                                   |  |   | 1,060             |  |   | 1,060       
|Technologies, Inc.                   |  |                    |  | Class A Common Stock(20,000 shares)                               |  | 93.0%                                             |  |   | 2,000             |  |   | 1,823       
|                                     |  |                    |  | Class B Common Stock(10 shares)                                   |  | 0.0%                                              |  |   |                  |  |   |            
|                                     |  |                    |  | Warrants to purchase Class B Common Stock                         |  | 97.3%                                             |  |   |                  |  |   |            
|                                     |  |                    |  | Guaranty ($1,000)                                                 |  |                                                   |  |   |                   |  |   |             
|Corporate Legal Times L.L.C.         |  | Publishing         |  | Senior Debt (17.0%, Due 12/04)                                    |  |                                                   |  |   | 4,625             |  |   | 4,625       
|                                     |  |                    |  | Subordinated Debt(18.0%, Due 12/04)                               |  |                                                   |  |   | 1,444             |  |   | 1,419       
|                                     |  |                    |  | LLC Interest                                                      |  | 90.6%                                             |  |   | 313               |  |   |            
|Crystal Media Network, LLC (6)       |  | Broadcasting       |  | Senior Debt (9.2%, Due 5/06)                                      |  |                                                   |  |   | 1,060             |  |   | 1,060       
|                                     |  |                    |  | LLC Interest                                                      |  | 100.0%                                            |  |   | 6,132             |  |   | 4,802       
|Interactive Business Solutions, Inc. |  | Security Alarm     |  | Senior Debt (8.0%, Due 4/06)                                      |  |                                                   |  |   | 75                |  |   | 75          
|                                     |  |                    |  | Common Stock (100 shares)                                         |  | 100.0%                                            |  |   | 2,750             |  |   | 432         
|Midwest Tower Partners, LLC (2)      |  | Telecommunications |  | Subordinated Debt(14.0%, Due 2/07)                                |  |                                                   |  |   | 16,143            |  |   | 16,143      
|                                     |  |                    |  | Preferred LLC Interest                                            |  | 91.0%                                             |  |   | 1,770             |  |   | 1,770       
|                                     |  |                    |  | Common LLC Interest                                               |  | 79.2%                                             |  |   | 201               |  |   | 201         
|Superior Publishing Corporation (2)  |  | Newspaper          |  | Senior Debt (7.5%, Due 12/06) Subordinated Debt(20.0%, Due 12/06) |  |                                                   |  |   | 20,75920,405      |  |   | 20,75920,405
|                                     |  |                    |  | Preferred Stock (7,999 shares)                                    |  | 100.0%                                            |  |   | 7,999             |  |   | 8,975       
|                                     |  |                    |  | Common Stock (100 shares)                                         |  | 100.0%                                            |  |   | 365               |  |   | 494         



See notes to consolidated financial
statements (unaudited).





25



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

December 31, 2004



(dollars in thousands)



|                                          |  |                    |  |                                             |         |                                                   |            |   |                   |   |  |   |       | 
|----------------------------------------- |  | ------------------ |  | ------------------------------------------- | ------- | ------------------------------------------------- | ---------- | - | ----------------- | - |  | - | ----- | 
|Portfolio Company                         |  | Industry           |  | Title of Securities Held by the Company(11) |         | Percentage ofClass Held ona FullyDiluted Basis(1) |            |   | December 31, 2004 |  
|                                          |  |                    |  | Cost                                        |         |                                                   | Fair Value |  
|Telecomm South,LLC (6)                    |  | Telecommunications |  | Senior Debt (12.0%, Due 7/05)               |         |                                                   |            | $ | 2,850             |   |  | $ | 748   | 
|                                          |  |                    |  | LLC Interest                                |         | 100.0%                                            |            |   | 11                |   |  |   |      | 
|UMAC, Inc. (6)                            |  | Publishing         |  | Common Stock (100 shares)                   |         | 100.0%                                            |            |   | 10,133            |   |  |   | 47    | 
|Working Mother                            |  | Publishing         |  | Senior Debt (6.0%, Due 12/05)               |         |                                                   |            |   | 7,526             |   |  |   | 7,526 | 
|Media, Inc. (6)                           |  |                    |  | Class A Preferred Stock(11,497 shares)      |         | 99.2%                                             |            |   | 11,497            |   |  |   | 4,796 | 
|                                          |  |                    |  | Class B Preferred Stock (1 share)           |         | 100.0%                                            |            |   | 1                 |   |  |   |      | 
|                                          |  |                    |  | Class C Preferred Stock (1 share)           |         | 100.0%                                            |            |   | 1                 |   |  |   |      | 
|                                          |  |                    |  | Common Stock (510 shares)                   |         | 51.0%                                             |            |   | 1                 |   |  |   |      | 
|                                          |  |                    |  | Guaranty ($1,191)                           |         |                                                   |            |   |                   |   |  |   |       | 
|Total Control investments: Majority-owned |  |                    |  |                                             | 220,000 |                                                   |            |   | 188,800           |  
|Total Investments                         |  |                    |  |                                             | 898,754 |                                                   |            |   | 880,400           |  
|Unearned income                           |  |                    |  |                                             | (12,529 | )                                                 |            |   | (12,529           | )
|Total Investments net of unearned income  |  |                    |  | $                                           | 886,225 |                                                   |            | $ | 867,871           |  



|(1) |  | The percentage of class held on a fully diluted basis represents the percentage of the class of security we may own assuming we exercise our warrants or options (whether
or not they are in-the-money) and assuming that warrants, options or convertible securities held by others are not exercised or converted. We have not included any security which is subject to significant vesting contingencies. Common stock,
preferred stock, warrants, options and equity interests are generally non-income producing and restricted. The percentage was calculated based on the most current outstanding share information available to us (i) in the case of private companies,
provided by that company, and (ii) in the case of public companies, provided in that companys most recent public filings with the SEC.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Some of the securities listed are issued by affiliate(s) of the listed portfolio company.
|--- |  | -----------------------------------------------------------------------------------------

|(3) |  | Affiliate investments are generally defined under the Investment Company Act of 1940 as companies in which the Company owns at least 5% but not more than 25% of the voting
securities of the company.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Non-majority owned control investments are generally defined under the Investment Company Act of 1940 as companies in which the Company owns more than 25% but not more than 50% of
the voting securities of the company.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Majority owned investments are generally defined under the Investment Company Act of 1940 as companies in which the Company owns more than 50% of the voting securities of the
company.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Non-income producing at the relevant period end.
|--- |  | ------------------------------------------------

|(7) |  | In June 2004, National Systems Integration, Inc. ceased operations and filed for protection under Chapter 7 of the United States Bankruptcy Code.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------



See notes to consolidated financial statements (unaudited).



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MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

December 31, 2004



(dollars in thousands)



|(8) |  | In December 2003, Telecomm North Corp., a wholly owned portfolio company, entered into an agreement to merge with another of the Companys portfolio companies, Bridgecom
Holdings, Inc. The merger was completed in March 2004 with Bridgecom Holdings, Inc. as the surviving corporation.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | In January 2005, one of the Companys majority-owned controlled portfolio companies, Bridgecom Holdings, Inc. completed a merger with Broadview Networks, Inc. The
Companys economic ownership in the new merged entity decreased below 50 percent; however, the Company retained greater than 50 percent of the voting control and, therefore, the Companys investment will continue to be reflected as a
majority-owned control portfolio company.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) |  | In March 2005, one of the Companys non majority-owned controlled portfolio companies, Creatas, L.L.C., was acquired by a subsidiary of Jupitermedia Corporation, a publicly
held corporation. The consideration paid by such subsidiary was a combination of cash and Jupitermedia Corporation common stock.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) |  | Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The
maturity dates represent the earliest and the latest maturity dates.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) |  | In February 2005, FTI Technologies Holdings, Inc. changed its name to GoldenSource Holdings, Inc.
|---- |  | -------------------------------------------------------------------------------------------------



See notes to consolidated financial statements (unaudited).



27



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited)

(in thousands except share and per share amounts)



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



MCG Capital Corporation (MCG or the Company or
we or us or our) is a solutions-focused financial services company providing financing and advisory services to a variety of small- and medium-sized companies throughout the United States with a focus on growth
oriented companies. Currently, our portfolio consists primarily of companies in the communications, information services, media, technology, software and business services industry sectors. The Company is a non-diversified internally managed,
closed-end investment company that has elected to be treated as a business development company under the Investment Company Act of 1940, as amended (1940 Act).



On December 4, 2001, MCG completed an initial public offering (IPO) of 13,375,000 shares of common stock and a
concurrent private offering of 625,000 shares of common stock. The Company elected to be treated for federal income tax purposes as a regulated investment company under the Internal Revenue Code with the filing of our corporate income tax return for
2002 which election was effective January 1, 2002. In 2002, MCG raised $54,000 of gross proceeds by selling 3,000,000 shares of newly issued common stock. In 2003, MCG raised $115,863 of gross proceeds by selling 7,475,000 shares of newly issued
common stock. In 2004, MCG raised $105,383 of gross proceeds by selling 6,622,155 shares of newly issued common stock. During the first quarter of 2005, MCG raised $31,500 of gross proceeds by selling 2,000,000 shares of newly issued common stock.
MCG intends to maintain an active shelf registration statement pursuant to which the company may issue additional shares from time to time.



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, 2004, as filed with the SEC.



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



28



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share amounts)



Note 2.    Investments



As of March 31, 2005 and December 31, 2004, investments consisted of the following:



|                                 |  |                |         |   |                   |   |         |      |  |   |            |   |  |   |         |  
|-------------------------------- |  | -------------- | ------- | - | ----------------- | - | ------- | ---- |  | - | ---------- | - |  | - | ------- | -
|                                 |  | March 31, 2005 |         |   | December 31, 2004 |  
|                                 |  | Cost           |         |   | Fair Value        |   |         | Cost |  |   | Fair Value |  
|Commercial loans                 |  | $              | 778,880 |   |                   | $ | 769,722 |      |  | $ | 767,282    |   |  | $ | 760,489 |  
|Investments in equity securities |  |                | 147,758 |   |                   |   | 118,841 |      |  |   | 131,472    |   |  |   | 119,911 |  
|Unearned income                  |  |                | (10,735 | ) |                   |   | (10,735 | )    |  |   | (12,529    | ) |  |   | (12,529 | )
|                                 |  |                |         |   |                   |   |         |      |  |   |            |   |  |   |         |  
|Total                            |  | $              | 915,903 |   |                   | $ | 877,828 |      |  | $ | 886,225    |   |  | $ | 867,871 |  
|                                 |  |                |         |   |                   |   |         |      |  |   |            |   |  |   |         |  



MCGs customer
base includes primarily small- and medium-sized private companies in the communications, information services, media, technology, software and business services industry sectors. The proceeds of the loans to these companies are generally used for
buyouts, growth, acquisitions, liquidity, refinancings and restructurings. In addition, MCG has 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. The Companys debt instruments generally provide for a contractual variable interest rate, a portion of which may be deferred. At March 31, 2005, approximately 78% of loans in the portfolio, based on amounts
outstanding at fair value, were at variable rates determined on the basis of a benchmark LIBOR or prime rate and approximately 22% were at fixed rates. In addition, approximately 41% of the loan portfolio has floors of between 1.25% and 3% on the
LIBOR base index. The Companys loans generally have stated maturities at origination that range from 2 to 8 years. Customers typically pay an origination fee based on a percentage of the commitment amount. They also often pay a fee based on
any undrawn commitments.



At March 31, 2005, approximately 34%
of MCGs loans had detachable warrants or an option to purchase warrants, stock appreciation rights or other equity interests or other provisions designed to provide the Company with an enhanced internal rate of return. 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 MCG is receiving warrants. In some cases, some or all of
the deferred interest may be used to pay the exercise price on the warrants or option to purchase warrants. The equity interests and warrants and options to purchase warrants often include registration rights, which allow MCG to register the
securities after a public offering. We intend to continue to obtain equity and equity-like instruments with similar features from our customers. Realized gains and losses on sales of investments, as determined on a specific identification basis, are
included in the Consolidated Statements of Operations.



29



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share amounts)



The composition of MCGs investments as of March 31, 2005 and December 31, 2004 at cost and fair
value was as follows (excluding unearned income):



|                           |  |                          |         |                              |                   |   |                          |   |                               |  |       |  
|-------------------------- |  | ------------------------ | ------- | ---------------------------- | ----------------- | - | ------------------------ | - | ----------------------------- |  | ----- | -
|                           |  | March 31, 2005           |         |                              | December 31, 2004 |  
|                           |  | Investments atCost       |         | Percentage ofTotal Portfolio |                   |   | Investments atCost       |   | Percentage of Total Portfolio | 
|Senior Debt                |  | $                        | 573,263 |                              | 61.9              | % |                          | $ | 626,703                       |  | 69.7  | %
|Subordinated Debt          |  |                          | 205,617 |                              | 22.2              |   |                          |   | 140,579                       |  | 15.6  |  
|Equity                     |  |                          | 138,178 |                              | 14.9              |   |                          |   | 121,892                       |  | 13.6  |  
|Warrants to Acquire Equity |  |                          | 9,580   |                              | 1.0               |   |                          |   | 9,580                         |  | 1.1   |  
|Equity Appreciation Rights |  |                          |        |                              | 0.0               |   |                          |   |                              |  | 0.0   |  
|                           |  |                          |         |                              |                   |   |                          |   |                               |  |       |  
|Total                      |  | $                        | 926,638 |                              | 100.0             | % |                          | $ | 898,754                       |  | 100.0 | %
|                           |  |                          |         |                              |                   |   |                          |   |                               |  |       |  
|                           |  |                         
|                           |  | March 31, 2005           |         |                              | December 31, 2004 |  
|                           |  | Investments atFair Value |         | Percentage ofTotal Portfolio |                   |   | Investments atFair Value |   | Percentage of Total Portfolio | 
|Senior Debt                |  | $                        | 566,146 |                              | 63.7              | % |                          | $ | 619,757                       |  | 70.4  | %
|Subordinated Debt          |  |                          | 203,576 |                              | 22.9              |   |                          |   | 140,732                       |  | 16.0  |  
|Equity                     |  |                          | 103,710 |                              | 11.7              |   |                          |   | 106,077                       |  | 12.1  |  
|Warrants to Acquire Equity |  |                          | 14,721  |                              | 1.7               |   |                          |   | 13,432                        |  | 1.5   |  
|Equity Appreciation Rights |  |                          | 410     |                              | 0.0               |   |                          |   | 402                           |  | 0.0   |  
|                           |  |                          |         |                              |                   |   |                          |   |                               |  |       |  
|Total                      |  | $                        | 888,563 |                              | 100.0             | % |                          | $ | 880,400                       |  | 100.0 | %
|                           |  |                          |         |                              |                   |   |                          |   |                               |  |       |  



Set forth below are
tables showing the composition of MCGs portfolio by industry sector at cost and fair value as of March 31, 2005 and December 31, 2004 (excluding unearned income):



|                          |  |                    |         |                              |                   |   |                    |   |                              |  |       |  
|------------------------- |  | ------------------ | ------- | ---------------------------- | ----------------- | - | ------------------ | - | ---------------------------- |  | ----- | -
|                          |  | March 31, 2005     |         |                              | December 31, 2004 |  
|                          |  | Investments atCost |         | Percentage ofTotal Portfolio |                   |   | Investmentsat Cost |   | Percentage ofTotal Portfolio | 
|Media                     |  |                    |         |                              |                   |   |                    |   |                              |  |       |  
|Newspaper                 |  | $                  | 168,105 |                              | 18.1              | % |                    | $ | 168,844                      |  | 18.8  | %
|Publishing                |  |                    | 102,942 |                              | 11.1              |   |                    |   | 109,939                      |  | 12.2  |  
|Broadcasting              |  |                    | 62,333  |                              | 6.7               |   |                    |   | 85,964                       |  | 9.6   |  
|Other Media               |  |                    | 31,993  |                              | 3.5               |   |                    |   | 31,750                       |  | 3.5   |  
|Telecommunications        |  |                    | 228,341 |                              | 24.6              |   |                    |   | 206,829                      |  | 23.0  |  
|Information Services      |  |                    | 63,667  |                              | 6.9               |   |                    |   | 73,893                       |  | 8.2   |  
|Technology (a)            |  |                    | 62,818  |                              | 6.8               |   |                    |   | 62,758                       |  | 7.0   |  
|Other Diversified Sectors |  |                    |         |                              |                   |   |                    |   |                              |  |       |  
|Leisure Activities        |  |                    | 26,029  |                              | 2.8               |   |                    |   | 5,375                        |  | 0.6   |  
|Drugs                     |  |                    | 23,506  |                              | 2.5               |   |                    |   | 5,811                        |  | 0.7   |  
|Laboratory Instruments    |  |                    | 23,500  |                              | 2.5               |   |                    |   |                             |  |      |  
|Specialty Retail          |  |                    | 21,692  |                              | 2.4               |   |                    |   | 23,015                       |  | 2.6   |  
|Healthcare                |  |                    | 19,642  |                              | 2.1               |   |                    |   | 21,616                       |  | 2.4   |  
|Home Furnishings          |  |                    | 10,784  |                              | 1.2               |   |                    |   | 10,838                       |  | 1.2   |  
|Commercial Services       |  |                    | 10,000  |                              | 1.1               |   |                    |   | 10,000                       |  | 1.1   |  
|Chemicals/plastics        |  |                    | 8,413   |                              | 0.9               |   |                    |   | 8,456                        |  | 0.9   |  
|Containers & Glass        |  |                    | 4,800   |                              | 0.5               |   |                    |   | 9,816                        |  | 1.1   |  
|Other (b)                 |  |                    | 58,073  |                              | 6.3               |   |                    |   | 63,850                       |  | 7.1   |  
|                          |  |                    |         |                              |                   |   |                    |   |                              |  |       |  
|Total                     |  | $                  | 926,638 |                              | 100.0             | % |                    | $ | 898,754                      |  | 100.0 | %
|                          |  |                    |         |                              |                   |   |                    |   |                              |  |       |  



|(a) |  | Includes software and business services industry sectors.
|--- |  | ---------------------------------------------------------

|(b) |  | No individual sector within this category exceeds 1% of the total portfolio.
|--- |  | ----------------------------------------------------------------------------



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share amounts)



|                              |  |                           |         |                               |                   |   |                           |   |                               |  |       |  
|----------------------------- |  | ------------------------- | ------- | ----------------------------- | ----------------- | - | ------------------------- | - | ----------------------------- |  | ----- | -
|                              |  | March 31, 2005            |         |                               | December 31, 2004 |  
|                              |  | Investments at Fair Value |         | Percentage of Total Portfolio |                   |   | Investments at Fair Value |   | Percentage of Total Portfolio | 
|Media                         |  |                           |         |                               |                   |   |                           |   |                               |  |       |  
|Newspaper                     |  | $                         | 169,939 |                               | 19.1              | % |                           | $ | 169,948                       |  | 19.3  | %
|Publishing                    |  |                           | 76,718  |                               | 8.6               |   |                           |   | 84,144                        |  | 9.6   |  
|Broadcasting                  |  |                           | 60,835  |                               | 6.9               |   |                           |   | 84,397                        |  | 9.6   |  
|Other Media                   |  |                           | 31,988  |                               | 3.6               |   |                           |   | 31,750                        |  | 3.6   |  
|Telecommunications            |  |                           | 214,917 |                               | 24.2              |   |                           |   | 191,363                       |  | 21.7  |  
|Information Services          |  |                           | 64,106  |                               | 7.2               |   |                           |   | 96,030                        |  | 10.9  |  
|Technology (a)                |  |                           | 63,636  |                               | 7.2               |   |                           |   | 63,515                        |  | 7.2   |  
|Other Diversified Sectors (b) |  |                           |         |                               |                   |   |                           |   |                               |  |       |  
|Leisure Activities            |  |                           | 26,029  |                               | 2.9               |   |                           |   | 5,375                         |  | 0.6   |  
|Drugs                         |  |                           | 23,506  |                               | 2.7               |   |                           |   | 5,811                         |  | 0.7   |  
|Laboratory Instruments        |  |                           | 23,500  |                               | 2.7               |   |                           |   |                              |  |      |  
|Specialty Retail              |  |                           | 21,692  |                               | 2.4               |   |                           |   | 23,015                        |  | 2.6   |  
|Healthcare                    |  |                           | 19,924  |                               | 2.2               |   |                           |   | 21,886                        |  | 2.5   |  
|Home Furnishings              |  |                           | 10,723  |                               | 1.2               |   |                           |   | 10,714                        |  | 1.2   |  
|Commercial Services           |  |                           | 10,000  |                               | 1.1               |   |                           |   | 10,000                        |  | 1.1   |  
|Chemicals/plastics            |  |                           | 8,482   |                               | 1.0               |   |                           |   | 8,529                         |  | 1.0   |  
|Containers & Glass            |  |                           | 4,664   |                               | 0.5               |   |                           |   | 9,835                         |  | 1.1   |  
|Other (b)                     |  |                           | 57,904  |                               | 6.5               |   |                           |   | 64,088                        |  | 7.3   |  
|                              |  |                           |         |                               |                   |   |                           |   |                               |  |       |  
|Total                         |  | $                         | 888,563 |                               | 100.0             | % |                           | $ | 880,400                       |  | 100.0 | %
|                              |  |                           |         |                               |                   |   |                           |   |                               |  |       |  



|(a) |  | Includes software and business services industry sectors.
|--- |  | ---------------------------------------------------------

|(b) |  | No individual sector within this category exceeds 1% of the total portfolio.
|--- |  | ----------------------------------------------------------------------------



At March 31, 2005, there were $40 of loans greater than 60 days past due compared to $2,045 of loans at December 31, 2004. At March 31, 2005, there
were $14,169 of loans on non-accrual, including all $40 of the loans greater than 60 days past due. At December 31, 2004, there were $16,003 of loans on non-accrual, including all $2,045 of the loans greater than 60 days past due.



Note 3.    Borrowings



The following is a summary of the Companys borrowings as of March 31,
2005 and 2004:



|                                   |  |                   |         |                 |   |         |    
|---------------------------------- |  | ----------------- | ------- | --------------- | - | ------- | ---
|(dollars in thousands)             |  | AmountOutstanding |         | TotalCommitment |  
|As of March 31, 2005               |  |                   |         |                 |   |         |    
|Term Securitization 2004-1 (b)     |  | $                 | 312,754 |                 | $ | 312,754 |    
|Term Securitization 2001-1 (b)     |  |                   | 106,070 |                 |   | 106,070 |    
|Senior Secured Credit Facility (b) |  |                   | 35,000  |                 |   | 35,000  |    
|Commercial Loan Funding Trust (c)  |  |                   |        |                 |   | 150,000 | (a)
|                                   |  |                  
|As of March 31, 2004               |  |                   |         |                 |   |         |    
|Term Securitization 2001-1         |  | $                 | 159,297 |                 | $ | 159,297 |    
|Revolving Credit Facility          |  |                   | 114,938 |                 |   | 130,000 | (a)
|Warehouse Credit Facility          |  |                   | 15,000  |                 |   | 150,000 | (a)



|(a) |  | Subject to certain minimum equity restrictions and other covenants, including having sufficient levels of collateral and various restrictions on which loans the Company may leverage
as collateral.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | Tied to 90-day LIBOR interest rate benchmark
|--- |  | --------------------------------------------

|(c) |  | Tied to Commercial Paper interest rate benchmark
|--- |  | ------------------------------------------------



31



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share amounts)



The weighted average borrowings for the three months ended March 31, 2005 and 2004 was $462,493 and
$278,413, respectively. The weighted average interest rate on all of the Companys borrowings, including amortization of deferred debt issuance costs, for the three months ended March 31, 2005 and 2004 was 4.11% and 3.04%, respectively. For the
above borrowings, the fair value of the borrowings approximates cost.



MCG borrows indirectly through credit facilities maintained by its subsidiaries. MCGs wholly owned subsidiary, MCG Finance III, LLC, has a $265,200 term funding securitization agreement under MCG Commercial Loan Trust 2001-1, arranged
by Wachovia Securities. In addition, our wholly owned subsidiary, MCG Finance IV, LLC has a $397,700 term funding securitization agreement under MCG Commercial Loan Trust 2004-1, arranged by UBS AG and MCGs wholly owned subsidiary, MCG Finance
V, LLC has a $150,000 warehouse financing facility funded through Three Pillars Funding LLC, an asset-backed commercial paper program administered by SunTrust Bank. The significant terms of these facilities are outlined below.



On September 30, 2004, MCG completed a $397,700 term debt securitization. In
addition to funding continued growth, the proceeds from the transaction were used to repay all of the outstanding borrowings under the Companys $200,000 secured warehouse facility, MCG Commercial Loan Trust 2003-1, with UBS AG and all of the
outstanding borrowings under its $115,000 revolving credit facility with Wachovia Bank, National Association. In connection with these repayments, MCG terminated these two facilities. In addition, on September 10, 2004, MCG entered into a $25,000
senior secured credit facility with Bayerische Hypo-und Vereinsbank, AG and on November 10, 2004, MCG established a $150,000 warehouse financing facility funded through Three Pillars Funding LLC.



Term Securitization 2004-1.On September 30, 2004, MCG established MCG
Commercial Loan Trust 2004-1 (the 2004-1 Trust), which issued three classes of series 2004-1 Notes. The facility was structured to hold up to $397,700 of loans. The facility is secured by all of the 2004-1 Trusts commercial loans
and cash held for investment, which totaled $387,591 and $406,044 as of March 31, 2005 and December 31, 2004, respectively. This facility is scheduled to terminate July 20, 2016 or sooner upon the full repayment of the Class A-1, Class A-2 and Class
B Notes. The Class A-1 Notes, Class A-2 Notes and Class B Notes are scheduled to be repaid as MCG receives principal collections on the underlying collateral.



The 2004-1 Trust issued $250,500 of Class A-1 Notes rated Aaa/AAA, $31,500 of Class A-2 Notes rated Aa1/AAA, and $43,500 of Class B Notes rated A2/A as
rated by Moodys and Fitch, respectively. As of March 31, 2005 $312,754 of the Series 2004-1 Notes were outstanding. The Series 2004-1 Class A-1 Notes, Class A-2 Notes and Class B Notes bear interest of LIBOR plus 0.43%, 0.65%, and 1.30%,
respectively.



Term Securitization 2001-1. On December
27, 2001, MCG established the MCG Commercial Loan Trust 2001-1 (the 2001-1 Trust), which issued two classes of Series 2001-1 Notes. The facility is secured by all of the 2001-1 Trusts commercial loans which were contributed by MCG
and totaled $158,215 as of March 31, 2005 and $194,263 as of December 31, 2004. 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 MCG receives principal collections on the underlying collateral.



In December 2001, the 2001-1 Trust issued $229,860 of Class A Notes rated AAA/Aaa/AAA, and $35,363 of Class B Notes rated A/A2/A as rated by Standard & Poors, Moodys and Fitch, respectively. As of
March 31, 2005, $70,707 of Class A Series 2001-1 Notes and $35,363 of Class B Series 2001-1 Notes were outstanding and as of December 31, 2004, $81,537 of Class A Series 2001-1 Notes and $35,363 of Class B Series 2001-1 Notes were outstanding. The
Series 2001-1 Class A Notes bear interest of LIBOR plus 0.60% and Series 2001-1 Class B Notes bear interest of LIBOR plus 1.75%, and interest on both is payable quarterly.



32



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share amounts)



Senior Secured Credit Facility. On September 10, 2004, MCG entered into a $25,000 senior
secured revolving credit facility with Bayerische Hypo-Und Vereinsbank, A.G. and in February 2005, MCG increased the aggregate available loan amount under the facility to $50,000. All new advances under the credit facility are at the discretion of
the lender and each has a maturity of one year from the date of the advance and bears interest at LIBOR plus 2.00% or the prime rate plus 0.50%. The credit facility is secured by a first priority security interest in MCG Capital Corporations
tangible and intangible assets subject to certain excluded collateral and certain permitted other liens. The credit facility contains customary terms and conditions, including, without limitation, affirmative and negative covenants such as
information reporting, minimum stockholders equity and a negative pledge. The credit facility also contains customary events of default with customary cure and notice, including, without limitation, nonpayment misrepresentation in a material
respect, breach of covenant, cross-default to other indebtedness, bankruptcy, change of control, change of management and material adverse change. As of March 31, 2005, MCG had $35,000 outstanding under the credit facility, $10,000 of which is
due in February 2006 and $25,000 of which is due in April 2006.



Commercial Loan Funding Trust Facility.On November 10, 2004, MCG established, through MCG Commercial Loan Funding Trust, a $150,000 warehouse financing facility funded through Three Pillars Funding LLC, an asset-backed commercial
paper program administered by SunTrust Bank. The warehouse financing facility operates like a revolving credit facility that is primarily secured by the assets of MCG Commercial Loan Funding Trust, including commercial loans sold to the trust by MCG
Capital. The pool of commercial loans in the trust must meet certain requirements, including, but not limited to, term, average life, investment rating, agency rating and sector diversity requirements. There are also certain requirements relating to
portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs. Such limitations, requirements, and associated defined terms are as provided for in the documents governing the facility. Advances
under the facility bear interest based on a commercial paper rate plus 1.15% and interest is payable monthly. The facility is scheduled to terminate on November 7, 2007, but may be extended under certain circumstances and is subject to annual
renewal by the lender. There was no balance outstanding under this facility at March 31, 2005.



Revolving Credit Facility. As of June 1, 2000, MCG, through MCG Master Trust, established a revolving credit facility (the Revolving Credit Facility), which allowed MCG 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). On February 12, 2004, the Revolving Credit Facility was amended to, among other things, reduce MCGs borrowing
capacity from $200,000 to $130,000 and reduce the interest rate from a commercial paper rate plus 3.0% to LIBOR plus 1.5%. On September 30, 2004, MCG paid off the revolving credit facility with the proceeds from the Term Securitization 2004-1 and
terminated the facility.



Warehouse Credit Facility. On
January 29, 2004, MCGs wholly owned, bankruptcy remote, special purpose indirect subsidiary, MCG Commercial Loan Trust 2003-1 entered into a $200,000 secured warehouse credit facility with an affiliate of UBS AG. MCG used the warehouse credit
facility to fund its origination and purchase of a diverse pool of loans, including broadly syndicated rated loans, which it securitized using an affiliate of the lender as the exclusive structurer and underwriter or placement agent. Advances under
the credit facility bore interest at LIBOR plus 0.50%. The warehouse credit facility operated much like a revolving credit facility that is primarily secured by the loans acquired with the advances under the credit facility. On September 30, 2004,
MCG paid off the warehouse credit facility with the proceeds from the Term Securitization 2004-1 and terminated the facility.



Each debt facility except the Senior Secured Credit Facility is funded through bankruptcy remote, special purpose, wholly owned subsidiaries of ours and,
therefore, their assets may not be available to our creditors.



33



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share amounts)



Note 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, 2005 and 2004:



|                                                                                                     |  |                             |        |      |   |       
|---------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------
|                                                                                                     |  | Three Months EndedMarch 31,
|                                                                                                     |  | 2005                        |        | 2004
|Basic                                                                                                |  |                             |        |      |   |       
|Net income                                                                                           |  | $                           | 13,058 |      | $ | 2,097 
|Weighted average common shares outstanding                                                           |  |                             | 45,108 |      |   | 37,823
|Earnings per common share-basic                                                                      |  | $                           | 0.29   |      | $ | 0.06  
|Diluted                                                                                              |  |                             |        |      |   |       
|Net income                                                                                           |  | $                           | 13,058 |      | $ | 2,097 
|Weighted average common shares outstanding                                                           |  |                             | 45,108 |      |   | 37,823
|Dilutive effect of stock options and restricted stock on which forfeiture provisions have not lapsed |  |                             | 41     |      |   | 105   
|                                                                                                     |  |                             |        |      |   |       
|Weighted average common shares and common stock equivalents                                          |  |                             | 45,149 |      |   | 37,928
|Earnings per common sharediluted                                                                    |  | $                           | 0.29   |      | $ | 0.06  



For purposes of
calculating earnings per common share, unvested restricted common stock whose forfeiture provisions are solely based on passage of time are included in diluted earnings per common share based on the treasury stock method. Unvested restricted common
stock whose forfeiture provisions are based on performance criteria are included in diluted earnings per common share when it becomes probable such criteria will be met and is calculated using the treasury stock method.



Note 5.    Employee Stock Plans



MCG periodically recognizes compensation expense associated with the
amortization of restricted stock awards granted to employees during 2001. This expense totaled approximately $1,142 and $4,977 for the first quarter of 2005 and 2004, respectively, which is included in long-term incentive compensation in the
consolidated statement of operations. The decrease of $3,835 is primarily the result of expenses in the first quarter of 2004 related to modifications to these restricted stock awards.



During the first quarter of 2004, as part of our review of executive compensation, our compensation committee waived the
performance-based forfeiture restrictions and modified the time-based forfeiture provisions associated with the Tier III shares of certain of our executive officers through their respective amended and restated restricted stock agreements. As a
result, we recorded long-term incentive compensation expense of $4,003 during the first quarter of 2004. The remainder of the compensation expense related to these shares will be amortized over the remaining service period. MCGs total stock
compensation expense would not have changed if SFAS No. 123 Accounting for Stock-Based Compensation was applied.



In addition, our compensation committee agreed to allow the restrictions on certain shares of restricted stock to lapse. As a result, the Tier I and Tier
II shares held by certain of our executive officers will vest immediately upon full repayment of the loans that are secured by the restricted stock.



34



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##### Table of Contents

MCG Capital Corporation

Notes To Consolidated Financial Statements (unaudited) (continued)

(in
thousands except share and per share amounts)



Note 6.    Financial Highlights



Following is a schedule of financial highlights for the three months ended
March 31, 2005 and 2004:



|                                                                            |  |                              |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                                            |  | Three Months Ended March 31, |        
|                                                                            |  | 2005                         |         |   | 2004 |  
|Per Share Data:                                                             |  |                              |         |   |      |   |         |  
|Net asset value at beginning of period (a)                                  |  | $                            | 12.22   |   |      | $ | 11.98   |  
|                                                                            |  |                             
|Net operating income before investment gains and losses (b)                 |  |                              | 0.32    |   |      |   | 0.26    |  
|Net realized gains on investments (b)                                       |  |                              | 0.41    |   |      |   | 0.05    |  
|Net change in unrealized depreciation on investments (b)                    |  |                              | (0.44   | ) |      |   | (0.25   | )
|                                                                            |  |                              |         |   |      |   |         |  
|Net income                                                                  |  |                              | 0.29    |   |      |   | 0.06    |  
|                                                                            |  |                             
|Dividends declared                                                          |  |                              | (0.42   | ) |      |   | (0.42   | )
|Antidilutive effect of stock offering on distributions                      |  |                              | 0.02    |   |      |   |        |  
|Antidilutive effect of distributions recorded as compensation expense (b)   |  |                              | 0.01    |   |      |   | 0.02    |  
|                                                                            |  |                              |         |   |      |   |         |  
|Net decrease in stockholders equity resulting from distributions           |  |                              | (0.39   | ) |      |   | (0.40   | )
|                                                                            |  |                             
|Issuance of shares                                                          |  |                              | 2.78    |   |      |   |        |  
|Dilutive effect of share issuances and unvested restricted stock            |  |                              | (2.68   | ) |      |   | (0.01   | )
|Net increase in stockholders equity from restricted stock amortization (b) |  |                              | 0.03    |   |      |   | 0.13    |  
|                                                                            |  |                              |         |   |      |   |         |  
|Net increase in stockholders equity relating to share issuances            |  |                              | 0.13    |   |      |   | 0.12    |  
|                                                                            |  |                              |         |   |      |   |         |  
|Net asset value at end of period (a)                                        |  | $                            | 12.25   |   |      | $ | 11.76   |  
|                                                                            |  |                              |         |   |      |   |         |  
|Per share market value at end of period                                     |  | $                            | 15.39   |   |      | $ | 20.18   |  
|Total return (c)                                                            |  |                              | -7.71   | % |      |   | 5.16    | %
|Shares outstanding at end of period                                         |  |                              | 47,343  |   |      |   | 38,733  |  
|                                                                            |  |                             
|Ratio/Supplemental Data:                                                    |  |                              |         |   |      |   |         |  
|Net assets at end of period                                                 |  | $                            | 579,934 |   |      | $ | 455,497 |  
|Ratio of operating expenses to average net assets (annualized)              |  |                              | 9.83    | % |      |   | 10.53   | %
|Ratio of net operating income to average net assets (annualized)            |  |                              | 10.45   | % |      |   | 8.38    | %



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

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

|(c) |  | For 2005, total return equals the decrease of the ending market value over the December 31, 2004 price of $17.13 per share plus dividends paid ($0.42 per share), divided by the
beginning price. For 2004, total return equals the increase of the ending market value over the December 31, 2003 price of $19.59 per share plus dividends paid ($0.42 per share), divided by the beginning price.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Note 7.    Subsequent Events



On April 21, 2005, the Company established, through MCG Commercial Loan
Trust 2005-1, a $100 million warehouse credit facility with an affiliate of UBS AG.



The warehouse credit facility allows MCG Commercial Loan Trust 2005-1 to borrow up to $100 million subject to certain covenants, concentration limitations and other restrictions. The warehouse credit facility is
primarily secured by the assets of MCG Commercial Loan Trust 2005-1, including commercial loans sold by the Company to the trust, and the lender has partial recourse to MCG Capital.



The Company intends to use the warehouse credit facility to fund its origination and purchase of a diverse pool of loans
that will collateralize a potential future term securitization. Advances under the facility bear interest based on LIBOR plus 0.50% and interest is payable monthly. The facility is scheduled to terminate on November 30, 2005, may be extended under
certain circumstances, and may be canceled by the lender for cause.



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##### Table of Contents

Report of Independent Registered Public Accounting Firm



We have reviewed the accompanying consolidated balance sheet of MCG Capital Corporation as of March 31, 2005, including the consolidated schedule of investments, and the related consolidated statements of operations for the three-month
periods ended March 31, 2005 and 2004 and the consolidated statements of stockholders equity, and statements of cash flows for the three-month periods ended March 31, 2005 and 2004. These financial statements are the responsibility of the
Companys management.



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



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



We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of MCG Capital Corporation as of December 31, 2004, including the consolidated schedule of investments, and the related consolidated statements of operations, stockholders equity,
and cash flows for the year then ended (not presented herein), and in our report dated March 1, 2005 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, 2004, including the schedule of investments, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.



/s/  ERNST & YOUNG LLP



McLean, Virginia

April 28, 2005





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##### Table of Contents

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



The information contained in this section should be read in conjunction with the Selected Financial Data, and our Consolidated Financial Statements and
notes thereto appearing elsewhere in this Quarterly Report.



This Quarterly Report, including the Managements Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking
statements are not historical facts, but rather are based on current expectations, estimates and projections about our industry, our beliefs, and our assumptions. Words such as anticipates, expects, intends,
plans, believes, seeks, and estimates and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future
performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking
statements including without limitation:



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



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



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



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



| |  |  | risks associated with terrorism could possibly cause disruption in the Companys operations; and
| | - |  | ------------------------------------------------------------------------------------------------



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



Although we believe that the assumptions
on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be incorrect. In light of these and
other uncertainties, the inclusion of forward-looking statements in this Quarterly Report should not be regarded as a representation by us that our plans and objectives will be achieved. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this Quarterly Report. We undertake no obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.



Overview



MCG Capital Corporation is a solutions-focused financial services company providing financing and advisory services to a
variety of small and medium-sized companies throughout the United States with a focus on growth oriented companies. Currently, our portfolio consists primarily of companies in the communications, information services, media, technology, software and
business services industry sectors. During 2004 and 2005 our portfolio has become increasingly diversified. Our capital is generally used by our portfolio companies to finance acquisitions, recapitalizations, management buyouts, organic growth and
working capital. We are 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 and have elected to be treated for federal income tax
purposes as a regulated investment company under the Internal Revenue Code. Pursuant to this election, and subject to continuing to qualify as a regulated investment company, we generally will not have to pay corporate-level taxes on any income we
distribute to our stockholders as dividends, allowing us to substantially reduce or eliminate our corporate-level tax liability.



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##### Table of Contents

Portfolio Composition and Asset Quality



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



Investment activity in the first quarter of 2005 included investments in twelve portfolio companies totaling $116.6 million, including an investment in
common stock of Jupitermedia Corporation that we received in the Creatas transaction, and several advances to existing customers totaling $11.4 million. Net growth in the investment portfolio totaled $8.2 million for the first quarter from $880.4
million at December 31, 2004 to $888.6 million at March 31, 2005.



We experience payments in our loan portfolio based on the scheduled amortization of the outstanding balances. In addition, from time to time we experience pay-offs of some of our investments prior to their scheduled maturity date. The
frequency or volume of these early pay-offs may fluctuate significantly from period to period. For the first quarter of 2005, we had loan payments, including payoffs, of $118.4 million. This amount included normal amortization plus pay-offs of $32.0
million from seven portfolio companies in our other diversified sectors, which were all acquired in the broadly syndicated markets, $41.1 million from one portfolio company in the information services industry, which included $19.4 million in debt
and $21.7 million in equity, and $11.4 million from one portfolio company in the broadcasting industry.



Total portfolio investment activity (excluding unearned income) for the three months ended March 31, 2005, was as follows:



|                                                    |  |                                   |        |  
|--------------------------------------------------- |  | --------------------------------- | ------ | -
|(dollars in millions)                               |  | Three Months Ended March 31, 2005 |       
|Investment Portfolio at 12/31/04                    |  | $                                 | 880.4  |  
|Originations and Advances                           |  |                                   | 128.0  |  
|Gross Payments / reductions / sales of securities   |  |                                   | (118.4 | )
|Net Unrealized Gains / (Losses)                     |  |                                   | 1.0    |  
|Net Realized Gains / (Losses)                       |  |                                   | 18.3   |  
|Reversals of unrealized appreciation / depreciation |  |                                   | (20.7  | )
|                                                    |  |                                   |        |  
|Investment Portfolio at 3/31/05                     |  | $                                 | 888.6  |  
|                                                    |  |                                   |        |  



The following table
shows the fair value of our portfolio of investments by asset class as of March 31, 2005 and December 31, 2004 (excluding unearned income):



|                           |  |                          |       |                              |                   |   |                          |   |                              |  |       |  
|-------------------------- |  | ------------------------ | ----- | ---------------------------- | ----------------- | - | ------------------------ | - | ---------------------------- |  | ----- | -
|                           |  | March 31, 2005           |       |                              | December 31, 2004 |  
|(dollars in millions)      |  | Investments atFair Value |       | Percentage ofTotal Portfolio |                   |   | Investments atFair Value |   | Percentage ofTotal Portfolio | 
|Senior Debt                |  | $                        | 566.2 |                              | 63.7              | % |                          | $ | 619.8                        |  | 70.4  | %
|Subordinated Debt          |  |                          | 203.6 |                              | 22.9              |   |                          | $ | 140.7                        |  | 16.0  |  
|Equity                     |  |                          | 103.7 |                              | 11.7              |   |                          | $ | 106.1                        |  | 12.1  |  
|Warrants to Acquire Equity |  |                          | 14.7  |                              | 1.7               |   |                          | $ | 13.4                         |  | 1.5   |  
|Equity Appreciation Rights |  |                          | 0.4   |                              | 0.0               |   |                          | $ | 0.4                          |  | 0.0   |  
|                           |  |                          |       |                             
|                           |  | $                        | 888.6 |                              | 100.0             | % |                          | $ | 880.4                        |  | 100.0 | %
|                           |  |                          |       |                              |                   |   |                          |   |                              |  |       |  



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##### Table of Contents

Set forth below is a table showing the composition of our portfolio by industry sector at fair value at
March 31, 2005 and December 31, 2004 (excluding unearned income):



|                          |  |                           |       |                               |                   |   |                           |   |                               |  |       |  
|------------------------- |  | ------------------------- | ----- | ----------------------------- | ----------------- | - | ------------------------- | - | ----------------------------- |  | ----- | -
|                          |  | March 31, 2005            |       |                               | December 31, 2004 |  
|(dollars in millions)     |  | Investments at Fair Value |       | Percentage of Total Portfolio |                   |   | Investments at Fair Value |   | Percentage of Total Portfolio | 
|Media                     |  |                           |       |                               |                   |   |                           |   |                               |  |       |  
|Newspaper                 |  | $                         | 170.0 |                               | 19.1              | % |                           | $ | 169.9                         |  | 19.3  | %
|Publishing                |  |                           | 76.7  |                               | 8.6               |   |                           |   | 84.1                          |  | 9.6   |  
|Broadcasting              |  |                           | 60.8  |                               | 6.9               |   |                           |   | 84.4                          |  | 9.6   |  
|Other Media               |  |                           | 32.0  |                               | 3.6               |   |                           |   | 31.8                          |  | 3.6   |  
|Telecommunications        |  |                           | 214.9 |                               | 24.2              |   |                           |   | 191.4                         |  | 21.7  |  
|Information Services      |  |                           | 64.1  |                               | 7.2               |   |                           |   | 96.0                          |  | 10.9  |  
|Technology (a)            |  |                           | 63.7  |                               | 7.2               |   |                           |   | 63.5                          |  | 7.2   |  
|Other Diversified Sectors |  |                           |       |                               |                   |   |                           |   |                               |  |       |  
|Leisure Activities        |  |                           | 26.0  |                               | 2.9               |   |                           |   | 5.4                           |  | 0.6   |  
|Drugs                     |  |                           | 23.5  |                               | 2.7               |   |                           |   | 5.8                           |  | 0.7   |  
|Laboratory Instruments    |  |                           | 23.5  |                               | 2.7               |   |                           |   |                              |  |      |  
|Specialty Retail          |  |                           | 21.7  |                               | 2.4               |   |                           |   | 23.0                          |  | 2.6   |  
|Healthcare                |  |                           | 19.9  |                               | 2.2               |   |                           |   | 21.9                          |  | 2.5   |  
|Home Furnishings          |  |                           | 10.7  |                               | 1.2               |   |                           |   | 10.7                          |  | 1.2   |  
|Commercial Services       |  |                           | 10.0  |                               | 1.1               |   |                           |   | 10.0                          |  | 1.1   |  
|Chemicals/plastics        |  |                           | 8.5   |                               | 1.0               |   |                           |   | 8.5                           |  | 1.0   |  
|Containers & Glass        |  |                           | 4.7   |                               | 0.5               |   |                           |   | 9.9                           |  | 1.1   |  
|Other (b)                 |  |                           | 57.9  |                               | 6.5               |   |                           |   | 64.1                          |  | 7.3   |  
|                          |  |                           |       |                               |                   |   |                           |   |                               |  |       |  
|                          |  | $                         | 888.6 |                               | 100.0             | % |                           | $ | 880.4                         |  | 100.0 | %
|                          |  |                           |       |                               |                   |   |                           |   |                               |  |       |  



|(a) |  | Includes software and business services industry sectors.
|--- |  | ---------------------------------------------------------

|(b) |  | No individual sector within this category exceeds 1% of the total portfolio.
|--- |  | ----------------------------------------------------------------------------



Asset Quality



Asset quality is generally a function of economic conditions, our underwriting and ongoing management of our investment portfolio. As a business
development company, our loans and equity investments are carried at market value or, in the absence of market value, at fair value as determined by our board of directors in good faith on a quarterly basis. As of March 31, 2005 and December 31,
2004, net unrealized depreciation on investments totaled $38.1 million and $18.4 million, respectively. For additional information on the change in unrealized depreciation on investments, see the section entitled Net Investment Gains
(Losses).



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



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



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##### Table of Contents

The following table shows the distribution of our investments on the 1 to 5 investment rating scale at
fair value as of March 31, 2005 and December 31, 2004:



|                      |  |                           |       |     |                              |       |   |                           |   |       |                              |  |       |  
|--------------------- |  | ------------------------- | ----- | --- | ---------------------------- | ----- | - | ------------------------- | - | ----- | ---------------------------- |  | ----- | -
|(dollars in millions) |  |                           |       |     |                              |       |   |                           |   |      
|                      |  | March 31, 2005            |       |     | December 31, 2004            |      
|InvestmentRating      |  | Investments at Fair Value |       |     | Percentage ofTotal Portfolio |       |   | Investments at Fair Value |   |       | Percentage ofTotal Portfolio | 
|1                     |  | $                         | 297.6 | (a) |                              | 33.5  | % |                           | $ | 301.5 | (a)                          |  | 34.2  | %
|2                     |  |                           | 358.0 |     |                              | 40.3  |   |                           |   | 375.8 |                              |  | 42.7  |  
|3                     |  |                           | 170.6 |     |                              | 19.2  |   |                           |   | 142.3 |                              |  | 16.2  |  
|4                     |  |                           | 61.2  |     |                              | 6.9   |   |                           |   | 59.4  |                              |  | 6.7   |  
|5                     |  |                           | 1.2   |     |                              | 0.1   |   |                           |   | 1.4   |                              |  | 0.2   |  
|                      |  |                           |       |     |                              |       |   |                           |   |       |                              |  |       |  
|                      |  | $                         | 888.6 |     |                              | 100.0 | % |                           | $ | 880.4 |                              |  | 100.0 | %
|                      |  |                           |       |     |                              |       |   |                           |   |       |                              |  |       |  



|(a) |  | Of this amount, $15.0 million at March 31, 2005 and $15.7 million at December 31, 2004 relates to debt instruments in companies for which we have already realized a gain through the
sale of equity instruments. While these debt investments are still outstanding, all of the related equity instruments have already been sold at a gain and, therefore, we do not expect any further realized gain.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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, 2005, of the investments with a 5 rating, $0.6 million were loans, all of which were on
non-accrual. Of the investments with a 4 rating, $53.4 million were loans, of which $11.9 million were on non-accrual. At December 31, 2004, of the investments with a 5 rating, $0.7 million were loans, all of which were on non-accrual. Of the
investments with a 4 rating, $54.6 million were loans, of which $13.9 million were on non-accrual.



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



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



At March 31, 2005
and December 31, 2004, there were less than $0.1 million and $2.0 million, respectively, of loans, or approximately 0.01% and 0.2%, respectively, of the investment portfolio, greater than 60 days past due. At March 31, 2005, $14.2 million of loans,
including all of the loans greater than 60 days past due, were on non-accrual status, which represented 1.6% of the investment portfolio. At December 31, 2004, $16.0 million of loans, including all of the loans greater than 60 days past due, were on
non-accrual status representing 1.8% of the investment portfolio. The non-accrual and past due loans at March 31, 2005 and December 31, 2004 primarily represented borrowers in the publishing, telecommunications and paging businesses. We believe this
situation has arisen because portions of the trade publishing industry which are dependent on financial, technology or telecommunications advertising, have experienced sluggish advertising revenue.



40



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##### Table of Contents

At March 31, 2005, of the $131.7 million of loans to our majority owned portfolio companies, $12.1
million were on non-accrual status. At December 31, 2004, of the $126.2 million of loans to our majority owned portfolio companies, $14.0 million were on non-accrual status. At March 31, 2005, of the $19.4 million of loans to our controlled
non-majority owned portfolio companies, $0.6 million were on non-accrual status. At December 31, 2004, of the $38.7 million of loans to our controlled non-majority owned portfolio companies, none were on non-accrual status. As of March 31, 2005, of
the $49.7 million of loans to other affiliates, $1.5 million were on non-accrual status. As of December 31, 2004, of the $49.6 million of loans to other affiliates, none were on non-accrual status.



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



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##### Table of Contents

Results of Operations



Comparison of the Three Months Ended March 31, 2005 and 2004



Operating Income



The change in operating income for the three months ended March 31, 2005 compared to the same period in 2004 is attributable
to the following items:



|                                           |  |                                          |        |  
|------------------------------------------ |  | ---------------------------------------- | ------ | -
|(dollars in thousands)                     |  | Three Months EndedMarch 31,2005 vs. 2004 |       
|Change due to:                             |  |                                          |        |  
|Loan growth (a)                            |  | $                                        | 4,279  |  
|Change in LIBOR (a)                        |  |                                          | 2,461  |  
|Change in spread on loans (a)              |  |                                          | (3,402 | )
|Increase in loan fee income                |  |                                          | 929    |  
|Increase in dividend income                |  |                                          | 1,837  |  
|Decrease in advisory fees and other income |  |                                          | (194   | )
|                                           |  |                                          |        |  
|Total change in operating income           |  | $                                        | 5,910  |  
|                                           |  |                                          |        |  



|(a) |  | The change in interest income due to loan growth, 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 income for the
first quarter of 2005 was $28.1 million, an increase of $5.9 million or 27% compared to the first quarter of 2004. Total operating income is primarily comprised of interest and dividend income on investments. Interest and dividend income for the
first quarter of 2005 was $24.6 million, an increase of $6.1 million or 33% compared to the first quarter of 2004. The increase in total operating income was due to an increase in loan fee income of approximately $0.9 million, an increase in
dividend income of approximately $1.8 million and an increase in interest income of approximately $3.3 million.



The increase in dividend income was primarily related to dividends on preferred stock of one of our majority-owned control portfolio investments,
Broadview Networks, Inc., which was our largest portfolio investment at March 31, 2005. Our investment in Broadview is a result of the merger of one of our majority-owned controlled portfolio companies, Bridgecom Holdings, Inc. with Broadview
Networks, Inc., which was completed in January 2005. In connection with the merger we acquired debt securities in the combined entity with a cost basis of $34.5 million and preferred securities with a current cost basis of $43.9 million in the
combined entity. The preferred securities entitle us to a preferred claim of approximately $90 million, plus dividends, which will accumulate at an annual rate of 12% on our preferred claim. As a result of this merger, our economic ownership in the
new merged entity decreased below 50 percent however, we retained greater than 50 percent of the voting control and therefore our investment will continue to be reflected as a majority-owned control portfolio company.



During the three months ended March 31, 2005, our Bridgecom and Broadview
investments accounted for approximately $5.6 million, or 19.8%, of our total operating income. Of this amount, approximately $1.6 million related to income recognition of previously collected fees. These fees were being amortized over the life of
our Bridgecom loans. The remaining amount of our operating income related to Bridgecom and Broadview related to interest and dividends on our loan and equity investments in these entities. We currently expect that our Broadview investment will
continue to comprise a significant component of our operating income. Our ability to record income related to the accumulating dividends on our preferred securities will be dependent upon the performance of Broadview.



The increase in interest income on loans was due primarily to growth in total
loans and an increase in LIBOR partially offset by a decrease in the spread to LIBOR in our loan portfolio. The lower spread to LIBOR is partly due to a change in investment mix, which includes an increase in the proportion of our portfolio that is
invested in syndicated loans. These investments generally bear lower risk and yield lower interest rates, which



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accounted for approximately $1.5 million of the change in spread. We have originated these investments to enhance our diversification, to reduce overall
portfolio risk and to achieve better execution on our debt financing. Further, because LIBOR increased during the first quarter of 2005 as compared to the first quarter of 2004, the spread to LIBOR on fixed rate loans and loans with LIBOR floors
decreased. This accounted for approximately $0.9 million of the change in spread. The remainder of $1.0 million is primarily due to the timing of contractual interest rate resets in a rising interest rate environment. At March 31, 2005, the yield on
our accruing loan and equity investments, which includes dividend income and loan fees, exceeded the March 31, 2005 90-day LIBOR by 9.9% as compared to 9.2% at December 31, 2004.



Advisory fees and other income decreased $0.2 million from the first quarter of 2004 to the first quarter of 2005. This
decrease was primarily due to $1.5 million of management fees from one of our control investments, Bridgecom Holdings, Inc. prior to its merger with Broadview in the first quarter of 2004 versus none in the first quarter of 2005. This was partially
offset by a $0.9 million increase in research revenues from our subsidiary Kagan Research, LLC, which we acquired in March of 2004. These research revenues increased in 2005 because we owned Kagan for the entire first quarter of 2005 whereas in 2004
we owned Kagan for only a part of the first quarter. The remaining $0.4 million of change relates primarily to an increase in interest on deposits.



Operating Expenses



The change in operating expenses for the three months ended March 31, 2005 compared to the same period in 2004 is attributable to the following items:



|                                   |  |                                           |        |  
|---------------------------------- |  | ----------------------------------------- | ------ | -
|(dollars in thousands)             |  | Three Months EndedMarch 31, 2005 vs. 2004 |       
|Change due to:                     |  |                                           |        |  
|Increase in borrowings (a)         |  | $                                         | 1,336  |  
|Change in LIBOR (a)                |  |                                           | 1,381  |  
|Change in spread (a)               |  |                                           | (439   | )
|Debt cost amortization             |  |                                           | 303    |  
|Salaries and benefits              |  |                                           | 1,871  |  
|Long-term incentive compensation   |  |                                           | (3,869 | )
|General and administrative expense |  |                                           | 677    |  
|                                   |  |                                           |        |  
|Total change in operating expense  |  | $                                         | 1,260  |  
|                                   |  |                                           |        |  



|(a) |  | The change in interest expense due to increase 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.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Operating
expenses are comprised of three components: (1) interest expense, (2) salaries and benefits and general and administrative expenses, and (3) long-term incentive compensation. Total operating expenses for the first quarter of 2005 were $13.6 million,
an increase of $1.3 million or 10% compared to the first quarter of 2004.



Interest expense increased by 123% to $4.7 million in the first quarter of 2005 compared to $2.1 million in the first quarter of 2004. The increase is primarily attributable to an increase in LIBOR and an increase in
average borrowings partially offset by a decrease in the spread to LIBOR. The increase in debt cost amortization is related to an increase in deferred debt costs associated with new debt facilities entered into during the second half of 2004.
Amortization of debt costs is recorded using the effective interest method.



Salaries and benefits and general and administrative expenses increased 54% to $7.3 million in the first quarter of 2005 from $4.7 million in the first quarter of 2004. For the first quarter of 2005, $1.2 million of
the increase in salaries and benefits and general and administrative expenses was due to increased expenses associated with Kagan Research, LLC. The Kagan expenses increased in 2005 because we owned Kagan for the entire first quarter of 2005 whereas
in 2004 we owned Kagan for only a part of the first quarter. In addition, salaries and benefits increased $1.0 million due to additional hires. The additional hires are part of an ongoing effort to expand our infrastructure in order to support our
plans for future growth.



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##### Table of Contents

Long-term incentive compensation expense is made up of non-cash amortization of restricted stock awards
granted in 2001 and the treatment of dividends on performance based restricted shares and shares securing employee loans as compensation. Long-term incentive compensation totaled $1.7 million for the first quarter of 2005 compared to $5.6 million
for the first quarter of 2004. During the first quarter of 2004, our compensation committee waived the performance-based forfeiture restrictions and modified the time-based forfeiture provisions associated with the Tier III shares of certain of our
executive officers which resulted in an expense of $4.0 million.



Net
Operating Income Before Investment Gains and Losses



Net
operating income before investment gains and losses (NOI) for the first quarter of 2005 totaled $14.5 million, an increase of 47% compared with $9.8 million for the first quarter of 2004. This increase is the result of the items described above.



Net Investment Gains and Losses



Net investment losses totaled ($1.4) million for the first quarter of 2005
compared to ($7.7) million for the first quarter of 2004. These amounts represent the total of net realized gains and losses, net unrealized appreciation and depreciation and reversals of unrealized appreciation and depreciation as summarized in the
following tables. Reversals of unrealized appreciation and depreciation occur when a gain or loss becomes realized. Net realized gains on investments for the first quarter of 2005 totaled $18.3 million. Reversals of unrealized appreciation and
depreciation associated with these realized gains and losses totaled ($20.6) million. The realized gains were primarily attributable to a $20.4 million realized gain on the sale of our Creatas equity investment. The reversal of unrealized
appreciation on this Creatas investment totaled ($22.1) million. The net change in unrealized appreciation (depreciation) during the first quarter of 2005 not associated with reversals was $0.9 million of appreciation.



44



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##### Table of Contents

The following table summarizes our realized gains and losses on investments for the three months ended
March 31, 2005 and 2004:



MCG Capital Corporation

Summary of Realized Gains and Losses on Investments

(dollars in thousands)



|                                              |  |                      |  |                             |        |   |      |   |       |  
|--------------------------------------------- |  | -------------------- |  | --------------------------- | ------ | - | ---- | - | ----- | -
|                                              |  |                      |  | Three MonthsEnded March 31, |       
|Portfolio Company                             |  | Sector               |  | 2005                        |        |   | 2004 |  
|Realized gains (losses) on loans              |  |                      |  |                             |        |   |      |   |       |  
|aaiPharma Inc.                                |  | Drugs                |  | $                           |       |   |      | $ | (291  | )
|Other                                         |  |                      |  |                             | 84     |   |      |   | 37    |  
|                                              |  |                      |  |                             |        |   |      |   |       |  
|                                              |  |                      |  |                             | 84     |   |      |   | (254  | )
|                                              |  |                      |  |                             |        |   |      |   |       |  
|Realized gains (losses) on equity investments |  |                      |  |                             |        |   |      |   |       |  
|Creatas, L.L.C.                               |  | Information Services |  |                             | 20,431 |   |      |   |      |  
|Interactive Business Solutions, Inc.          |  | Security Alarm       |  |                             | (1,750 | ) |      |   |      |  
|Corporate Legal Times                         |  | Publishing           |  |                             | (287   | ) |      |   |      |  
|Executive Enterprise Institute, LLC           |  | Business Services    |  |                             | (190   | ) |      |   |      |  
|Bridgecom Holdings, Inc.                      |  | Telecommunications   |  |                             |       |   |      |   | 2,158 |  
|                                              |  |                      |  |                             |        |   |      |   |       |  
|                                              |  |                      |  |                             | 18,204 |   |      |   | 2,158 |  
|                                              |  |                      |  |                             |        |   |      |   |       |  
|Realized gains (losses) on investments        |  |                      |  | $                           | 18,288 |   |      | $ | 1,904 |  
|                                              |  |                      |  |                             |        |   |      |   |       |  



45



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##### Table of Contents

The following table summarizes the net change in our unrealized appreciation and depreciation on
investments for the three months ended March 31, 2005 and 2004.



MCG Capital Corporation

Summary of Net Change in Unrealized Appreciation and Depreciation on Investments

(dollars in thousands)



|                                                         |  |                      |  |                             |         |   |  |   |         |  
|-------------------------------------------------------- |  | -------------------- |  | --------------------------- | ------- | - |  | - | ------- | -
|Portfolio Company                                        |  | Sector               |  | Three MonthsEnded March 31, |        
|                                                         |  | 2005                 |  |                             | 2004    |  
|Unrealized appreciation on loans                         |  |                      |  |                             |         |   |  |   |         |  
|Images.com, Inc.                                         |  | Information Services |  | $                           |        |   |  | $ | 1,225   |  
|Sunshine Media Delaware, LLC                             |  | Publishing           |  |                             | 546     |   |  |   |        |  
|Other                                                    |  |                      |  |                             | 323     |   |  |   | 803     |  
|                                                         |  |                      |  |                             |         |   |  |   |         |  
|                                                         |  |                      |  |                             | 869     |   |  |   | 2,028   |  
|Unrealized appreciation on equity investments            |  |                      |  |                             |         |   |  |   |         |  
|Wiesner Publishing Company, LLC                          |  | Publishing           |  |                             | 1,548   |   |  |   |        |  
|Midwest Tower Partners, LLC                              |  | Telecommunications   |  |                             | 1,382   |   |  |   |        |  
|Superior Publishing Corporation                          |  | Newspaper            |  |                             | 730     |   |  |   | 295     |  
|Fawcette Technical Publications Holding                  |  | Publishing           |  |                             |        |   |  |   | 477     |  
|Copperstate Technologies, Inc.                           |  | Security Alarm       |  |                             | 470     |   |  |   |        |  
|ETC Group, LLC                                           |  | Publishing           |  |                             | 444     |   |  |   |        |  
|Jupitermedia Corporation                                 |  | Information Services |  |                             | 439     |   |  |   |        |  
|Metropolitan Telecommunications Holding Company          |  | Telecommunications   |  |                             | 267     |   |  |   | 193     |  
|Creatas, L.L.C.                                          |  | Information Services |  |                             |        |   |  |   | 233     |  
|Other                                                    |  |                      |  |                             | 273     |   |  |   | 1,372   |  
|                                                         |  |                      |  |                             |         |   |  |   |         |  
|                                                         |  |                      |  |                             | 5,553   |   |  |   | 2,570   |  
|                                                         |  |                      |  |                             |         |   |  |   |         |  
|Total unrealized appreciation on investments             |  |                      |  |                             | 6,422   |   |  |   | 4,598   |  
|Unrealized depreciation on loans                         |  |                      |  |                             |         |   |  |   |         |  
|FTI Technologies Holdings, Inc.                          |  | Technology           |  |                             |        |   |  |   | (4,125  | )
|Sunshine Media Delaware, LLC                             |  | Publishing           |  |                             |        |   |  |   | (1,424  | )
|CCG Consulting, LLC                                      |  | Business Services    |  |                             | (465    | ) |  |   |        |  
|Telecomm South, LLC                                      |  | Telecommunications   |  |                             |        |   |  |   | (448    | )
|Fawcette Technical Publications Holding                  |  | Publishing           |  |                             | (2,161  | ) |  |   |        |  
|Other                                                    |  |                      |  |                             | (257    | ) |  |   |        |  
|                                                         |  |                      |  |                             |         |   |  |   |         |  
|                                                         |  |                      |  |                             | (2,883  | ) |  |   | (5,997  | )
|Unrealized depreciation on equity investments            |  |                      |  |                             |         |   |  |   |         |  
|Copperstate Technologies, Inc.                           |  | Security Alarm       |  |                             |        |   |  |   | (2,230  | )
|Talk America Holdings, Inc.                              |  | Telecommunications   |  |                             | (46     | ) |  |   | (863    | )
|Working Mother Media, Inc.                               |  | Publishing           |  |                             | (1,039  | ) |  |   | (777    | )
|ETC Group, LLC                                           |  | Publishing           |  |                             |        |   |  |   | (748    | )
|IDS Telcom LLC                                           |  | Telecommunications   |  |                             | (692    | ) |  |   |        |  
|Interactive Business Solutions, Inc.                     |  | Security Alarm       |  |                             |        |   |  |   | (634    | )
|National Systems Integration                             |  | Security Alarm       |  |                             |        |   |  |   | (1,255  | )
|Cleartel                                                 |  | Telecommunications   |  |                             | (734    | ) |  |   |        |  
|Other                                                    |  |                      |  |                             | (94     | ) |  |   | (158    | )
|                                                         |  |                      |  |                             |         |   |  |   |         |  
|                                                         |  |                      |  |                             | (2,605  | ) |  |   | (6,665  | )
|                                                         |  |                      |  |                             |         |   |  |   |         |  
|Total unrealized depreciation on investments             |  |                      |  |                             | (5,488  | ) |  |   | (12,662 | )
|Reversal of unrealized appreciation (depreciation)*      |  |                      |  |                             |         |   |  |   |         |  
|Creatas, L.L.C.                                          |  | Information Services |  |                             | (22,138 | ) |  |   |        |  
|Interactive Business Solutions, Inc.                     |  | Security Alarm       |  |                             | 1,826   |   |  |   |        |  
|Bridgecom Holdings, Inc.                                 |  | Telecommunications   |  |                             | (497    | ) |  |   | (2,242  | )
|NOW Communications, Inc.                                 |  | Telecommunications   |  |                             |        |   |  |   | 658     |  
|Executive Enterprise Institute, LLC                      |  | Business Services    |  |                             | 190     |   |  |   |        |  
|Corporate Legal Times                                    |  | Publishing           |  |                             | 339     |   |  |   |        |  
|Other                                                    |  |                      |  |                             | (375    | ) |  |   |        |  
|                                                         |  |                      |  |                             |         |   |  |   |         |  
|Total reversal of unrealized appreciation (depreciation) |  |                      |  |                             | (20,655 | ) |  |   | (1,584  | )
|                                                         |  |                      |  |                             |         |   |  |   |         |  
|Net change in unrealized depreciation on investments     |  |                      |  | $                           | (19,721 | ) |  | $ | (9,648  | )
|                                                         |  |                      |  |                             |         |   |  |   |         |  



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



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Net Income



Net income totaled $13.1 million for the quarter ended March 31, 2005 compared to $2.1 million for the quarter ended March 31, 2004. The increase in net
income is due to the items discussed above.



Financial
Condition, Liquidity and Capital Resources



Cash, Cash Equivalents and
Cash, Securitization Accounts



At March 31, 2005 and
December 31, 2004, we had $50.8 million and $82.7 million, respectively, in cash and cash equivalents. In addition, at March 31, 2005 and December 31, 2004, we had $109.0 million and $79.5 million, respectively, in cash, securitization accounts.
Also, at March 31, 2005, we had $1.9 million in cash held in escrow. We invest cash on hand in interest bearing deposit accounts. 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 and to originate loans. As of March 31, 2005, we had no
cash in securitization accounts available for originations of loans that meet certain requirements compared to $41.0 million at December 31, 2004. The majority of the $41.0 million was used to originate loans during the first quarter of 2005. Our
objective is to maintain sufficient cash on hand to cover current funding requirements, operations and to maintain flexibility as we manage our debt facilities. Borrowed funds that have not yet been invested may negatively impact our earnings until
they are invested since the interest we pay on borrowings typically exceeds the rate of return that we are able to earn on temporary cash investments.



For the first three months of 2005, net cash provided by operating activities totaled $13.7 million, a decrease of $0.5 million over the first three
months of 2004. In the first three months of 2005, net cash used in investing and financing activities totaled $45.6 million compared with $36.4 million in the first three months of 2004. The 2005 activity was principally due to higher investment
originations in 2005 and an increase in cash securitization accounts used for paydown of principal on debt partially offset by principal payments on loans and issuance of common stock.



Liquidity and Capital Resources



We expect our cash on hand and cash generated from operations, including the portion of the cash in securitization accounts that will be released to us,
to be adequate to meet our cash needs at our current level of operations. In order to fund new originations, we intend to use cash on hand, advances under our borrowing facilities and equity financings.



In 2003, we raised $115.9 million of gross proceeds by selling 7,475,000
shares of newly issued common stock. In 2004, we raised $105.4 million of gross proceeds by selling 6,622,155 shares of newly issued common stock. During the first quarter of 2005, we raised $31.5 million of gross proceeds by selling 2,000,000
shares of newly issued common stock. We intend to maintain a shelf registration statement.



In order to satisfy the requirements applicable to a regulated investment company, we intend to distribute to our stockholders all of our income except for certain net capital gains and adjustments for long-term
incentive compensation. In addition, as a business development company, we generally will be required to meet a coverage ratio of total assets to total senior securities, which include all of our borrowings and any preferred stock we may issue in
the future, of at least 200%. As of March 31, 2005, this ratio was 226%. This requirement limits the amount that we may borrow. To fund growth in our investment portfolio in the future, we anticipate needing to raise additional capital from various
sources, including the equity markets and the securitization or other debt-related markets.



Off-Balance Sheet Arrangements



We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our customers. These instruments include commitments to extend credit and involve, to



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varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. We attempt to limit our credit risk by conducting extensive
due diligence and obtaining collateral where appropriate.



As
of March 31, 2005, we had unused commitments to extend credit to our customers of $26.5 million, which are not reflected on our balance sheet. See Borrowings section below for discussion of our borrowing facilities.



Contractual Obligations



The following table shows our significant contractual obligations as of March 31, 2005:



|                                                  |  |                        |       |                 |   |          |  |          |       |              |   |       |  |   |     
|------------------------------------------------- |  | ---------------------- | ----- | --------------- | - | -------- |  | -------- | ----- | ------------ | - | ----- |  | - | ----
|                                                  |  | Payments Due by Period
|(dollars in millions) Contractual Obligations (a) |  | Total                  |       | Less than1 year |   | 1-3years |  | 4-5years |       | After5 years
|Borrowings (b)                                    |  | $                      | 453.8 |                 | $ | 174.6    |  | $        | 139.0 |              | $ | 112.4 |  | $ | 27.8
|Future minimum rental obligations                 |  |                        | 12.9  |                 |   | 1.7      |  |          | 3.3   |              |   | 3.3   |  |   | 4.6 
|                                                  |  |                        |       |                 |   |          |  |          |       |              |   |       |  |   |     
|Total contractual obligations                     |  | $                      | 466.7 |                 | $ | 176.3    |  | $        | 142.3 |              | $ | 115.7 |  | $ | 32.4
|                                                  |  |                        |       |                 |   |          |  |          |       |              |   |       |  |   |     



|(a) |  | This excludes the unused commitments to extend credit to our customers of $26.5 million as discussed above.
|--- |  | -----------------------------------------------------------------------------------------------------------

|(b) |  | Borrowings under the Warehouse Credit Facility and the Revolving Credit Facility are listed based on the contractual maturity of the respective facility due to the revolving nature
of the facilities. Repayments of the Series 2001-1 Notes are based on the contractual principal collections of the loans which comprise the collateral. Repayments of the Series 2004-1 Notes are based on the contractual maturity of the facility
because the required payments are based on principal collections of the loans that comprise the collateral. Actual repayments could differ significantly due to prepayments by our borrowers and modifications of our borrowers existing loan
agreements.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Borrowings



We borrow indirectly through credit facilities maintained by our
subsidiaries. Our wholly owned subsidiary, MCG Finance III, LLC, has a $265.2 million term funding securitization agreement under MCG Commercial Loan Trust 2001-1, arranged by Wachovia Securities. In addition, our wholly owned subsidiary, MCG
Finance IV, LLC has a $397.7 million term funding securitization agreement under MCG Commercial Loan Trust 2004-1, arranged by UBS AG and our wholly owned subsidiary, MCG Finance V, LLC has a $150.0 million warehouse financing facility funded
through Three Pillars Funding LLC, an asset-backed commercial paper program administered by SunTrust Bank. The material terms of these facilities are outlined below.



On September 30, 2004, we completed a $397.7 million term debt securitization. In addition to funding continued growth, the
proceeds from the transaction were used to repay all of the outstanding borrowings under our $200 million secured warehouse facility, MCG Commercial Loan Trust 2003-1, with UBS AG and all of the outstanding borrowings under our $115 million
revolving credit facility with Wachovia Bank, National Association. In connection with these repayments, we terminated these two facilities. In addition, on September 10, 2004, we entered into a $25.0 million senior secured credit facility with
Bayerische Hypo-und Vereinsbank, AG and on November 10, 2004, we established a $150.0 million warehouse financing facility funded through Three Pillars Funding LLC.



Term Securitization 2004-1.On September 30, 2004, we established MCG Commercial Loan Trust 2004-1 (the 2004-1
Trust), which issued three classes of series 2004-1 Notes. The facility was structured to hold up to $397.7 million of loans. The facility is secured by all of the 2004-1 Trusts commercial loans, and cash held for investment, which
totaled $387.6 million and $406.0 million as of March 31, 2005 and December 31, 2004, respectively. This facility is scheduled to terminate July 20, 2016 or sooner upon the full repayment of the Class A-1, Class A-2 and Class B Notes. The Class A-1
Notes, Class A-2 Notes and Class B Notes are scheduled to be repaid as we receive principal collections on the underlying collateral.



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The 2004-1 Trust issued $250.5 million of Class A-1 Notes rated Aaa/AAA, $31.5 million of Class A-2 Notes
rated Aa1/AAA, and $43.5 million of Class B Notes rated A2/A as rated by Moodys and Fitch, respectively. As of March 31, 2005 $312.7 million of the Series 2004-1 Notes were outstanding. The Series 2004-1 Class A-1 Notes, Class A-2 Notes and
Class B Notes bear interest of LIBOR plus 0.43%, 0.65%, and 1.30%, respectively.



Term Securitization 2001-1. On December 27, 2001, we established the MCG Commercial Loan Trust 2001-1 (the 2001-1 Trust), which issued two classes of Series 2001-1 Notes. The facility is secured by
all of the 2001-1 Trusts commercial loans which were contributed by us and totaled $158.2 million as of March 31, 2005 and $194.3 million as of December 31, 2004. 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.



In December 2001 the 2001-1 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 & Poors, Moodys and Fitch, respectively. As of March 31, 2005, $70.7 million
of the Series 2001-1 Notes were outstanding and $116.9 million were outstanding as of December 31, 2004. 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.



Senior Secured Credit Facility. On September 10, 2004, we entered into a $25.0 million senior secured revolving credit facility with Bayerische Hypo-Und Vereinsbank, A.G. and in February 2005, we increased the aggregate available
loan amount under this facility to $50.0 million. All new advances under the credit facility are at the discretion of the lender and each has a maturity of one year from the date of the advance and bears interest at LIBOR plus 2.00% or the prime
rate plus 0.50%. The credit facility is secured by a first priority security interest in our tangible and intangible assets subject to certain excluded collateral and certain permitted other liens. The credit facility contains customary terms and
conditions, including, without limitation, affirmative and negative covenants such as information reporting, minimum stockholders equity and a negative pledge. The credit facility also contains customary events of default with customary cure
and notice, including, without limitation, nonpayment misrepresentation in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, change of control, change of management and material adverse change. As of March 31,
2005, we had $35.0 million outstanding under the credit facility, $10.0 million of which is due in February 2006 and $25.0 million of which is due in April 2006.



Commercial Loan Funding Trust Facility.On November 10, 2004, we established, through MCG Commercial Loan Funding
Trust, a $150.0 million warehouse financing facility funded through Three Pillars Funding LLC, an asset-backed commercial paper program administered by SunTrust Bank. The warehouse financing facility operates like a revolving credit facility that is
primarily secured by the assets of MCG Commercial Loan Funding Trust, including commercial loans sold to the trust by MCG Capital. The pool of commercial loans in the trust must meet certain requirements, including, but not limited to, term, average
life, investment rating, agency rating and sector diversity requirements. There are also certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs. Such
limitations, requirements, and associated defined terms are as provided for in the documents governing the facility. Advances under the facility bear interest based on a commercial paper rate plus 1.15% and interest is payable monthly. The facility
is scheduled to terminate on November 7, 2007, but may be extended under certain circumstances and is subject to annual renewal by the lender. There was no balance outstanding under this facility at March 31, 2005.



Revolving Credit Facility As of June 1, 2000, we, through MCG Master
Trust, established a revolving credit facility (the Revolving Credit Facility), which allowed us to issue up to $200.0 million of Series 2000-1 Class A Notes (the Series 2000-1 Notes or Series 2000-1 Class A Asset
Backed Securities). On February 12, 2004, the Revolving Credit Facility was amended to, among other things, reduce our borrowing capacity from $200.0 million to $130.0 million and reduce the interest rate from a commercial paper rate plus 3.0%
to LIBOR plus



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1.5%. On September 30, 2004, we paid off the revolving credit facility with the proceeds from the Term Securitization 2004-1 and terminated the facility.



Warehouse Credit Facility. On January 29, 2004, our
wholly owned, bankruptcy remote, special purpose indirect subsidiary, MCG Commercial Loan Trust 2003-1 entered into a $200 million secured warehouse credit facility with an affiliate of UBS AG. We used the warehouse credit facility to fund our
origination and purchase of a diverse pool of loans, including broadly syndicated rated loans, which we securitized using an affiliate of the lender as the exclusive structurer and underwriter or placement agent. Advances under the credit facility
bore interest at LIBOR plus 0.50%. The warehouse credit facility operated much like a revolving credit facility that is primarily secured by the loans acquired with the advances under the credit facility. On September 30, 2004, we paid off the
warehouse credit facility with the proceeds from the Term Securitization 2004-1 and terminated the facility.



Outstanding Borrowings



At March 31, 2005, we had aggregate outstanding borrowings of $453.8 million. The following table shows the facility amounts and outstanding borrowings at
March 31, 2005:



|                                           |  |                 |       |                   |   |      
|------------------------------------------ |  | --------------- | ----- | ----------------- | - | -----
|(dollars in millions)                      |  | Facility amount |       | Amountoutstanding
|Term Securitizations                       |  |                 |       |                   |   |      
|Series 2004-1 Class A-1 Asset Backed Bonds |  | $               | 237.7 |                   | $ | 237.7
|Series 2004-1 Class A-2 Asset Backed Bonds |  |                 | 31.5  |                   |   | 31.5 
|Series 2004-1 Class B Asset Backed Bonds   |  |                 | 43.5  |                   |   | 43.5 
|Series 2001-1 Class A Asset Backed Bonds   |  |                 | 70.7  |                   |   | 70.7 
|Series 2001-1 Class B Asset Backed Bonds   |  |                 | 35.4  |                   |   | 35.4 
|                                           |  |                
|Senior Secured Credit Facility             |  |                 | 35.0  |                   |   | 35.0 
|                                           |  |                
|Revolving Credit Facility                  |  |                 | 150.0 |                   |   |     
|                                           |  |                 |       |                   |   |      
|Total borrowings                           |  | $               | 603.8 |                   | $ | 453.8
|                                           |  |                 |       |                   |   |      



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



The weighted average borrowings for the three months ended March 31, 2005 and 2004 was $462.5 million and $278.4 million, respectively. The weighted
average interest rate on all of our borrowings, including amortization of deferred debt issuance costs, for the three months ended March 31, 2005 and 2004 was 4.11% and 3.04%, respectively. For the above borrowings, the fair value of the borrowings
approximates cost.



At December 31, 2004, we had aggregate
outstanding borrowings of $467.4 million. The following table shows the facility amounts and outstanding borrowings at December 31, 2004:



|                                           |  |                |       |                   |   |      
|------------------------------------------ |  | -------------- | ----- | ----------------- | - | -----
|(dollars in millions)                      |  | Facilityamount |       | Amountoutstanding
|Term Securitizations                       |  |                |       |                   |   |      
|Series 2004-1 Class A-1 Asset Backed Bonds |  | $              | 250.5 |                   | $ | 250.5
|Series 2004-1 Class A-2 Asset Backed Bonds |  |                | 31.5  |                   |   | 31.5 
|Series 2004-1 Class B Asset Backed Bonds   |  |                | 43.5  |                   |   | 43.5 
|Series 2001-1 Class A Asset Backed Bonds   |  |                | 81.5  |                   |   | 81.5 
|Series 2001-1 Class B Asset Backed Bonds   |  |                | 35.4  |                   |   | 35.4 
|                                           |  |               
|Senior Secured Credit Facility             |  |                | 25.0  |                   |   | 25.0 
|                                           |  |               
|Revolving Credit Facility                  |  |                | 150.0 |                   |   |     
|                                           |  |                |       |                   |   |      
|Total borrowings                           |  | $              | 617.4 |                   | $ | 467.4
|                                           |  |                |       |                   |   |      



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



Each debt facility except the Senior Secured Credit Facility are 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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Subject to certain minimum equity restrictions and other covenants, including restrictions on which loans we may leverage as collateral, the unused amount
under the Commercial Loan Funding Trust totaled $150.0 million at March 31, 2005 and December 31, 2004. See Note 3 to the Consolidated Financial Statements for further discussion of our borrowings.



Dividends



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



Through March 31, 2005, we have made distributions in excess of our earnings of approximately $42.5 million. In addition, through March 31, 2005, we have
net unrealized depreciation on our investments of $38.1 million. We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In
addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a business development company under the Investment Company Act of 1940 and due to provisions in our credit
facilities. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of our status as a regulated investment company. We cannot assure shareholders that they will receive
any distributions or distributions at a particular level.



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



|                   |  |                   |  |                  |  |        |     
|------------------ |  | ----------------- |  | ---------------- |  | ------ | ----
|Date Declared      |  | Record Date       |  | Payment Date     |  | Amount
|April 27, 2005     |  | May 26, 2005      |  | July 28, 2005    |  |        | 0.42
|February 23, 2005  |  | March 14, 2005    |  | April 28, 2005   |  |        | 0.42
|October 29, 2004   |  | November 19, 2004 |  | January 27, 2005 |  |        | 0.42
|July 28, 2004      |  | August 20, 2004   |  | October 28, 2004 |  |        | 0.42
|April 22, 2004     |  | May 7, 2004       |  | July 29, 2004    |  |        | 0.42
|March 25, 2004     |  | April 6, 2004     |  | April 29, 2004   |  |        | 0.42
|December 16, 2003  |  | December 31, 2003 |  | January 29, 2004 |  |        | 0.42
|August 6, 2003     |  | August 18, 2003   |  | October 30, 2003 |  |        | 0.42
|June 16, 2003      |  | June 23, 2003     |  | July 30, 2003    |  |        | 0.41
|March 28, 2003     |  | April 16, 2003    |  | April 29, 2003   |  |        | 0.40
|December 18, 2002  |  | December 30, 2002 |  | January 30, 2003 |  |        | 0.42
|September 30, 2002 |  | October 16, 2002  |  | October 30, 2002 |  |        | 0.46
|June 3, 2002       |  | June 11, 2002     |  | July 31, 2002    |  |        | 0.47
|March 28, 2002     |  | April 17, 2002    |  | April 30, 2002   |  |        | 0.41
|December 31, 2001  |  | January 22, 2002  |  | January 31, 2002 |  |        | 0.86
|                   |  |                   |  |                  |  |        |     
|Total Declared     |  |                   |  |                  |  | $      | 6.79
|                   |  |                   |  |                  |  |        |     



Prior to becoming a
business development company, we did not make distributions to our stockholders, but instead retained all of our income. 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



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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 first 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.



A return of capital for federal income tax purposes, which we call a tax
return of capital, of $0.53 per share occurred with respect to the fiscal year ended December 31, 2004. Each year a statement on Form 1099-DIV identifying the source of the dividend (i.e., paid from ordinary income, paid from net capital gains on
the sale of securities, and/or a return of paid-in-capital surplus which is a nontaxable distribution) is mailed to our stockholders. To the extent our taxable earnings fall below the total amount of our dividends for that fiscal year, a portion of
those dividend distributions may be deemed a tax return of capital to our stockholders.



Related Party Transactions



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



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



In the first quarter of 2004, as part of a review of our executive compensation, the compensation committee of our Board of Directors agreed with certain of our executive officers to allow the forfeiture restrictions
to lapse with respect to their Tier I and Tier II shares immediately upon full repayment of the partially nonrecourse promissory notes that are secured by the restricted stock. In addition, the compensation committee waived the performance-based
forfeiture restrictions and modified the time-based forfeiture provisions associated with the Tier III shares through their respective amended and restated restricted stock agreements. The expense associated with the modifications totaled $5.8
million for 2004, of which $4.0 million was expensed in the first quarter of 2004.



Critical Accounting Policies



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



Income Recognition



Interest on commercial loans is recognized when earned and 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



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



Paid-in-Kind Interest



We include in income certain amounts that we have not yet received in cash, such as contractual paid-in-kind (PIK) interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the
loan term. We will cease accruing PIK if we do not expect the customer to be able to pay all principal and interest due. 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 $17.3 million or 1.9% of our portfolio of investments as of March
31, 2005 and $17.3 million or 2.0% of our portfolio of investments as of December 31, 2004.



PIK related activity for the three months ended March 31, 2005 was as follows:



|                                        |  |                                  |      |  
|--------------------------------------- |  | -------------------------------- | ---- | -
|(in millions)                           |  | Three MonthsEnded March 31, 2005 |     
|Beginning PIK loan balance              |  | $                                | 17.3 |  
|PIK interest earned during the period   |  |                                  | 3.2  |  
|Principal payments of cash on PIK loans |  |                                  | (3.2 | )
|                                        |  |                                  |      |  
|Ending PIK loan balance                 |  | $                                | 17.3 |  
|                                        |  |                                  |      |  



As noted above, in
certain cases, a customer may make principal payments on its loan that are contractually applied first to the non-PIK loan balance instead of the PIK loan balance. If all principal payments from these customers had been applied first to any PIK loan
balance outstanding at the time of the payment, and any remainder applied to the non-PIK loan balance, an additional $4.4 million of payments would have been applied against the March 31, 2005 PIK loan balance of $17.3 million and an additional $5.8
million of payments would have been applied against the December 31, 2004 PIK loan balance of $17.3 million.



As of March 31, 2005, 85.6% of the $17.3 million of PIK loans outstanding have an investment rating of 3 or better and as of December 31, 2004, 87.5% of
the $17.3 million of PIK loans outstanding had an investment rating of 3 or better. The net increase in loan balances as a result of contracted PIK arrangements is separately identified in our consolidated statements of cash flows.



Dividends



Certain of our equity investments have stated accruing dividend rates. We accrue dividends on our equity investments as they
are earned to the extent there is sufficient value to support the ultimate payment of those dividends.



Dividend related activity for the three months ended March 31, 2005 was as follows:



|                                         |  |                                  |      |  
|---------------------------------------- |  | -------------------------------- | ---- | -
|(in millions)                            |  | Three MonthsEnded March 31, 2005 |     
|Beginning accrued dividend balance       |  | $                                | 5.4  |  
|Dividend income earned during the period |  |                                  | 3.2  |  
|Payment of previously accrued dividends  |  |                                  | (5.4 | )
|                                         |  |                                  |      |  
|Ending accrued dividend balance          |  | $                                | 3.2  |  
|                                         |  |                                  |      |  





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Loan Origination Fees



Loan origination fees are deferred and amortized as adjustments to the related loans yield over the contractual life of the loan. In certain loan
arrangements, warrants or other equity interests are received from the borrower as additional origination fees. The borrowers granting these interests are typically non-publicly traded companies. We record the financial instruments received at fair
value as determined by our board of directors. Fair values are determined using various valuation models which attempt to estimate the underlying value of the associated entity. These models are then applied to our ownership share considering any
discounts for transfer restrictions or other terms which impact the value. Changes in these values are recorded through our statement of operations. Any resulting discount on the loan from recordation of warrant and other equity instruments are
accreted into income over the term of the loan. We had $10.7 million and $12.5 million of unearned income as of March 31, 2005 and December 31, 2004, respectively.



Unearned fee activity for the three months ended March 31, 2005 and year ended December 31, 2004 was as follows:



|                                              |  |                              |      |   |                                      |   |      |       |  |   |              |   |  |                                      |      |   |       |   |      |   |  |   |      |  
|--------------------------------------------- |  | ---------------------------- | ---- | - | ------------------------------------ | - | ---- | ----- |  | - | ------------ | - |  | ------------------------------------ | ---- | - | ----- | - | ---- | - |  | - | ---- | -
|                                              |  | Three Months Ended March 31, |      |   | Year Ended December 31, 2004         |  
|(in millions)                                 |  | CashReceived                 |      |   | Equity Interestand FutureReceivables |   |      | Total |  |   | CashReceived |   |  | Equity Interestand FutureReceivables |      |   | Total |  
|Beginning unearned income balance             |  | $                            | 5.0  |   |                                      | $ | 7.5  |       |  | $ | 12.5         |   |  | $                                    | 5.6  |   |       | $ | 10.8 |   |  | $ | 16.4 |  
|Additional fees                               |  |                              | 1.1  |   |                                      |   |     |       |  |   | 1.1          |   |  |                                      | 2.8  |   |       |   | 2.3  |   |  |   | 5.1  |  
|Unearned income recognized                    |  |                              | (0.7 | ) |                                      |   | (2.1 | )     |  |   | (2.8         | ) |  |                                      | (3.0 | ) |       |   | (5.6 | ) |  |   | (8.6 | )
|Unearned fees applied against loanbalance (a) |  |                              | (0.1 | ) |                                      |   |     |       |  |   | (0.1         | ) |  |                                      | (0.4 | ) |       |   |     |   |  |   | (0.4 | )
|                                              |  |                              |      |   |                                      |   |      |       |  |   |              |   |  |                                      |      |   |       |   |      |   |  |   |      |  
|Ending unearned income balance                |  | $                            | 5.3  |   |                                      | $ | 5.4  |       |  | $ | 10.7         |   |  | $                                    | 5.0  |   |       | $ | 7.5  |   |  | $ | 12.5 |  
|                                              |  |                              |      |   |                                      |   |      |       |  |   |              |   |  |                                      |      |   |       |   |      |   |  |   |      |  



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



Other Fees



In certain investment
transactions, we may perform consulting or advisory services. For services that are separately identifiable and external evidence exists to substantiate fair value, income is recognized as earned which is often when an investment transaction closes.



Valuation of Investments



Value, as defined in Section 2(a)(41) of the Investment Company Act of 1940,
is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the board of directors. Since there is typically no readily
available market value for the investments in our portfolio, we value a substantial portion 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. At
March 31, 2005, approximately 84% of our total assets represented investments of which approximately 89% are recorded at fair value and approximately 11% are valued at market value based on readily ascertainable public market quotes at March 31,
2005. Because of the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments determined in good faith by the board of directors may differ significantly
from the values that would have been used had a ready market existed for the investments, and the differences could be material.



There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the
specific facts and circumstances of each portfolio investment. Unlike banks, we are not permitted to provide a general reserve for anticipated loan losses. Instead, we must determine



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the fair value of each individual investment on a quarterly basis. We will record unrealized depreciation on investments when we believe that an investment
has decreased in value, including where collection of a loan or realization of an equity security is doubtful. Conversely, we will record unrealized appreciation if we believe that the underlying portfolio company has appreciated in value and,
therefore, our investment has also appreciated in value, where appropriate.



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



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



Stock-based Compensation



We account for stock-based compensation under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related
interpretations. For restricted common stock issued to employees for whom no return-based criteria apply, compensation expense, equal to the value of the shares at the later of the grant date or the date at which all return-based forfeiture
provisions lapsed or were removed, is recorded over the term of the forfeiture provisions. See Note 5 to the Consolidated Financial Statements for further discussion of our employee stock plans.



Securitization Transactions



Periodically, we transfer pools of loans to special purpose entities (SPEs)
for use in securitization transactions. These on-balance sheet securitization transactions comprise a significant source of our overall funding, with the total face amount of the outstanding loans and equity investments assumed by third parties
equaling $543.4 million at March 31, 2005 and $536.5 million at December 31, 2004. 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



On April 21, 2005, we established, through MCG Commercial Loan Trust 2005-1, a $100 million warehouse credit facility with
an affiliate of UBS AG.



The warehouse credit facility allows
MCG Commercial Loan Trust 2005-1 to borrow up to $100 million subject to certain covenants, concentration limitations and other restrictions. The warehouse credit facility is primarily secured by the assets of MCG Commercial Loan Trust 2005-1,
including commercial loans sold by us to the trust, and the lender has partial recourse to MCG Capital.



We intend to use the warehouse credit facility to fund our origination and purchase of a diverse pool of loans that will collateralize a potential future
term securitization. Advances under the facility bear interest based on LIBOR plus 0.50% and interest is payable monthly. The facility is scheduled to terminate on November 30, 2005, may be extended under certain circumstances, and may be canceled
by the lender for cause.



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Risk Factors



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



Risks Related to Our Business and Financial Results



We have a limited operating history as a business development company and as a regulated investment company, which may impair your
ability to assess our prospects.



Prior to our initial
public offering in December 2001, we had not operated as a business development company under the Investment Company Act of 1940, or the 1940 Act, or as a regulated investment company under Subchapter M of the Internal Revenue Code. As a result, we
have limited operating results under these regulatory frameworks that can demonstrate to you either their effect on our business or our ability to manage our business under these frameworks. In addition, prior to our initial public offering, our
management had no prior experience managing a business development company or regulated investment company. We cannot assure you that we will be able to operate successfully as a business development company and a regulated investment company.



Because there is generally no established market for which to value our
investments, our board of directors determination of the value of our investments may differ materially from the values that a ready market or third party would attribute to these investments.



Under the 1940 Act, we are required to carry our portfolio investments at
market value or, if there is no readily available market value, at fair value as determined by our board. We are not permitted to maintain a general reserve for anticipated loan losses. Instead, we are required by the 1940 Act to specifically value
each individual investment and to record any unrealized depreciation for any asset that we believe has decreased in value. Because there is typically no public market for the loans and equity securities of the companies in which we invest, our board
will determine the fair value of these loans and equity securities on a quarterly basis pursuant to our valuation policy. Because of the inherent uncertainty of determining the fair value of investments that do not have a readily available market
value, the fair value of our investments determined in good faith by the board of directors may differ significantly from the values that have been used had a ready market existed for the investment and the differences could be material.



We make loans to and invest in primarily small- and medium-sized privately owned
companies, which may default on their loans, thereby reducing or eliminating the return on our investments.



Our portfolio primarily consists of loans to and securities issued by small- and medium-sized privately owned businesses. Compared to larger publicly
owned firms, these companies may be more vulnerable to economic downturns, may have more limited access to capital and higher funding costs, may have a weaker financial position, and may need more capital to expand or compete. These businesses also
may experience substantial variations in operating results. They may face intense competition, including from companies with greater financial, technical and marketing resources. Typically, they also depend for their success on the management
talents and efforts of an individual or a small group of persons. The death, disability or resignation of any of their key employees could harm their financial condition. Furthermore, some of these companies do business in regulated industries and
could be affected by changes in government regulation. Accordingly, these factors could impair their cash flow or result in other events, such as bankruptcy, which could limit their ability to repay their obligations to us, and may adversely affect
the return on, or the recovery of, our investment in these businesses. Deterioration in a borrowers financial condition and prospects may be accompanied by deterioration in any collateral for the loan.



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Some of these companies may be unable to obtain financing from public capital markets or from traditional
credit sources, such as commercial banks. Accordingly, advances made to these types of customers may entail a higher risk of loss than advances made to customers who are able to utilize traditional credit sources. These conditions may also make it
difficult for us to obtain repayment of our loans.



Furthermore, there is generally no publicly available information about such companies and we must rely on the diligence of our employees to obtain information in connection with our investment decisions. If we are unable to uncover all
material information about these companies, we may not make a fully informed investment decision and we may lose money on our investments.



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



Currently our customer base is primarily in the
communications, information services, media, technology, software and business services, industry sectors. These sectors are characterized by high margins, high growth rates, consolidation and product and market extension opportunities. Value often
is vested in intangible assets and intellectual property. These customers can experience adverse business conditions or risks related to their industries.



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



Our financial results could be negatively affected if Broadview Networks Holdings, Inc. fails to perform as expected.



At March 31, 2005, our largest portfolio investment was Broadview Networks
Holdings, Inc. (Broadview), which totaled $78.4 million at value, or 9% of the fair value of our investments. In connection with the merger between Bridgecom Holdings, Inc. and Broadview, which closed during January 2005, we acquired
debt securities in the newly merged entity with a cost basis of $34.5 million and preferred securities with a current cost basis of $43.9 million in the newly merged entity. The preferred securities entitle us to a preferred claim of approximately
$90.0 million, plus dividends, which will accumulate at an annual rate of 12% on our preferred claim. We expect to recognize these dividends as income on a quarterly basis; however, our ability to record income related to these accumulating
dividends will be dependent upon the performance of the combined entity. Our financial results could be negatively affected if this portfolio company fails to perform as expected.



Economic downturns or recessions could impair our customers ability to repay our loans, harm our operating results and reduce our
volume of new loans.



Many of our customers may be
susceptible to economic downturns or recessions and may be unable to repay our loans during these periods. Therefore, our non-performing assets are likely to increase and the value of our portfolio is likely to decrease during these periods. Adverse
economic conditions also may decrease the value of collateral securing some of our loans and the value of our equity investments. Economic downturns or recessions could lead to financial losses in our portfolio and a decrease in net income.
Unfavorable economic conditions could also lead to a decrease in revenues and assets.



An economic downturn could disproportionately impact the industry sectors in which we concentrate causing us to be more vulnerable to losses in our portfolio and experience diminished demand for capital in these
industry sectors and, consequently, our operating results may be negatively impacted.



Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from
increasing our loan originations and investments and harm our operating results.



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If we fail to qualify as a regulated investment company, we will have to pay corporate-level taxes on our income and
our income available for distribution would be reduced.



We have elected to be taxed for federal income tax purposes as a regulated investment company under Subchapter M of the Internal Revenue Code. If we can meet certain requirements, including source of income, asset diversification and
distribution requirements, as well as if we continue to qualify as a business development company, we will qualify to be a regulated investment company and will not have to pay corporate-level taxes on any income we distribute to our stockholders as
dividends, allowing us to substantially reduce or eliminate our corporate-level tax liability. Covenants and provisions in our credit facilities limit the ability of our subsidiaries and our securitization trusts to make distributions to us, which
could affect our ability to make distributions to our stockholders and to maintain our status as a regulated investment company. In addition, we may have difficulty meeting the requirement to make distributions to our stockholders because in certain
cases we may recognize income before or without receiving cash representing such income. If we fail to qualify as a regulated investment company, we will have to pay corporate-level taxes on all of our income whether or not we distribute it, which
would substantially reduce the amount of income available for distribution to our stockholders. Even if we qualify as a regulated investment company, we generally will be subject to a corporate-level income tax on the income we do not distribute.
Moreover, if we do not distribute at least 98% of our income, we generally will be subject to a 4% excise tax.



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



In order to
satisfy the requirements applicable to a regulated investment company, we intend to distribute to our stockholders all of our income except for certain net capital gains. We expect to elect to make deemed distributions to our stockholders of the
retained net capital gains. In addition, as a business development company, we generally will be required to meet a coverage ratio of total assets to total senior securities, which includes all of our borrowings and any preferred stock we may issue
in the future, of at least 200%. This requirement limits the amount that we may borrow. Because we will continue to need capital to grow our loan and investment portfolio, this limitation may prevent us from incurring debt and require us to raise
additional equity at a time when it may be disadvantageous to do so. Additional financing may not be available on favorable terms, if at all, or may be restricted by the terms of our securitization facilities. If additional funds are not available
to us, we could be forced to curtail or cease our new lending and investment activities, and our net asset value could decrease.



We have substantial indebtedness and servicing our indebtedness could reduce funds available to grow our business or make new investments.



As of March 31, 2005, we had $418.8 million of outstanding borrowings under
our debt facilities As a result, our current financial structure has a high proportion of debt and our debt service is substantial. As of March 31, 2005, the weighted average annual interest rate on all of our outstanding borrowings was 3.48%. In
order for us to cover our annual interest payments on indebtedness, we must achieve annual returns on our March 31, 2005 total assets of at least 1.48%. Our ability to service our debt depends largely on our financial performance and will be subject
to prevailing economic conditions and competitive pressures.



In addition, our subsidiaries have sold some of our loans to trusts that serve as the vehicles for our securitization facilities, and we do not hold legal title to these assets. However, we bear losses of principal and interest from
defaults on these loans held by the trusts up to the amount of our retained interest in the trusts, which was approximately $233.8 million as of March 31, 2005.



Our securitization facilities impose financial and operating covenants that restrict our business activities, including limitations that could hinder
our ability to finance additional loans and investments or to make the distributions required to maintain our status as a regulated investment company under Subchapter M of the Internal Revenue Code.



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



As a business development company, we generally are required to meet a
coverage ratio of total assets to total borrowings and other senior securities, which include all of our borrowings and any preferred stock we may issue in the future, of at least 200%. If this ratio declines below 200%, we may not be able to incur
additional debt and may need to sell a portion of our investments to repay some debt when it is disadvantageous to do so, and we may not be able to make distributions. At March 31, 2005, this ratio was approximately 226%.



In addition, because substantially all of our assets and liabilities are
priced using various short-term rate indices, including one-month to six-month LIBOR, commercial paper rates and the prime rate, the timing of changes in market interest rates or in the relationship between interest rate indices could affect the
interest rates earned on interest-earning assets differently than the interest rates paid on interest-bearing liabilities, which could result in a decrease in net income.



If we are not able to refinance our debt or able to do so on favorable terms, we would not be able to operate our business in the
ordinary course.



Our Senior Secured Credit Facility is
scheduled to expire on September 30, 2005 and our $150.0 million warehouse financing facility through Three Pillars Funding, LLC is scheduled to terminate on November 7, 2007. Further, our $150.0 million warehouse financing facility is subject to
annual renewal by the lender.



We cannot assure you that we
will be able to extend the terms of these facilities or obtain sufficient funds to repay any amounts outstanding under these facilities before they expire or terminate either from a replacement facility or alternative debt or equity financing. If we
are unable to repay amounts outstanding under these facilities and are declared in default or are unable to refinance these facilities, we would not be able to operate our business in the regular course. Even if we are able to refinance our debt, we
may not be able to do so on favorable terms.



You may not receive
distributions.



We intend to make distributions on a
quarterly basis to our stockholders. We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, due to the asset
coverage test applicable to us as a business development company, we may be limited in our ability to make distributions. Also, restrictions and provisions in our debt facilities limit our ability to make distributions. If we do not distribute a
certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of our status as a regulated investment company. We cannot assure you that you will receive any distributions or distributions at a
particular level.



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



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



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represents contractual interest added to the loan balance and due at the end of the loan term. The increases in loan balances as a result of contracted
payment-in-kind arrangements are included in income in advance of receiving cash payment, and are separately identified on our consolidated statements of cash flows. Since we may recognize income before or without receiving cash representing such
income, we may have difficulty meeting the requirement to distribute at least 90% of our investment company taxable income to maintain regulated investment company tax treatment. See Managements Discussion and Analysis of Financial
Condition and Results of Operations  Critical Accounting Policies.



If we fail to manage our growth, our financial results could be adversely affected.



We have expanded our operations significantly since purchasing our business from First Union National Bank in 1998. Our growth has placed and could
continue to place significant strain on our management systems and resources. We must continue to refine and expand our marketing capabilities, our management of the investment process, our access to financing resources and our technology. As we
grow, we must continue to hire, train, supervise and manage new employees. We may not develop sufficient lending and administrative personnel and management and operating systems to manage our expansion effectively. If we are unable to manage our
growth, our operations could be adversely affected and our financial results could be adversely affected.



If we need to sell any of our investments, we may not be able to do so at a favorable price and, as a result, we may suffer losses.



Our investments are usually subject to contractual or legal restrictions on resale or are otherwise illiquid because there
is usually no established trading market for such investments. The illiquidity of most of our investments may make it difficult for us to dispose of them at a favorable price, and, as a result, we may suffer losses. In addition, if we were forced to
immediately liquidate some or all of the investments in our portfolio, the proceeds of such liquidation could be significantly less than the current value of such investments. We may be required to liquidate some or all of our portfolio to meet our
debt service obligations or to maintain our qualification as a business development company and as a regulated investment company if we do not satisfy one or more of the applicable criteria under the respective regulatory frameworks.



Our business depends on our key personnel.



Our future success depends to a significant extent on the continued services
of Bryan J. Mitchell, our Chief Executive Officer, Steven F. Tunney, our President and Chief Operating Officer, B. Hagen Saville, one of our Executive Vice Presidents, and Robert J. Merrick, our Chief Credit Officer, as well as other key personnel.
The loss of any of these key employees would likely have a significant detrimental effect on our business. In addition, if any two of Mr. Mitchell, Mr. Saville, Mr. Tunney or Mr. Merrick cease to be actively involved in our management, the lender
under one of our warehouse financing facilities could, absent a waiver or cure, replace us as the servicer of the loans and declare a default. In addition, if any two of Mr. Mitchell, Mr. Tunney or Mr. Saville cease to be an executive officer of MCG
actively involved in the management of MCG, the lender of our Senior Secured Credit Facility could, absent a waiver or cure, declare a default.



Fluctuations in interest rates could adversely affect our income.



A significant increase in market interest rates could harm our ability to attract new customers and originate new loans and investments, our
non-performing assets could increase and the value of our portfolio could decrease because our floating-rate loan customers may be unable to meet higher payment obligations. Conversely, a significant decrease in interest rates would reduce our net
income, all other things being equal. A decrease in interest rates may reduce net income despite the increased demand for our capital that the decrease in interest rates may produce. Approximately 78% of the loans in our portfolio, based on amounts
outstanding at cost as of March 31, 2005, were at variable rates determined on the basis of a benchmark LIBOR or prime rate and approximately 22% were at fixed rates. From October 1, 2003 to March 31, 2005, three-month LIBOR has increased from 1.15%
to 3.12%.



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Regulations governing our operation as a business development company will affect our ability to, and the way in which
we, raise additional capital.



We have issued debt
securities and may issue debt securities and/or borrow money from banks or other financial institutions, which we refer to collectively as senior securities, up to the maximum amount permitted by the 1940 Act. Under the provisions of the
1940 Act, we are permitted, as a business development company, to issue senior securities only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after each issuance of senior securities. If the value of our
assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be
disadvantageous.



We are not generally able to issue and sell
our common stock at a price below net asset value per share. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the current net asset value of the common stock if our board of
directors determines that such sale is in the best interests of MCG and its stockholders, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in
the determination of our board of directors, closely approximates the market value of such securities (less any distributing commission or discount).



Any change in regulation of our business could negatively affect the profitability of our operations.



Changes in the laws, regulations or interpretations of the laws and
regulations that govern business development companies, regulated investment companies or non-depository commercial lenders could significantly affect our operations and our cost of doing business. We are subject to federal, state and local laws and
regulations and are subject to judicial and administrative decisions that affect our operations. If these laws, regulations or decisions change, or if we expand our business into jurisdictions that have adopted more stringent requirements than those
in which we currently conduct business, we may have to incur significant expenses in order to comply or we might have to restrict our operations.



Our ability to invest in private companies may be limited in certain circumstances.



If we are to maintain our status as a business development company, we must not acquire any assets other than
qualifying assets unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. If we acquire debt or equity securities from an issuer that has outstanding marginable
securities at the time we make an investment, these acquired assets generally cannot be treated as qualifying assets. This result is dictated by the definition of eligible portfolio company under the 1940 Act, which in part focuses on
whether a company has outstanding marginable securities.



Amendments promulgated in 1998 by the Board of Governors of the Federal Reserve System expanded the definition of a marginable security under the Federal Reserves margin rules to include any non-equity security. Thus, any debt
securities issued by any entity are marginable securities under the Federal Reserves current margin rules. As a result, the staff of the SEC has raised the question as to whether a private company that has outstanding debt securities would
qualify under the relevant portion of the eligible portfolio company criteria. The SEC has recently issued proposed rules to include any company that does not have a class of securities listed on a national securities exchange or
association in the definition of eligible portfolio company.



Until the question raised by the staff of the SEC pertaining to the Federal Reserves 1998 change to its margin rules has been addressed by final legislative, administrative or judicial action, we intend to treat
as qualifying assets only those debt and equity securities that are issued by a private company that has no marginable securities outstanding at the time we purchase such securities or that otherwise qualifies as an eligible portfolio
company under the 1940 Act.



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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 71%
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 41% of our loan portfolio has a LIBOR floor, at various levels. Our interest rates on our
borrowings are based on LIBOR and commercial paper rates, with the majority based on LIBOR. At March 31, 2005, the yield on our accruing loan and equity investments, which includes dividend income and loan fees, exceeded the March 31, 2005 90-day
LIBOR by 9.9%.



We regularly measure exposure to interest rate
risk. We have interest rate risk exposure mainly from the portion of the commercial loan portfolio funded using stockholders equity. Our board of directors assesses interest rate risk and we manage our interest rate exposure on an ongoing
basis. The following table shows a comparison of the interest rate base for our interest bearing cash, outstanding commercial loans and our outstanding borrowings at March 31, 2005 and December 31, 2004:



|                          |  |                                            |       |                   |   |                                            |  |            |       |  |   |      
|------------------------- |  | ------------------------------------------ | ----- | ----------------- | - | ------------------------------------------ |  | ---------- | ----- |  | - | -----
|                          |  | March 31, 2005                             |       | December 31, 2004
|(dollars in millions)     |  | Interest Bearing Cash and Commercial Loans |       | Borrowings        |   | Interest Bearing Cash and Commercial Loans |  | Borrowings
|Repurchase Agreement Rate |  | $                                          | 159.4 |                   |   |                                            |  | $          | 160.4 |  |   |      
|Money Market Rate         |  |                                            | 2.0   |                   |   |                                            |  |            |      |  |   |      
|Prime Rate                |  |                                            | 48.9  |                   |   |                                            |  |            | 38.8  |  |   |      
|30-Day LIBOR              |  |                                            | 25.3  |                   |   |                                            |  |            | 43.6  |  |   |      
|60-Day LIBOR              |  |                                            | 42.7  |                   |   |                                            |  |            | 7.1   |  |   |      
|90-Day LIBOR              |  |                                            | 457.4 |                   | $ | 453.8                                      |  |            | 514.7 |  | $ | 467.4
|180-Day LIBOR             |  |                                            | 23.2  |                   |   |                                            |  |            | 34.0  |  |   |      
|Fixed Rate                |  |                                            | 172.2 |                   |   |                                            |  |            | 122.3 |  |   |      
|                          |  |                                            |       |                   |   |                                            |  |            |       |  |   |      
|Total                     |  | $                                          | 931.1 |                   | $ | 453.8                                      |  | $          | 920.9 |  | $ | 467.4
|                          |  |                                            |       |                   |   |                                            |  |            |       |  |   |      



Based on our March
31, 2005 balance sheet, the following table shows the impact of base rate changes in interest rates assuming no changes in our investment and borrowing structure. The impact of an additional 100 basis point increase is different from the first 100
basis point increase due to the imposition of LIBOR floors.



(dollars in
millions)

|                   |  |                 |      |   |                  |   |      |            |  |   |      |  
|------------------ |  | --------------- | ---- | - | ---------------- | - | ---- | ---------- |  | - | ---- | -
|Basis Point Change |  | Interest Income |      |   | Interest Expense |   |      | Net Income | 
|(100)              |  | $               | (6.9 | ) |                  | $ | (4.5 | )          |  | $ | (2.4 | )
|100                |  | $               | 7.7  |   |                  | $ | 4.5  |            |  | $ | 3.2  |  
|200                |  | $               | 15.3 |   |                  | $ | 9.1  |            |  | $ | 6.2  |  
|300                |  | $               | 23.0 |   |                  | $ | 13.6 |            |  | $ | 9.4  |  



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



Item 4.    Controls and Procedures

| | (a) |  | As of the end of the period covered by this report, MCG carried out an evaluation, under the supervision and with the participation of MCGs management, including MCGs
Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, of the effectiveness of the design and operation of MCGs disclosure controls and procedures (as defined in Rule 13a-15 of the Securities Exchange Act of 1934).
Based on that evaluation, the Chief Executive Officer, the Chief Financial Officer and Chief Accounting Officer have concluded that MCGs current disclosure controls and procedures are effective in timely alerting them of material information
relating to MCG that is required to be disclosed by MCG in the reports it files or submits under the Securities Exchange Act of 1934.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | There have been no changes in MCGs internal control over financial reporting that occurred during the quarter ended March 31, 2005 that have materially affected, or are
reasonably likely to materially affect, MCGs internal control over financial reporting.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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PART II.    OTHER INFORMATION



Item 1.    Legal Proceedings



From time to time, we are 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.    Unregistered Sales of Equity Securities and Use of Proceeds



During the three months ended March 31, 2005, MCG issued a total of 1,505 shares of common stock under its dividend reinvestment plan pursuant to an
exemption from the registration requirements of the Securities Act of 1933. The aggregate offering proceeds for the shares of common stock sold under the dividend reinvestment plan were approximately $24 thousand. The proceeds were used for general
corporate purposes.



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



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



|              |   |  |                                                                                                                                                                                                                                                         
|------------- | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |   |  | Description of Document                                                                                                                                                                                                                                 
|              |  
|10.71         | * |  | Credit and Warehouse Agreement, dated as of April 21, 2005, among USB AG, Stamford Branch, MCG Commercial Loan Trust 2005-1 and MCG Capital
Corporation.                                                                                                
|              |  
|10.72         | * |  | Pledge, Security and Custody Agreement by and among MCG Commercial Loan Trust 2005-1, MCG Finance VI, LLC, MCG Capital Corporation, UBS AG,
Stamford Branch, and Wells Fargo Bank, National Association, dated as of April 21, 2005.                    
|              |  
|10.73         | * |  | Master Conveyance Assignment, dated as of April 21, 2005 among MCG Capital Corporation, MCG Finance VI, LLC, and MCG Commercial Loan Trust
2005-1.                                                                                                      
|              |  
|10.74         | * |  | First Amendment to Sale and Servicing Agreement by and among MCG Commercial Loan Funding Trust, MCG Capital Corporation, Three Pillars
Funding LLC, Sun Trust Capital Markets, Inc. and Wells Fargo Bank, National Association, dated as of May 2, 2005.
|              |  
|31.1          | * |  | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.                                                                                                                                          
|              |  
|31.2          | * |  | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.                                                                                                                                          
|              |  
|31.3          | * |  | Certification of Chief Accounting Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.                                                                                                                                         
|              |  
|32.1          | * |  | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350).                                                                                                                                  
|              |  
|32.2          | * |  | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350).                                                                                                                                  
|              |  
|32.3          | * |  | Certification of Chief Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).                                                                                                                                   



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



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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 5, 2005.



MCG CAPITAL CORPORATIONBy:

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

/s/    MICHAEL R. MCDONNELLMichael R. McDonnell Chief Financial OfficerBy:

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




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