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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, 2006.



| ̈ |  | 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act.

|Large |  | accelerated filer x                        Accelerated filer ̈Non-accelerated filer ̈
|----- |  | -----------------------------------------------------------------------------------



Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ̈No x



The number of shares of the registrants Common Stock, $.01 par value, outstanding as of May 3, 2006 was 53,378,309.



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MCG CAPITAL CORPORATION



FORM 10-Q FOR
THE QUARTER ENDED MARCH 31, 2006



TABLE OF CONTENTS



|           |  |                                                                                                        |  |   
|---------- |  | ------------------------------------------------------------------------------------------------------ |  | --
|PART I     |  | FINANCIAL INFORMATION                                                                                  |  | 1 
|           |  |                                                                                                       
|           |  | Selected Financial Data                                                                                |  | 1 
|           |  |                                                                                                       
|Item 1.    |  | Financial Statements                                                                                   |  |   
|           |  |                                                                                                       
|           |  | Consolidated Balance Sheets  March 31, 2006 (unaudited) and December 31, 2005                         |  | 2 
|           |  |                                                                                                       
|           |  | Consolidated Statements of Operations (unaudited) for the quarter ended March 31, 2006 and 2005        |  | 3 
|           |  |                                                                                                       
|           |  | Consolidated Statements of Changes in Net Assets (unaudited) for quarter ended March 31, 2006 and 2005 |  | 4 
|           |  |                                                                                                       
|           |  | Consolidated Statements of Cash Flows (unaudited) for the quarter ended March 31, 2006 and 2005        |  | 5 
|           |  |                                                                                                       
|           |  | Consolidated Schedule of Investments as of March 31, 2006 (unaudited)                                  |  | 6 
|           |  |                                                                                                       
|           |  | Consolidated Schedule of Investments as of December 31, 2005                                           |  | 12
|           |  |                                                                                                       
|           |  | Notes to Consolidated Financial Statements (unaudited)                                                 |  | 19
|           |  |                                                                                                       
|           |  | Report of Independent Registered Public Accounting Firm                                                |  | 27
|           |  |                                                                                                       
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                  |  | 28
|           |  |                                                                                                       
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                             |  | 44
|           |  |                                                                                                       
|Item 4.    |  | Controls and Procedures                                                                                |  | 45
|           |  |                                                                                                       
|PART II    |  | OTHER INFORMATION                                                                                      |  | 46
|           |  |                                                                                                       
|Item 1.    |  | Legal Proceedings                                                                                      |  | 46
|           |  |                                                                                                       
|Item 1A.   |  | Risk Factors                                                                                           |  | 46
|           |  |                                                                                                       
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                            |  | 51
|           |  |                                                                                                       
|Item 3.    |  | Defaults Upon Senior Securities                                                                        |  | 51
|           |  |                                                                                                       
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                    |  | 52
|           |  |                                                                                                       
|Item 5.    |  | Other Information                                                                                      |  | 52
|           |  |                                                                                                       
|Item 6.    |  | Exhibits                                                                                               |  | 52
|           | 
|Signatures |  | 58                                                                                                    



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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 consolidated subsidiaries (including 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)                                     |  | 2006                        |           | 2005
|Income Statement Data:                                                                     |  |                             |           |      |   |          
|Operating income                                                                           |  | $                           | 37,637    |      | $ | 28,115   
|Net operating income before investment gains and losses                                    |  |                             | 20,764    |      |   | 14,491   
|Net income                                                                                 |  |                             | 26,402    |      |   | 13,058   
|                                                                                           |  |                            
|Per Common Share Data:                                                                     |  |                             |           |      |   |          
|Net operating income before investment gains and losses per common share basic and diluted |  |                             | 0.39      |      |   | 0.32     
|Earnings per common sharebasic and diluted                                                |  |                             | 0.50      |      |   | 0.29     
|Net asset value per common share (a)                                                       |  |                             | 12.59     |      |   | 12.25    
|Cash dividends declared per common share                                                   |  |                             | 0.42      |      |   | 0.42     
|                                                                                           |  |                            
|Selected Period-End Balances:                                                              |  |                             |           |      |   |          
|Total investment portfolio                                                                 |  | $                           | 1,105,072 |      | $ | 888,563  
|Total assets                                                                               |  |                             | 1,278,993 |      |   | 1,063,720
|Borrowings                                                                                 |  |                             | 573,945   |      |   | 453,824  
|                                                                                           |  |                            
|Other data (at period-end):                                                                |  |                             |           |      |   |          
|Number of portfolio companies                                                              |  |                             | 89        |      |   | 97       
|Number of employees                                                                        |  |                             | 79        |      |   | 116      



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

|(b) |  | At March 31, 2005 we had 50 employees in our consolidated entitiy Kagan Research, LLC. Effective January 1, 2006 Kagan no longer qualified as a consolidated entity.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



1



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##### Table of Contents

MCG Capital Corporation

Consolidated Balance Sheets

(in thousands, except per share amounts)



|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                                        |  | March 31,2006 |           |   | December 31,2005 |  
|                                                                                                                                                                                                        |  | (unaudited)   |           |   |                  |  
|Assets                                                                                                                                                                                                  |  |               |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                                                                                               |  | $             | 42,247    |   |                  | $ | 45,626    |  
|Cash, securitization accounts                                                                                                                                                                           |  |               | 119,596   |   |                  |   | 82,107    |  
|Cash, restricted                                                                                                                                                                                        |  |               | 1,163     |   |                  |   | 1,977     |  
|Investments at fair value                                                                                                                                                                               |  |               |           |   |                  |   |           |  
|Non-affiliate investments (cost of $706,201 and $733,717, respectively)                                                                                                                                 |  |               | 724,793   |   |                  |   | 745,757   |  
|Affiliate investments (cost of $34,923 and $46,168, respectively)                                                                                                                                       |  |               | 34,804    |   |                  |   | 46,156    |  
|Control investments (cost of $375,791 and $337,372, respectively)                                                                                                                                       |  |               | 345,475   |   |                  |   | 305,647   |  
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|Total investments (cost of $1,116,915 and $1,117,257, respectively)                                                                                                                                     |  |               | 1,105,072 |   |                  |   | 1,097,560 |  
|Unearned income on commercial loans                                                                                                                                                                     |  |               | (8,416    | ) |                  |   | (9,062    | )
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|Total investments net of unearned income                                                                                                                                                                |  |               | 1,096,656 |   |                  |   | 1,088,498 |  
|Interest receivable                                                                                                                                                                                     |  |               | 8,456     |   |                  |   | 10,602    |  
|Other assets                                                                                                                                                                                            |  |               | 10,875    |   |                  |   | 15,677    |  
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|Total assets                                                                                                                                                                                            |  | $             | 1,278,993 |   |                  | $ | 1,244,487 |  
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|Liabilities                                                                                                                                                                                             |  |               |           |   |                  |   |           |  
|Borrowings (maturing within one year of $469,650 and $362,435, respectively)                                                                                                                            |  | $             | 573,945   |   |                  | $ | 541,119   |  
|Interest payable                                                                                                                                                                                        |  |               | 4,303     |   |                  |   | 5,904     |  
|Dividends payable                                                                                                                                                                                       |  |               | 22,417    |   |                  |   | 20,967    |  
|Other liabilities                                                                                                                                                                                       |  |               | 6,518     |   |                  |   | 10,410    |  
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                                                       |  |               | 607,183   |   |                  |   | 578,400   |  
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|Stockholders Equity                                                                                                                                                                                    |  |               |           |   |                  |   |           |  
|Preferred stock, par value $.01, authorized 1 share, none issued and outstanding                                                                                                                        |  |               |          |   |                  |   |          |  
|Common stock, par value $.01, authorized 200,000 shares on March 31, 2006 and December 31, 2005, 53,375 issued and outstanding on
March 31, 2006 and 53,372 issued and outstanding on December 31, 2005 |  |               | 534       |   |                  |   | 534       |  
|Paid-in capital                                                                                                                                                                                         |  |               | 755,521   |   |                  |   | 758,433   |  
|Distributions in excess of earnings:                                                                                                                                                                    |  |               |           |   |                  |   |           |  
|Paid -in capital                                                                                                                                                                                        |  |               | (39,219   | ) |                  |   | (39,219   | )
|Other                                                                                                                                                                                                   |  |               | (30,141   | ) |                  |   | (26,784   | )
|Net unrealized depreciation on investments                                                                                                                                                              |  |               | (11,843   | ) |                  |   | (19,697   | )
|Stockholder loans                                                                                                                                                                                       |  |               | (3,042    | ) |                  |   | (3,624    | )
|Unearned compensationrestricted stock                                                                                                                                                                  |  |               |          |   |                  |   | (3,556    | )
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|Total stockholders equity                                                                                                                                                                              |  |               | 671,810   |   |                  |   | 666,087   |  
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|Total liabilities and stockholders equity                                                                                                                                                              |  | $             | 1,278,993 |   |                  | $ | 1,244,487 |  
|                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|Net asset value per common share at period end                                                                                                                                                          |  | $             | 12.59     |   |                  | $ | 12.48     |  



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, |       
|                                                                                 |  | 2006                        |        |   | 2005 |  
|Operating income                                                                 |  |                             |        |   |      |   |         |  
|Interest and dividend income                                                     |  |                             |        |   |      |   |         |  
|Non-affiliate investments (less than 5% owned)                                   |  | $                           | 23,056 |   |      | $ | 14,234  |  
|Affiliate investments (5% to 25% owned)                                          |  |                             | 1,022  |   |      |   | 1,377   |  
|Control investments (more than 25% owned)                                        |  |                             | 8,404  |   |      |   | 8,982   |  
|                                                                                 |  |                             |        |   |      |   |         |  
|Total interest and dividend income                                               |  |                             | 32,482 |   |      |   | 24,593  |  
|Advisory fees and other income                                                   |  |                             |        |   |      |   |         |  
|Non-affiliate investments (less than 5% owned)                                   |  |                             | 3,212  |   |      |   | 3,237   |  
|Affiliate investments (5% to 25% owned)                                          |  |                             | 1,126  |   |      |   |        |  
|Control investments (more than 25% owned)                                        |  |                             | 817    |   |      |   | 285     |  
|                                                                                 |  |                             |        |   |      |   |         |  
|Total advisory fees and other income                                             |  |                             | 5,155  |   |      |   | 3,522   |  
|                                                                                 |  |                             |        |   |      |   |         |  
|Total operating income                                                           |  |                             | 37,637 |   |      |   | 28,115  |  
|                                                                                 |  |                             |        |   |      |   |         |  
|Operating expenses                                                               |  |                             |        |   |      |   |         |  
|Interest expense                                                                 |  |                             | 8,912  |   |      |   | 4,684   |  
|Employee compensation:                                                           |  |                             |        |   |      |   |         |  
|Salaries and benefits                                                            |  |                             | 4,950  |   |      |   | 4,756   |  
|Long-term incentive compensation                                                 |  |                             | 1,122  |   |      |   | 1,682   |  
|                                                                                 |  |                             |        |   |      |   |         |  
|Total employee compensation                                                      |  |                             | 6,072  |   |      |   | 6,438   |  
|General and administrative expense                                               |  |                             | 1,889  |   |      |   | 2,502   |  
|                                                                                 |  |                             |        |   |      |   |         |  
|Total operating expenses                                                         |  |                             | 16,873 |   |      |   | 13,624  |  
|                                                                                 |  |                             |        |   |      |   |         |  
|Net operating income before investment gains and losses                          |  |                             | 20,764 |   |      |   | 14,491  |  
|                                                                                 |  |                             |        |   |      |   |         |  
|Net realized gains (losses) on investments                                       |  |                             |        |   |      |   |         |  
|Non-affiliate investments (less than 5% owned)                                   |  |                             | 685    |   |      |   | 101     |  
|Affiliate investments (5% to 25% owned)                                          |  |                             | 9      |   |      |   | (190    | )
|Control investments (more than 25% owned)                                        |  |                             | (2,910 | ) |      |   | 18,377  |  
|                                                                                 |  |                             |        |   |      |   |         |  
|Total net realized gains (losses) on investments                                 |  |                             | (2,216 | ) |      |   | 18,288  |  
|                                                                                 |  |                             |        |   |      |   |         |  
|Net change in unrealized appreciation (depreciation) on investments              |  |                             |        |   |      |   |         |  
|Non-affiliate investments (less than 5% owned)                                   |  |                             | 6,552  |   |      |   | 955     |  
|Affiliate investments (5% to 25% owned)                                          |  |                             | (107   | ) |      |   | 730     |  
|Control investments (more than 25% owned)                                        |  |                             | 1,409  |   |      |   | (21,406 | )
|                                                                                 |  |                             |        |   |      |   |         |  
|Total net change in unrealized appreciation (depreciation) on investments        |  |                             | 7,854  |   |      |   | (19,721 | )
|                                                                                 |  |                             |        |   |      |   |         |  
|Net investment gains (losses)                                                    |  |                             | 5,638  |   |      |   | (1,433  | )
|                                                                                 |  |                             |        |   |      |   |         |  
|Net income                                                                       |  | $                           | 26,402 |   |      | $ | 13,058  |  
|                                                                                 |  |                             |        |   |      |   |         |  
|Earnings per common share basic and diluted                                      |  | $                           | 0.50   |   |      | $ | 0.29    |  
|Cash dividends declared per common share                                         |  | $                           | 0.42   |   |      | $ | 0.42    |  
|Weighted average common shares outstanding                                       |  |                             | 53,197 |   |      |   | 45,108  |  
|Weighted average common shares outstanding and dilutive common stock equivalents |  |                             | 53,197 |   |      |   | 45,149  |  



See notes to consolidated financial statements (unaudited).



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MCG Capital Corporation

Consolidated Statements of Changes in Net Assets (unaudited)

(in thousands, except per share amounts)



|                                                                     |  |                             |         |   |      |   |         |  
|-------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                     |  | Three Months EndedMarch 31, |        
|                                                                     |  | 2006                        |         |   | 2005 |  
|Operations:                                                          |  |                             |         |   |      |   |         |  
|Net operating income                                                 |  | $                           | 20,764  |   |      | $ | 14,491  |  
|Net realized (loss) gain on investments                              |  |                             | (2,216  | ) |      |   | 18,288  |  
|Net unrealized appreciation (depreciation) of investments            |  |                             | 7,854   |   |      |   | (19,721 | )
|                                                                     |  |                             |         |   |      |   |         |  
|Net increase in net assets resulting from operations                 |  |                             | 26,402  |   |      |   | 13,058  |  
|                                                                     |  |                             |         |   |      |   |         |  
|                                                                     |  |                            
|Shareholder distributions:                                           |  |                             |         |   |      |   |         |  
|Distributions from net investment income                             |  |                             | (21,905 | ) |      |   | (18,503 | )
|                                                                     |  |                             |         |   |      |   |         |  
|Net decrease in net assets resulting from shareholder distributions  |  |                             | (21,905 | ) |      |   | (18,503 | )
|                                                                     |  |                             |         |   |      |   |         |  
|                                                                     |  |                            
|Capital share transactions:                                          |  |                             |         |   |      |   |         |  
|Issuance of common stock                                             |  |                             |        |   |      |   | 29,994  |  
|Issuance of common stock under dividend reinvestment plan            |  |                             | 34      |   |      |   | 24      |  
|Decrease in notes receivable from sale of common stock               |  |                             | 582     |   |      |   | 6       |  
|Amortization of restricted stock awards                              |  |                             | 610     |   |      |   | 1,142   |  
|                                                                     |  |                             |         |   |      |   |         |  
|Net increase in net assets resulting from capital share transactions |  |                             | 1,226   |   |      |   | 31,166  |  
|                                                                     |  |                             |         |   |      |   |         |  
|Total increase in net assets                                         |  |                             | 5,723   |   |      |   | 25,721  |  
|Net assets at beginning of period                                    |  |                             | 666,087 |   |      |   | 554,213 |  
|                                                                     |  |                             |         |   |      |   |         |  
|Net assets at end of period                                          |  | $                           | 671,810 |   |      | $ | 579,934 |  
|                                                                     |  |                             |         |   |      |   |         |  
|                                                                     |  |                             |         |   |      |   |         |  
|Net asset value per common share                                     |  | $                           | 12.59   |   |      | $ | 12.25   |  
|                                                                     |  |                            
|Common shares outstanding at end of period                           |  |                             | 53,375  |   |      |   | 47,343  |  





See notes to consolidated financial statements (unaudited).



4



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MCG Capital Corporation

Consolidated Statements of Cash Flows (unaudited)

(in thousands)



|                                                                                  |  |                             |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | --------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                  |  | Three Months EndedMarch 31, |         
|                                                                                  |  | 2006                        |          |   | 2005 |  
|Operating activities                                                              |  |                             |          |   |      |   |          |  
|Net income                                                                        |  | $                           | 26,402   |   |      | $ | 13,058   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                             |          |   |      |   |          |  
|Depreciation and amortization                                                     |  |                             | 80       |   |      |   | 230      |  
|Amortization of restricted stock awards                                           |  |                             | 610      |   |      |   | 1,142    |  
|Amortization of deferred debt issuance costs                                      |  |                             | 1,244    |   |      |   | 640      |  
|Net realized losses (gains) on investments                                        |  |                             | 2,216    |   |      |   | (18,288  | )
|Net change in unrealized (appreciation) depreciation on investments               |  |                             | (7,854   | ) |      |   | 19,721   |  
|Decrease in cashsecuritization accounts from interest collections                |  |                             | 3,419    |   |      |   | 4,765    |  
|Increase (decrease) in interest receivable                                        |  |                             | 2,103    |   |      |   | (1,492   | )
|Increase in accrued payment-in-kind interest and dividends                        |  |                             | (3,849   | ) |      |   | (3,210   | )
|Decrease in unearned income                                                       |  |                             | (739     | ) |      |   | (1,732   | )
|Decrease in other assets                                                          |  |                             | 4,089    |   |      |   | 266      |  
|(Decrease) increase in interest payable                                           |  |                             | (1,601   | ) |      |   | 104      |  
|Decrease in other liabilities                                                     |  |                             | (3,381   | ) |      |   | (1,499   | )
|                                                                                  |  |                             |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                             | 22,739   |   |      |   | 13,705   |  
|                                                                                  |  |                             |          |   |      |   |          |  
|Investing activities                                                              |  |                             |          |   |      |   |          |  
|Originations, draws and advances on loans                                         |  |                             | (101,962 | ) |      |   | (104,019 | )
|Principal payments on loans                                                       |  |                             | 122,297  |   |      |   | 92,840   |  
|Purchase of equity investments                                                    |  |                             | (18,864  | ) |      |   | (4,800   | )
|Proceeds from sales of equity investments                                         |  |                             | 814      |   |      |   | 7,493    |  
|Disposal (purchase) of premises, equipment and software                           |  |                             | 53       |   |      |   | (75      | )
|                                                                                  |  |                             |          |   |      |   |          |  
|Net cash provided by (used in) investing activities                               |  |                             | 2,338    |   |      |   | (8,561   | )
|                                                                                  |  |                             |          |   |      |   |          |  
|Financing activities                                                              |  |                             |          |   |      |   |          |  
|Net proceeds from borrowings                                                      |  |                             | 25,091   |   |      |   | 23,978   |  
|Increase in cashsecuritization accounts for paydown of principal on debt         |  |                             | (33,174  | ) |      |   | (71,834  | )
|Payment of financing costs                                                        |  |                             | (22      | ) |      |   | (174     | )
|Dividends paid                                                                    |  |                             | (20,967  | ) |      |   | (19,044  | )
|Issuance of common stock, net of costs                                            |  |                             | 34       |   |      |   | 30,018   |  
|Repayment of loans to officers/shareholders                                       |  |                             | 582      |   |      |   | 6        |  
|                                                                                  |  |                             |          |   |      |   |          |  
|Net cash used in financing activities                                             |  |                             | (28,456  | ) |      |   | (37,050  | )
|                                                                                  |  |                             |          |   |      |   |          |  
|Decrease in cash and cash equivalents                                             |  |                             | (3,379   | ) |      |   | (31,906  | )
|Cash and cash equivalents at beginning of period                                  |  |                             | 45,626   |   |      |   | 82,732   |  
|                                                                                  |  |                             |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                        |  | $                           | 42,247   |   |      | $ | 50,826   |  
|                                                                                  |  |                             |          |   |      |   |          |  
|Supplemental disclosures                                                          |  |                             |          |   |      |   |          |  
|Interest paid                                                                     |  | $                           | 9,269    |   |      | $ | 3,940    |  
|Income taxes paid                                                                 |  |                             | 137      |   |      |   | 3        |  



See notes to consolidated financial statements (unaudited).



5



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

March 31, 2006



(dollars in thousands)



|                                          |  |                     |  |                                                                                                                                                                                    |  |                                                   |  |                |              |  |         |                      |  |   |                   
|----------------------------------------- |  | ------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------- |  | -------------- | ------------ |  | ------- | -------------------- |  | - | ------------------
|Portfolio Company                         |  | Industry            |  | Investment (8)                                                                                                                                                                     |  | Percentage ofClass Held ona FullyDiluted Basis(1) |  | March 31, 2006
|                                          |  |                     |  | Principal                                                                                                                                                                          |  | Cost                                              |  | Fair Value    
|Control investments: Majority-owned (5):  |  |                     |  |                                                                                                                                                                                    |  |                                                   |  |                |             
|Broadview Networks Holdings, Inc. (2) (7) |  | Communications      |  | Subordinated Debt (12.0%, Due 12/09) Series A Preferred Stock (88,394 shares) Common Stock (2,228,937 shares)                                                                      |  | 48.5%33.8%                                        |  | $              | 44,282       |  | $       | 44,28255,071        |  | $ | 44,28255,071     
|Cleartel Communications, Inc. (2)         |  | Communications      |  | Subordinated Debt (9.0%-14.9%,Due 6/06-6/09) Preferred Stock (57,859 shares) Common Stock (9 shares) Guaranty ($7,952)                                                             |  | 99.1%0.005%                                       |  |                | 40,342       |  |         | 40,34250,613540      |  |   | 40,34240,684     
|Crystal Media Network, LLC (6)            |  | Broadcasting        |  | Senior Debt (11.8%, Due 5/06) LLC Interest                                                                                                                                         |  | 100.0%                                            |  |                | 1,099        |  |         | 9156,132             |  |   | 9151,020          
|Helicon Cable Holdings, LLC (2)           |  | Cable               |  | Senior Debt (9.6%, Due 12/12-6/13) Subordinated Debt (14.3%, Due 6/13) Preferred LLC Interest (82,500 units) Standby Letter of Credit ($300)                                       |  | 73.3%                                             |  |                | 10,0505,845  |  |         | 10,0505,8458,521     |  |   | 10,0505,8458,521  
|JupiterKagan, Inc. (2) (11)               |  | InformationServices |  | Senior Debt (12.0%, Due 3/10) Series A Preferred Stock (100,000 shares) Common Stock (100,000 shares)                                                                              |  | 100.0%100.0%                                      |  |                | 3,789        |  |         | 3,78910,000         |  |   | 3,78910,000      
|Midwest Tower Partners, LLC (2)           |  | Communications      |  | Subordinated Debt (14.1%, Due 2/07) Preferred LLC Interest Common LLC Interest                                                                                                     |  | 91.0%79.2%                                        |  |                | 16,984       |  |         | 16,9842,195201       |  |   | 16,9842,1951,180  
|RadioPharmacy Investors, LLC (2)          |  | Healthcare          |  | Senior Debt ( 9.1%, Due 12/10) Subordinated Debt (15%, Due 12/11) Preferred LLC Interest (70,000 units)                                                                            |  | 98.6%                                             |  |                | 7,0009,050   |  |         | 7,0009,0507,100      |  |   | 7,0009,0507,100   
|Superior Publishing Corporation (2)       |  | Newspaper           |  | Senior Debt (9.5%, Due 12/06) Subordinated Debt (20.0%, Due 12/06) Preferred Stock (7,999 shares) Common Stock (100 shares)                                                        |  | 100.0%100.0%                                      |  |                | 20,75923,038 |  |         | 20,75920,1417,999365 |  |   | 20,75920,1418,468
|West Coast WirelessLines LLC (6)          |  | Conferences         |  | LLC Interest                                                                                                                                                                       |  | 100.0%                                            |  |                |              |  |         | 966                  |  |   | 851               
|Working Mother Media, Inc. (6)            |  | Publishing          |  | Senior Debt (8.0%, Due 6/06) Class A Preferred Stock (12,497 shares) Class B Preferred Stock (1 share) Class C Preferred Stock (1 share) Common Stock (510 shares) Guaranty ($744) |  | 99.2%100.0%100.0%51.0%                            |  |                | 11,152       |  |         | 9,07612,497111       |  |   | 9,0764,419     
|Total Control investments: Majority-owned |  |                     |  |                                                                                                                                                                                    |  |                                                   |  | 350,436        |              |  | 327,742



See notes to consolidated financial statements (unaudited).



6



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

March 31, 2006



(dollars in thousands)



|                                                |  |                        |  |                                                                                                                                                    |  |                                                    |    |            |                |        |        |                     |        |   |                    
|----------------------------------------------- |  | ---------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------- | -- | ---------- | -------------- | ------ | ------ | ------------------- | ------ | - | -------------------
|Portfolio Company                               |  | Industry               |  | Investment (8)                                                                                                                                     |  | Percentage of Class Held ona FullyDiluted Basis(1) |    |            | March 31, 2006
|                                                |  |                        |  | Principal                                                                                                                                          |  | Cost                                               |    | Fair Value
|Control investments: Non-majority owned (4):    |  |                        |  |                                                                                                                                                    |  |                                                    |    |            |                |        |       
|ETC Group, LLC (6)                              |  | Publishing             |  | Series A LLC Interest Series C LLC Interest                                                                                                        |  | 100.0100.0                                         | %% |            |                |        | $      | 270100              |        | $ | 123               
|Fawcette Technical Publications Holding (2) (6) |  | Publishing             |  | Senior Debt (15.0%, Due 12/06) Subordinated Debt (15.2%, Due 12/06) Series A Preferred Stock (8,473 shares) Common Stock (5,010,379 shares)        |  | 84.736.0                                           | %% |            | 13,1915,262    |        |        | 12,5454,6902,569   |        |   | 12,545263        
|Platinum Wireless, Inc.                         |  | Communications         |  | Senior Debt (8.0%, Due 6/06) Common Stock (2,937 shares) Option to purchase Common Stock (expire 12/31/13)                                         |  | 37.01.5                                            | %% |            | 269            |        |        | 2694,640272         |        |   | 2694,43895         
|Total Control investments: Non-majority-owned   |  |                        |  |                                                                                                                                                    |  |                                                    |    | 25,355     |                |        | 17,733
|                                                |  |                        |  |                                                                                                                                                    |  |                                                    |    |            |                |        |        |                     |       
|Affiliate investments (3):                      |  |                        |  |                                                                                                                                                    |  |                                                    |    |            |                |        |        |                     |       
|iVerify. US Inc.                                |  | Security Alarm         |  | Preferred Stock (54 shares) Common Stock (20 shares)                                                                                               |  | 12.911.6                                           | %% |            |                |        |        | 578550              |        |   | 456               
|NYL Brands Holdings, Inc. (2)                   |  | Clothing & Accessories |  | Senior Debt ( 8.2%, Due 10/10) Subordinated Debt (13.0%, Due 2/11) Class A Common (1,500 shares) Warrants to purchase Common Stock (expire 2/3/16) |  | 20.67.2                                            | %% |            | 7,80010,000    |        |        | 7,80010,0001,500332 |        |   | 7,80010,0001,500332
|On Target Media, LLC (6)                        |  | Publishing             |  | Class A LLC Interest Class B LLC Interest                                                                                                          |  | 6.816.9                                            | %% |            |                |        |        | 1,508              |        |   | 1,705865           
|Sunshine Media Delaware, LLC (2)                |  | Publishing             |  | Senior Debt (13.9%, Due 12/08) Class A LLC Interest Warrants to purchase Class B LLC interest (expire 1/31/11)                                     |  | 12.8100.0                                          | %% |            | 13,307         |        |        | 12,091564          |        |   | 12,09155          
|Total Affiliate investments                     |  |                        |  |                                                                                                                                                    |  |                                                    |    |            |                | 34,923 |        |                     | 34,804



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, 2006



(dollars in thousands)



|                                                |  |                          |  |                                                                                                                         |  |                                                   |  |                |            |  |   |              |  |   |             
|----------------------------------------------- |  | ------------------------ |  | ----------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------- |  | -------------- | ---------- |  | - | ------------ |  | - | ------------
|Portfolio Company                               |  | Industry                 |  | Investment (8)                                                                                                          |  | Percentage ofClass Held ona FullyDiluted Basis(1) |  | March 31, 2006
|                                                |  |                          |  | Principal                                                                                                               |  | Cost                                              |  | Fair Value    
|Non-affiliate investments (less than 5% owned): |  |                          |  |                                                                                                                         |  |                                                   |  |                |            |  |  
|Allens TV Cable Service, Inc.                  |  | Cable                    |  | Senior Debt (12.6%, Due 12/12) Subordinated Debt (12.3%, Due 12/12) Warrants to purchase Common Stock (expire 12/31/15) |  | 10.0%                                             |  | $              | 7,1302,027 |  | $ | 7,1302,027  |  | $ | 7,1302,027 
|Amerifit Nutrition, Inc. (2)                    |  | Drugs                    |  | Senior Debt (12.8%, Due 3/10)                                                                                           |  |                                                   |  |                | 6,507      |  |   | 6,507        |  |   | 6,507       
|Archway Broadcasting Group, LLC                 |  | Broadcasting             |  | Senior Debt (11.1%, Due 12/08)                                                                                          |  |                                                   |  |                | 5,800      |  |   | 5,800        |  |   | 5,800       
|Auto Europe, LLC                                |  | Equipment Leasing        |  | Subordinated Debt (11.8%, Due 10/12)                                                                                    |  |                                                   |  |                | 13,500     |  |   | 13,500       |  |   | 13,500      
|B & H Education, Inc. (2)                       |  | Education                |  | Senior Debt (11.0%, Due 3/10) Preferred Stock ( 5,384 shares)                                                           |  | 4.1%                                              |  |                | 4,000      |  |   | 4,0001,090   |  |   | 4,0001,163  
|Badoud Enterprises, Inc. (2)                    |  | Newspaper                |  | Senior Debt (9.7%, Due 9/11)                                                                                            |  |                                                   |  |                | 5,299      |  |   | 5,299        |  |   | 5,299       
|BLI Holdings, Inc. (2)                          |  | Drugs                    |  | Subordinated Debt (12.6%, Due 3/10)                                                                                     |  |                                                   |  |                | 10,000     |  |   | 10,000       |  |   | 10,000      
|Builders First Source, Inc.                     |  | Building & Development   |  | Senior Debt (7.0%, Due 8/11)                                                                                            |  |                                                   |  |                | 889        |  |   | 889          |  |   | 893         
|Cambridge Information Group, Inc. (2)           |  | Information Services     |  | Senior Debt (10.5%, Due 6/07-6/11)                                                                                      |  |                                                   |  |                | 24,350     |  |   | 24,350       |  |   | 24,350      
|CEI Holdings, Inc.                              |  | Cosmetics                |  | Subordinated Debt (12.4%, Due 12/11)                                                                                    |  |                                                   |  |                | 4,755      |  |   | 4,755        |  |   | 4,660       
|Chesapeake Ridan Towers, LLC                    |  | Communications           |  | Senior Debt (9.8%, Due 6/06)                                                                                            |  |                                                   |  |                | 225        |  |   | 225          |  |   | 225         
|Communications & Power Industries, Inc.         |  | Aerospace & Defense      |  | Senior Debt (7.0%, Due 7/10)                                                                                            |  |                                                   |  |                | 1,777      |  |   | 1,777        |  |   | 1,798       
|Communicom Broadcasting, LLC (2)                |  | Broadcasting             |  | Senior Debt (11.8%, Due 2/11)                                                                                           |  |                                                   |  |                | 8,006      |  |   | 8,006        |  |   | 8,006       
|Community Media Group, Inc. (2)                 |  | Newspaper                |  | Senior Debt (9.3%, Due 9/10)                                                                                            |  |                                                   |  |                | 21,210     |  |   | 21,210       |  |   | 21,210      
|Cornerstone Healthcare Group Holding, Inc.      |  | Healthcare               |  | Subordinated Debt (14.0%, Due 7/12)                                                                                     |  |                                                   |  |                | 7,095      |  |   | 7,095        |  |   | 7,095       
|Country Road Communications LLC (2)             |  | Communications           |  | Subordinated Debt (12.6%, Due 7/13)                                                                                     |  |                                                   |  |                | 13,000     |  |   | 13,000       |  |   | 13,000      
|Creative Loafing, Inc. (2)                      |  | Newspaper                |  | Senior Debt (11.5%, Due 6/10)                                                                                           |  |                                                   |  |                | 19,400     |  |   | 19,400       |  |   | 19,400      
|Crescent Publishing Company LLC (2)             |  | Newspaper                |  | Senior Debt (14.7%, Due 6/09-6/10)                                                                                      |  |                                                   |  |                | 8,932      |  |   | 8,932        |  |   | 8,932       
|Dayton Parts Holdings, LLC (2)                  |  | Vehicle Parts & Supplies |  | Subordinated Debt (12.5%, Due 6/11) Preferred LLC Interest ( 16,371 units) Class A LLC Interest (10,914 units)          |  | 2.7%2.7%                                          |  |                | 16,000     |  |   | 16,000616409 |  |   | 16,000616409
|D&B Towers, LLC                                 |  | Communications           |  | Senior Debt (14.6%, Due 6/08)                                                                                           |  |                                                   |  |                | 5,206      |  |   | 5,206        |  |   | 5,206       
|dick clark productions, inc. (6)                |  | Broadcasting             |  | Common Stock (235,714 shares) Warrants to purchase Common Stock (expire 7/25/11)                                        |  | 0.5%5.3%                                          |  |                |            |  |   | 210858       |  |   | 1291,257    



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, 2006



(dollars in thousands)



|                                            |  |                                          |                                                     |                                                    |     |                                                      |       |            |                |       |       |        |       |       |       
|------------------------------------------- |  | ---------------------------------------- | --------------------------------------------------- | -------------------------------------------------- | --- | ---------------------------------------------------- | ----- | ---------- | -------------- | ----- | ----- | ------ | ----- | ----- | ------
|Portfolio Company                           |  | Industry                                 |                                                     | Investment (8)                                     |     | Percentage of Class Held on a Fully
Diluted Basis(1) |       |            | March 31, 2006
|                                            |  |                                          |                                                     | Principal                                          |     | Cost                                                 |       | Fair Value
|The e-Media Club, LLC (6)                   |  | Investment Fund                          |                                                     | LLC Interest                                       |     | 0.8                                                  | %     |            |                |       | $     | 88     |       | $     | 34    
|EAS Group, Inc.                             |  | Communications Equipment                 |                                                     | Subordinated Debt (16.0%, Due 4/11)                |     |                                                      |       |            | 10,533         |       |       | 10,533 |       |       | 10,533
|Empower IT Holdings, Inc. (2)               |  | Information Services                     |                                                     | Senior Debt (11.4%, Due 5/12-6/12)                 |     |                                                      |       |            | 9,750          |       |       | 9,750  |       |       | 9,750 
|                                            |  | Subordinated Debt (14.5%, Due 6/12)      |                                                     |                                                    |     |                                                      | 5,124 |            |                | 5,124 |       |        | 5,124
|Equibrand Holding Corporation (2)           |  | Leisure Activities                       |                                                     | Senior Debt (12.0%, Due 9/10)                      |     |                                                      |       |            | 4,640          |       |       | 4,640  |       |       | 4,640 
|                                            |  |                                          | Subordinated Debt (16.0%, Due 3/11)                 |                                                    |     |                                                      |       | 8,850      |                |       | 8,850 |        |       | 8,850
|Flexsol Packaging Corp.                     |  | Chemicals/Plastics                       |                                                     | Subordinated Debt (11.7%, Due 12/12)               |     |                                                      |       |            | 5,000          |       |       | 5,000  |       |       | 5,013 
|GoldenSource Holdings Inc. (2)              |  | Technology                               |                                                     | Senior Debt (9.5%, Due 9/08)                       |     |                                                      |       |            | 17,000         |       |       | 17,000 |       |       | 17,000
|                                            |  |                                          | Warrants to purchase Common Stock (expire 10/31/08) |                                                    | 4.2 | %                                                    |       |            |                |       |      |        |       |     
|The Hillman Group, Inc.                     |  | Home Furnishings                         |                                                     | Senior Debt (7.7%, Due 3/11)                       |     |                                                      |       |            | 5,880          |       |       | 5,880  |       |       | 5,979 
|Home Interiors & Gifts, Inc.                |  | Home Furnishings                         |                                                     | Senior Debt (9.8%, Due 3/11)                       |     |                                                      |       |            | 4,609          |       |       | 4,609  |       |       | 4,373 
|Images.com, Inc.                            |  | Information Services                     |                                                     | Senior Debt (13.0%, Due 12/07)                     |     |                                                      |       |            | 2,527          |       |       | 2,527  |       |       | 2,527 
|Instant Web, Inc.                           |  | Direct Mail Advertiser                   |                                                     | Senior Debt (8.5%, Due 2/11)                       |     |                                                      |       |            | 4,950          |       |       | 4,950  |       |       | 4,993 
|Jenzabar, Inc. (2)                          |  | Technology                               |                                                     | Preferred Stock (5,000 shares)                     |     | 100.0                                                | %     |            |                |       |       | 5,969  |       |       | 5,969 
|                                            |  |                                          |                                                     | Subordinated Preferred Stock (109,800 shares)      |     | 100.0                                                | %     |            |                |       |       | 1,098  |       |       | 1,098 
|                                            |  |                                          |                                                     | Warrants to purchase Common Stock (expire 4/30/16) |     | 19.5                                                 | %     |            |                |       |       | 422    |       |       | 8,261 
|The Joseph F. Biddle Publishing Company (2) |  | Newspaper                                |                                                     | Senior Debt (7.6%, Due 12/11)                      |     |                                                      |       |            | 6,825          |       |       | 6,825  |       |       | 6,825 
|Jupitermedia Corporation (6)                |  | Information Services                     |                                                     | Common Stock (148,373 shares)                      |     | 0.4                                                  | %     |            |                |       |       | 2,114  |       |       | 2,534 
|MD Beauty, Inc.                             |  | Cosmetics                                |                                                     | Subordinated Debt (11.7%, Due 2/13)                |     |                                                      |       |            | 9,000          |       |       | 9,000  |       |       | 9,124 
|MCI Holdings, LLC (2)                       |  | Management Consulting Service            |                                                     | Subordinated Debt (12.5%, Due 3/12)                |     |                                                      |       |            | 17,207         |       |       | 17,207 |       |       | 17,207
|                                            |  |                                          | Class A LLC Interest (4,712,042 units)              |                                                    | 5.2 | %                                                    |       |            |                |       | 3,000 |        |       | 3,000
|Metropolitan                                |  | Communications                           |                                                     | Senior Debt (13.6%, Due 6/10-9/10)                 |     |                                                      |       |            | 21,575         |       |       | 21,575 |       |       | 21,575
|Telecommunications                          |  |                                          |                                                     | Subordinated Debt (18.0%, Due 12/10)               |     |                                                      |       |            | 10,929         |       |       | 10,929 |       |       | 10,929
|Holding Company (2) (9)                     |  |                                          |                                                     | Warrants to purchase Common Stock (expire 9/30/13) |     | 20.4                                                 | %     |            |                |       |       | 1,843  |       |       | 4,692 
|MicroCal Holdings, LLC (2)                  |  | Laboratory Instruments                   |                                                     | Senior Debt (9.5%, Due 3/10-9/10)                  |     |                                                      |       |            | 13,700         |       |       | 13,700 |       |       | 13,700
|                                            |  | Subordinated Debt (14.5%, Due 3/10-3/11) |                                                     |                                                    |     |                                                      | 9,115 |            |                | 9,115 |       |        | 9,115



See notes to consolidated financial
statements (unaudited).



9



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

March 31, 2006



(dollars in thousands)



|                                      |  |                                          |                                                   |                                                            |      |                                                    |   |            |                |        |        |        |        |        |        |       
|------------------------------------- |  | ---------------------------------------- | ------------------------------------------------- | ---------------------------------------------------------- | ---- | -------------------------------------------------- | - | ---------- | -------------- | ------ | ------ | ------ | ------ | ------ | ------ | ------
|Portfolio Company                     |  | Industry                                 |                                                   | Investment (8)                                             |      | Percentage ofClass Held ona
Fully Diluted Basis(1) |   |            | March 31, 2006
|                                      |  |                                          |                                                   | Principal                                                  |      | Cost                                               |   | Fair Value
|MicroDental Laboratories (2)          |  | Healthcare                               |                                                   | Senior Debt (10.2%, Due 5/11-11/11)                        |      |                                                    |   |            | $              | 11,651 |        | $      | 11,651 |        | $      | 11,651
|                                      |  |                                          | Subordinated Debt (15.0%, Due 5/12)               |                                                            |      |                                                    |   |            | 6,155          |        |        | 6,155  |        |        | 6,155 
|Miles Media Holding, Inc. (2)         |  | Publishing                               |                                                   | Senior Debt (11.3%, Due 6/12)                              |      |                                                    |   |            |                | 8,181  |        |        | 8,181  |        |        | 8,181 
|                                      |  |                                          | Subordinated Debt (15.8%, Due 12/12)              |                                                            |      |                                                    |   |            | 4,000          |        |        | 4,000  |        |        | 4,000 
|                                      |  |                                          | Warrants to purchase Common Stock (expire 6/3/15) |                                                            | 19.5 | %                                                  |   |            |                |        |        | 439    |        |        | 1,031 
|Monotype Imaging Holdings Corp. (2)   |  | Technology                               |                                                   | Senior Debt (7.6%, Due 11/09)                              |      |                                                    |   |            |                | 4,738  |        |        | 4,738  |        |        | 4,738 
|MultiPlan, Inc.                       |  | Insurance                                |                                                   | Senior Debt (7.3%, Due 3/09)                               |      |                                                    |   |            |                | 3,048  |        |        | 3,048  |        |        | 3,059 
|National Display Holdings, LLC (2)    |  | Electronics                              |                                                   | Senior Debt (10.2%, Due 12/10-12/12)                       |      |                                                    |   |            |                | 20,289 |        |        | 20,289 |        |        | 20,289
|                                      |  |                                          | Subordinated Debt (15.0%, Due 12/12)              |                                                            |      |                                                    |   |            | 13,000         |        |        | 13,000 |        |        | 13,000
|                                      |  |                                          | Class A LLC Interest (1,000,000 units)            |                                                            | 3.7  | %                                                  |   |            |                |        |        | 1,000  |        |        | 1,000 
|National Product Services, Inc. (2)   |  | Business Services                        |                                                   | Subordinated Debt (14.0%, Due 6/07)                        |      |                                                    |   |            |                | 10,225 |        |        | 10,225 |        |        | 10,225
|New Century Companies, Inc. (6)       |  | Industrial Equipment                     |                                                   | Warrants to purchase Common Stock (expire 6/30/10)         |      | 0.3                                                | % |            |                |        |        |        |       |        |        |      
|OMP, Inc.                             |  | Drugs                                    |                                                   | Senior Debt (8.6%, Due 1/10-1/11)                          |      |                                                    |   |            |                | 7,327  |        |        | 7,327  |        |        | 7,327 
|OnCure Medical Corp. (2)              |  | Medical Offices                          |                                                   | Subordinated Debt (13.5%, Due 8/12)                        |      |                                                    |   |            |                | 20,012 |        |        | 20,012 |        |        | 20,012
|PartMiner, Inc. (2)                   |  | Information Services                     |                                                   | Senior Debt (15.0%, Due 6/09)                              |      |                                                    |   |            |                | 4,780  |        |        | 4,780  |        |        | 4,780 
|Powercom Corporation (2)              |  | Communications                           |                                                   | Senior Debt (12.0%, Due 12/06)                             |      |                                                    |   |            |                | 1,798  |        |        | 1,798  |        |        | 1,798 
|                                      |  |                                          |                                                   | Warrants to purchase Class A Common Stock (expire 6/30/14) |      | 20.3                                               | % |            |                |        |        |        | 286    |        |        | 340   
|Quantum Medical Holdings, LLC LLC (2) |  | Laboratory Instruments                   |                                                   | Senior Debt (9.8%, Due 12/10-5/11)                         |      |                                                    |   |            |                | 17,535 |        |        | 17,535 |        |        | 17,535
|                                      |  | Subordinated Debt (15.0%, Due 12/11)     |                                                   |                                                            |      |                                                    |   | 10,580     |                |        | 10,580 |        |        | 10,580
|                                      |  | Preferred LLC Interest (1,000,000 units) |                                                   | 6.3                                                        | %    |                                                    |   |            |                |        | 1,037  |        |        | 1,037 
|R.R. Bowker, LLC (2)                  |  | Information Services                     |                                                   | Senior Debt (11.8%, Due 12/08-12/09)                       |      |                                                    |   |            |                | 15,925 |        |        | 15,925 |        |        | 15,925
|Republic National Cabinet Corporation |  | Cabinet Maker                            |                                                   | Senior Debt (9.7%, Due 6/09)                               |      |                                                    |   |            |                | 3,467  |        |        | 3,467  |        |        | 3,467 
|                                      |  |                                          | Subordinated Debt (13.5%, Due 6/09)               |                                                            |      |                                                    |   |            | 5,000          |        |        | 5,000  |        |        | 5,000 
|Restaurant Technologies, Inc.         |  | Food Services                            |                                                   | Subordinated Debt (16.0%, Due 2/12)                        |      |                                                    |   |            |                | 14,158 |        |        | 14,158 |        |        | 14,158
|                                      |  |                                          | Series A Preferred Stock (7,813 Shares)           |                                                            | 0.3  | %                                                  |   |            |                |        |        | 250    |        |        | 250   
|Sagamore Hill Broadcasting, LLC (2)   |  | Broadcasting                             |                                                   | Senior Debt (11.8%, Due 11/09)                             |      |                                                    |   |            |                | 12,000 |        |        | 12,000 |        |        | 12,000
|SCI Holdings, Inc.                    |  | Communication Services                   |                                                   | Subordinated Debt (11.9%, Due 11/12)                       |      |                                                    |   |            |                | 7,500  |        |        | 7,500  |        |        | 7,500 
|Sterigenics International, Inc.       |  | Healthcare                               |                                                   | Senior Debt (7.9%, Due 6/11)                               |      |                                                    |   |            |                | 4,913  |        |        | 4,913  |        |        | 4,980 



See notes to consolidated financial statements (unaudited).



10



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

March 31, 2006



(dollars in thousands)



|                                           |  |                      |                                                             |                                                                                 |       |                                                      |    |   |                |        |  |       |           |   |  |       |        | 
|------------------------------------------ |  | -------------------- | ----------------------------------------------------------- | ------------------------------------------------------------------------------- | ----- | ---------------------------------------------------- | -- | - | -------------- | ------ |  | ----- | --------- | - |  | ----- | ------ | 
|Portfolio Company                          |  | Industry             |                                                             | Investment (8)                                                                  |       | Percentage of Class Held on a
FullyDiluted Basis (1) |    |   | March 31, 2006 |       
|                                           |  |                      |                                                             | Principal                                                                       |       | Cost                                                 |    |   | Fair Value     |       
|Stratford School Holdings, Inc. (2)        |  | Education            |                                                             | Senior Debt (9.9%, Due 6/11)                                                    |       |                                                      |    |   | $              | 14,500 |  | $     | 14,500    |   |  | $     | 14,500 | 
|                                           |  |                      | Subordinated Debt (14.0%, Due 12/11)                        |                                                                                 |       |                                                      |    |   | 6,717          |        |  | 6,717 |           |   |  | 6,717 |       
|                                           |  |                      | Preferred Stock (10,000 shares)                             |                                                                                 | 14.9  | %                                                    |    |   |                |        |  | 1,101 |           |   |  | 2,484 |       
|                                           |  |                      | Warrants to purchase Common Stock (expire 5/31/15)          |                                                                                 | 100.0 | %                                                    |    |   |                |        |  | 68    |           |   |  | 815   |       
|Switch & Data Holdings, Inc.               |  | Business Services    |                                                             | Subordinated Debt (12.1%, Due 4/11)                                             |       |                                                      |    |   |                | 12,000 |  |       | 12,000    |   |  |       | 12,000 | 
|SXC Health Solutions, Inc. (2)             |  | Healthcare           |                                                             | Senior Debt (9.5%, Due 12/10)                                                   |       |                                                      |    |   |                | 12,920 |  |       | 12,920    |   |  |       | 12,920 | 
|                                           |  |                      | Common Stock (1,111,100 shares)                             |                                                                                 | 1.6   | %                                                    |    |   |                |        |  | 1,235 |           |   |  | 3,809 |       
|Talk America Holdings, Inc. (6)            |  | Communications       |                                                             | Warrants to purchase Common Stock (expire 8/17/06 - 3/31/07)                    |       | 0.7                                                  | %  |   |                |        |  |       | 25        |   |  |       | 324    | 
|Team Express, Inc.                         |  | Specialty Retail     |                                                             | Subordinated Debt (15.0%, Due 6/11)                                             |       |                                                      |    |   |                | 7,162  |  |       | 7,162     |   |  |       | 7,162  | 
|Teleguam Holdings, LLC (2)                 |  | Communications       |                                                             | Subordinated Debt (11.8%, Due 10/12)                                            |       |                                                      |    |   |                | 20,000 |  |       | 20,000    |   |  |       | 20,000 | 
|Tippmann Sports, LLC                       |  | Leisure Goods        |                                                             | Senior Debt (10.8%, Due 6/09)                                                   |       |                                                      |    |   |                | 6,046  |  |       | 6,046     |   |  |       | 6,046  | 
|Total Sleep Holdings, Inc. (2)             |  | Healthcare           |                                                             | Subordinated Debt (14.0%, Due 9/11)                                             |       |                                                      |    |   |                | 22,387 |  |       | 22,387    |   |  |       | 22,387 | 
|ValuePage, Inc. (6)                        |  | Communications       |                                                             | Senior Debt (9.9%, Due 7/11)                                                    |       |                                                      |    |   |                | 1,100  |  |       | 1,100     |   |  |       | 1,100  | 
|VS&A-PBI Holding LLC (6)                   |  | Publishing           |                                                             | LLC Interest                                                                    |       | 0.8                                                  | %  |   |                |        |  |       | 500       |   |  |       |       | 
|VOX Communications Group Holdings, LLC (2) |  | Broadcasting         |                                                             | Senior Debt (11.2%, Due 12/07-6/10)                                             |       |                                                      |    |   |                | 10,750 |  |       | 10,750    |   |  |       | 10,750 | 
|                                           |  |                      | Convertible Preferred Subordinated Notes (12.0%, Due 6/15 ) |                                                                                 | 16.2  | %                                                    |    |   | 1,094          |        |  | 1,094 |           |   |  | 1,094 |       
|Wicks Business Information, LLC            |  | Publishing           |                                                             | Unsecured Note (9.8%, Due 2/08)                                                 |       |                                                      |    |   |                | 220    |  |       | 220       |   |  |       | 220    | 
|Wiesner Publishing Company, LLC (6)        |  | Publishing           |                                                             | Warrants to purchase membership interest in LLC (expire 6/30/12)                |       | 15.0                                                 | %  |   |                |        |  |       | 406       |   |  |       | 2,173  | 
|Wire Rope Corporation of America, Inc.     |  | Industrial Equipment |                                                             | Senior Debt (12.3%, Due 6/11)                                                   |       |                                                      |    |   |                | 6,000  |  |       | 6,000     |   |  |       | 6,180  | 
|WirelessLines II, Inc.                     |  | Communications       |                                                             | Senior Debt (8.0%, Due 4/07)                                                    |       |                                                      |    |   |                | 152    |  |       | 152       |   |  |       | 152    | 
|XFone, Inc (6) (10)                        |  | Communications       |                                                             | Common Stock (868,946 shares) Warrants to purchase common stock (expire 3/3/11) |       | 4.60.8                                               | %% |   |                |        |  |       | 2,485    |   |  |       | 2,485 | 
|Total Non-affiliate investments            |  |                      |                                                             |                                                                                 |       |                                                      |    |   | 706,201        |        |  |       | 724,793   |  
|Total Investments                          |  |                      |                                                             |                                                                                 |       |                                                      |    |   | 1,116,915      |        |  |       | 1,105,072 |  
|Unearned income                            |  |                      |                                                             |                                                                                 |       |                                                      |    |   | (8,416         | )      |  |       | (8,416    | )
|Total Investments net of unearned income   |  |                      |                                                             |                                                                                 |       |                                                      |    | $ | 1,108,499      |        |  | $     | 1,096,656 |  



See notes to consolidated financial
statements (unaudited).



11



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments

December 31, 2005



(dollars in thousands)



|                                          |  |                |                                                             |                                      |       |                                                   |   |            |                   |        |  |         |        |  |        |       
|----------------------------------------- |  | -------------- | ----------------------------------------------------------- | ------------------------------------ | ----- | ------------------------------------------------- | - | ---------- | ----------------- | ------ |  | ------- | ------ |  | ------ | ------
|Portfolio Company                         |  | Industry       |                                                             | Investment (8)                       |       | Percentage ofClass Held ona FullyDiluted Basis(1) |   |            | December 31, 2005
|                                          |  |                |                                                             | Principal                            |       | Cost                                              |   | Fair Value
|Control investments: Majority-owned (5):  |  |                |                                                             |                                      |       |                                                   |   |            |                   |        |  |        
|Broadview Networks Holdings, Inc. (2) (7) |  | Communications |                                                             | Subordinated Debt (12.0%, Due 12/09) |       |                                                   |   |            | $                 | 42,993 |  | $       | 42,993 |  | $      | 42,993
|                                          |  |                | Series A Preferred Stock (89,154 shares)                    |                                      | 49.1  | %                                                 |   |            |                   |        |  | 52,137  |        |  | 52,137
|                                          |  |                | Common Stock (2,228,937 shares)                             |                                      | 33.8  | %                                                 |   |            |                   |        |  |        |        |  |      
|Cleartel Communications, Inc. (2)         |  | Communications |                                                             | Senior Debt (8.3%, Due 6/09)         |       |                                                   |   |            |                   | 28,850 |  |         | 28,850 |  |        | 28,850
|                                          |  |                | Subordinated Debt (14.4%, Due 6/09)                         |                                      |       |                                                   |   |            | 9,356             |        |  | 9,356   |        |  | 9,356 
|                                          |  |                | Preferred Stock (57,859 shares)                             |                                      | 99.1  | %                                                 |   |            |                   |        |  | 50,613  |        |  | 40,684
|                                          |  |                | Common Stock (9 shares)                                     |                                      | 0.005 | %                                                 |   |            |                   |        |  | 540     |        |  |      
|                                          |  |                | Guaranty ($8,092)                                           |                                      |       |                                                   |   |            |                   |        |  |         |        |  |       
|Copperstate Technologies, Inc.            |  | Security Alarm |                                                             | Senior Debt (11.0%, Due 9/07)        |       |                                                   |   |            |                   | 1,272  |  |         | 1,272  |  |        | 1,272 
|                                          |  |                | Class A Common Stock (20,000 shares)                        |                                      | 93.0  | %                                                 |   |            |                   |        |  | 2,000   |        |  | 946   
|                                          |  |                | Class B Common Stock (10 shares)                            |                                      | 0.05  | %                                                 |   |            |                   |        |  |        |        |  |      
|                                          |  |                | Warrants to purchase Class B Common Stock (expire 12/20/12) |                                      | 93.7  | %                                                 |   |            |                   |        |  |        |        |  |      
|                                          |  |                | Standby Letter of Credit ($1,000)                           |                                      |       |                                                   |   |            |                   |        |  |         |        |  |       
|Crystal Media Network, LLC (6)            |  | Broadcasting   |                                                             | Senior Debt (11.4%, Due 5/06)        |       |                                                   |   |            |                   | 1,099  |  |         | 947    |  |        | 947   
|                                          |  |                | LLC Interest                                                |                                      | 100.0 | %                                                 |   |            |                   |        |  | 6,132   |        |  | 1,097 
|Helicon Cable Holdings, LLC (2)           |  | Cable          |                                                             | Senior Debt (9.18%, Due 12/12)       |       |                                                   |   |            |                   | 10,072 |  |         | 10,072 |  |        | 10,072
|                                          |  |                | Subordinated Debt (14.3%, Due 6/13)                         |                                      |       |                                                   |   |            | 5,750             |        |  | 5,750   |        |  | 5,750 
|                                          |  |                | Preferred LLC Interest (82,500 units)                       |                                      | 57.9  | %                                                 |   |            |                   |        |  | 8,316   |        |  | 8,316 
|                                          |  |                | Standby Letter of Credit ($300)                             |                                      |       |                                                   |   |            |                   |        |  |         |        |  |       
|Midwest Tower Partners, LLC (2)           |  | Communications |                                                             | Subordinated Debt (14.1%, Due 2/07)  |       |                                                   |   |            |                   | 16,813 |  |         | 16,813 |  |        | 16,813
|                                          |  |                | Preferred LLC Interest                                      |                                      | 91.0  | %                                                 |   |            |                   |        |  | 2,121   |        |  | 2,121 
|                                          |  |                | Common LLC Interest                                         |                                      | 79.2  | %                                                 |   |            |                   |        |  | 201     |        |  | 1,332 
|Superior Publishing Corporation (2)       |  | Newspaper      |                                                             | Senior Debt (9.0%, Due 12/06)        |       |                                                   |   |            |                   | 20,759 |  |         | 20,759 |  |        | 20,759
|                                          |  |                | Subordinated Debt (20.0%, Due 12/06)                        |                                      |       |                                                   |   |            | 22,692            |        |  | 20,141  |        |  | 20,141
|                                          |  |                | Preferred Stock (7,999 shares)                              |                                      | 100.0 | %                                                 |   |            |                   |        |  | 7,999   |        |  | 8,545 
|                                          |  |                | Common Stock (100 shares)                                   |                                      | 100.0 | %                                                 |   |            |                   |        |  | 365     |        |  |      
|Telecomm South, LLC (6)                   |  | Communications |                                                             | Senior Debt (13.4%, Due 12/05)       |       |                                                   |   |            |                   | 7,996  |  |         | 2,582  |  |        | 1,100 
|                                          |  |                |                                                             | LLC Interest                         |       | 100.0                                             | % |            |                   |        |  |         | 10     |  |        |      
|West Coast WirelessLines LLC              |  | Conferences    |                                                             | LLC Interest                         |       | 100.0                                             | % |            |                   |        |  |         | 851    |  |        | 851   
|Working Mother Media, Inc. (6)            |  | Publishing     |                                                             | Senior Debt (7.5%, Due 6/06)         |       |                                                   |   |            |                   | 10,452 |  |         | 8,576  |  |        | 8,576 
|                                          |  |                | Class A Preferred Stock (12,497 shares)                     |                                      | 99.2  | %                                                 |   |            |                   |        |  | 12,497  |        |  | 4,192 
|                                          |  |                | 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 ($834)                                             |                                      |       |                                                   |   |            |                   |        |  |         |        |  |       
|Total Control investments: Majority-owned |  |                |                                                             |                                      |       |                                                   |   |            | 311,896           |        |  | 286,850



See notes to consolidated financial statements (unaudited).



12



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments

December 31, 2005



(dollars in thousands)



|                                              |  |                |                                                            |                                                   |       |                                                   |   |            |                   |  |        |        |  |   |       
|--------------------------------------------- |  | -------------- | ---------------------------------------------------------- | ------------------------------------------------- | ----- | ------------------------------------------------- | - | ---------- | ----------------- |  | ------ | ------ |  | - | ------
|Portfolio Company                             |  | Industry       |                                                            | Investment (8)                                    |       | Percentage ofClass Held ona FullyDiluted Basis(1) |   |            | December 31, 2005
|                                              |  |                |                                                            | Principal                                         |       | Cost                                              |   | Fair Value
|Control investments: Non-majority owned (4):  |  |                |                                                            |                                                   |       |                                                   |   |            |                   |  |       
|ETC Group, LLC (6)                            |  | Publishing     |                                                            | Series A LLC Interest                             |       | 100.0                                             | % |            |                   |  | $      | 270    |  | $ | 123   
|                                              |  |                |                                                            | Series C LLC Interest                             |       | 100.0                                             | % |            |                   |  |        | 100    |  |   |      
|Fawcette Technical                            |  | Publishing     |                                                            | Senior Debt (14.5%, Due 12/06)                    |       |                                                   |   |            | 13,061            |  |        | 12,545 |  |   | 12,545
|Publications Holding (2)                      |  |                |                                                            | Subordinated Debt (14.8%, Due 12/06)              |       |                                                   |   |            | 5,186             |  |        | 4,691  |  |   | 1,137 
|                                              |  |                |                                                            | Series A Preferred Stock (8,473 shares)           |       | 84.7                                              | % |            |                   |  |        | 2,569  |  |   |      
|                                              |  |                |                                                            | Common Stock (5,010,379 shares)                   |       | 36.0                                              | % |            |                   |  |        |       |  |   |      
|Platinum Wireless, Inc.                       |  | Communications |                                                            | Senior Debt (8.0%, Due 6/06)                      |       |                                                   |   |            | 389               |  |        | 389    |  |   | 389   
|                                              |  |                |                                                            | Common Stock (2,937 shares)                       |       | 37.0                                              | % |            |                   |  |        | 4,640  |  |   | 4,505 
|                                              |  |                |                                                            | Option to purchase Common Stock (expire 12/31/13) |       | 1.5                                               | % |            |                   |  |        | 272    |  |   | 98    
|Total Control investments: Non-majority-owned |  |                |                                                            |                                                   |       |                                                   |   | 25,476     |                   |  | 18,797
|                                              |  |                |                                                            |                                                   |       |                                                   |   |            |                   |  |        |        |  |   |       
|Affiliate investments (3):                    |  |                |                                                            |                                                   |       |                                                   |   |            |                   |  |       
|iVerify. US Inc.                              |  | Security Alarm |                                                            | Senior Debt (8.0%, Due 4/06)                      |       |                                                   |   |            | 75                |  |        | 75     |  |   | 75    
|                                              |  |                |                                                            | Common Stock (20 shares)                          |       | 12.0                                              | % |            |                   |  |        | 550    |  |   |      
|On Target Media, LLC                          |  | Publishing     |                                                            | Senior Debt (10.5%, Due 9/09)                     |       |                                                   |   |            | 20,000            |  |        | 20,000 |  |   | 20,000
|                                              |  |                |                                                            | Subordinated Debt (17.0%, Due 3/10)               |       |                                                   |   |            | 11,266            |  |        | 11,266 |  |   | 11,266
|                                              |  |                |                                                            | Class A LLC Interest                              |       | 6.8                                               | % |            |                   |  |        | 1,508  |  |   | 2,610 
|                                              |  |                |                                                            | Class B LLC Interest                              |       | 16.9                                              | % |            |                   |  |        |       |  |   |      
|Sunshine Media Delaware, LLC (2)              |  | Publishing     |                                                            | Senior Debt (13.7%, Due 12/07)                    |       |                                                   |   |            | 12,739            |  |        | 12,205 |  |   | 12,205
|                                              |  |                | Class A LLC Interest                                       |                                                   | 12.8  | %                                                 |   |            |                   |  | 564    |        |  | 
|                                              |  |                | Warrants to purchase Class B LLC interest (expire 1/31/11) |                                                   | 100.0 | %                                                 |   |            |                   |  |       |        |  | 
|Total Affiliate investments                   |  |                |                                                            |                                                   |       |                                                   |   | 46,168     |                   |  | 46,156



See notes to consolidated financial statements (unaudited).



13



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments

December 31, 2005



(dollars in thousands)



|                                                |  |                                        |                                                     |                                                    |      |                                                    |   |            |                   |        |     |        |        |     |        |       
|----------------------------------------------- |  | -------------------------------------- | --------------------------------------------------- | -------------------------------------------------- | ---- | -------------------------------------------------- | - | ---------- | ----------------- | ------ | --- | ------ | ------ | --- | ------ | ------
|Portfolio Company                               |  | Industry                               |                                                     | Investment (8)                                     |      | Percentage of Class Heldon a FullyDilutedBasis (1) |   |            | December 31, 2005
|                                                |  |                                        |                                                     | Principal                                          |      | Cost                                               |   | Fair Value
|Non-affiliate investments (less than 5% owned): |  |                                        |                                                     |                                                    |      |                                                    |   |            |                   |        |     |       
|Allens TV Cable Service, Inc.                  |  | Cable                                  |                                                     | Senior Debt (13.1%, Due 12/12)                     |      |                                                    |   |            | $                 | 7,130  |     | $      | 7,130  |     | $      | 7,130 
|                                                |  |                                        | Subordinated Debt (12.6%, Due 12/12)                |                                                    |      |                                                    |   |            | 2,007             |        |     | 2,007  |        |     | 2,007 
|                                                |  |                                        | Warrants to purchase Common Stock (expire 12/31/15) |                                                    | 10.0 | %                                                  |   |            |                   |        |     |       |        |     |      
|Amerifit Nutrition, Inc. (2)                    |  | Drugs                                  |                                                     | Senior Debt (13.9%, Due 3/10)                      |      |                                                    |   |            |                   | 6,623  |     |        | 6,623  |     |        | 6,623 
|Archway Broadcasting Group, LLC                 |  | Broadcasting                           |                                                     | Senior Debt (11.0%, Due 12/08)                     |      |                                                    |   |            |                   | 4,900  |     |        | 4,900  |     |        | 4,900 
|Auto Europe, LLC                                |  | Equipment Leasing                      |                                                     | Subordinated Debt (11.3%, Due 10/12)               |      |                                                    |   |            |                   | 13,500 |     |        | 13,500 |     |        | 13,500
|B & H Education, Inc. (2)                       |  | Education                              |                                                     | Senior Debt (10.5%, Due 3/10)                      |      |                                                    |   |            |                   | 4,000  |     |        | 4,000  |     |        | 4,000 
|                                                |  |                                        |                                                     | Preferred Stock ( 5,384 shares)                    |      | 4.1                                                | % |            |                   |        |     |        | 1,060  |     |        | 1,078 
|Badoud Enterprises, Inc. (2)                    |  | Newspaper                              |                                                     | Senior Debt (9.7%, Due 9/11)                       |      |                                                    |   |            |                   | 5,449  |     |        | 5,449  |     |        | 5,449 
|BLI Holdings, Inc. (2)                          |  | Drugs                                  |                                                     | Subordinated Debt (12.2%, Due 3/10)                |      |                                                    |   |            |                   | 10,000 |     |        | 10,000 |     |        | 10,000
|Builders First Source, Inc.                     |  | Building & Development                 |                                                     | Senior Debt (6.2%, Due 8/11)                       |      |                                                    |   |            |                   | 889    |     |        | 889    |     |        | 894   
|Cambridge Information Group, Inc. (2)           |  | Information Services                   |                                                     | Senior Debt (8.7%, Due 6/07-6/11)                  |      |                                                    |   |            |                   | 26,825 |     |        | 26,825 |     |        | 26,825
|CEI Holdings, Inc.                              |  | Cosmetics                              |                                                     | Subordinated Debt (11.1%, Due 12/11)               |      |                                                    |   |            |                   | 2,377  |     |        | 2,377  |     |        | 2,270 
|Communications & Power Industries, Inc.         |  | Aerospace & Defense                    |                                                     | Senior Debt (6.6%, Due 7/10)                       |      |                                                    |   |            |                   | 1,778  |     |        | 1,778  |     |        | 1,797 
|Community Media Group, Inc. (2)                 |  | Newspaper                              |                                                     | Senior Debt (8.9%, Due 9/10)                       |      |                                                    |   |            |                   | 22,365 |     |        | 22,365 |     |        | 22,365
|Cornerstone Healthcare Group Holding, Inc.      |  | Healthcare                             |                                                     | Subordinated Debt (14.0%, Due 7/12)                |      |                                                    |   |            |                   | 7,060  |     |        | 7,060  |     |        | 7,060 
|Country Road Communications LLC (2)             |  | Communications                         |                                                     | Subordinated Debt (11.6%, Due 7/13)                |      |                                                    |   |            |                   | 13,000 |     |        | 13,000 |     |        | 13,000
|Creative Loafing, Inc. (2)                      |  | Newspaper                              |                                                     | Senior Debt (11.1%, Due 6/10)                      |      |                                                    |   |            |                   | 19,400 |     |        | 19,400 |     |        | 19,400
|Crescent Publishing Company LLC (2)             |  | Newspaper                              |                                                     | Senior Debt (14.3%, Due 6/09-6/10)                 |      |                                                    |   |            |                   | 8,942  |     |        | 8,942  |     |        | 8,942 
|Cruz Bay Publishing, Inc. (2)                   |  | Publishing                             |                                                     | Senior Debt (12.1%, Due 12/06)                     |      |                                                    |   |            |                   | 6,172  |     |        | 6,172  |     |        | 6,172 
|                                                |  |                                        | Subordinated Debt (20.5%, Due 12/06)                |                                                    |      |                                                    |   |            | 11,417            |        |     | 11,417 |        |     | 11,417
|Dayton Parts Holdings, LLC (2)                  |  | Vehicle Parts & Supplies               |                                                     | Subordinated Debt (12.5%, Due 6/11)                |      |                                                    |   |            |                   | 16,000 |     |        | 16,000 |     |        | 16,000
|                                                |  | Preferred LLC Interest ( 16,371 units) |                                                     | 2.7                                                | %    |                                                    |   |            |                   |        | 602 |        |        | 602
|                                                |  | Class A LLC Interest (10,914 units)    |                                                     | 4.4                                                | %    |                                                    |   |            |                   |        | 401 |        |        | 401
|D&B Towers, LLC                                 |  | Communications                         |                                                     | Senior Debt (14.2%, Due 6/08)                      |      |                                                    |   |            |                   | 5,022  |     |        | 5,022  |     |        | 5,022 
|dick clark productions, inc. (6)                |  | Broadcasting                           |                                                     | Common Stock (235,714 shares)                      |      | 0.5                                                | % |            |                   |        |     |        | 210    |     |        | 111   
|                                                |  |                                        |                                                     | Warrants to purchase Common Stock (expire 7/25/11) |      | 5.3                                                | % |            |                   |        |     |        | 858    |     |        | 1,085 



See notes to consolidated financial statements (unaudited).



14



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments

December 31, 2005



(dollars in thousands)



|                                                        |  |                                     |                                                     |                                                    |      |                                                   |       |            |                   |       |        |        |       |        |       
|------------------------------------------------------- |  | ----------------------------------- | --------------------------------------------------- | -------------------------------------------------- | ---- | ------------------------------------------------- | ----- | ---------- | ----------------- | ----- | ------ | ------ | ----- | ------ | ------
|Portfolio Company                                       |  | Industry                            |                                                     | Investment (8)                                     |      | Percentage ofClass Held ona FullyDiluted Basis(1) |       |            | December 31,
2005
|                                                        |  |                                     |                                                     | Principal                                          |      | Cost                                              |       | Fair Value
|The e-Media Club, LLC (6)                               |  | Investment Fund                     |                                                     | LLC Interest                                       |      | 0.8                                               | %     |            |                   |       | $      | 89     |       | $      | 37    
|EAS Group, Inc.                                         |  | Communications Equipment            |                                                     | Subordinated Debt (16.0%, Due 4/11)                |      |                                                   |       |            | 10,227            |       |        | 10,227 |       |        | 10,227
|Empower IT Holdings, Inc. (2)                           |  | Information Services                |                                                     | Senior Debt (11.0%, Due 5/12)                      |      |                                                   |       |            | 10,000            |       |        | 10,000 |       |        | 10,000
|                                                        |  | Subordinated Debt (14.5%, Due 6/12) |                                                     |                                                    |      |                                                   | 5,067 |            |                   | 5,067 |        |        | 5,067
|Equibrand Holding Corporation (2)                       |  | Leisure Activities                  |                                                     | Senior Debt (11.5%, Due 3/10-9/10)                 |      |                                                   |       |            | 4,640             |       |        | 4,640  |       |        | 4,640 
|                                                        |  |                                     | Subordinated Debt (16.0%, Due 3/11)                 |                                                    |      |                                                   |       | 8,763      |                   |       | 8,763  |        |       | 8,763 
|Flexsol Packaging Corp.                                 |  | Chemicals/Plastics                  |                                                     | Subordinated Debt (10.7%, Due 12/12)               |      |                                                   |       |            | 5,000             |       |        | 5,000  |       |        | 5,000 
|GoldenSource Holdings Inc. (2)                          |  | Technology                          |                                                     | Senior Debt (9.0%, Due 9/08)                       |      |                                                   |       |            | 17,000            |       |        | 17,000 |       |        | 17,000
|                                                        |  |                                     | Warrants to purchase Common Stock (expire 10/31/08) |                                                    | 4.2  | %                                                 |       |            |                   |       |       |        |       |      
|The Hillman Group, Inc.                                 |  | Home Furnishings                    |                                                     | Senior Debt (7.7%, Due 3/11)                       |      |                                                   |       |            | 5,910             |       |        | 5,910  |       |        | 6,010 
|Home Interiors & Gifts, Inc.                            |  | Home Furnishings                    |                                                     | Senior Debt (9.4%, Due 3/11)                       |      |                                                   |       |            | 4,668             |       |        | 4,668  |       |        | 4,290 
|I-55 Internet Services, Inc. (6)                        |  | Communications                      |                                                     | Senior Debt (17.5%, Due 12/06)                     |      |                                                   |       |            | 1,778             |       |        | 1,778  |       |        | 1,539 
|                                                        |  |                                     | Warrants to purchase Common Stock (expire 4/30/10)  |                                                    | 20.0 | %                                                 |       |            |                   |       | 366    |        |       |      
|Images.com, Inc.                                        |  | Information Services                |                                                     | Senior Debt (12.5%, Due 12/07)                     |      |                                                   |       |            | 2,664             |       |        | 2,664  |       |        | 2,664 
|Information Today, Inc. (2)                             |  | Information Services                |                                                     | Senior Debt (11.0%, Due 9/08)                      |      |                                                   |       |            | 6,915             |       |        | 6,915  |       |        | 6,915 
|Instant Web, Inc.                                       |  | Direct Mail Advertiser              |                                                     | Senior Debt (7.8%, Due 2/11)                       |      |                                                   |       |            | 4,962             |       |        | 4,962  |       |        | 5,037 
|Jenzabar, Inc. (2)                                      |  | Technology                          |                                                     | Senior Debt (12.5%, Due 4/09)                      |      |                                                   |       |            | 12,000            |       |        | 12,000 |       |        | 12,000
|                                                        |  |                                     |                                                     | Subordinated Debt (18.0%, Due 4/09-4/12)           |      |                                                   |       |            | 7,467             |       |        | 7,467  |       |        | 7,467 
|                                                        |  |                                     |                                                     | Senior Preferred Stock (5,000 shares)              |      | 100.0                                             | %     |            |                   |       |        | 5,831  |       |        | 5,831 
|                                                        |  |                                     |                                                     | Subordinated Preferred Stock (109,800 shares)      |      | 100.0                                             | %     |            |                   |       |        | 1,098  |       |        | 1,098 
|                                                        |  |                                     |                                                     | Warrants to purchase Common Stock (expire 4/30/16) |      | 19.5                                              | %     |            |                   |       |        | 422    |       |        | 7,630 
|The Joseph F. Biddle Publishing Company (2)             |  | Newspaper                           |                                                     | Senior Debt (7.4%, Due 12/11)                      |      |                                                   |       |            | 7,225             |       |        | 7,225  |       |        | 7,225 
|Jupitermedia Corporation                                |  | Information Services                |                                                     | Common Stock (148,373 shares)                      |      | 0.4                                               | %     |            |                   |       |        | 2,115  |       |        | 2,084 
|Managed Health Care Associates, Inc.                    |  | Drugs                               |                                                     | Senior Debt (10.3%, Due 6/09-6/10)                 |      |                                                   |       |            | 4,380             |       |        | 4,380  |       |        | 4,380 
|MD Beauty, Inc                                          |  | Cosmetics                           |                                                     | Subordinated Debt (11.3%, Due 2/13)                |      |                                                   |       |            | 9,000             |       |        | 9,000  |       |        | 9,079 
|MCI Holdings, LLC (2)                                   |  | Management Consulting Service       |                                                     | Subordinated Debt (12.5%, Due 3/12)                |      |                                                   |       |            | 17,102            |       |        | 17,102 |       |        | 17,102
|                                                        |  |                                     | Class A LLC Interest (4,712,042 units)              |                                                    | 5.2  | %                                                 |       |            |                   |       | 3,000  |        |       | 3,000 
|Metropolitan Telecommunications Holding Company (2) (9) |  | Communications                      |                                                     | Senior Debt (11.6%, Due 6/10-9/10)                 |      |                                                   |       |            | 22,000            |       |        | 22,000 |       |        | 22,000
|                                                        |  |                                     | Subordinated Debt (15.5%, Due 12/10)                |                                                    |      |                                                   |       | 10,929     |                   |       | 10,929 |        |       | 10,929
|                                                        |  |                                     | Warrants to purchase Common Stock (expire 9/30/13)  |                                                    | 20.4 | %                                                 |       |            |                   |       | 1,843  |        |       | 3,897 



See notes to consolidated financial statements (unaudited).



15



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments

December 31, 2005



(dollars in thousands)



|                                      |  |                                          |                                                   |                                                            |      |                                                   |   |            |                   |        |        |        |        |        |        |       
|------------------------------------- |  | ---------------------------------------- | ------------------------------------------------- | ---------------------------------------------------------- | ---- | ------------------------------------------------- | - | ---------- | ----------------- | ------ | ------ | ------ | ------ | ------ | ------ | ------
|Portfolio Company                     |  | Industry                                 |                                                   | Investment (8)                                             |      | Percentage ofClass Held ona FullyDiluted Basis(1) |   |            | December 31, 2005
|                                      |  |                                          |                                                   | Principal                                                  |      | Cost                                              |   | Fair Value
|Michael May                           |  | Security Alarm                           |                                                   | Senior Debt (12.0%, Due 2/08)                              |      |                                                   |   |            | $                 | 450    |        | $      | 450    |        | $      | 450   
|MicroCal Holdings, LLC (2)            |  | Laboratory Instruments                   |                                                   | Senior Debt (9.0%, Due 3/10-9/10)                          |      |                                                   |   |            |                   | 13,900 |        |        | 13,900 |        |        | 13,900
|                                      |  | Subordinated Debt (14.5%, Due 3/11)      |                                                   |                                                            |      |                                                   |   | 9,115      |                   |        | 9,115  |        |        | 9,115 
|MicroDental Laboratories (2)          |  | Healthcare                               |                                                   | Senior Debt (9.8%, Due 5/11-11/11)                         |      |                                                   |   |            |                   | 11,767 |        |        | 11,767 |        |        | 11,767
|                                      |  |                                          | Subordinated Debt (15.0%, Due 5/12)               |                                                            |      |                                                   |   |            | 6,113             |        |        | 6,113  |        |        | 6,113 
|Miles Media Holding, Inc. (2)         |  | Publishing                               |                                                   | Senior Debt (10.9%, Due 6/12)                              |      |                                                   |   |            |                   | 8,287  |        |        | 8,287  |        |        | 8,287 
|                                      |  |                                          | Subordinated Debt (15.4%, Due 12/12)              |                                                            |      |                                                   |   |            | 4,000             |        |        | 4,000  |        |        | 4,000 
|                                      |  |                                          | Warrants to purchase Common Stock (expire 6/3/15) |                                                            | 19.5 | %                                                 |   |            |                   |        |        | 439    |        |        | 837   
|Monotype Imaging Holdings Corp. (2)   |  | Technology                               |                                                   | Senior Debt (8.8%, Due 11/09)                              |      |                                                   |   |            |                   | 4,850  |        |        | 4,850  |        |        | 4,850 
|MultiPlan, Inc.                       |  | Insurance                                |                                                   | Senior Debt (7.0%, Due 3/09)                               |      |                                                   |   |            |                   | 3,194  |        |        | 3,194  |        |        | 3,234 
|Nalco Company                         |  | Ecological Services                      |                                                   | Senior Debt (6.32%, Due 11/10)                             |      |                                                   |   |            |                   | 4,162  |        |        | 4,162  |        |        | 4,217 
|National Display Holdings, LLC (2)    |  | Electronics                              |                                                   | Senior Debt (9.7%, Due 12/10-12/11)                        |      |                                                   |   |            |                   | 20,087 |        |        | 20,087 |        |        | 20,087
|                                      |  |                                          | Subordinated Debt (15.0%, Due 12/12)              |                                                            |      |                                                   |   |            | 13,000            |        |        | 13,000 |        |        | 13,000
|                                      |  |                                          | Class A LLC Interest (1,000,000 units)            |                                                            | 3.7  | %                                                 |   |            |                   |        |        | 1,000  |        |        | 1,000 
|National Product Services, Inc.       |  | Business Services                        |                                                   | Subordinated Debt (14.0%, Due 6/07)                        |      |                                                   |   |            |                   | 10,225 |        |        | 10,225 |        |        | 10,225
|New Century Companies, Inc. (6)       |  | Industrial Equipment                     |                                                   | Warrants to purchase Common Stock (expire 6/30/10)         |      | 0.4                                               | % |            |                   |        |        |        |       |        |        |      
|OMP, Inc.                             |  | Drugs                                    |                                                   | Senior Debt (8.3%, Due 1/10-1/11)                          |      |                                                   |   |            |                   | 7,714  |        |        | 7,714  |        |        | 7,714 
|PartMiner, Inc. (2)                   |  | Information Services                     |                                                   | Senior Debt (15.0%, Due 6/09)                              |      |                                                   |   |            |                   | 5,240  |        |        | 5,240  |        |        | 5,240 
|Powercom Corporation (2)              |  | Communications                           |                                                   | Senior Debt (12.0%, Due 12/06)                             |      |                                                   |   |            |                   | 1,861  |        |        | 1,861  |        |        | 1,861 
|                                      |  |                                          |                                                   | Warrants to purchase Class A Common Stock (expire 6/30/14) |      | 30.7                                              | % |            |                   |        |        |        | 286    |        |        | 341   
|Quantum Medical Holdings, LLC LLC (2) |  | Laboratory Instruments                   |                                                   | Senior Debt (9.3%, Due 12/10-5/11)                         |      |                                                   |   |            |                   | 17,535 |        |        | 17,535 |        |        | 17,535
|                                      |  | Subordinated Debt (15.0%, Due 12/11)     |                                                   |                                                            |      |                                                   |   | 10,502     |                   |        | 10,502 |        |        | 10,502
|                                      |  | Preferred LLC Interest (1,000,000 units) |                                                   | 3.3                                                        | %    |                                                   |   |            |                   |        | 1,001  |        |        | 1,001 
|R.R. Bowker, LLC (2)                  |  | Information Services                     |                                                   | Senior Debt (11.4%, Due 12/08-12/09)                       |      |                                                   |   |            |                   | 16,650 |        |        | 16,650 |        |        | 16,650
|Republic National Cabinet Corporation |  | Cabinet Maker                            |                                                   | Senior Debt (9.2%, Due 6/09)                               |      |                                                   |   |            |                   | 3,578  |        |        | 3,578  |        |        | 3,578 
|                                      |  |                                          | Subordinated Debt (13.1%, Due 6/09)               |                                                            |      |                                                   |   |            | 5,000             |        |        | 5,000  |        |        | 5,000 
|Sagamore Hill Broadcasting, LLC (2)   |  | Broadcasting                             |                                                   | Senior Debt (11.9%, Due 11/09)                             |      |                                                   |   |            |                   | 12,400 |        |        | 12,400 |        |        | 12,400
|SCI Holdings, Inc                     |  | Communication Services                   |                                                   | Subordinated Debt (11.5%, Due 11/12)                       |      |                                                   |   |            |                   | 7,500  |        |        | 7,500  |        |        | 7,500 
|Sheridan Healthcare, Inc.             |  | Healthcare                               |                                                   | Senior Debt (7.5%, Due 11/10)                              |      |                                                   |   |            |                   | 2,850  |        |        | 2,850  |        |        | 2,895 
|Sterigenics International, Inc.       |  | Healthcare                               |                                                   | Senior Debt (7.5%, Due 6/11)                               |      |                                                   |   |            |                   | 4,925  |        |        | 4,925  |        |        | 4,993 



See notes to consolidated financial statements (unaudited).



16



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments

December 31, 2005



(dollars in thousands)



|                                                                                        |  |                      |                                                              |                                                                  |       |                                                       |   |   |                   |        |  |       |           |   |  |       |        | 
|--------------------------------------------------------------------------------------- |  | -------------------- | ------------------------------------------------------------ | ---------------------------------------------------------------- | ----- | ----------------------------------------------------- | - | - | ----------------- | ------ |  | ----- | --------- | - |  | ----- | ------ | 
|Portfolio Company                                                                       |  | Industry             |                                                              | Investment (8)                                                   |       | Percentage of Class Held on a Fully
Diluted Basis (1) |   |   | December 31, 2005 |       
|                                                                                        |  |                      |                                                              | Principal                                                        |       | Cost                                                  |   |   | Fair Value        |       
|Stratford School Holdings, Inc. (2)                                                     |  | Education            |                                                              | Senior Debt (9.5%, Due 6/11)                                     |       |                                                       |   |   | $                 | 6,500  |  | $     | 6,500     |   |  | $     | 6,500  | 
|                                                                                        |  |                      | Subordinated Debt (14.0%, Due 12/11)                         |                                                                  |       |                                                       |   |   | 6,651             |        |  | 6,651 |           |   |  | 6,651 |       
|                                                                                        |  |                      | Preferred Stock (10,000 shares)                              |                                                                  | 13.3  | %                                                     |   |   |                   |        |  | 1,059 |           |   |  | 1,059 |       
|                                                                                        |  |                      | Warrants to purchase Common Stock (expire 5/31/15)           |                                                                  | 100.0 | %                                                     |   |   |                   |        |  | 67    |           |   |  | 192   |       
|Survey Sampling International, LLC                                                      |  | Research             |                                                              | Senior Debt (7.3%, Due 5/11)                                     |       |                                                       |   |   |                   | 3,911  |  |       | 3,911     |   |  |       | 3,943  | 
|Switch & Data Holdings, Inc.                                                            |  | Business Services    |                                                              | Subordinated Debt (11.6%, Due 4/11)                              |       |                                                       |   |   |                   | 12,000 |  |       | 12,000    |   |  |       | 12,000 | 
|SXC Health Solutions, Inc. (2)                                                          |  | Technology           |                                                              | Senior Debt (9.0%, Due 12/10)                                    |       |                                                       |   |   |                   | 13,260 |  |       | 13,260    |   |  |       | 13,260 | 
|                                                                                        |  |                      | Common Stock (1,111,100 shares)                              |                                                                  | 1.9   | %                                                     |   |   |                   |        |  | 1,235 |           |   |  | 2,630 |       
|Talk America Holdings, Inc. (6)                                                         |  | Communications       |                                                              | Warrants to purchase Common Stock (expire 8/17/06 - 3/31/07)     |       | 0.7                                                   | % |   |                   |        |  |       | 25        |   |  |       | 330    | 
|Team Express, Inc.                                                                      |  | Specialty Retail     |                                                              | Senior Debt (10.7%, Due 12/09-12/10)                             |       |                                                       |   |   |                   | 13,364 |  |       | 13,364    |   |  |       | 13,364 | 
|                                                                                        |  |                      |                                                              | Subordinated Debt (15.0%, Due 6/11)                              |       |                                                       |   |   |                   | 7,108  |  |       | 7,108     |   |  |       | 7,108  | 
|Teleguam Holdings, LLC                                                                  |  | Communications       |                                                              | Subordinated Debt (11.4%, Due 10/12)                             |       |                                                       |   |   |                   | 20,000 |  |       | 20,000    |   |  |       | 20,000 | 
|Tippmann Sports, LLC                                                                    |  | Leisure Goods        |                                                              | Senior Debt (10.3%, Due 6/09)                                    |       |                                                       |   |   |                   | 6,550  |  |       | 6,550     |   |  |       | 6,550  | 
|Total Sleep Holdings, Inc. (2)                                                          |  | Healthcare           |                                                              | Subordinated Debt (14.0%, Due 9/11)                              |       |                                                       |   |   |                   | 22,220 |  |       | 22,220    |   |  |       | 22,220 | 
|U. S. I. Holdings Corporation                                                           |  | Insurance            |                                                              | Senior Debt (6.7%, Due 8/08)                                     |       |                                                       |   |   |                   | 2,970  |  |       | 2,970     |   |  |       | 2,982  | 
|VS&A-PBI Holding LLC (6)                                                                |  | Publishing           |                                                              | LLC Interest                                                     |       | 0.8                                                   | % |   |                   |        |  |       | 500       |   |  |       |       | 
|VOX Communications Group Holdings, LLC (2)                                              |  | Broadcasting         |                                                              | Senior Debt (10.8%, Due 12/07-6/10)                              |       |                                                       |   |   |                   | 10,350 |  |       | 10,350    |   |  |       | 10,350 | 
|                                                                                        |  |                      | Convertible Preferred Subordinated Notes (12.0%, Due 12/49 ) |                                                                  | 16.5  | %                                                     |   |   | 1,062             |        |  | 1,062 |           |   |  | 1,062 |       
|Wicks Business Information, LLC                                                         |  | Publishing           |                                                              | Unsecured Notes (9.3%, Due 2/08)                                 |       |                                                       |   |   |                   | 215    |  |       | 215       |   |  |       | 215    | 
|Wiesner Publishing Company, LLC (2)                                                     |  | Publishing           |                                                              | Warrants to purchase membership interest in LLC (expire 6/30/12) |       | 15.0                                                  | % |   |                   |        |  |       | 406       |   |  |       | 1,723  | 
|Wire Rope Corporation of America, Inc.                                                  |  | Industrial Equipment |                                                              | Senior Debt (11.9%, Due 6/11)                                    |       |                                                       |   |   |                   | 6,000  |  |       | 6,000     |   |  |       | 6,180  | 
|WirelessLines II, Inc.                                                                  |  | Communications       |                                                              | Senior Debt (8.0%, Due 4/07)                                     |       |                                                       |   |   |                   | 185    |  |       | 185       |   |  |       | 185    | 
|Total Non-affiliate investments                                                         |  |                      |                                                              |                                                                  |       |                                                      |   |   | 733,717           |        |  |       | 745,757   |  
|Total Investments                                                                       |  |                      |                                                              |                                                                  |       |                                                       |   |   | 1,117,257         |        |  |       | 1,097,560 |  
|Unearned income                                                                         |  |                      |                                                              |                                                                  |       |                                                       |   |   | (9,062            | )      |  |       | (9,062    | )
|Total Investments net of unearned income                                                |  |                      |                                                              |                                                                  |       |                                                       |   | $ | 1,108,195         |        |  | $     | 1,088,498 |  
|                                                                                        | 
|Call options written (included in Other Liabilities in the Consolidated Balance Sheets) |  |                      |                                                              |                                                                  |      
|Metropolitan Telecommunications Holding Company (9)                                     |  | Communications       |                                                              | Call options written                                             |       |                                                       |   |   |                   |        |  | $     | 575       |   |  | $     | 575    | 
|Total Call options written                                                              |  |                      |                                                              |                                                                  |       |                                                       |   | $ | 575               |        |  | $     | 575       |  



See notes to consolidated financial statements (unaudited).



17



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##### Table of Contents

MCG Capital Corporation



Consolidated Schedule of Investments (unaudited)

March 31, 2006 and December 31, 2005



(dollars in thousands)



|(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 by 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 MCG 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 MCG 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 MCG owns more than 50% of the voting securities of the company.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(7) |  | In January 2005, MCG IH II, Inc., the sole owner of one of the Companys majority-owned controlled portfolio companies, Bridgecom Holdings, Inc., completed a merger with and
into BV-BC Acquisition Corporation, a wholly-owned subsidiary of Broadview Networks, Inc. The Companys economic ownership in the new merged entity dropped below 50 percent; however, the Company retained greater than 50% of the voting control
of the merged entity. Accordingly, our investment will continue to be reflected as a majority-owned control portfolio company.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | 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.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | In June 2005, MCG granted Metropolitan Telecommunication Holding Company an option to repurchase all of the warrants to purchase their common stock currently held by MCG at a
specified price. This option expired on March 31, 2006.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) |  | In March 2006, I-55 Internet Services, Inc. merged with XFone, Inc.
|---- |  | -------------------------------------------------------------------

|(11) |  | In March 2006, Kagan Research, LLC and Jupiter Research, LLC merged to form JupiterKagan, Inc., a majority-owned controlled portfolio company. At December 31, 2005, Kagan Research,
LLC was a consolidated subsidiary of MCG.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See notes to
consolidated financial statements (unaudited).



18



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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) is a
solutions-focused specialized commercial finance company providing financing and advisory services to middle market, growth oriented companies throughout the United States. The Company is a non-diversified internally managed, closed-end investment
company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (1940 Act).



The accompanying financial statements reflect the consolidated accounts of MCG, including Solutions Capital I, LP, Solutions Capital GP, LLC, and
MCGs special purpose financing subsidiaries, MCG Finance I, LLC, MCG Finance II, LLC, MCG Finance III, LLC, MCG Finance IV, LLC, MCG Finance V, LLC, MCG Finance VI, LLC, and MCG Finance VII, LLC, with all significant intercompany balances
eliminated. 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.
Prior to January 1, 2006, Kagan Research, LLC was one of the Companys consolidated subsidiaries. As of January 1, 2006, Kagan Research, LLC no longer qualifies to be a consolidated subsidiary because it is held for investment. During
the first quarter of 2006, Kagan Research, LLC and Jupiter Research, LLC merged to create JupiterKagan, Inc., which is reflected on the Companys schedule of investments.



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 of 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, 2005, as filed with the SEC.



Note 2Investments



At March 31, 2006 and December 31, 2005, the Companys investments consisted of the following:



|                                         |  |                |           |   |                   |   |           |      |  |   |            |   |  |   |           |  
|---------------------------------------- |  | -------------- | --------- | - | ----------------- | - | --------- | ---- |  | - | ---------- | - |  | - | --------- | -
|                                         |  | March 31, 2006 |           |   | December 31, 2005 |  
|                                         |  | Cost           |           |   | Fair Value        |   |           | Cost |  |   | Fair Value |  
|Commercial loans                         |  | $              | 915,280   |   |                   | $ | 911,084   |      |  | $ | 939,086    |   |  | $ | 934,036   |  
|Investments in equity securities         |  |                | 201,635   |   |                   |   | 193,988   |      |  |   | 178,171    |   |  |   | 163,524   |  
|                                         |  |                |           |   |                   |   |           |      |  |   |            |   |  |   |           |  
|Total investments                        |  |                | 1,116,915 |   |                   |   | 1,105,072 |      |  |   | 1,117,257  |   |  |   | 1,097,560 |  
|Unearned income                          |  |                | (8,416    | ) |                   |   | (8,416    | )    |  |   | (9,062     | ) |  |   | (9,062    | )
|                                         |  |                |           |   |                   |   |           |      |  |   |            |   |  |   |           |  
|Total investments net of unearned income |  | $              | 1,108,499 |   |                   | $ | 1,096,656 |      |  | $ | 1,108,195  |   |  | $ | 1,088,498 |  
|                                         |  |                |           |   |                   |   |           |      |  |   |            |   |  |   |           |  



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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, 2006 and December 31, 2005, at
cost, was as follows, excluding unearned income:



|                    |  |                    |           |                              |                   |   |                    |   |                              |  |       |  
|------------------- |  | ------------------ | --------- | ---------------------------- | ----------------- | - | ------------------ | - | ---------------------------- |  | ----- | -
|                    |  | March 31, 2006     |           |                              | December 31, 2005 |  
|                    |  | Investments atCost |           | Percentage ofTotal Portfolio |                   |   | Investments atCost |   | Percentage ofTotal Portfolio | 
|Secured Senior Debt |  | $                  | 461,601   |                              | 41.3              | % |                    | $ | 544,449                      |  | 48.7  | %
|Subordinated Debt   |  |                    |           |                              |                   |   |                    |   |                              |  |       |  
|Secured             |  |                    | 390,455   |                              | 35.0              |   |                    |   | 333,080                      |  | 29.8  |  
|Unsecured           |  |                    | 63,224    |                              | 5.7               |   |                    |   | 61,557                       |  | 5.5   |  
|Equity              |  |                    | 201,635   |                              | 18.0              |   |                    |   | 178,171                      |  | 16.0  |  
|                    |  |                    |           |                              |                   |   |                    |   |                              |  |       |  
|Total               |  | $                  | 1,116,915 |                              | 100.0             | % |                    | $ | 1,117,257                    |  | 100.0 | %
|                    |  |                    |           |                              |                   |   |                    |   |                              |  |       |  



The composition of
MCGs investments as of March 31, 2006 and December 31, 2005, at fair value, was as follows, excluding unearned income:



|                                 |  |                          |           |                              |                   |   |                          |   |                              |  |       |  
|-------------------------------- |  | ------------------------ | --------- | ---------------------------- | ----------------- | - | ------------------------ | - | ---------------------------- |  | ----- | -
|                                 |  | March 31, 2006           |           |                              | December 31, 2005 |  
|                                 |  | Investments atFair Value |           | Percentage ofTotal Portfolio |                   |   | Investments atFair Value |   | Percentage ofTotal Portfolio | 
|Secured Senior Debt              |  | $                        | 461,790   |                              | 41.8              | % |                          | $ | 542,981                      |  | 49.5  | %
|Subordinated Debt                |  |                          |           |                              |                   |   |                          |   |                              |  |       |  
|Secured                          |  |                          | 386,070   |                              | 34.9              |   |                          |   | 329,498                      |  | 30.0  |  
|Unsecured                        |  |                          | 63,224    |                              | 5.7               |   |                          |   | 61,557                       |  | 5.6   |  
|Investments in equity securities |  |                          | 193,988   |                              | 17.6              |   |                          |   | 163,524                      |  | 14.9  |  
|                                 |  |                          |           |                              |                   |   |                          |   |                              |  |       |  
|Total                            |  | $                        | 1,105,072 |                              | 100.0             | % |                          | $ | 1,097,560                    |  | 100.0 | %
|                                 |  |                          |           |                              |                   |   |                          |   |                              |  |       |  



The Companys
debt instruments provide for a contractual interest rate generally ranging from 7% to 20%, a portion of which may be deferred. At March 31, 2006, approximately 66% 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 34% were at fixed rates. In addition, approximately 35% of the loan portfolio has floors of between 1.25% and 3.0% on the LIBOR base index. The
Companys loans have stated maturities at origination that generally 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.



20



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except share and per share amounts)



The following table summarizes loans on non-accrual status and loans greater than 60 days past due,
at fair value, at March 31, 2006 and December 31, 2005:



|                                                                                                                  |  |                |        |   |                   |   |        |  
|----------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | - | ----------------- | - | ------ | -
|                                                                                                                  |  | March 31, 2006 |        |   | December 31, 2005 |  
|Loans on non-accrual status                                                                                       |  |                |        |   |                   |   |        |  
|Loans greater than 60 days past due                                                                               |  | $              | 12,808 |   |                   | $ | 3,218  |  
|Other loans on non-accrual status                                                                                 |  |                | 11,091 |   |                   |   | 9,522  |  
|                                                                                                                  |  |                |        |   |                   |   |        |  
|Total loans on non-accrual status                                                                                 |  |                | 23,899 |   |                   |   | 12,740 |  
|Loans greater than 60 days past due not on non-accrual status                                                     |  |                |       |   |                   |   | 14,132 |  
|                                                                                                                  |  |                |        |   |                   |   |        |  
|Total loans on non-accrual status and greater than 60 days past due                                               |  | $              | 23,899 |   |                   | $ | 26,872 |  
|                                                                                                                  |  |                |        |   |                   |   |        |  
|Loans on non-accrual status as a percentage of total investment portfolio                                         |  |                | 2.2    | % |                   |   | 1.2    | %
|Loans greater than 60 days past due as a percentage of total investment portfolio                                 |  |                | 1.2    | % |                   |   | 1.5    | %
|Total loans on non-accrual status and greater than 60 days past due as a percentage of total investment portfolio |  |                | 2.2    | % |                   |   | 2.4    | %



The table below shows
the composition of MCGs portfolio by industry (excluding unearned income) at fair value as of March 31, 2006 and December 31, 2005:



|                                           |  |                          |           |                              |                   |   |                              |   |                              |  |       |  
|------------------------------------------ |  | ------------------------ | --------- | ---------------------------- | ----------------- | - | ---------------------------- | - | ---------------------------- |  | ----- | -
|                                           |  | March 31, 2006           |           |                              | December 31, 2005 |  
|                                           |  | Investments atFair Value |           | Percentage ofTotal Portfolio |                   |   | Investments atFair Value (a) |   | Percentage ofTotal Portfolio | 
|Communications:                            |  |                          |           |                              |                   |   |                              |   |                              |  |       |  
|CLEC (competitive local exchange carriers) |  | $                        | 219,713   |                              | 19.9              | % |                              | $ | 213,050                      |  | 19.4  | %
|Other                                      |  |                          | 68,109    |                              | 6.2               |   |                              |   | 69,175                       |  | 6.3   |  
|Healthcare                                 |  |                          | 132,366   |                              | 12.0              |   |                              |   | 91,040                       |  | 8.4   |  
|Newspaper                                  |  |                          | 111,034   |                              | 10.0              |   |                              |   | 112,826                      |  | 10.3  |  
|Information Services                       |  |                          | 78,779    |                              | 7.1               |   |                              |   | 75,444                       |  | 6.9   |  
|Broadcasting                               |  |                          | 74,544    |                              | 6.7               |   |                              |   | 65,228                       |  | 5.9   |  
|Publishing                                 |  |                          | 55,028    |                              | 5.0               |   |                              |   | 72,280                       |  | 6.6   |  
|Laboratory Instruments                     |  |                          | 51,967    |                              | 4.7               |   |                              |   | 52,052                       |  | 4.7   |  
|Technology                                 |  |                          | 47,599    |                              | 4.3               |   |                              |   | 66,103                       |  | 6.0   |  
|Electronics                                |  |                          | 34,289    |                              | 3.1               |   |                              |   | 34,087                       |  | 3.1   |  
|Education                                  |  |                          | 29,679    |                              | 2.7               |   |                              |   | 19,479                       |  | 1.8   |  
|Retail                                     |  |                          | 26,794    |                              | 2.4               |   |                              |   | 20,472                       |  | 1.9   |  
|Drugs                                      |  |                          | 23,834    |                              | 2.2               |   |                              |   | 28,717                       |  | 2.6   |  
|Business Services                          |  |                          | 22,225    |                              | 2.0               |   |                              |   | 22,225                       |  | 2.1   |  
|Auto Parts                                 |  |                          | 17,025    |                              | 1.5               |   |                              |   | 17,003                       |  | 1.5   |  
|Food Services                              |  |                          | 14,408    |                              | 1.3               |   |                              |   |                             |  |      |  
|Cosmetics                                  |  |                          | 13,784    |                              | 1.2               |   |                              |   | 11,349                       |  | 1.0   |  
|Car Rental                                 |  |                          | 13,500    |                              | 1.2               |   |                              |   | 13,500                       |  | 1.2   |  
|Leisure Activities                         |  |                          | 13,490    |                              | 1.2               |   |                              |   | 13,403                       |  | 1.2   |  
|Home Furnishings                           |  |                          | 10,352    |                              | 0.9               |   |                              |   | 10,300                       |  | 0.9   |  
|Other Media                                |  |                          | 2,570     |                              | 0.2               |   |                              |   | 33,876                       |  | 3.1   |  
|Other (b)                                  |  |                          | 43,983    |                              | 4.2               |   |                              |   | 55,951                       |  | 5.1   |  
|                                           |  |                          |           |                              |                   |   |                              |   |                              |  |       |  
|Total                                      |  | $                        | 1,105,072 |                              | 100.0             | % |                              | $ | 1,097,560                    |  | 100.0 | %
|                                           |  |                          |           |                              |                   |   |                              |   |                              |  |       |  



|(a) |  | Certain amounts have been reclassified into different industries to conform to the current period industry breakdowns.
|--- |  | ----------------------------------------------------------------------------------------------------------------------

|(b) |  | No individual industry within this category exceeds 1%.
|--- |  | -------------------------------------------------------



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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 table below shows the composition of MCGs portfolio by industry (excluding unearned income)
at cost as of March 31, 2006 and December 31, 2005:



|                                           |  |                    |           |                              |                   |   |                        |   |                              |  |       |  
|------------------------------------------ |  | ------------------ | --------- | ---------------------------- | ----------------- | - | ---------------------- | - | ---------------------------- |  | ----- | -
|                                           |  | March 31, 2006     |           |                              | December 31, 2005 |  
|                                           |  | Investments atCost |           | Percentage ofTotal Portfolio |                   |   | Investments atCost (a) |   | Percentage ofTotal Portfolio | 
|Communications:                            |  |                    |           |                              |                   |   |                        |   |                              |  |       |  
|CLEC (competitive local exchange carriers) |  | $                  | 227,279   |                              | 20.3              | % |                        | $ | 221,409                      |  | 19.8  | %
|Other                                      |  |                    | 67,882    |                              | 6.1               |   |                        |   | 71,750                       |  | 6.4   |  
|Healthcare                                 |  |                    | 129,725   |                              | 11.6              |   |                        |   | 89,533                       |  | 8.0   |  
|Newspaper                                  |  |                    | 110,930   |                              | 9.9               |   |                        |   | 112,646                      |  | 10.1  |  
|Broadcasting                               |  |                    | 79,338    |                              | 7.1               |   |                        |   | 70,134                       |  | 6.3   |  
|Information Services                       |  |                    | 78,359    |                              | 7.0               |   |                        |   | 75,475                       |  | 6.8   |  
|Publishing                                 |  |                    | 69,117    |                              | 6.2               |   |                        |   | 86,308                       |  | 7.7   |  
|Laboratory Instruments                     |  |                    | 51,967    |                              | 4.7               |   |                        |   | 52,052                       |  | 4.7   |  
|Technology                                 |  |                    | 39,760    |                              | 3.6               |   |                        |   | 58,894                       |  | 5.3   |  
|Electronics                                |  |                    | 34,289    |                              | 3.1               |   |                        |   | 34,087                       |  | 3.0   |  
|Education                                  |  |                    | 27,476    |                              | 2.5               |   |                        |   | 19,337                       |  | 1.7   |  
|Retail                                     |  |                    | 26,794    |                              | 2.4               |   |                        |   | 20,472                       |  | 1.8   |  
|Drugs                                      |  |                    | 23,834    |                              | 2.1               |   |                        |   | 28,717                       |  | 2.6   |  
|Business Services                          |  |                    | 22,225    |                              | 2.0               |   |                        |   | 22,225                       |  | 2.0   |  
|Auto Parts                                 |  |                    | 17,025    |                              | 1.5               |   |                        |   | 17,003                       |  | 1.5   |  
|Food Services                              |  |                    | 14,408    |                              | 1.3               |   |                        |   |                             |  |      |  
|Cosmetics                                  |  |                    | 13,755    |                              | 1.2               |   |                        |   | 11,377                       |  | 1.0   |  
|Car Rental                                 |  |                    | 13,500    |                              | 1.2               |   |                        |   | 13,500                       |  | 1.2   |  
|Leisure Activities                         |  |                    | 13,490    |                              | 1.2               |   |                        |   | 13,403                       |  | 1.2   |  
|Home Furnishings                           |  |                    | 10,489    |                              | 0.9               |   |                        |   | 10,578                       |  | 0.9   |  
|Other Media                                |  |                    | 1,508     |                              | 0.1               |   |                        |   | 32,773                       |  | 2.9   |  
|Other (b)                                  |  |                    | 43,765    |                              | 4.0               |   |                        |   | 55,584                       |  | 5.1   |  
|                                           |  |                    |           |                              |                   |   |                        |   |                              |  |       |  
|Total                                      |  | $                  | 1,116,915 |                              | 100.0             | % |                        | $ | 1,117,257                    |  | 100.0 | %
|                                           |  |                    |           |                              |                   |   |                        |   |                              |  |       |  



|(a) |  | Certain amounts have been reclassified into different industries to conform to the current period industry breakdowns.
|--- |  | ----------------------------------------------------------------------------------------------------------------------

|(b) |  | No individual industry within this category exceeds 1%.
|--- |  | -------------------------------------------------------



Note 3Borrowings



The following is a summary of the Companys borrowings at March 31, 2006 and December 31, 2005:



|                                           |  |                |         |                   |   |                |  |                   |         |  |   |        
|------------------------------------------ |  | -------------- | ------- | ----------------- | - | -------------- |  | ----------------- | ------- |  | - | -------
|                                           |  | March 31, 2006 |         | December 31, 2005
|(dollars in thousands)                     |  | Facilityamount |         | Amountoutstanding |   | Facilityamount |  | Amountoutstanding
|Unsecured Notes                            |  | $              | 50,000  |                   | $ | 50,000         |  | $                 | 50,000  |  | $ | 50,000 
|Commercial Loan Trust 2005-2               |  |                | 250,000 |                   |   | 181,815        |  |                   | 250,000 |  |   | 159,181
|Commercial Loan Funding Trust Facility     |  |                | 250,000 |                   |   | 185,091        |  |                   | 250,000 |  |   | 160,000
|Term Securitization                        |  |                |         |                   |   |                |  |                   |         |  |   |        
|Series 2004-1 Class A-1 Asset Backed Bonds |  |                | 43,239  |                   |   | 43,239         |  |                   | 81,138  |  |   | 81,138 
|Series 2004-1 Class A-2 Asset Backed Bonds |  |                | 31,500  |                   |   | 31,500         |  |                   | 31,500  |  |   | 31,500 
|Series 2004-1 Class B Asset Backed Bonds   |  |                | 43,500  |                   |   | 43,500         |  |                   | 43,500  |  |   | 43,500 
|Series 2004-1 Class C Asset Backed Bonds   |  |                | 15,800  |                   |   | 15,800         |  |                   | 15,800  |  |   | 15,800 
|Revolving Unsecured Credit Facility        |  |                | 50,000  |                   |   | 23,000         |  |                   | 50,000  |  |   |       
|                                           |  |                |         |                   |   |                |  |                   |         |  |   |        
|Total                                      |  | $              | 734,039 |                   | $ | 573,945        |  | $                 | 771,938 |  | $ | 541,119
|                                           |  |                |         |                   |   |                |  |                   |         |  |   |        



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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, 2006 and 2005 were $533,883
and $462,493, respectively. The weighted average interest rate on all of the Companys borrowings, including amortization of deferred debt issuance costs and commitment fees, for the three months ended March 31, 2006 and 2005 was 6.68% and
4.05%, respectively. This increase of approximately 2.63% in the weighted average interest rate for the three months ended March 31, 2006 compared to the three months ended March 31, 2005 was primarily attributable to an increase in
average LIBOR of 1.92%, as well as increases in the average spread to LIBOR of 0.32% and increases in deferred debt issuance cost amortization of 0.39%. The increase in deferred debt issuance cost amortization is primarily attributable to loan
repayments, which, in certain instances, requires the Company to accelerate amortization of these costs. For the above borrowings, the fair value of the borrowings approximates cost.



All of the Companys debt facilities, except the Revolving Unsecured Credit Facility and the Unsecured Notes, are
funded through the Companys bankruptcy remote, special purpose, wholly owned subsidiaries, therefore the assets of these subsidiaries may not be available to the Companys creditors. In some cases, advances under the Companys debt
facilities are subject to certain other covenants, including having sufficient levels of collateral and various restrictions on which loans the Company may leverage as collateral.



The Company borrows directly as well as indirectly through credit facilities maintained by its subsidiaries. During the
three months ended March 31, 2006 there were no material changes to the Companys credit facilities. For a detailed discussion of our credit facilities please refer to Note C in our 2005 Annual Report on Form 10K filed with the SEC on
March 3, 2006. See also Note 7Subsequent Events.



Borrowings outstanding, by interest rate benchmark, as of March 31, 2006 and December 31, 2005 were as follows:



|                      |  |                |         |                   |   |        
|--------------------- |  | -------------- | ------- | ----------------- | - | -------
|                      |  | March 31, 2006 |         | December 31, 2005
|90-day LIBOR          |  | $              | 338,854 |                   | $ | 331,119
|Commercial Paper Rate |  |                | 185,091 |                   |   | 160,000
|Fixed Rate            |  |                | 50,000  |                   |   | 50,000 
|                      |  |                |         |                   |   |        
|                      |  | $              | 573,945 |                   | $ | 541,119
|                      |  |                |         |                   |   |        



Note 4Share Based Payments



Prior to January 1, 2006, the Company accounted for share
based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Effective January 1, 2006, the Company adopted the Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment, (SFAS No. 123R) using the modified prospective method. The adoption of SFAS No. 123R did not impact the Companys net operating income
before investment gains and losses, net income, cash flows from operations, cash flows from financing activities, or basic and diluted earnings per share during the three months ended March 31, 2006. During the quarter ended March 31, 2006, the
Company recognized compensation expense related to share-based awards in the amount of $1,122 compared with $1,682 during the quarter ended March 31, 2005. Effective January 1, 2006, unearned compensation amounts previously recorded as a
separate component of equity on the Companys balance sheet are included in paid-in capital.



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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)



In 2001, MCG terminated its stock option plan and the option grants made thereunder. In connection
with the termination of its stock option plan, MCG issued 1,539,851 shares of restricted stock. As of March 31, 2006 and December 31, 2005 there were 176,379 and 205,776 shares outstanding, respectively, for which forfeiture restrictions
have not lapsed.



Pro Forma Information Under FAS 123 for Periods Prior to
January 1, 2006



If compensation expense had been
determined consistent with the method in SFAS No. 123, on a pro forma basis, MCGs net income and basic and diluted earnings per share would have been unchanged for the three months ended March 31, 2005.



Note 5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, 2006 and 2005:



|                                                                                   |  |                             |        |      |   |       
|---------------------------------------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------
|                                                                                   |  | Three Months EndedMarch 31,
|                                                                                   |  | 2006                        |        | 2005
|Basic                                                                              |  |                             |        |      |   |       
|Net income                                                                         |  | $                           | 26,402 |      | $ | 13,058
|Weighted average common shares outstanding                                         |  |                             | 53,197 |      |   | 45,108
|Earnings per common share-basic                                                    |  | $                           | 0.50   |      | $ | 0.29  
|Diluted                                                                            |  |                             |        |      |   |       
|Net income                                                                         |  | $                           | 26,402 |      | $ | 13,058
|Weighted average common shares outstanding                                         |  |                             | 53,197 |      |   | 45,108
|Dilutive effect of restricted stock on which forfeiture provisions have not lapsed |  |                             |       |      |   | 41    
|                                                                                   |  |                             |        |      |   |       
|Weighted average common shares and common stock equivalents                        |  |                             | 53,197 |      |   | 45,149
|Earnings per common share-diluted                                                  |  | $                           | 0.50   |      | $ | 0.29  



For purposes of
calculating earnings per common share, unvested restricted common stock whose forfeiture provisions are solely based on continued service conditions are included in diluted earnings per common share using the treasury stock method.



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except share and per share amounts)



Note 6Financial Highlights



Following is a schedule of financial highlights for the three months ended March 31, 2006, and 2005:



|                                                                                |  |                             |         |    |      |   |         |   
|------------------------------------------------------------------------------- |  | --------------------------- | ------- | -- | ---- | - | ------- | --
|                                                                                |  | Three Months EndedMarch 31, |        
|                                                                                |  | 2006                        |         |    | 2005 |  
|Per Share Data:                                                                 |  |                             |         |    |      |   |         |   
|Net asset value at beginning of period (a)                                      |  | $                           | 12.48   |    |      | $ | 12.22   |   
|                                                                                |  |                            
|Net operating income before investment gains and losses (b)                     |  |                             | 0.39    |    |      |   | 0.32    |   
|Net realized gains on investments (b)                                           |  |                             | (0.04   | )  |      |   | 0.41    |   
|Net change in unrealized appreciation (depreciation) on investments (b)         |  |                             | 0.15    |    |      |   | (0.44   | ) 
|                                                                                |  |                             |         |    |      |   |         |   
|Net income                                                                      |  |                             | 0.50    |    |      |   | 0.29    |   
|                                                                                |  |                            
|Distributions from net investment income                                        |  |                             | (0.42   | )  |      |   | (0.42   | ) 
|Antidilutive effect of stock offering on distributions                          |  |                             |        |    |      |   | 0.02    |   
|Antidilutive effect of distributions recorded as compensation expense (b)       |  |                             | 0.01    |    |      |   | 0.01    |   
|                                                                                |  |                             |         |    |      |   |         |   
|Net decrease in stockholders equity resulting from distributions               |  |                             | (0.41   | )  |      |   | (0.39   | ) 
|                                                                                |  |                            
|Net increase in shareholders equity resulting from reduction in employee loans |  |                             | 0.01    |    |      |   |        |   
|Issuance of shares                                                              |  |                             |        |    |      |   | 2.78    |   
|Dilutive effect of share issuances and unvested restricted stock                |  |                             |        |    |      |   | (2.68   | ) 
|Net increase in stockholders equity from restricted stock amortization (b)     |  |                             | 0.01    |    |      |   | 0.03    |   
|                                                                                |  |                             |         |    |      |   |         |   
|Net increase in stockholders equity relating to share issuances                |  |                             | 0.02    |    |      |   | 0.13    |   
|                                                                                |  |                             |         |    |      |   |         |   
|Net asset value at end of period (a)                                            |  | $                           | 12.59   |    |      | $ | 12.25   |   
|                                                                                |  |                             |         |    |      |   |         |   
|Per share market value at end of period                                         |  | $                           | 14.11   |    |      | $ | 15.39   |   
|Total return (c)                                                                |  |                             | (0.41   | )% |      |   | (7.71   | )%
|Shares outstanding at end of period                                             |  |                             | 53,375  |    |      |   | 47,343  |   
|                                                                                |  |                            
|Ratio/Supplemental Data:                                                        |  |                             |         |    |      |   |         |   
|Net assets at end of period                                                     |  | $                           | 671,810 |    |      | $ | 579,934 |   
|Ratio of operating expenses to average net assets (annualized)                  |  |                             | 10.39   | %  |      |   | 9.83    | % 
|Ratio of net operating income to average net assets (annualized)                |  |                             | 12.79   | %  |      |   | 10.45   | % 



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

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

|(c) |  | Total return equals the change in the ending market value over the beginning of period price per share plus dividends paid per share during the period, divided by the beginning
price.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Note 7Subsequent Events



On April 17, 2006, the Company amended its Commercial Loan Funding
Trust Facility, funded through Three Pillars Funding LLC, an asset-backed commercial paper program administered by SunTrust Bank. Pursuant to this amendment, the concentration criteria were modified to allow, among other things, for an increase in
the allowable percentage of certain secured subordinated loans in the collateral pool from 35% to 50% and the inclusion of additional industry segments. Other minor modifications were also made.



On April 18, 2006, the Company completed a $500 million debt
securitization through MCG Commercial Loan Trust 2006-1, a wholly owned subsidiary of the Company.



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##### Table of Contents

MCG Capital Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

(in
thousands, except share and per share amounts)



The 2006-1 Trust issued $106.25 million of Class A-1 Notes rated AAA / Aaa, $50.0 million of
Class A-2 Notes rated AAA / Aaa, $85.0 million of Class A-3 Notes rated AAA / Aaa, $58.75 million of Class B Notes rated AA / Aa2, $45.0 million of Class C Notes rated A / A2 and $47.5 million of Class D Notes rated BBB / Baa2 as rated by
Moodys and S&P, respectively. The Series 2006-1 Class A-1 Notes, Class A-2 Notes, Class A-3 Notes, Class B Notes, Class C Notes and Class D Notes bear interest of LIBOR plus 0.33%, 0.35%, 0.33%, 0.58%, 1.05% and 2.25%,
respectively.



The Company retained all of the equity in the
securitization. The securitization includes a reinvestment period of five years, during which principal collections received on the underlying collateral may be used to purchase new collateral from the Company. Under the terms of the securitization,
up to 55% of the collateral may be non-senior secured commercial loans and the remaining 45% must be senior secured commercial loans.



The Class A-1, Class B, Class C and Class D Notes are term notes. The Class A-2 Notes are a revolving class of secured notes and have a
revolving period of five years. The Class A-3 Notes are a delayed draw class of secured notes and are required to be drawn within the next 12 months. All of the notes are secured by the assets of MCG Commercial Loan Trust 2006-1, including
commercial loans currently totaling $349.7 million, which were purchased by the trust from the Company. Additional commercial loans will be purchased by the trust from the Company primarily using the proceeds from the Class A-3 delayed draw
notes and the Class A-2 revolving notes. The pool of commercial loans in the trust must meet certain requirements, including, but not limited to, asset mix and concentration, collateral coverage, term, agency rating, minimum coupon, minimum
spread and sector diversity requirements.



The new
securitization facility is scheduled to terminate on April 20, 2018, or sooner upon repayment of the offered notes. The proceeds from this transaction will be used to fund the Companys origination of investments and continued growth and
to repay approximately $264.5 million of existing indebtedness. As a result of this transaction, the Companys warehouse credit facility with Merrill Lynch Capital Corp. terminated in accordance with its terms.



On May 2, 2006, the Company established, through MCG Commercial Loan Trust
2006-2, a $250 million warehouse credit facility with Merrill Lynch Capital Corp.



The warehouse credit facility allows MCG Commercial Loan Trust 2006-2 to acquire up to $250 million of commercial loans with borrowings of up to $200 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 2006-2, including the commercial loans purchased by the trust from MCG Capital. Under the terms of the credit and warehouse agreement,
the loans may be senior secured loans, second lien loans or unsecured loans, as defined in the agreement, subject to certain limitations. Up to 60% of the collateral in this warehouse facility may be non-senior secured loans, and the remaining 40%
must be senior secured loans.



The Company intends to use the
warehouse credit facility to fund the origination of a diverse pool of loans that will collateralize a future term securitization. Advances under the facility, equal to 80% of the value of commercial loans purchased by the trust, bear interest based
on LIBOR plus 0.75% and interest is payable monthly. The facility is scheduled to terminate on the earlier of November 30, 2007 or the completion of a term securitization and may be extended under certain circumstances.



26



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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, 2006, including the consolidated schedule of investments, and the related consolidated statements of operations
for the three-month periods ended March 31, 2006 and 2005, the consolidated statements of changes in net assets, cash flows, and financial highlights for the three-month periods ended March 31, 2006 and 2005. 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 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, 2005,
including the consolidated schedule of investments, and the related consolidated statements of operations, stockholders equity, cash flows, and financial highlights for the year then ended (not presented herein), and in our report dated
February 17, 2006 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, 2005, including the consolidated 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 25, 2006



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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 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 industries in which we invest, and such conditions may cause us to suffer losses in our portfolio and experience
diminished demand for capital in these industries;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | the risks associated with the possible disruption in our operations due to terrorism; and
| | - |  | -----------------------------------------------------------------------------------------



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



Although we believe that the assumptions
on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be incorrect. In light of these and
other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report should not be regarded as a representation by us that our plans and objectives will be achieved. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this Quarterly Report. We undertake no obligation to update 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 specialized commercial finance
company providing financing and advisory services to middle market, growth oriented companies throughout the United States. Our capital is generally used by our portfolio companies to finance acquisitions, recapitalizations, buyouts, organic growth
and working capital. We primarily acquire new customers directly through our contacts with owner operators and other investors, such as private equity sponsors. We primarily make secured debt, unsecured debt, and equity investments in companies with
annual revenue of $20 million to $200 million and earnings before interest, taxes, depreciation and amortization (EBITDA) of $3 million to $25 million.



We are an internally managed, non-diversified, closed-end investment company that has elected to be regulated as a business
development company under the Investment Company Act of 1940 or the 1940 Act. As a business development company, we are required to meet various regulatory tests. A business development company is required to invest at least 70% of its
total assets in private or thinly traded public U.S.-based



28



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##### Table of Contents

companies. A business development company also must meet a coverage ratio of total net assets to total senior securities, which include all of our borrowings
(including accrued interest payable) and any preferred stock we may issue in the future, of at least 200%. In addition, we have elected to be treated for federal income tax purposes as a regulated investment company, or RIC, under
Subchapter M of the Internal Revenue Code. A RIC is required to meet certain requirements in order to continue to qualify as a RIC for federal income tax purposes, including certain minimum distribution requirements. Pursuant to this election, we
generally will not have to pay corporate-level taxes on any income we distribute to our stockholders as dividends, allowing us to substantially reduce or eliminate our corporate-level tax liability.



Portfolio Composition and Investment Activity



The total portfolio value of our investments was $1,105.1 million and
$1,097.6 million at March 31, 2006 and December 31, 2005, respectively (exclusive of unearned income). The increase of $7.5 million in total investments during the first three months of 2006 was due to newly originated investments, offset
by debt repayments and sales of equity investments. The increase is also due to additional investments in existing portfolio companies, accrual of payment-in-kind interest and dividends and changes in fair value. During the first three months of
2006, we originated investments in 11 portfolio companies (some of which were new customers and some of which were existing customers) and made advances to existing customers under existing contractual terms. Our gross originations and advances
totaled $132.1 million during the three months ended March 31, 2006.



We receive payments in our loan portfolio based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some of our loans prior to their scheduled maturity date. The frequency or
volume of these repayments may fluctuate significantly from period to period. For the three months ended March 31, 2006, we had $126.4 million of loan repayments and $3.8 million of sales of equity securities.



Total portfolio investment activity (exclusive of unearned income) for the
three months ended March 31, 2006 was as follows:



|                                              |  |   |         |  
|--------------------------------------------- |  | - | ------- | -
|(dollars in millions)                         |  |   |        
|Investment portfolio at 12/31/05              |  | $ | 1,097.6 |  
|Originations and advances                     |  |   | 132.1   |  
|Gross payments/reductions/sales of securities |  |   | (130.2  | )
|Net unrealized gains                          |  |   | 4.8     |  
|Net realized losses                           |  |   | (2.2    | )
|Reversals of unrealized depreciation          |  |   | 3.0     |  
|                                              |  |   |         |  
|Investment Portfolio at 3/31/06               |  | $ | 1,105.1 |  
|                                              |  |   |         |  



The following table
shows the fair value of our portfolio of investments by asset class as of March 31, 2006 and December 31, 2005 (excluding unearned income):



|                                 |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|-------------------------------- |  | ------------------------ | ------- | ---------------------------- | ----------------- | - | ------------------------ | - | ---------------------------- |  | ----- | -
|                                 |  | March 31, 2006           |         |                              | December 31, 2005 |  
|(dollars in millions)            |  | Investments atFair Value |         | Percentage ofTotal Portfolio |                   |   | Investments atFair Value |   | Percentage ofTotal Portfolio | 
|Secured Senior Debt              |  | $                        | 461.8   |                              | 41.8              | % |                          | $ | 543.0                        |  | 49.5  | %
|Subordinated Debt                |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|Secured                          |  |                          | 386.1   |                              | 34.9              |   |                          |   | 329.5                        |  | 30.0  |  
|Unsecured                        |  |                          | 63.2    |                              | 5.7               |   |                          |   | 61.6                         |  | 5.6   |  
|Investments in equity securities |  |                          | 194.0   |                              | 17.6              |   |                          |   | 163.5                        |  | 14.9  |  
|                                 |  |                          |         |                              |                   |   |                          |   |                              |  |       |  
|                                 |  | $                        | 1,105.1 |                              | 100.0             | % |                          | $ | 1,097.6                      |  | 100.0 | %
|                                 |  |                          |         |                              |                   |   |                          |   |                              |  |       |  



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The following table shows our portfolio of investments by industry at fair value, as of March 31,
2006 and December 31, 2005 (excluding unearned income):



|                                           |  |                          |         |                              |                   |   |                              |   |                              |  |       |  
|------------------------------------------ |  | ------------------------ | ------- | ---------------------------- | ----------------- | - | ---------------------------- | - | ---------------------------- |  | ----- | -
|                                           |  | March 31, 2006           |         |                              | December 31, 2005 |  
|(dollars in millions)                      |  | Investments atFair Value |         | Percentage ofTotal Portfolio |                   |   | Investments atFair Value (a) |   | Percentage ofTotal Portfolio | 
|Communications:                            |  |                          |         |                              |                   |   |                              |   |                              |  |       |  
|CLEC (competitive local exchange carriers) |  | $                        | 219.7   |                              | 19.9              | % |                              | $ | 213.1                        |  | 19.4  | %
|Other                                      |  |                          | 68.1    |                              | 6.2               |   |                              |   | 69.1                         |  | 6.3   |  
|Healthcare                                 |  |                          | 132.4   |                              | 12.0              |   |                              |   | 91.1                         |  | 8.4   |  
|Newspaper                                  |  |                          | 111.0   |                              | 10.0              |   |                              |   | 112.8                        |  | 10.3  |  
|Information Services                       |  |                          | 78.8    |                              | 7.1               |   |                              |   | 75.4                         |  | 6.9   |  
|Broadcasting                               |  |                          | 74.5    |                              | 6.7               |   |                              |   | 65.2                         |  | 5.9   |  
|Publishing                                 |  |                          | 55.0    |                              | 5.0               |   |                              |   | 72.3                         |  | 6.6   |  
|Laboratory Instruments                     |  |                          | 52.0    |                              | 4.7               |   |                              |   | 52.1                         |  | 4.8   |  
|Technology                                 |  |                          | 47.6    |                              | 4.3               |   |                              |   | 66.1                         |  | 6.0   |  
|Electronics                                |  |                          | 34.3    |                              | 3.1               |   |                              |   | 34.1                         |  | 3.1   |  
|Education                                  |  |                          | 29.7    |                              | 2.7               |   |                              |   | 19.5                         |  | 1.8   |  
|Retail                                     |  |                          | 26.8    |                              | 2.4               |   |                              |   | 20.5                         |  | 1.9   |  
|Drugs                                      |  |                          | 23.8    |                              | 2.2               |   |                              |   | 28.7                         |  | 2.6   |  
|Business Services                          |  |                          | 22.2    |                              | 2.0               |   |                              |   | 22.2                         |  | 2.0   |  
|Auto Parts                                 |  |                          | 17.0    |                              | 1.5               |   |                              |   | 17.0                         |  | 1.5   |  
|Food Services                              |  |                          | 14.4    |                              | 1.3               |   |                              |   |                             |  |      |  
|Cosmetics                                  |  |                          | 13.8    |                              | 1.2               |   |                              |   | 11.3                         |  | 1.0   |  
|Car Rental                                 |  |                          | 13.5    |                              | 1.2               |   |                              |   | 13.5                         |  | 1.2   |  
|Leisure Activities                         |  |                          | 13.5    |                              | 1.2               |   |                              |   | 13.4                         |  | 1.2   |  
|Home Furnishings                           |  |                          | 10.4    |                              | 0.9               |   |                              |   | 10.3                         |  | 0.9   |  
|Other Media                                |  |                          | 2.6     |                              | 0.2               |   |                              |   | 33.9                         |  | 3.1   |  
|Other (b)                                  |  |                          | 44.0    |                              | 4.2               |   |                              |   | 56.0                         |  | 5.1   |  
|                                           |  |                          |         |                              |                   |   |                              |   |                              |  |       |  
|Total                                      |  | $                        | 1,105.1 |                              | 100.0             | % |                              | $ | 1,097.6                      |  | 100.0 | %
|                                           |  |                          |         |                              |                   |   |                              |   |                              |  |       |  



|(a) |  | Certain amounts have been reclassified into different industries to conform to the current period industry breakdowns.
|--- |  | ----------------------------------------------------------------------------------------------------------------------

|(b) |  | No individual industry within this category exceeds 1%.
|--- |  | -------------------------------------------------------



Asset Quality



Asset quality is generally a function of portfolio company performance, economic conditions, our underwriting and ongoing management of our investment
portfolio. 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:



|                 |  |                                                                                                                                                                
|---------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|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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The following tables show the distribution of our investments on the 1 to 5 investment rating scale at
fair value as of March 31, 2006 and December 31, 2005:



|                      |  |                          |         |     |                              |       |   |                          |   |         |                              |  |       |  
|--------------------- |  | ------------------------ | ------- | --- | ---------------------------- | ----- | - | ------------------------ | - | ------- | ---------------------------- |  | ----- | -
|(dollars in millions) |  |                          |         |     |                              |       |   |                          |   |        
|                      |  | March 31, 2006           |         |     | December 31, 2005            |      
|InvestmentRating      |  | Investments atFair Value |         |     | Percentage ofTotal Portfolio |       |   | Investments atFair Value |   |         | Percentage ofTotal Portfolio | 
|1                     |  | $                        | 499.8   | (a) |                              | 45.2  | % |                          | $ | 459.0   | (a)                          |  | 41.8  | %
|2                     |  |                          | 349.7   |     |                              | 31.6  |   |                          |   | 429.9   |                              |  | 39.2  |  
|3                     |  |                          | 178.6   |     |                              | 16.2  |   |                          |   | 128.0   |                              |  | 11.7  |  
|4                     |  |                          | 75.9    |     |                              | 6.9   |   |                          |   | 77.4    |                              |  | 7.0   |  
|5                     |  |                          | 1.1     |     |                              | 0.1   |   |                          |   | 3.3     |                              |  | 0.3   |  
|                      |  |                          |         |     |                              |       |   |                          |   |         |                              |  |       |  
|                      |  | $                        | 1,105.1 |     |                              | 100.0 | % |                          | $ | 1,097.6 |                              |  | 100.0 | %
|                      |  |                          |         |     |                              |       |   |                          |   |         |                              |  |       |  



|a) |  | Of this amount, $15.9 million at March 31, 2006 and $16.7 million at December 31, 2005 relate to debt instruments in companies for which we have already realized a gain
through the sale of equity instruments. While these debt instruments 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.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



At March 31, 2006, none of the investments with a 5 rating were
loans, and $30.7 million of the investments with a 4 rating were loans, $9.3 million of which were on non-accrual status. At December 31, 2005, $1.1 million of the investments with a 5 rating were loans, all of which were on non-accrual status,
and $32.5 million of the investments with a 4 rating were loans, $10.7 million of which were on non-accrual status.



At March 31, 2006 and December 31, 2005, there were $12.8 million and $16.8 million, respectively, of loans, or approximately 1.2% and 1.5%,
respectively, of our total investment portfolio, greater than 60 days past due. At March 31, 2006, $23.9 million of loans, including all of the loans greater than 60 days past due, were on non-accrual status, representing 2.2% of our total
investment portfolio. At December 31, 2005, $12.7 million of loans, including $3.2 million of the loans greater than 60 days past due, were on non-accrual status representing 1.2% of our total investment portfolio.



At March 31, 2006, of the $188.2 million of loans to our majority owned
portfolio companies, $10.0 million were on non-accrual status. At December 31, 2005, of the $166.6 million of loans to our majority owned portfolio companies, $10.6 million were on non-accrual status. At March 31, 2006, of the $13.1
million of loans to our controlled non-majority owned portfolio companies, $12.8 million were on non-accrual status. At December 31, 2005, of the $14.1 million of loans to our controlled non-majority owned portfolio companies, $0.6 million were
on non-accrual status. As of March 31, 2006, of the $29.9 million of loans to other affiliates, none were on non-accrual status. As of December 31, 2005, of the $43.5 million of loans to other affiliates, none were on non-accrual status.



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Results of Operations



Comparison of the Three Months Ended March 31, 2006 and 2005



The following table shows the components of our net income for the three
months ended March 31, 2006, and 2005:



|                                   |  |                             |      |      |        |      |   |                  |   |      |   |  |     |   
|---------------------------------- |  | --------------------------- | ---- | ---- | ------ | ---- | - | ---------------- | - | ---- | - |  | --- | --
|                                   |  | Three Months EndedMarch 31, |      |      | Change |      |   | PercentageChange |  
|(dollars in millions)              |  | 2006                        |      | 2005 |        |      |  
|Operating income                   |  |                             |      |      |        |      |   |                  |   |      |   |  |     |   
|Interest and dividend income       |  | $                           | 30.1 |      | $      | 21.7 |   |                  | $ | 8.4  |   |  | 39  | % 
|Loan fees                          |  |                             | 2.4  |      |        | 2.9  |   |                  |   | (0.5 | ) |  | (17 | )%
|                                   |  |                             |      |      |        |      |   |                  |   |      |   |  |     |   
|Total interest and dividend income |  |                             | 32.5 |      |        | 24.6 |   |                  |   | 7.9  |   |  | 32  | % 
|Advisory fees and other income     |  |                             | 5.1  |      |        | 3.5  |   |                  |   | 1.6  |   |  | 46  | % 
|                                   |  |                             |      |      |        |      |   |                  |   |      |   |  |     |   
|Total operating income             |  |                             | 37.6 |      |        | 28.1 |   |                  |   | 9.5  |   |  | 34  | % 
|                                   |  |                             |      |     
|Operating expenses                 |  |                             |      |      |        |      |   |                  |   |      |   |  |     |   
|Interest expense                   |  |                             | 8.9  |      |        | 4.7  |   |                  |   | 4.2  |   |  | 89  | % 
|Employee compensation:             |  |                             |      |      |        |      |   |                  |   |      |   |  |     |   
|Salaries and benefits              |  |                             | 4.9  |      |        | 4.7  |   |                  |   | 0.2  |   |  | 4   | % 
|Long-term incentive compensation   |  |                             | 1.1  |      |        | 1.7  |   |                  |   | (0.6 | ) |  | (35 | )%
|                                   |  |                             |      |      |        |      |   |                  |   |      |   |  |     |   
|Total employee compensation        |  |                             | 6.0  |      |        | 6.4  |   |                  |   | (0.4 | ) |  | (6  | )%
|                                   |  |                             |      |     
|General and administrative expense |  |                             | 1.9  |      |        | 2.5  |   |                  |   | (0.6 | ) |  | (24 | )%
|                                   |  |                             |      |      |        |      |   |                  |   |      |   |  |     |   
|Total operating expenses           |  |                             | 16.8 |      |        | 13.6 |   |                  |   | 3.2  |   |  | 24  | % 
|                                   |  |                             |      |      |        |      |   |                  |   |      |   |  |     |   
|Net operating income               |  |                             | 20.8 |      |        | 14.5 |   |                  |   | 6.3  |   |  | 43  | % 
|                                   |  |                             |      |     
|Net investment gains               |  |                             | 5.6  |      |        | (1.4 | ) |                  |   | 7.0  |   |  | 500 | % 
|                                   |  |                             |      |      |        |      |   |                  |   |      |   |  |     |   
|Net income                         |  | $                           | 26.4 |      | $      | 13.1 |   |                  | $ | 13.3 |   |  | 102 | % 
|                                   |  |                             |      |      |        |      |   |                  |   |      |   |  |     |   



Total Operating Income



Total operating income includes interest and dividend
income, loan fees and fees and other income. The level of interest income is directly related to the balance of the interest-bearing investment portfolio outstanding during the period multiplied by the weighted average yield. The weighted average
yield varies from period to period based on the current stated interest rate on interest-bearing investments and the amounts of loans for which interest is not accruing. Dividend income results from dividends earned on our yielding equity
investments. Dividend income will vary from period to period depending upon the level of yield on our equity investments and the amount of yielding equities outstanding, as well as the value of the underlying securities.



The increase in interest and dividend income for the three months ended
March 31, 2006, as compared to the three months ended March 31, 2005, is due to growth in average loans, which had an impact of $4.3 million, an increase in LIBOR, which had an impact of $4.0 million and an increase in dividend income,
primarily attributable to an increase in yielding equity investments, which had an impact of $0.3 million. These increases were partially offset by a decrease in the spread to LIBOR in our loan portfolio, which had an impact of ($0.2) million. The
majority of the decrease in the spread to LIBOR is related to holding fixed rate loans and loans with LIBOR floors in a rising interest rate environment, as well as fluctuations due to payoff and origination activity. The total yield on our total
investment portfolio, at cost, for the three months ended March 31, 2006 and 2005 was 11.8% and 11.0%, respectively. The total yield on our debt portfolio at fair value for the three months ended March 31, 2006 and March 31, 2005 was
12.7% and 11.4%, respectively.



32



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At March 31, 2006, our investment in Broadview accounted for approximately 9.0% of the fair value of
our investments and $4.2 million, or 11.2%, of our total operating income for the period then ended. Our operating income related to Broadview was comprised of interest and dividends on our loan and equity investments. Our preferred stock investment
in Broadview, which had a fair value of $55.1 million as of March 31, 2006, entitles us to a preferred claim of approximately $90 million plus accrued dividends, which accumulate at an annual rate of 12% on our preferred claim. We currently
expect that our Broadview investment will continue to comprise a material component of our operating income. In future periods, our ability to record income related to the accumulating dividends on our preferred securities and deferred interest on
our loan investment will be dependent upon the performance and value of Broadview.



Loan fees for the three months ended March 31, 2006 and 2005, included fees relating to the following:



|                      |  |                             |     |      |   |    
|--------------------- |  | --------------------------- | --- | ---- | - | ---
|                      |  | Three Months EndedMarch 31,
|(dollars in millions) |  | 2006                        |     | 2005
|Amortizing fee income |  | $                           | 0.8 |      | $ | 1.1
|Fee accelerations     |  |                             | 1.6 |      |   | 1.8
|                      |  |                             |     |      |   |    
|Total loan fees       |  | $                           | 2.4 |      | $ | 2.9
|                      |  |                             |     |      |   |    



Loan fees include
origination fees on loans that are capitalized and amortized into interest income over the life of the loan. When repayments or restructurings with other than minor modifications occur, we accelerate the recognition into loan fee income of
previously unamortized loan origination fees. These accelerations have the effect of increasing current period income and may reduce future amortizable income. Because these repayments and restructurings may vary from period to period, the amount of
loan origination fees that are recognized as interest income may also vary from period to period. The decrease in amortizing fee income for the three months ended March 31, 2006 as compared to the three months ended March 31, 2005 is
related primarily to the decrease in our average origination fees on new loans.



Fees and other income primarily include fees related to advisory and management services, prepayment fees, research revenues, bank interest and other income. Fees and other income are generally related to specific
transactions or services and therefore may vary from period to period depending on the level and types of services provided. The increase in fees and other income of $1.6 million for the three months ended March 31, 2006 as compared to the
three months ended March 31, 2005 was primarily due to increases in prepayment fees of approximately $2.4 million, advisory fees of approximately $0.4 million and bank interest of approximately $0.2 million, offset by a decrease in research
fees of ($1.4) due to the deconsolidation of Kagan Research, LLC effective January 1, 2006.



Total Operating Expenses



Operating expenses include interest, employee compensation and general and administrative expenses. The increase in interest expense during the three months ended March 31, 2006 as compared to the three months ended March 31,
2005, is primarily attributable to an increase of $2.5 million due to increases in LIBOR, an increase of $1.0 million due to increases in the spread to LIBOR, and an increase of $0.7 million due to higher average borrowings. Of the $1.0 million
increase due to increases in the spread to LIBOR, $0.6 million is attributable to the amortization of deferred debt issuance costs. The increase in deferred debt issuance cost amortization is primarily attributable to loan repayments, which, in
certain instances, require us to accelerate amortization of these costs.



Employee compensation includes base salaries and benefits, variable annual incentive compensation, and long-term incentive compensation. The increase in salaries and benefits expense during the three months ended
March 31, 2006 as compared to the three months ended March 31, 2005 is primarily due to increased staffing and variable annual incentive compensation, partially offset by a decrease due to the deconsolidation of Kagan Research, LLC.
Long-term incentive compensation expense is made up of non-cash amortization of restricted



33



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##### Table of Contents

stock awards granted in 2001 and dividends on restricted shares with performance based forfeiture restrictions and shares securing employee loans. Long-term
incentive compensation decreased $0.6 million for the three months ended March 31, 2006 compared to the three months ended March 31, 2005 due to a fewer number or restricted shares vesting during the three months ended March 31, 2006
compared to the three months ended March 31, 2005.



General and administrative expenses include legal and accounting fees, insurance premiums, rent and various other expenses. General and administrative expenses decreased approximately ($0.6) million during the three months ended
March 31, 2006 compared to the three months ended March 31, 2005 due to the deconsolidation of Kagan Research LLC.



Net Operating Income Before Investment Gains and Losses



Net operating income before investment gains and losses (NOI) for the three months ended March 31, 2006 totaled $20.8 million, an increase of
approximately 43% compared with $14.5 million for the three months ended March 31, 2005. This increase is due to the items discussed above. During the three months ended March 31, 2005, our wholly owned subsidiary, Kagan Research, LLC,
accounted for losses of $(0.3) million. Effective January 1, 2006 Kagan Research, LLC no longer qualifies to be a consolidated subsidiary of the Company.



Net Investment Gains and Losses



The following table summarizes our realized gains and (losses) on investments for the three months ended March 31, 2006 and 2005:



|                                                |  |                      |      |                    |  |                             |        |   |  |   |        |  
|----------------------------------------------- |  | -------------------- | ---- | ------------------ |  | --------------------------- | ------ | - |  | - | ------ | -
|(dollars in thousands)  Portfolio Company       |  | Industry             |      | Year ofOrigination |  | Three Months EndedMarch 31, |       
|                                                |  |                      | 2006 |                    |  | 2005                        |       
|Corporate Legal Times                           |  | Publishing           |      | 1998               |  | $                           |       |   |  | $ | (287   | )
|Executive Enterprise Institute, LLC             |  | Business Sevices     |      | 1998               |  |                             |       |   |  |   | (190   | )
|Metropolitan Telecommunications Holding Company |  | Communications       |      | 1999               |  |                             | 575    |   |  |   |       |  
|Creatas, L.L.C.                                 |  | Information Services |      | 2000               |  |                             |       |   |  |   | 20,431 |  
|Copperstate Technologies, Inc.                  |  | Security Alarm       |      | 2002               |  |                             | (1,483 | ) |  |   |       |  
|iVerify. US Inc.                                |  | Security Alarm       |      | 2002               |  |                             |       |   |  |   | (1,750 | )
|Telecomm South, LLC                             |  | Communications       |      | 2002               |  |                             | (1,493 | ) |  |   |       |  
|Other                                           |  |                      |      |                    |  |                             | 185    |   |  |   | 84     |  
|                                                |  |                      |      |                    |  |                             |        |   |  |   |        |  
|Net realized gains (losses) on investments      |  |                      |      |                    |  | $                           | (2,216 | ) |  | $ | 18,288 |  
|                                                |  |                      |      |                    |  |                             |        |   |  |   |        |  



34



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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, 2006 and 2005:



|                                                          |  |                      |  |                             |       |   |      |   |         |  
|--------------------------------------------------------- |  | -------------------- |  | --------------------------- | ----- | - | ---- | - | ------- | -
|(dollars in thousands)                                    |  |                      |  | Three Months EndedMarch 31, |      
|Portfolio Company                                         |  | Industry             |  | 2006                        |       |   | 2005 |  
|Unrealized appreciation (depreciation) on investments     |  |                      |  |                             |       |   |      |   |         |  
|Stratford School Holdings, Inc.                           |  | Education            |  | $                           | 2,005 |   |      | $ |        |  
|SXC Health Solutions, Inc.                                |  | Technology           |  |                             | 1,179 |   |      |   | 59      |  
|Fawcette Technical Publications Holding                   |  | Publishing           |  |                             | (874  | ) |      |   | (2,161  | )
|Metropolitan Telecommunications Holding Company           |  | Communications       |  |                             | 795   |   |      |   | 267     |  
|Jenzabar, Inc.                                            |  | Technology           |  |                             | 631   |   |      |   | 3       |  
|Jupitermedia Corporation                                  |  | Technology           |  |                             | 451   |   |      |   | 439     |  
|Wiesner Publishing Company, LLC                           |  | Publishing           |  |                             | 450   |   |      |   | 1,548   |  
|Working Mother Media, Inc.                                |  | Publishing           |  |                             | 228   |   |      |   | (1,039  | )
|Miles Media Holding, Inc.                                 |  | Publishing           |  |                             | 193   |   |      |   | 13      |  
|Midwest Tower Partners, LLC                               |  | Communications       |  |                             | (152  | ) |      |   | 1,382   |  
|Superior Publishing Corporation                           |  | Newspaper            |  |                             | (77   | ) |      |   | 730     |  
|Sunshine Media Delaware, LLC                              |  | Publishing           |  |                             | 55    |   |      |   | 546     |  
|IDS Telcom LLC                                            |  | Communications       |  |                             |      |   |      |   | (692    | )
|Cleartel                                                  |  | Communications       |  |                             |      |   |      |   | (734    | )
|Copperstate Technologies, Inc.                            |  | Security Alarm       |  |                             |      |   |      |   | 470     |  
|CCG Consulting, LLC                                       |  | Business Services    |  |                             |      |   |      |   | (465    | )
|ETC Group, LLC                                            |  | Publishing           |  |                             |      |   |      |   | 444     |  
|Other                                                     |  |                      |  |                             | (37   | ) |      |   | 124     |  
|                                                          |  |                      |  |                             |       |   |      |   |         |  
|Unrealized appreciation on investments                    |  |                      |  |                             | 4,847 |   |      |   | 934     |  
|                                                          |  |                      |  |                             |       |   |      |   |         |  
|                                                          |  |                      | 
|Reversal of unrealized (appreciation) depreciation*       |  |                      |  |                             |       |   |      |   |         |  
|                                                          |  |                      |  |                             |       |   |      |   |         |  
|Telecomm South, LLC                                       |  | Communications       |  |                             | 1,493 |   |      |   |        |  
|Copperstate Technologies, Inc.                            |  | Security Alarm       |  |                             | 1,053 |   |      |   |        |  
|I-55 Internet Services, Inc.                              |  | Communications       |  |                             | 606   |   |      |   |        |  
|Creatas, L.L.C.                                           |  | Information Services |  |                             |      |   |      |   | (22,138 | )
|Interactive Business Solutions, Inc.                      |  | Security Alarm       |  |                             |      |   |      |   | 1,826   |  
|Bridgecom Holdings, Inc. after acquisition                |  | Communications       |  |                             |      |   |      |   | (497    | )
|Corporate Legal Times                                     |  | Publishing           |  |                             |      |   |      |   | 339     |  
|Executive Enterprise Institute, LLC                       |  | Business Services    |  |                             |      |   |      |   | 190     |  
|Other                                                     |  |                      |  |                             | (145  | ) |      |   | (375    | )
|                                                          |  |                      |  |                             |       |   |      |   |         |  
|Net reversal of unrealized (appreciation) depreciation    |  |                      |  |                             | 3,007 |   |      |   | (20,655 | )
|                                                          |  |                      |  |                             |       |   |      |   |         |  
|Net unrealized appreciation (depreciation) on investments |  |                      |  | $                           | 7,854 |   |      | $ | (19,721 | )
|                                                          |  |                      |  |                             |       |   |      |   |         |  



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



Net investment gains totaled $5.6 million for the three months ended March 31, 2006, compared to net investment losses
of ($1.4) million for the three months ended March 31, 2005. 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 tables above. Reversals of unrealized appreciation and depreciation occur when a gain or loss becomes realized. The net investment gains for the three months ended March 31, 2006 were primarily attributable to five of our
portfolio companies in the technology, communications and education industries. The net investment losses for the three months ended March 31, 2005 were primarily due to a $20.4 million realized gain on the sale of our Creatas equity
investment, offset by a the reversal of unrealized appreciation on the Creatas investment totaling ($22.1) million, and the net investment gains on two companies in the security alarm industry.



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##### Table of Contents

Net Income



Net income totaled $26.4 million for the three months ended March 31, 2006, compared to $13.1 million for the three months ended March 31, 2005.
The increase in net income is due to the items discussed above.



Financial Condition, Liquidity and Capital Resources



Cash
and Cash Equivalents, Cash, Securitization Accounts, and Cash, Restricted



At March 31, 2006 and December 31, 2005, we had $42.2 million and $45.6 million, respectively, in cash and cash equivalents. In addition, at March 31, 2006 and December 31, 2005, we had $119.6
million and $82.1 million, respectively, in cash, securitization accounts. We also had $1.2 million and $2.0 million of restricted cash as of March 31, 2006 and December 31, 2005, respectively. We primarily invest cash on hand in interest
bearing deposit accounts. Cash, securitization accounts include payments received on securitized loans, which are held in designated bank accounts until monthly or quarterly disbursements are made from the securitization trusts. 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. Cash in securitization accounts negatively impacts our earnings since the interest we pay on
borrowings typically exceeds the rate of return that we are able to earn on temporary cash investments. Our objective is to maintain sufficient cash on hand to cover current funding requirements and operational needs.



For the first three months of 2006, net cash provided by operating activities
totaled $22.7 million, an increase of approximately $9.0 million from the first three months of 2005. This increase was due primarily to an increase in net operating income. Cash provided by investing activities totaled $2.3 million for the three
months ended March 31, 2006 compared with cash used in investing activities ($8.6) million for the three months ended March 31, 2005. This change is primarily the result of an increase in the amount of proceeds from payments of
investments, partially offset by originations of investments. Cash used in financing activities was ($28.5) million for the three months ended March 31, 2006, compared to cash used by financing activities of ($37.1) million for the three months
ended March 31, 2005. The decrease in cash used in financing activities is primarily the result of a smaller increase in cash, securitization accounts, partially offset by a decrease in proceeds from the 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. Our secured borrowing facilities generally contain collateral requirements, including, but not limited to, asset mix, minimum diversity and rating and limitations on loan size. These limitations limit our ability to
fund certain new originations with advances under such facilities, in which case we fund originations using unsecured debt or equity financings.



During the first three months of 2006 we did not raise any proceeds through the sale of newly issued common stock. During the first three months of 2005
we raised $31.5 million of gross proceeds by selling 2,000,000 shares of newly issued common stock.



In order to satisfy the requirements applicable to a regulated investment company, we intend to distribute to our stockholders substantially all of our
income. 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, 2006, this ratio was 213%. 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 various debt markets. We intend to maintain a current shelf registration statement pursuant to which we may issue common stock from time to time.



36



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##### Table of Contents

Off-Balance Sheet Arrangements



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



As of March 31, 2006, we had unused commitments to extend credit to our customers of $51.7 million, which are not reflected on our balance sheet. From time to time, we provide guarantees or standby letters of credit on behalf of our
portfolio companies. As of March 31, 2006, we had guarantees and standby letters of credit of approximately $9.0 million.



Contractual Obligations



The following table shows our contractual obligations as of March 31, 2006:



|                                               |  |                        |       |                  |   |       |           |  |           |      |               |   |      |  |   |    
|---------------------------------------------- |  | ---------------------- | ----- | ---------------- | - | ----- | --------- |  | --------- | ---- | ------------- | - | ---- |  | - | ---
|                                               |  | Payments Due by Period
|dollars in millions Contractual
Obligations(a) |  | Total                  |       | Less than 1 year |   |       | 1-3 years |  | 4-5 years |      | After 5 years
|Borrowings(b)                                  |  | $                      | 573.9 |                  | $ | 469.6 | (c)       |  | $         | 32.8 |               | $ | 71.5 |  | $ |   
|Future minimum rental obligations              |  |                        | 10.0  |                  |   | 1.4   |           |  |           | 2.9  |               |   | 3.0  |  |   | 2.7
|                                               |  |                        |       |                  |   |       |           |  |           |      |               |   |      |  |   |    
|Total contractual obligations                  |  | $                      | 583.9 |                  | $ | 471.0 |           |  | $         | 35.7 |               | $ | 74.5 |  | $ | 2.7
|                                               |  |                        |       |                  |   |       |           |  |           |      |               |   |      |  |   |    



|(a) |  | This excludes the unused commitments to extend credit to our customers of $51.7 million as discussed above.
|--- |  | -----------------------------------------------------------------------------------------------------------

|(b) |  | Borrowings under the MCG Commercial Loan Funding Trust Facility and the Revolving Unsecured Credit Facility are listed based on the contractual maturity of the respective facility
due to the revolving nature of the facilities. The contractual obligations listed above related to the Series 2004-1 Notes, are based on the contractual principal payments on the loans which comprise the collateral in that facility. The terms of the
Series 2004-1 Notes require these principal collections on the loans which comprise the collateral to be used to repay the notes. Actual repayments could differ significantly due to prepayments by our borrowers and modifications of our
borrowers existing loan agreements. These amounts do not include interest on the borrowings.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) |  | Of the amount due in less than one year, $264.5 was repaid subsequent to March 31, 2006 using the proceeds from our Commercial Loan Trust 2006-1 securitization. See
Recent Developments.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Borrowings



At March 31, 2006 and December 31, 2005, we had
aggregate outstanding borrowings of $573.9 million and $541.1 million, respectively. The following table shows the facility amounts and outstanding borrowings at March 31, 2006 and December 31, 2005:



|                                           |  |                |       |                   |   |                |  |                   |       |  |   |      
|------------------------------------------ |  | -------------- | ----- | ----------------- | - | -------------- |  | ----------------- | ----- |  | - | -----
|                                           |  | March 31, 2006 |       | December 31, 2005
|(dollars in millions)                      |  | Facilityamount |       | Amountoutstanding |   | Facilityamount |  | Amountoutstanding
|Unsecured Notes                            |  | $              | 50.0  |                   | $ | 50.0           |  | $                 | 50.0  |  | $ | 50.0 
|Commercial Loan Trust 2005-2               |  |                | 250.0 |                   |   | 181.8          |  |                   | 250.0 |  |   | 159.2
|Commercial Loan Funding Trust Facility     |  |                | 250.0 |                   |   | 185.1          |  |                   | 250.0 |  |   | 160.0
|Term Securitizations                       |  |                |       |                   |   |                |  |                   |       |  |   |      
|Series 2004-1 Class A-1 Asset Backed Bonds |  |                | 43.2  |                   |   | 43.2           |  |                   | 81.1  |  |   | 81.1 
|Series 2004-1 Class A-2 Asset Backed Bonds |  |                | 31.5  |                   |   | 31.5           |  |                   | 31.5  |  |   | 31.5 
|Series 2004-1 Class B Asset Backed Bonds   |  |                | 43.5  |                   |   | 43.5           |  |                   | 43.5  |  |   | 43.5 
|Series 2004-1 Class C Asset Backed Bonds   |  |                | 15.8  |                   |   | 15.8           |  |                   | 15.8  |  |   | 15.8 
|Revolving Unsecured Credit Facility        |  |                | 50.0  |                   |   | 23.0           |  |                   | 50.0  |  |   |     
|                                           |  |                |       |                   |   |                |  |                   |       |  |   |      
|Total                                      |  | $              | 734.0 |                   | $ | 573.9          |  | $                 | 771.9 |  | $ | 541.1
|                                           |  |                |       |                   |   |                |  |                   |       |  |   |      



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Our weighted average borrowings for the three months ended March 31, 2006 and 2005 were $533.9
million and $462.5 million, respectively. The weighted average interest rate on all of our borrowings, including amortization of deferred debt issuance costs and commitment fees, for the three months ended March 31, 2006 and 2005 was 6.68% and
4.05%, respectively. This increase of approximately 2.63% in the weighted average interest rate for the three months ended March 31, 2006 compared to the three months ended March 31, 2005 was primarily attributable to an increase in average LIBOR of
1.92%, as well as increases in the average spread to LIBOR of 0.32% and increases in deferred debt issuance cost amortization of 0.39%. The increase in deferred debt issuance cost amortization is primarily attributable to loan repayments, which, in
certain instances, require us to accelerate amortization of these costs. For the above borrowings, the fair value of the borrowings approximates cost.



All of our debt facilities, except the Revolving Unsecured Credit Facility and the Unsecured Notes, are funded through our bankruptcy remote, special
purpose, wholly owned subsidiaries and, therefore, their assets may not be available to our creditors. In some cases, advances under our debt facilities are subject to certain other covenants, including having sufficient levels of collateral and
various restrictions on which loans we may leverage as collateral.



Subsequent to March 31, 2006, we completed a $500 million debt securitization. In connection with this securitization transaction, we repaid $264.5 million of existing indebtedness under our Commercial Loan Trust 2005-2 and Commercial Loan
Funding Trust facilities and terminated our Commercial Loan Trust 2005-2 credit facility in accordance with its terms. See Recent Developments.



Unsecured Notes. On October 11, 2005, we issued $50.0 million of investment grade five-year unsecured notes
in a private placement. The notes were rated BBB- by Fitch Ratings, Inc. and have a fixed interest rate of 6.73% per year payable semi-annually. Bayerische Hypo-Und Vereinsbank, AG, New York Branch (HVB) acted as the
placement agent for the issuance.



Commercial Loan Trust
2005-2. On June 9, 2005, we established, through MCG Commercial Loan Trust 2005-2, a $250.0 million warehouse credit facility with Merrill Lynch Capital Corp. On April 18, 2006, this facility terminated in connection with our Term
Securitization 2006-1. See Recent Developments. The warehouse credit facility allowed MCG Commercial Loan Trust 2005-2 to borrow up to $250.0 million subject to certain covenants, concentration limitations and other restrictions.
The warehouse credit facility was primarily secured by the assets of MCG Commercial Loan Trust 2005-2, including cash and commercial loans transferred by us to the trust. Under the terms of the credit and warehouse agreement, the loans could be
senior secured loans, second lien loans or unsecured loans, as defined in the agreement, subject to certain limitations, including the requirement that at least 50% of the overall warehouse facility amount be senior secured commercial loans.
Advances under the facility bore interest based on LIBOR plus 0.75% and interest was payable monthly. As of March 31, 2006, we had $181.8 million outstanding under this credit facility, all of which was repaid in connection with the completion
of the Term Securitization 2006-1.



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 by us to the trust. 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 industry 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. Through July 29,
2005, advances under the facility bore interest based on a commercial paper rate plus 1.15%.



On July 29, 2005, we amended the Commercial Loan Funding Trust Facility. Pursuant to this amendment, the total facility amount was increased from $150.0 million to $250.0 million, the interest rate was changed
from



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commercial paper rate plus 1.15% to commercial paper rate plus 0.95%, the concentration criteria were modified to allow, among other things, for an increase
in the allowable percentage of certain secured subordinated loans in the collateral pool from 25% to 35%, and other minor modifications were made. The facility is scheduled to terminate on November 7, 2007, but is subject to annual renewal and
may be extended under certain circumstances. In connection with this amendment, the facility was renewed until July 28, 2006. As of March 31, 2006, we had $185.1 million outstanding under this credit facility. See Recent
Developments.



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 in securitization accounts, which totaled $190.6 million and $228.0 million as of March 31, 2006 and December 31, 2005, respectively. This facility is scheduled to terminate
July 20, 2016 or sooner upon the full repayment of the Class A-1, Class A-2, Class B and Class C Notes. The Class A-1, Class A-2, Class B and Class C Notes are scheduled to be repaid as we receive principal collections on
the underlying collateral. As of March 31, 2006, a total of $134.0 million of these notes were outstanding.



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, $43.5 million of Class
B Notes rated A2/A and $15.8 million of Class C Notes rated Baa2/BBB as rated by Moodys and Fitch, respectively. On June 1, 2005, we sold the Class C securities, which had previously been retained by MCG. The Series 2004-1 Class A-1
Notes, Class A-2 Notes, Class B Notes and Class C Notes bear interest of LIBOR plus 0.43%, 0.65%, 1.30%, and 2.50%, respectively.



Revolving Unsecured Credit Facility. On September 20, 2005, we amended our existing senior secured credit facility with Bayerische
Hypo-Und Vereinsbank, AG, New York Branch (HVB). This credit facility is unsecured and is committed up to $50.0 million on a revolving basis. In addition, this Revolving Unsecured Credit Facility allows for additional lenders with HVB
acting as the agent. Advances under this credit facility bear interest at LIBOR plus 2.00% or the prime rate plus 0.50%, and there is a commitment fee of 0.25% per annum on undrawn amounts. The credit facility contains customary terms and
conditions, including, without limitation, affirmative and negative covenants such as information reporting, minimum stockholders equity, minimum asset coverage ratio, and minimum cash net investment income. 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. The credit facility is scheduled to mature on September 19, 2006 and is subject to annual renewal at the discretion of the agent. As of March 31, 2006, we had $23.0 million outstanding under this
credit facility.



Distributions



We intend to make distributions on a quarterly basis to our stockholders of
substantially all of our income. We may make deemed distributions to our stockholders of certain net capital gains.



As a business development company that has elected to be treated as a regulated investment company, we generally are required to (1) distribute at
least 90% of our investment company taxable income and 90% of any ordinary pre-RIC built in gains that we recognize and (2) distribute (actually or on a deemed basis) at least 98% of our income (both ordinary income and net capital gains) to
avoid an excise tax.



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



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The following table summarizes our distributions declared since January 1, 2004:



|                  |  |                   |  |                  |  |        |     
|----------------- |  | ----------------- |  | ---------------- |  | ------ | ----
|Date Declared     |  | Record Date       |  | Payment Date     |  | Amount
|April 27, 2006    |  | May 25, 2006      |  | July 28, 2006    |  | $      | 0.42
|February 16, 2006 |  | March 16, 2006    |  | April 27, 2006   |  |        | 0.42
|October 26, 2005  |  | November 23, 2005 |  | January 30, 2006 |  |        | 0.42
|July 27, 2005     |  | August 25, 2005   |  | October 28, 2005 |  |        | 0.42
|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



Each year a statement
on Form 1099-DIV identifying the source of the distributions (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 distributions for that fiscal year, a portion of those distributions may be deemed a tax return of capital to our stockholders. Because the determination of tax
return of capital is done on an annual basis and our taxable income fluctuates from quarter to quarter, we have not determined the amount, if any, of tax return of capital there may be for the year ended December 31, 2006.



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. We monitor individual customers financial trends in order to assess the recoverability of interest with respect to each
customer. We closely monitor the status and performance of each individual investment.



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



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 $15.1 million or 1.4% of our portfolio of investments as of March 31, 2006 and $13.5 million or 1.2% of our portfolio of investments as of December 31, 2005.



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PIK related activity for the three months ended March 31, 2006 was as follows:



|                                        |  |                                 |      |  
|--------------------------------------- |  | ------------------------------- | ---- | -
|(dollars in millions)                   |  | Three MonthsEndedMarch 31, 2006 |     
|Beginning PIK loan balance              |  | $                               | 13.5 |  
|PIK interest earned during the period   |  |                                 | 4.3  |  
|Principal payments on PIK loans         |  |                                 | (4.1 | )
|PIK loans converted to other securities |  |                                 | (0.2 | )
|Interest receivable converted to PIK    |  |                                 | 1.6  |  
|                                        |  |                                 |      |  
|Ending PIK loan balance                 |  | $                               | 15.1 |  
|                                        |  |                                 |      |  



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 $3.9 million and $3.4 million of payments would have been applied against the March 31, 2006 and December 31, 2005 PIK
loan balances, respectively, resulting in a PIK loan balance of $11.2 million and $10.1 million as of March 31, 2006 and December 31, 2005, respectively.



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 activity for the three months ended March 31, 2006 was as follows:



|                                         |  |                                 |     
|---------------------------------------- |  | ------------------------------- | ----
|(dollars in millions)                    |  | Three MonthsEndedMarch 31, 2006
|Beginning accrued dividend balance       |  | $                               | 12.4
|Dividend income earned during the period |  |                                 | 3.5 
|                                         |  |                                 |     
|Ending accrued dividend balance          |  | $                               | 15.9
|                                         |  |                                 |     



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 $8.4 million and $9.1 million of unearned income as of March 31, 2006 and
December 31, 2005, respectively.



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Unearned income activity for the three months ended March 31, 2006 was as follows:



|                                  |  |                                   |      |   |                                      |   |      |       |  |   |      |  
|--------------------------------- |  | --------------------------------- | ---- | - | ------------------------------------ | - | ---- | ----- |  | - | ---- | -
|                                  |  | Three Months Ended March 31, 2006 |     
|(dollars in millions)             |  | CashReceived                      |      |   | Equity Interestand FutureReceivables |   |      | Total | 
|Beginning unearned income balance |  | $                                 | 6.9  |   |                                      | $ | 2.2  |       |  | $ | 9.1  |  
|Additional fees                   |  |                                   | 1.3  |   |                                      |   | 0.3  |       |  |   | 1.6  |  
|Unearned income recognized        |  |                                   | (1.0 | ) |                                      |   | (1.3 | )     |  |   | (2.3 | )
|                                  |  |                                   |      |   |                                      |   |      |       |  |   |      |  
|Ending unearned income balance    |  | $                                 | 7.2  |   |                                      | $ | 1.2  |       |  | $ | 8.4  |  
|                                  |  |                                   |      |   |                                      |   |      |       |  |   |      |  



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 generally when the 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 substantially all of our investments at fair value as determined in good faith by the board of directors pursuant to a valuation policy and a consistent
valuation process. At March 31, 2006, approximately 86% of our total assets represented investments of which approximately 95% are valued at fair value and approximately 5% are valued at market value based on readily ascertainable public market
quotes at March 31, 2006. Because of the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments determined in good faith by the board of directors
may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.



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



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.



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Each debt and equity investment is valued using industry valuation benchmarks. The investment value is
discounted if it is illiquid in nature and/or a 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 date of the relevant period end. However,
restricted or thinly traded public securities may be valued at discounts from the public market value due to the restrictions on sale.



Share-based Compensation



Prior to January 1, 2006, we accounted for share based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. Effective January 1, 2006, we adopted the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (SFAS
No. 123R) using the modified prospective method. The adoption of SFAS No. 123R did not impact our net operating income before investment gains and losses, net income, cash flows from operations, cash flows from financing activities,
or basic and diluted earnings per share during that period. See Note 4 to the Consolidated Financial Statements for further discussion of our share-based compensation.



Securitization Transactions



Periodically, we transfer pools of loans to bankruptcy remote special purpose entities 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 assets assumed by our consolidated bankruptcy remote special purpose entities equaling $593.6 million at March 31, 2006 and
$596.9 million at December 31, 2005.



Recent
Developments



On April 17, 2006, we amended our
Commercial Loan Funding Trust Facility, funded through Three Pillars Funding LLC, an asset-backed commercial paper program administered by SunTrust Bank. Pursuant to this amendment, the concentration criteria were modified to allow, among other
things, for an increase in the allowable percentage of certain secured subordinated loans in the collateral pool from 35% to 50% and the inclusion of additional industry segments. Other minor modifications were also made.



On April 18, 2006, we completed a $500 million debt securitization
through MCG Commercial Loan Trust 2006-1, our wholly owned subsidiary.



The 2006-1 Trust issued $106.25 million of Class A-1 Notes rated AAA / Aaa, $50.0 million of Class A-2 Notes rated AAA / Aaa, $85.0 million of Class A-3 Notes rated AAA / Aaa, $58.75 million of Class B Notes rated AA / Aa2,
$45.0 million of Class C Notes rated A / A2 and $47.5 million of Class D Notes rated BBB / Baa2 as rated by Moodys and S&P, respectively. The Series 2006-1 Class A-1 Notes, Class A-2 Notes, Class A-3 Notes, Class B Notes,
Class C Notes and Class D Notes bear interest of LIBOR plus 0.33%, 0.35%, 0.33%, 0.58%, 1.05% and 2.25%, respectively.



We retained all of the equity in the securitization. The securitization includes a reinvestment period of five years, during which principal collections
received on the underlying collateral may be used to purchase new collateral from us. Under the terms of the securitization, up to 55% of the collateral may be non-senior secured commercial loans and the remaining 45% must be senior secured
commercial loans.



The Class A-1, Class B, Class C and
Class D Notes are term notes. The Class A-2 Notes are a revolving class of secured notes and have a revolving period of five years. The Class A-3 Notes are a delayed draw class of



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secured notes and are required to be drawn within the next 12 months. All of the notes are secured by the assets of MCG Commercial Loan Trust 2006-1,
including commercial loans currently totaling $349.7 million, which were purchased by the trust from us. Additional commercial loans will be purchased by the trust from us primarily using the proceeds from the Class A-3 delayed draw notes and
the Class A-2 revolving notes. The pool of commercial loans in the trust must meet certain requirements, including, but not limited to, asset mix and concentration, collateral coverage, term, agency rating, minimum coupon, minimum spread and
sector diversity requirements.



The new securitization facility
is scheduled to terminate on April 20, 2018, or sooner upon repayment of the offered notes. The proceeds from this transaction will be used to fund our origination of investments and continued growth and to repay approximately $264.5 million of
existing indebtedness. As a result of this transaction, our warehouse credit facility with Merrill Lynch Capital Corp. terminated in accordance with its terms.



On May 2, 2006, we established, through MCG Commercial Loan Trust 2006-2, a $250 million warehouse credit facility with Merrill Lynch Capital Corp.



The warehouse credit facility allows MCG Commercial Loan Trust
2006-2 to acquire up to $250 million of commercial loans with borrowings of up to $200 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 2006-2, including the commercial loans purchased by the trust from us. Under the terms of the credit and warehouse agreement, the loans may be senior secured loans, second lien loans or unsecured loans, as defined in the
agreement, subject to certain limitations. Up to 60% of the collateral in this warehouse facility may be non-senior secured loans, and the remaining 40% must be senior secured loans.



We intend to use the warehouse credit facility to fund the origination of a diverse pool of loans that will collateralize a
future term securitization. Advances under the facility, equal to 80% of the value of commercial loans purchased by the trust, bear interest based on LIBOR plus 0.75% and interest is payable monthly. The facility is scheduled to terminate on the
earlier of November 30, 2007 or the completion of a term securitization and may be extended under certain circumstances.



Recent Accounting Pronouncements



In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment, (SFAS No. 123R) which requires that compensation costs related to share-based payment transactions be recognized in financial statements. SFAS No. 123R requires all companies to measure
compensation costs for all share-based payments at fair value, and eliminates the option of using the intrinsic method of accounting provided for in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, (APB No. 25) which generally resulted in no compensation expense recorded in the financial statements related to the grant of stock options to employees and directors if certain conditions were met. Effective
January 1, 2006, we adopted SFAS No. 123R using the modified prospective method. See Note 4 to the Consolidated Financial Statements for further discussion of our share-based compensation.



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. As of March 31, 2006, approximately 65% of our loan portfolio, at cost, bears interest at a spread to LIBOR, with the remainder bearing
interest at a fixed rate or at a spread to a prime rate. As of March 31, 2006, approximately 36% of our loan portfolio, at cost, has a LIBOR floor, at various levels.



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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, 2006 and December 31, 2005:



|                          |  |                                          |         |                   |   |                                          |  |            |         |  |   |      
|------------------------- |  | ---------------------------------------- | ------- | ----------------- | - | ---------------------------------------- |  | ---------- | ------- |  | - | -----
|                          |  | March 31, 2006                           |         | December 31, 2005
|(dollars in millions)     |  | Interest BearingCash andCommercial Loans |         | Borrowings        |   | Interest BearingCash andCommercial Loans |  | Borrowings
|Repurchase Agreement Rate |  | $                                        | 161.7   |                   | $ |                                         |  | $          | 120.7   |  | $ |     
|Money Market Rate         |  |                                          | 1.2     |                   |   |                                         |  |            | 2.0     |  |   |     
|Prime Rate                |  |                                          | 13.0    |                   |   |                                         |  |            | 36.1    |  |   |     
|30-Day LIBOR              |  |                                          | 30.9    |                   |   |                                         |  |            | 36.0    |  |   |     
|60-Day LIBOR              |  |                                          |        |                   |   |                                         |  |            |        |  |   |     
|90-Day LIBOR              |  |                                          | 534.2   |                   |   | 338.8                                    |  |            | 562.6   |  |   | 331.1
|180-Day LIBOR             |  |                                          | 31.1    |                   |   |                                         |  |            | 30.9    |  |   |     
|Commercial Paper          |  |                                          |        |                   |   | 185.1                                    |  |            |        |  |   | 160.0
|Fixed Rate                |  |                                          | 306.0   |                   |   | 50.0                                     |  |            | 273.5   |  |   | 50.0 
|                          |  |                                          |         |                   |   |                                          |  |            |         |  |   |      
|Total                     |  | $                                        | 1,078.1 |                   | $ | 573.9                                    |  | $          | 1,061.8 |  | $ | 541.1
|                          |  |                                          |         |                   |   |                                          |  |            |         |  |   |      



Based on our
March 31, 2006 balance sheet, the following table shows the impact to net income of base rate changes in interest rates assuming no changes in our investment and borrowing structure.



(dollars in millions)

|                   |  |                 |       |   |                  |   |       |            |  |   |      |  
|------------------ |  | --------------- | ----- | - | ---------------- | - | ----- | ---------- |  | - | ---- | -
|Basis Point Change |  | Interest Income |       |   | Interest Expense |   |       | Net Income | 
|(300)              |  | $               | (22.3 | ) |                  | $ | (15.7 | )          |  | $ | (6.6 | )
|(200)              |  |                 | 15.4  | ) |                  |   | (10.5 | )          |  |   | (4.9 | )
|(100)              |  |                 | (7.7  | ) |                  |   | (5.2  | )          |  |   | (2.5 | )
|100                |  |                 | 7.7   |   |                  |   | 5.2   |            |  |   | .5   |  
|200                |  |                 | 15.4  |   |                  |   | 10.5  |            |  |   | 4.9  |  
|300                |  |                 | 23.2  |   |                  |   | 15.7  |            |  |   | 7.5  |  



We continually monitor
our exposure to interest rate changes and may engage in certain hedging activities as we deem appropriate. We assess the risks associated with changes in interest rates and the cost of hedging activities to determine when it is appropriate to
hedge any exposure we may have. Certain of our interest bearing investments contain LIBOR floors to minimize the exposure to significant decreases in interest rates. We currently have no investments in any derivative securities that would
be considered interest rate hedges.



Item 4.    Controls and Procedures



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



There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, our 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 1A.    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



Because there is generally no established market for which to value most of 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 would have been used
had a ready market existed for the investments, and the differences could be material.



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



Our portfolio primarily consists of investments in privately owned middle
market businesses in the form of secured debt, unsecured debt, and equity. 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, their success depends 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.



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.



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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 industries in which we invest experience
adverse economic or business conditions, our operating results may be negatively impacted.



From time to time we target specific industries in which to invest on a recurring basis, which could cause a high concentration of our portfolio in a
specific industry. At March 31, 2006, approximately 26.4% of our portfolio consisted of customers in the communications industry. If our customers in the communications industry, or any other industry in which our portfolio is or may become
concentrated, suffer due to adverse business conditions or due to economic slowdowns or downturns, we will be more vulnerable to losses in our portfolios and our operating results may be negatively impacted.



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



At March 31, 2006, our
largest portfolio investment was Broadview Networks Holdings, Inc. (Broadview), which totaled $99.4 million at fair value, or 9.0% of the fair value of our investments. Broadview accounted for approximately 11.3% of our operating income
during the quarter ended March 31, 2006. We own preferred securities of Broadview, which entitle us to a preferred claim of approximately $90 million, plus dividends, which accumulate at an annual rate of 12% on our preferred claim. We
currently 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 and value of Broadview. Our financial results could be
negatively affected if this portfolio company fails to perform as expected or if we are unable to recognize these dividends as income on a quarterly basis.



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 decreases in revenue, net income, and assets.



An economic downturn could disproportionately impact the
industries in which we invest, causing us to be more vulnerable to losses in our portfolio, which could negatively impact our financial results.



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 negatively impact our financial results.



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



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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 substantially all of our
income. We may elect to make deemed distributions to our stockholders of certain 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 debt 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, 2006, we had $573.9 million of outstanding borrowings under our debt facilities. As of March 31, 2006, the weighted average annual interest rate on all of our outstanding borrowings was 5.81%. In order for us to
make our annual interest payments on indebtedness, we must achieve annual returns on our March 31, 2006 total assets of at least 2.61%. 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 $163.8 million as of March 31, 2006.



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.



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



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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, 2006, this ratio was approximately 213%.



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 Revolving Unsecured Credit Facility is scheduled to expire on September 19, 2006 and our Commercial Loan Funding Trust Facility $250.0 million warehouse financing facility through Three Pillars Funding, LLC is scheduled to
terminate on November 7, 2007, but is subject to annual renewal and may be extended under certain circumstances. The next renewal date for this facility is July 28, 2006.



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. 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 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.



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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 $50.0 million revolving unsecured credit facility could, absent a waiver or cure, declare a
default. We currently do not have employment agreements with Messrs. Tunney, Saville, or Merrick.



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 67% of the loans in our portfolio, based on amounts
outstanding at cost as of March 31, 2006, were at variable rates determined on the basis of a benchmark LIBOR or prime rate and approximately 33% were at fixed rates. From January 1, 2004 to March 31, 2006, the three-month LIBOR has
increased from 1.15% to 4.98%.



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



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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 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.



Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds



During the three months ended March 31, 2006, we issued a total of 2,672 shares of common stock under our 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 $39 thousand. Proceeds were used for general
corporate purposes.



Item 3.    Defaults Upon Senior Securities



Not Applicable



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



Not Applicable



Item 5.    Other Information



On May 2, 2006, we established, through MCG Commercial Loan Trust 2006-2, a $250 million warehouse credit facility with Merrill Lynch Capital Corp.



The warehouse credit facility allows MCG Commercial Loan Trust 2006-2 to acquire up to $250 million of commercial loans with
borrowings of up to $200 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 2006-2, including the commercial loans
purchased by the trust from us. Under the terms of the credit and warehouse agreement, the loans may be senior secured loans, second lien loans or unsecured loans, as defined in the agreement, subject to certain limitations. Up to 60% of the
collateral in this warehouse facility may be non-senior secured loans, and the remaining 40% must be senior secured loans.



We intend to use the warehouse credit facility to fund the origination of a diverse pool of loans that will collateralize a future term securitization.
Advances under the facility, equal to 80% of the value of commercial loans purchased by the trust, bear interest based on LIBOR plus 0.75% and interest is payable monthly. The facility is scheduled to terminate on the earlier of November 30, 2007 or
the completion of a term securitization and may be extended under certain circumstances.



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                                                                                                                                                                                                                                                                                                                 
|3.1           |  | Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 filed with MCG Capitals Current Report on Form 8-K
filed on May 31, 2005).                                                                                                                                                                             
|              | 
|3.2           |  | Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 filed with MCG Capitals Current Report on Form 8-K filed on
March 28, 2005).                                                                                                                                                                                     
|              | 
|4.1           |  | Specimen Common Stock Certificate (incorporated by reference to Exhibit D.1 to Pre-effective Amendment No.2 to MCG Capitals
registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 1, 2001).                                                                            
|              | 
|10.1          |  | Third Amended and Restated Registration Rights Agreement by and among MCG Capital Corporation and certain stockholders (incorporated by
reference to Exhibit 10.1 filed with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                                             
|              | 
|10.2          |  | Sale and Servicing Agreement by and among MCG Commercial Loan Trust 2001-1, MCG Finance III, LLC, MCG Capital Corporation and Wells Fargo
Bank Minnesota, National Association, dated as of December 1, 2001 (incorporated by reference to Exhibit 10.13 filed with MCG Capitals Form 10-K for the year ended December 31, 2001).      
|              | 
|10.3          |  | Note Purchase Agreement among MCG Commercial Loan Trust 2001-1, MCG Capital Corporation, MCG Finance III, LLC and Wachovia Securities, Inc.
(formerly First Union Securities, Inc.), dated as of December 19, 2001 (incorporated by reference to Exhibit 10.14 filed with MCG Capitals Form 10-K for the year ended December 31, 2001).
|              | 
|10.4          |  | Trust Agreement between MCG Finance III, LLC and Wilmington Trust Company, dated as of December 1, 2001 (incorporated by reference to
Exhibit 10.15 filed with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                                                           
|              | 
|10.5          |  | MCG Commercial Loan Trust 2001-1 Trust Certificate, dated as of December 27, 2001 (incorporated by reference to Exhibit 10.16 filed with
MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                                                                                 



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|              |  |                                                                                                                                                                                                                                                                                                         
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                 
|10.6          |  | MCG Commercial Loan Trust 2001-1 Class A Note, dated as of December 27, 2001 (incorporated by reference to Exhibit 10.17 filed with MCG
Capitals Form 10-K for the year ended December 31, 2001).                                                                                                      
|              | 
|10.7          |  | MCG Commercial Loan Trust 2001-1 Class B Note, dated as of December 27, 2001 (incorporated by reference to Exhibit 10.18 filed with MCG
Capitals Form 10-K for the year ended December 31, 2001).                                                                                                      
|              | 
|10.8          |  | MCG Commercial Loan Trust 2001-1 Class C Note issued to MCG Finance III, LLC, dated as of December 27, 2001 (incorporated by reference to
Exhibit 10.19 filed with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                       
|              | 
|10.9          |  | Indenture between MCG Commercial Loan Trust 2001-1 and Wells Fargo Bank Minnesota, National Association, dated as of December 1, 2001
(incorporated by reference to Exhibit 10.20 filed with MCG Capitals Form 10-K for the year ended December 31, 2001).                                             
|              | 
|10.10         |  | Commercial Loan Sale Agreement between MCG Capital Corporation and MCG Finance III, LLC, dated as of December 1, 2001 (incorporated by
reference to Exhibit 10.21 filed with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                             
|              | 
|10.11         |  | 401(k) Plan (incorporated by reference to Exhibit i.1 filed with MCG Capitals registration statement on Form N-2 [File No. 333-64596]
filed with the Securities and Exchange Commission on July 5, 2001).                                                                                              
|              | 
|10.12         |  | Deferred Compensation Plan (incorporated by reference to Exhibit i.2 filed with MCG Capitals registration statement on Form N-2 [File
No. 333-64596] filed with the Securities and Exchange Commission on July 5, 2001).                                                                               
|              | 
|10.13         |  | Dividend Reinvestment Plan (incorporated by reference to Exhibit e to Pre-effective Amendment No. 2 to MCG Capitals registration
statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 1, 2001).                                                    
|              | 
|10.14         |  | Form of Restricted Stock Agreement for administrative personnel (incorporated by reference to Exhibit i.3 to Pre-effective Amendment No. 3 to
MCG Capitals registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 6, 2001).             
|              | 
|10.15         |  | Form of Restricted Stock Agreement for staff professionals (incorporated by reference to Exhibit i.4 to Pre-effective Amendment No.3 to MCG
Capitals registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 6, 2001).                   
|              | 
|10.16         |  | Form of Restricted Stock Agreement for senior management (incorporated by reference to Exhibit i.6 to Pre-effective Amendment No. 3 to MCG
Capitals registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 6, 2001).                    
|              | 
|10.17         |  | Form of Amended and Restated Restricted Stock Agreement for senior management (incorporated by reference to Exhibit i.26 to MCG Capitals
registration statement on Form N-2 [File No. 333-113236] filed with the Securities and Exchange Commission on March 3, 2004.                                  
|              | 
|10.18         |  | Amended and Restated Restricted Stock Agreement between the Company and Bryan J. Mitchell, dated March 1, 2004 (incorporated by reference to
Exhibit i.27 to MCG Capitals registration statement on Form N-2 [File No. 333-113236] filed with the Securities and Exchange Commission on March 3, 2004).
|              | 
|10.19         |  | Restricted Stock Agreement between the Company and Robert J. Merrick, dated November 28, 2001 (incorporated by reference to Exhibit 10.30
filed with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                                     
|              | 
|10.20         |  | Amended and Restated Restricted Stock Agreement between the Company and B. Hagen Saville, dated March 1, 2004 (incorporated by reference to
Exhibit i.29 to MCG Capitals registration statement on Form N-2 [File No. 333-113236] filed with the Securities and Exchange Commission on March 3, 2004). 



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|              |  |                                                                                                                                                                                                                                                                                                        
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                
|10.21         |  | Amended and Restated Restricted Stock Agreement between the Company and Steven F. Tunney, dated March 1, 2004 (incorporated by reference to
Exhibit i.28 to MCG Capitals registration statement on Form N-2 [File No. 333-113236] filed with the Securities and Exchange Commission on March 3, 2004).
|              | 
|10.22         |  | Form of Restricted Stock Agreement for directors (incorporated by reference to Exhibit 99.i.7 to Pre-effective Amendment No. 3 to MCG
Capitals registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 6, 2001).                        
|              | 
|10.23         |  | Promissory Note issued to Bryan J. Mitchell, dated as of November 28, 2001 (incorporated by reference to Exhibit 10.34 filed with MCG
Capitals Form 10-K for the year ended December 31, 2001).                                                                                                       
|              | 
|10.24         |  | Promissory Note issued to B. Hagen Saville, dated as of November 28, 2001 (incorporated by reference to Exhibit 10.35 filed with MCG
Capitals Form 10-K for the year ended December 31, 2001).                                                                                                        
|              | 
|10.25         |  | Promissory Note issued to Steven F. Tunney, dated as of November 28, 2001 (incorporated by reference to Exhibit 10.36 filed with MCG
Capitals Form 10-K for the year ended December 31, 2001).                                                                                                        
|              | 
|10.26         |  | Form of Promissory Note issued to senior management (incorporated by reference to Exhibit i.8 to Pre-effective Amendment No. 3 to MCG
Capitals registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 6, 2001).                        
|              | 
|10.27         |  | Form of Promissory Note issued to employees (incorporated by reference to Exhibit i.9 to Pre-effective Amendment No. 3 to MCG
Capitals registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 6, 2001).                                
|              | 
|10.28         |  | Pledge Agreement between the Company and Bryan J. Mitchell, dated as of November 28, 2001 (incorporated by reference to Exhibit 10.39 filed
with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                                        
|              | 
|10.29         |  | Pledge Agreement between the Company and B. Hagen Saville, dated as of November 28, 2001 (incorporated by reference to Exhibit 10.40 filed
with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                                         
|              | 
|10.30         |  | Pledge Agreement between the Company and Steven F. Tunney, dated as of November 28, 2001 (incorporated by reference to Exhibit 10.41 filed
with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                                         
|              | 
|10.31         |  | Form of Pledge Agreement between the Company and employee (incorporated by reference to Exhibit i.10 to Pre-effective Amendment No. 3 to
MCG Capitals registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 6, 2001).                 
|              | 
|10.32         |  | Form of Amended and Restated Promissory Note issued to senior management (incorporated by reference to Exhibit I.10 to Pre-effective
Amendment No.2 to MCG Capitals registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on November 1, 2001).   
|              | 
|10.33         |  | Form of Pledge Agreement between the Company and senior management, dated as of June 24, 1998 (incorporated by reference to Exhibit i.7
filed with MCG Capitals registration statement on Form N-2 [File No. 333-64596] filed with the Securities and Exchange Commission on July 5, 2001).           
|              | 
|10.34         |  | Custodial Agreement between the Company and Riggs Bank, N.A. (incorporated by reference to Exhibit 10.45 filed with MCG Capitals Form
10-K for the year ended December 31, 2001).                                                                                                                     
|              | 
|10.35         |  | Employment Agreement between the Company and Robert J. Merrick, dated November 28, 2001 (incorporated by reference to Exhibit 10.47 filed
with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                                          



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.36         |  | Employment Agreement between the Company and B. Hagen Saville, dated November 28, 2001 (incorporated by reference to Exhibit 10.48 filed
with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                                                                                                                                                                                    
|              | 
|10.37         |  | Employment Agreement between the Company and Steven F. Tunney, dated November 28, 2001 (incorporated by reference to Exhibit 10.49 filed
with MCG Capitals Form 10-K for the year ended December 31, 2001).                                                                                                                                                                                                                                    
|              | 
|10.38         |  | Deed of Lease by and between Twin Towers II Associates Limited Partnership, as landlord, and MCG Capital Corporation, as tenant, dated as
of September 24, 2002 (incorporated by reference to Exhibit 10.50 filed with MCG Capitals Form 10-Q for the quarter ended September 30, 2002).                                                                                                                                                       
|              | 
|10.39         |  | Amended and Restated Employment Agreement between MCG Capital Corporation and Bryan J. Mitchell dated November 3, 2002 (incorporated by
reference to Exhibit 10.51 filed with MCG Capitals Form 10-Q for the quarter ended September 30, 2002).                                                                                                                                                                                                
|              | 
|10.40         |  | MCG Capital Corporation Swingline Note issued to Wachovia Bank, National Association (formerly First Union National Bank), dated as of
February 12, 2004 (incorporated by reference to Exhibit f.27 to MCG Capitals registration statement on Form N-2 [File No. 333-113236] filed with the Securities and Exchange Commission on March 3, 2004).                                                                                              
|              | 
|10.41         |  | Employment Agreement between the Company and Michael R. McDonnell, dated July 14, 2004 (incorporated by reference to Exhibit 10.65 filed
with MCG Capitals Form 10-Q for the quarter ended June 30, 2004).                                                                                                                                                                                                                                     
|              | 
|10.42         |  | Sale and Servicing Agreement by and among MCG Commercial Loan Trust 2004-1, MCG Finance IV, LLC, MCG Capital Corporation and Wells Fargo
Bank, National Association, dated as of September 30, 2004 (incorporated by reference to Exhibit 10.66 filed with MCG Capitals Form 10-Q for quarter ended September 30, 2004).                                                                                                                       
|              | 
|10.43         |  | Indenture between MCG Commercial Loan Trust 2004-1 and Wells Fargo Bank, National Association, dated as of September 30, 2004 (incorporated
by reference to Exhibit 10.67 filed with MCG Capitals Form 10-Q for quarter ended September 30, 2004).                                                                                                                                                                                             
|              | 
|10.44         |  | Sale and Servicing Agreement by and among MCG Capital Corporation, MCG Commercial Loan Funding Trust, Three Pillars Funding, LLC, SunTrust
Capital Markets, Inc. and Wells Fargo Bank, National Association, dated as of November 10, 2004 (incorporated by reference to Exhibit f.37 filed with MCG Capitals registration statement on Form N-2 [File No. 333-121358] filed with the
Securities and Exchange Commission on December 17, 2004).
|              | 
|10.45         |  | Credit and Warehouse Agreement, dated as of April 21, 2005, among UBS AG, Stamford Branch, MCG Commercial Loan Trust 2005-1 and MCG Capital
Corporation (incorporated by reference to Exhibit 10.71 filed with MCG Capitals Form 10-Q for the quarter ended March 31, 2005).                                                                                                                                                                   
|              | 
|10.46         |  | 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 (incorporated by reference to Exhibit 10.72 filed with MCG Capitals Form 10-Q for the quarter ended March 31, 2005).                                                                                       
|              | 
|10.47         |  | Master Conveyance Assignment, dated as of April 21, 2005, among MCG Capital Corporation, MCG Finance VI, LLC, and MCG Commercial Loan Trust
2005-1 (incorporated by reference to Exhibit 10.73 filed with MCG Capitals Form 10-Q for the quarter ended March 31, 2005).                                                                                                                                                                        
|              | 
|10.48         |  | First Amendment to Sale and Servicing Agreement by and among MCG Commercial Loan Funding Trust, MCG Capital Corporation, Three Pillars
Funding LLC, SunTrust Capital Markets, Inc. and Wells Fargo Bank, National Association, dated as of May 2, 2005 (incorporated by reference to Exhibit 10.74 filed with MCG Capitals Form 10-Q for the quarter ended March 31,
2005).                                                                    



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.49         |  | Credit and Warehouse Agreement, dated as of June 9, 2005, among Merrill Lynch Capital Corp., MCG Commercial Loan Trust 2005-2 and MCG
Capital Corporation (incorporated by reference to Exhibit 99.1 filed with MCG Capitals Current Report on Form 8-K filed on June 9, 2005).                                                                                                                                                                
|              | 
|10.50         |  | Second Amendment to Sale and Servicing Agreement, dated as of July 29, 2005 among MCG Commercial Loan Funding Trust, MCG Capital
Corporation, Three Pillars Funding LLC, SunTrust Capital Markets, Inc., and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.76 filed with MCG Capitals Form 10-Q for the quarter ended June 30,
2005).                                                                        
|              | 
|10.51         |  | Amended and Restated Revolving Credit Agreement dated as of September 20, 2005 among MCG Capital Corporation, Bayerische Hypo-Und
Vereinsbank, AG, New York Branch and Various Lenders (incorporated by reference to Exhibit 99.1 filed with MCG Capitals Current Report on Form 8-K filed on September 21, 2005).                                                                                                                             
|              | 
|10.52         |  | Note Purchase Agreement, dated October 11, 2005 (incorporated by reference to Exhibit 99.1 filed with MCG Capitals Current Report on
Form 8-K filed on October 12, 2005).                                                                                                                                                                                                                                                                      
|              | 
|10.53         |  | Third Amendment to Sale and Servicing Agreement, dated as of December 7, 2005 among MCG Commercial Loan Funding Trust, MCG Capital
Corporation, Three Pillars Funding LLC, SunTrust Capital Markets, Inc., and Wells Fargo Bank, National Association (incorporated by reference Exhibit 99.1 filed with MCG Capitals Current Report on Form 8-K filed on December 13,
2005).                                                                  
|              | 
|10.54         |  | Fourth Amendment to Sale and Servicing Agreement, dated as of April 17, 2006, among MCG Commercial Loan Funding Trust, MCG Capital
Corporation, Three Pillars Funding LLC, SunTrust Capital Markets, Inc., and Wells Fargo, National Association (incorporated by reference to Exhibit f.23 filed with MCG Capitals registration statement on Form N-2 [File No. 333-133669]
filed with the Securities and Exchange Commission on May 1, 2006).
|              | 
|10.55         |  | Indenture by and between MCG Commercial Loan Trust 2006-1 and Wells Fargo Bank, National Association, dated as of April 18, 2006
(incorporated by reference to Exhibit f.24 filed with MCG Capitals registration statement on Form N-2 [File No. 333-133669] filed with the Securities and Exchange Commission on May 1, 2006).                                                                                                                
|              | 
|10.56         |  | Collateral Management Agreement, dated as of April 18, 2006, by and between MCG Commercial Loan Trust 2006-1 and MCG Capital Corporation
(incorporated by reference to Exhibit f.25 filed with MCG Capitals registration statement on Form N-2 [File No. 333-133669] filed with the Securities and Exchange Commission on May 1, 2006).                                                                                                        
|              | 
|10.57         |  | Class A-2 Note Purchase Agreement, dated as of April 18, 2006, among MCG Commercial Loan Trust 2006-1 and Wells Fargo Bank, National
Association (incorporated by reference to Exhibit f.26 filed with MCG Capitals registration statement on Form N-2 [File No. 333-133669] filed with the Securities and Exchange Commission on May 1, 2006).                                                                                                
|              | 
|10.58         |  | Class A-3 Note Purchase Agreement, dated as of April 18, 2006, by and among MCG Commercial Loan Trust 2006-1, North Sea Funding Europe
Asset Purchasing Company No. 1 B.V. and Wells Fargo Bank, National Association (incorporated by reference to Exhibit f.27 filed with MCG Capitals registration statement on Form N-2 [File No. 333-133669] filed with the Securities and Exchange
Commission on May 1, 2006).                           
|              | 
|10.59         |  | Class A-3 Note Purchase Agreement, dated as of April 18, 2006 by and among MCG Commercial Loan Trust 2006-1, Barclays Bank PLC and Wells
Fargo Bank, National Association (incorporated by reference to Exhibit f.28 filed with MCG Capitals registration statement on Form N-2 [File No. 333-133669] filed with the Securities and Exchange Commission on May 1,
2006).                                                                       
|              | 
|10.60++       |  | Credit and Warehouse Agreement, dated as of May 2, 2006, among Merrill Lynch Capital Corp., MCG Commercial Loan Trust 2006-2 and MCG
Capital Corporation.                                                                                                                                                                                                                                                                                       



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|              |  |                                                                                                                                                                                                           
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                   
|10.61++       |  | Custody Agreement, dated as of May 2, 2006, among MCG Capital Corporation, MCG Finance VIII, LLC, MCG Commercial Loan Trust 2006-2, Wells
Fargo Bank, National Association and Merrill Lynch Capital Corp.
|              | 
|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).                                                                                   



|++ |  | Filed 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 3, 2006.



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




58