e10vq

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2005


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-28405

MVC Capital, Inc.

(Formerly known as meVC Draper Fisher Jurvetson Fund I, inc.)

(Exact name of the registrant as specified in its charter)


DELAWARE (State or other jurisdiction of incorporation or organization)		94-3346760 (I.R.S. Employer Identification No.)


287 Bowman Avenue 3^rd Floor Purchase, New York (Address of principal executive offices)		10577 (Zip Code)

Registrant’s telephone number, including area code: (914) 701-0310

Securities registered pursuant to Section 12(b) of the Act:


Title of each class Common Stock		Name of each exchange on which registered New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

As of March 10, 2005, there were 18,938,990 shares of Registrant’s common stock, $.01 par value (the “Shares”), outstanding.

Part I. Consolidated Financial Information

Item 1. Consolidated Financial Statements

CONSOLIDATED FINANCIAL STATEMENTS

MVC Capital, Inc.

Consolidated Balance Sheets


	January 31,
	2005			October 31,
	(Unaudited)			2004
ASSETS
Assets
Cash	$	4,029,546		$	1,214,537
Cash equivalents		22,322,488			11,932,404
Investments in short term securities, at market value
(cost $81,222,955 and $34,114,792, respectively)		81,222,955			34,114,792
Investments in debt instruments, at fair value
(cost $30,646,181 and $28,795,958, respectively) (Note 4)		29,865,713			27,502,755
Investments in equity, at fair value
(cost $107,468,918 and $122,786,256, respectively), (Note 4)		44,196,745			51,017,530
Interest and fees receivable		546,835			442,322
Prepaid expenses		55,466			219,772
Deferred tax		122,111			87,278
Other assets		39,263			45,445


Total assets	$	182,401,122		$	126,576,835


LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Revolving credit facility	$	—		$	10,025,000
Payable for investment purchased		3,000,000			—
Professional fees		326,416			223,069
Directors’ fees		30,920			17,815
Employee compensation and benefits		271,683			422,363
Taxes payable		—			166,205
Other accrued expenses and liabilities		562,048			155,039

Total liabilities		4,191,067			11,009,491


Shareholders’ equity
Common stock, $0.01 par value; 150,000,000 shares authorized; 18,938,990 and 12,293,042 shares outstanding, respectively		165,000			165,000
Additional paid in capital		358,384,522			298,406,395
Accumulated deficit		(145,873,366	)		(148,537,950	)
Treasury stock, at cost, 4,206,958 and 4,206,958 shares held, respectively		(34,466,101	)		(34,466,101	)

Total shareholders’ equity		178,210,055			115,567,344


Total liabilities and shareholders’ equity	$	182,401,122		$	126,576,835


Net asset value per share	$	9.41		$	9.40

The accompanying notes are an integral part of these consolidated financial statements.

MVC Capital, Inc.

Consolidated Statements of Operations
(Unaudited)


	For the			For the
	Quarter Ended			Quarter Ended
	January 31, 2005			January 31, 2004
Investment Income:
Interest income	$	1,280,047		$	711,117
Dividend income		346,370			—
Fee income		179,683			—
Other income		189,326			5,059

Total investment income		1,995,426			716,176

Operating Expenses:
Employee compensation and benefits		433,747			267,840
Insurance		186,116			368,638
Legal fees		150,574			230,933
Directors fees		44,370			81,906
Audit fees		65,068			36,764
Public relations fees		33,224			41,368
Other expenses		107,357			189,606
Administration		28,585			27,632
Facilities		68,863			(140,033	)
Printing and postage		18,004			41,768
Interest expense		12,359			—

Total operating expenses		1,148,267			1,146,422

Net investment income (loss) before taxes		847,159			(430,246	)


Tax Expense (Benefit):
Deferred tax expense (benefit)		(34,833	)		—
Current tax expense		325			—


Total tax expense (benefit)		(34,508	)		—


Net investment income (loss)		881,667			(430,246	)


Net Realized and Unrealized Gain (Loss) on Investments:

Net realized loss on investments		(7,226,371	)		(10,340,698	)

Net change in unrealized appreciation on investments		9,009,288			13,075,576


Net realized and unrealized gain on investments		1,782,917			2,734,878


Net increase in net assets resulting from operations	$	2,664,584		$	2,304,632


Net increase in net assets per share resulting from operations	$	0.18		$	0.14


Dividends declared per share	$	—		$	—

The accompanying notes are an integral part of these consolidated financial statements.

MVC Capital, Inc.

Consolidated Statements of Cash Flows
(Unaudited)


	For the			For the
	Quarter Ended			Quarter Ended
	January 31, 2005			January 31, 2004
Cash Flows from Operating Activities:
Net increase in net assets resulting from operations	$	2,664,584		$	2,304,632
Adjustments to reconcile net assets resulting from operations to net cash provided (used) by operating activities:
Realized loss		7,226,371			10,340,698
Net change in unrealized (appreciation)		(9,009,288	)		(13,075,576	)
Changes in assets and liabilities:
Interest and fees receivable		(104,513	)		56,127
Prepaid expenses		164,306			329,244
Receivable for investment deposit		—			(1,000,000	)
Deferred tax		(34,833	)		—
Other assets		6,182			—
Liabilities		3,206,576			(335,991	)
Purchases of equity investments		—			—
Purchases of debt instruments		(4,250,000	)		—
Purchases of short-term investments		(84,795,388	)		(80,807,409	)
Purchases of cash equivalents		(22,340,571	)		(46,907,725	)
Proceeds from equity investments		8,295,018			136,272
Proceeds from debt instruments		2,473,890			5,617,223
Sales/maturities of short-term investments		37,935,975			113,389,123
Sales/maturities of cash equivalents		21,313,657			46,635,706

Net cash provided (used) by operating activities		(37,248,034	)		36,682,324


Cash Flows from Financing Activities:
Repurchases of capital stock		—			(31,571,184	)
Revolving credit facility		(10,025,000	)		—


Net cash used for financing activities		(10,025,000	)		(31,571,184	)


Cash Flows from Investing Activities:
Issuance of capital stock		60,478,127			—


Net cash provided by investing activities		60,478,127			—


Net change in cash and cash equivalents for the period		13,205,093			5,111,140


Cash and cash equivalents, beginning of period		13,146,941			6,850


Cash and cash equivalents, end of period	$	26,352,034		$	5,117,990

The accompanying notes are an integral part of these consolidated financial statements.

MVC Capital, Inc.

Consolidated Statements of Shareholders’ Equity
(Unaudited)


	Fund					Additional									Total
	Shares			Common		Paid in			Treasury			Accumulated			Shareholders’
	Issued			Stock		Capital			Stock			Deficit			Equity
Balance at November 1, 2003		16,152,600		$	165,000	$	311,485,000		$	(2,894,917	)		(171,746,921	)		137,008,162
Return of Capital Statement of Position reclass		—			—		(11,613,512	)		—			11,613,512			—
Treasury Shares repurchased		(3,859,558	)		—		—			(31,571,184	)		—			(31,571,184	)
Net increase in net assets from operations		—			—		—			—			2,304,632			2,304,632

Balance at January 31, 2004		12,293,042		$	165,000	$	299,871,488		$	(34,466,101	)	$	(157,828,777	)	$	107,741,610


Balance at November 1, 2004		12,293,042		$	165,000	$	298,406,395		$	(34,466,101	)		(148,537,950	)		115,567,344
Issuance of capital stock		6,645,948			—		60,478,127			—			—			60,478,127
Offering expenses		—			—		(500,000	)		—			—			(500,000	)
Net increase in net assets from operations		—			—		—			—			2,664,584			2,664,584

Balance at January 31, 2005		18,938,990		$	165,000	$	358,384,522		$	(34,466,101	)	$	(145,873,366	)	$	178,210,055

The accompanying notes are an integral part of these consolidated financial statements.

MVC Capital, Inc.

Consolidated Selected Per Share Data and Ratios


	For the			For the
	Quarter Ended			Year Ended
	January 31, 2005			October 31, 2004
	(Unaudited)
Net asset value, beginning of period	$	9.40		$	8.48

Gain (loss) from investment operations:

Net investment income		0.06			—

Net realized and unrealized gain on investments		0.12			0.91


Total gain from investment operations		0.18			0.91


Less distributions from:

Income		—			—

Return of Capital		—			(0.12	)


Total distributions		—			(0.12	)


Capital share transactions
Anti-dilutive effect of share repurchase program		—			0.13
Dilutive effect of issuance of capital stock		(0.17	)		—


Net asset value, end of period	$	9.41		$	9.40


Market value, end of period	$	9.30		$	9.24


Market discount		(1.17	%)		(1.70	%)

Total Return - At NAV (a)		0.11	%		12.26	%

Total Return - At Market (a)		0.65	%		15.56	%

Ratios and Supplemental Data:

Net assets, end of period (in thousands)	$	178,210		$	115,567

Ratios to average net assets:

Expenses excluding tax expense (benefit)		3.40	% (b)		3.36	%

Net investment income before tax expense (benefit)		2.51	% (b)		0.08	%

Expenses including tax expense (benefit)		3.30	% (b)		3.43	%

Net investment income after tax expense (benefit)		2.61	% (b)		0.02	%

(a) Total return is historical and assumes changes in share price, reinvestments of all dividends and distributions, and no sales charge for the year.

(b)		Annualized.

The accompanying notes are an integral part of these consolidated financial statements.

MVC Capital, Inc.

Consolidated Schedule of Investments
January 31, 2005
(Unaudited)


				Date of
				Initial
Description			Shares/Principal	Investment	Cost		Fair Value

Equity Investments - 24.80% (b, d) (Note 3, 4, 5)

		Automotive Dealerships - 3.37% (a, f)

	*	Baltic Motors Corporation, Common Stock (c)	54,947	June 2004	$	6,000,000	$	6,000,000

		Confections Manufacturing and Distribution - 1.51% (a, f)

	*	Impact Confections, Inc., Common Stock	252	July 2004		2,700,000		2,700,000

		Distributor - Landscaping and Irrigation Equipment - 2.53% (a, f)

	*	Timberland Machines & Irrigation, Inc., Common Stock (c)	450	Aug. 2004		4,500,000		4,500,000

	*	Timberland Machines & Irrigation, Inc., Warrants (c)	150	Aug. 2004		—		—


		Total Distributor - Landscaping and Irrigation Equipment				4,500,000		4,500,000

		Financial Services - 0.66% (a, f)

		Octagon Credit Investors, LLC, Membership Interest	5	June 2004		629,525		629,525

		Octagon Credit Investors, LLC, Warrants	1	May 2004		550,000		550,000


		Total Financial Services				1,179,525		1,179,525

		Iron Foundries - 0.25% (a, f)

	*	Vestal Manufacturing Enterprises, Inc., Common Stock (c)	40,500	Apr. 2004		450,000		450,000

		Manufacturer of Packaged Foods - 2.81% (a, f)

	*	Dakota Growers Pasta Company, Inc., Common Stock	909,091	July 2004		5,000,000		5,000,000

		Non-Alcoholic Beverages - 8.49% (a)

	*	Vitality Foodservice, Inc., Common Stock (f)	500,000	Sept. 2004		5,000,000		5,000,000

	*	Vitality Foodservice, Inc., Series A (i)	1,013,322	Sept. 2004		10,133,219		10,133,219

	*	Vitality Foodservice, Inc., Warrants (f)	1,000,000	Sept. 2004		—		—


		Total Non-Alcoholic Beverages				15,133,219		15,133,219

		Technology Investments - 5.18% (f)

		Actelis Networks, Inc. Series C (a)	150,602	May 2001		5,000,003		—

		DPHI, Inc., Series A (a)	602,131	May 2002		4,520,350		—

	*	Endymion Systems, Inc., Series A (a)	7,156,760	June 2000		7,000,000		—

		FOLIOfn, Inc., Series C (a)	5,802,259	June 2000		15,000,000		—

		Lumeta Corporation, Series A (a)	384,615	Oct. 2000		250,000		43,511

		Lumeta Corporation, Series B (a)	266,846	June 2002		156,489		156,489

		MainStream Data, Common Stock (a)	5,786	Aug. 2002		3,750,000		—

		Mentor Graphics Corp. (h)	82,283	Nov. 2001		480,008		—

	*	Phosistor Technologies, Inc., Series B (a, e)	6,666,667	Jan. 2002		1,000,000		—

	*	ProcessClaims, Inc., Series C (a)	6,250,000	June 2001		2,000,000		2,000,000

	*	ProcessClaims, Inc., Series D (a)	849,257	May 2002		400,000		400,000

	*	ProcessClaims, Inc., Series E Warrants, expire 12/31/05 (a)	873,362	May 2002		20		—

		SafeStone Technologies PLC, Series A Ordinary Shares (a)	2,106,378	Dec. 2000		4,015,402		—

	*	ShopEaze Systems, Inc., Series B (a, e)	2,097,902	May 2000		6,000,000		—

	*	Sonexis, Inc., Common Stock (a)	131,615	June 2000		10,000,000		—

The accompanying notes are an integral part of these consolidated financial statements.

MVC Capital, Inc.
Consolidated Schedule of Investments (Continued)
January 31, 2005
(Unaudited)


			Date of
			Initial
Description	Shares/Principal		Investment	Cost		Fair Value

* Sygate Technologies, Inc., Series D (a)		9,756,098	Oct. 2002	$	4,000,001	$	5,500,000

* Vendio Services, Inc., Common Stock (a, c)		10,476	June 2000		5,499,900		—

* Vendio Services, Inc., Series A (a, c)		6,443,188	Jan. 2002		1,134,001		1,134,001

* Yaga, Inc., Series A (a)		300,000	Nov. 2000		300,000		—

* Yaga, Inc., Series B (a)		1,000,000	June 2001		2,000,000		—


Total Technology Investments					72,506,174		9,234,001


Total Equity Investments					107,468,918		44,196,745


Debt Instruments - 16.76% (a, b, d)

Automotive Dealerships - 2.53%

* Baltic Motors Corporation (c) 10.0000%, 06/24/2007		4,500,000	June 2004		4,500,000		4,500,000

Confections Manufacturing and Distribution - 2.84%

* Impact Confections, Inc. (i) 17.0000%, 07/30/2009		5,056,712	July 2004		4,947,965		5,056,712

Distributor - Landscaping and Irrigation Equipment - 4.13%

* Timberland Machines & Irrigation, Inc., Loan (c) (i) 17.0000%, 08/04/2009		6,110,697	Aug. 2004		6,015,053		6,110,697

* Timberland Machines & Irrigation, Inc., Subordinated Bridge Notes (c) 12.5000%, 01/31/2006		1,250,000	Dec. 2004		1,214,748		1,250,000


Total Distributor - Landscaping and Irrigation Equipment Investments							7,360,697


Electrical Distribution - 1.68%

JDC Lighting, LLC (i) 17.0000%, 01/31/2009		3,000,000	Jan. 2005		2,925,000		3,000,000

Financial Services - 2.56%

Octagon Credit Investors, LLC (i) 15.0000%, 05/07/2011		5,081,290	May 2004		4,451,017		4,563,586

Iron Foundries - 0.56%

* Vestal Manufacturing Enterprises, Inc. (c) 12.0000%, 04/29/2011		1,000,000	Apr. 2004		1,000,000		1,000,000

Technology Investments - 2.46%

Arcot Systems, Inc. (g) 10.2500%, 12/31/2005		3,226,386	Dec. 2002		3,215,630		2,000,000

Integral Development Corporation (g) 10.2500%, 12/31/2005		2,384,718	Dec. 2002		2,376,768		2,384,718


Total Technology Investments					5,592,398		4,384,718


Total Debt Instruments					30,646,181		29,865,713

The accompanying notes are an integral part of these consolidated financial statements.

MVC Capital, Inc.
Consolidated Schedule of Investments (Continued)
January 31, 2005
(Unaudited)


			Date of
			Initial
Description	Shares/Principal		Investment	Cost		Market Value

Short-Term Securities - 45.58% (b)

U.S. Government & Agency Securities - 45.58% (b)

U.S. Treasury Bill 1.9900%, 02/17/2005		9,030,000	Dec. 2004	$	9,022,502	$	9,022,502

U.S. Treasury Bill 2.0516%, 04/07/2005		65,400,000	Jan. 2005		65,139,124		65,139,124

U.S. Treasury Bill 2.0400%, 04/28/2005		7,100,000	Jan. 2005		7,061,329		7,061,329

Total U.S. Government & Agency Securities					81,222,955		81,222,955


Total Short-Term Securities					81,222,955		81,222,955


Cash Equivalents - 12.52% (b)

Money Market Funds - 0.69% (b)

First American Prime Obligations Fund - Class A		1,241,724	Oct. 2004		1,241,724		1,241,724

Time Deposits - 11.83% (b)

LaSalle Enhanced Liquidity 1.2000%, 12/31/2031		21,080,764	Oct. 2004		21,080,764		21,080,764


Total Cash Equivalents					22,322,488		22,322,488


Total Investments - 99.66% (b)				$	241,660,542	$	177,607,901

The accompanying notes are an integral part of these consolidated financial statements.

MVC Capital, Inc.
Consolidated Schedule of Investments (Continued)
January 31, 2005
(Unaudited)

(a) These securities are restricted from public sale without prior registration under the Securities Act of 1933. The Fund negotiates certain aspects of the method and timing of the disposition of these investments, including registration rights and related costs.

(b) Percentages are based on net assets of $178,210,055 as of January 31, 2005.

(c) As defined in the Investment Company Act of 1940, at January 31, 2005, the Fund was considered to have a controlling interest in Baltic Motors Corporation, Timberland Machines & Irrigation, Inc., Vendio Services, Inc., and Vestal Manufacturing Enterprises, Inc.

(d) All of the Fund’s preferred and common stock and debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940, except Baltic Motors Corporation and SafeStone Technologies PLC. The Fund makes available significant managerial assistance to all of the portfolio companies in which it has invested.

(e) Company in dissolution.

(f) Non-income producing assets.

(g) Also received warrants to purchase a number of shares of preferred stock to be determined upon exercise.

(h) These shares are held in escrow until September 1, 2005 and have been valued at zero by the Fund’s Valuation Committee. The Fund has no way to determine the amount of shares, if any, it will receive from the escrow.

(i) These securities accrue a portion of their interest/dividends in “paid in kind” interest/dividends which is capitalized to the investment.

* Affiliated Issuers (Total Market Value of $60,734,629): companies in which the Fund owns at least 5% of the voting securities.

- Denotes zero cost/fair value.

The accompanying notes are an integral part of these consolidated financial statements.

MVC Capital, Inc. (the “Fund”)

Notes to Consolidated Financial Statements
January 31, 2005
(Unaudited)

1. Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. Certain amounts have been reclassified to adjust to current period presentations. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the financial statements and notes thereto included in the Fund’s Annual Report on Form 10-K for the year ended October 31, 2004, as filed with the United States Securities and Exchange Commission (the “SEC”) on January 14, 2005 (File No. 814-00201).

2. Consolidation

On July 16, 2004, the Fund formed a wholly owned subsidiary MVC Financial Services, Inc. (“MVCFS”). MVCFS is incorporated in Delaware and its principal purpose is to provide advisory, administrative and other services to the Fund and the Fund’s portfolio companies. Under regulations governing the content of the Fund’s financial statements, the Fund is generally precluded from consolidating any entity other than another investment company; however, an exception to these regulations allows the Fund to consolidate MVCFS since it is a wholly owned operating subsidiary. MVCFS had opening equity of $1 (100 shares at $0.01 per share). The Fund does not hold MVCFS for investment purposes and does not intend to sell MVCFS. All intercompany accounts have been eliminated in consolidation.

3. Concentration of Market Risk

Financial instruments that subjected the Fund to concentrations of market risk consisted principally of equity investments, subordinated notes, and debt instruments, which represent approximately 41.56% of the Fund’s net assets at January 31, 2005. As discussed in Note 4, these investments consist of securities in companies with no readily determinable market values and as such are valued in accordance with the Fund’s fair value policies and procedures. The Fund’s investment strategy represents a high degree of business and financial risk due to the fact that the investments (other than cash equivalents) are generally illiquid, in small and middle market companies, and include entities with little operating history or entities that possess operations in new or developing industries. These investments, should they become publicly traded, would generally be (i) subject to restrictions on resale, if they were acquired from the issuer in private placement transactions; and (ii) susceptible to market risk. At this time, the Fund’s investments in short-term securities are in 90-day Treasury Bills, which are federally guaranteed securities, except that the Fund’s cash balances, if not large enough to be invested in 90-day Treasury Bills, are swept into a designated money market account.

4. Portfolio Investments

For the Quarter Ended January 31, 2005

During the three months ended January 31, 2005, the Fund made one new investment, totaling $3 million, in JDC Lighting, LLC, in the form of subordinated debt. The Fund also made a follow-on investment of $1.25 million in Timberland Machines & Irrigation, Inc. (“Timberland Machines”), an existing portfolio company, in the form of a subordinated bridge note.

Also, during the three months ended January 31, 2005, the Fund sold 603,396 shares of Mentor Graphics Corp. (“Mentor Graphics”) at an average price of $13.75 per share. The total net proceeds received from the shares sold was approximately $8.3 million. The Fund realized a gain on the shares sold of approximately $4.8 million. At January 31, 2005, the 82,283 remaining shares of Mentor Graphics owned by the Fund were held in escrow and therefore restricted as to their resale until September 1, 2005. The Fund’s Valuation Committee

determined to carry the escrow shares at zero because it was unable to determine how many shares, if any, the Fund would receive from the escrow.

The Fund also realized a loss on CBCA, Inc. (“CBCA”) of approximately $12 million. The Fund received no proceeds from the dissolution of this company and the investment has been removed from the Fund’s portfolio. The market value of CBCA was previously written down to zero.

On December 21, 2005, Determine Software, Inc. repaid its senior credit facility from the Fund in full. The amount of proceeds the Fund received from the repayment was approximately $1.64 million. This amount included all outstanding principal and any unpaid accrued interest. Under the terms of the early repayment, the Fund returned its 2,229,955 Series C warrants for no consideration.

The Fund also continued to receive the monthly principal repayments on the credit facilities of Integral Development Corporation (“Integral”) and Arcot Systems, Inc. (“Arcot”) Each made payments according to its respective credit facility agreement totaling the following amounts: Arcot $420,834 and Integral, $420,834.

For the three months ended January 31, 2005, the Valuation Committee of the Board of Directors (“Valuation Committee”) did not increase or decrease the fair value of any of the of the Fund’s investments. The change in the fair value of certain investments was due to the receipt of paid in kind (PIK) interest or flow through income from portfolio companies.

At January 31 2005, the fair value of all portfolio investments, exclusive of short-term securities, was $74.06 million with a cost of $138.12 million and at October 31, 2004, the fair value of all portfolio investments, exclusive of short-term securities, was $ 78.52 million with a cost of $ 151.58 million.

For the Year Ended October 31, 2004

During the year ended October 31, 2004, the Fund made seven new investments, totaling $55.71 million. The investments were made as follows: Vestal Manufacturing Enterprises, Inc., $1,450,000, Octagon Credit Investors LLC, $5,560,000, Baltic Motors Corporation, $10,500,000, Dakota Growers Pasta Company, Inc., $5,000,000, Impact Confections, Inc., $7,700,000, Timberland Machines, $10,500,000 and Vitality Foodservice, Inc., $15,000,000. No additional investments were made in existing portfolio companies.

The Fund had a return of capital from PTS Messaging, Inc. (“PTS Messaging”) with proceeds totaling approximately $102,000 from the initial and final disbursement of assets and a realized loss totaling approximately $11.6 million. As of October 31, 2004 the Fund no longer held an investment in PTS Messaging. The market value of PTS Messaging was previously written down to zero.

The Fund also realized a loss on Ishoni Networks, Inc. (“Ishoni”) of approximately $10.0 million. The Fund received no proceeds from the dissolution of this company and the investment was removed from the Fund’s portfolio. The market value of Ishoni was previously written down to zero.

There was a gain of $39,630 representing proceeds received from the cashless exercise of the Fund’s warrants of Synhrgy HR Technologies, Inc. (“Synhrgy”) in conjunction with the early repayment by Synhrgy of the $4.9 million remaining balance of the Fund’s credit facility.

On August 26, 2004, Affiliated Computer Services, Inc. (“ACS”) acquired the Fund’s portfolio company BlueStar Solutions, Inc (“BlueStar”) in a cash transaction. The Fund received approximately $4.5 million for its investment in BlueStar. The amount received includes contingent payments, to be held in escrow that may be received in late 2005 up to $459,000. The carrying value of the BlueStar investment was $3.0 million with zero value attributed to the contingent payments. The Fund realized a loss of approximately $8.8 million, which was offset by a decrease in unrealized loss by the same amount. The effect of the transaction on the Fund was an increase in assets by $1.1 million. After the sale, the Fund no longer held any investment in BlueStar.

On September 1, 2004, Mentor Graphics acquired the Fund’s portfolio company 0-In Design Automation, Inc (“0-In”). The Fund received 685,679 common shares of Mentor stock for its investment in 0-In. Of these shares approximately 82,283 are being held in escrow for a one year period. The Fund’s Valuation Committee determined to carry the escrow shares at zero because it was unable to determine how many shares, if any, the Fund would receive from the escrow. The 603,396 freely tradable shares received at the time of the exchange had a market value of approximately $6.6 million. The Fund’s carrying value of the 0-In investment was $6.0 million. The effect of the transaction on the Fund was an increase in assets and unrealized gain of

approximately $0.6 million. The terms of the acquisition also include a multi-year earn-out, based upon future revenues, under which the Fund may be entitled to receive additional cash consideration. After the exchange, the Fund no longer held any investment in 0-In.

The Fund also began to receive the monthly principal repayments on the credit facilities of Integral Development Corporation (“Integral”), Arcot Systems, Inc. (“Arcot”), and Determine Software, Inc. (“Determine”). Each made payments according to its respective credit facility agreement totaling the following amounts: Arcot $1,402,780, Determine $392,778 and Integral $1,683,336.

For the year ended October 31, 2004, the Valuation Committee increased the fair value of the Fund’s investments in 0-In by $5 million, Sygate Technologies, Inc. (“Sygate”) by $1.5 million, BlueStar by $1.5 million, Vendio by $634,000 and Integral by $989,000 and wrote down the fair value of the Fund’s investments in Actelis Networks, Inc. by $1,000,000, CBCA by $500,000, and Sonexis, Inc. by $500,000.

At October 31 2004, the fair/market value of all portfolio investments, exclusive of short-term securities, was $78.52 million with a cost of $151.58 million and at October 31, 2003, the fair value of all portfolio investments, exclusive of short-term securities, was $24.1 million with a cost of $146.5 million.

5. Commitments and Contingencies

The Fund rents office space at 287 Bowman Avenue, 3rd Floor, Purchase, New York 10577, under a lease which is scheduled to expire on November 30, 2005. Future payments under this lease total $42,512 from February 1, 2005 through October 31, 2005, and $4,734 from November 1, 2005 through November 30, 2005. The building at 287 Bowman Avenue, Purchase, New York is owned by Phoenix Capital Partners, LLC, an entity which is 97% owned by Michael Tokarz, the Fund’s Chairman, Portfolio Manager, and Director. See “Subsequent Events” for more information.

The Fund has also extended a $5,000,000 senior secured credit facility to Octagon Credit Investors, LLC (“Octagon”). This credit facility expires on May 7, 2009 and bears interest at LIBOR plus 4%. Octagon has not yet drawn down on this facility. The Fund receives a 0.50% unused facility fee on an annual basis and a 0.25% servicing fee on an annual basis for maintaining the credit facility.

Timberland Machines has a floor plan financing program administered by Transamerica Commercial Finance Corporation. As is typical in this industry, under the terms of the dealer financing arrangement, Timberland Machines guarantees the repurchase of product from Transamerica, if a dealer defaults on payment and the underlying assets are repossessed. The Fund has agreed to be a co-guarantor of this repurchase commitment, but its maximum potential exposure as a result of the guarantee is contractually limited to $0.5 million.

On October 28, 2004, the Fund entered into a one-year, cash collateralized, $20 million revolving credit facility (the “Credit Facility”) with LaSalle Bank National Association (the “Bank”). On October 28, 2004, the Fund borrowed $10,025,000 under the Credit Facility. The proceeds from borrowings made under the Credit Facility were used for general corporate purposes. On November 12, 2004 the Fund repaid the $10,025,000 it borrowed from the Bank under the Credit Facility. As of January 31, 2005, the Fund has not drawn upon the Credit Facility since the repayment. The Credit Facility will expire on October 31, 2005, at which time all outstanding amounts under the Credit Facility will be due and payable.

Borrowings under the Credit Facility, if any, will bear interest, at the Fund’s option, at either a fixed rate equal to the LIBOR rate (for one, two, three or six months), plus 1.00% per annum, or at a floating rate equal to the Bank’s prime rate in effect from time to time, minus a spread of 1.00% per annum.

The Fund enters into contracts with portfolio companies and other parties that contain a variety of indemnifications. The Fund’s maximum exposure under these arrangements is unknown. However, the Fund has not experienced prior claims or losses pursuant to these contracts and expects the risk of loss related to such indemnification to be remote.

6. Certain Issuances of Equity Securities by the Issuer

right. For every two rights held, stockholders were able to purchase one share of the Fund’s common stock at the subscription price of 95% of the Fund’s net asset value per share on January 3, 2005. In addition, stockholders who elected to exercise all of their rights to purchase the Fund’s common stock received an over-subscription right to subscribe for additional shares that were not purchased by other holders of rights. Based on a final count by the Fund’s subscription agent, the rights offering was over-subscribed with 6,645,948 shares of the Fund’s common stock subscribed for. This was out of 6,146,521 shares available before the 25% oversubscription. Each share was subscribed for at a price of $9.10 which resulted in gross proceeds to the Fund of approximately $60.5 million before offering expenses of approximately $500,000.

7. Management

For the Quarter Ended January 31, 2005

On November 29, 2004, Jaclyn Shapiro was appointed Vice President of the Fund responsible for board and shareholder matters, portfolio development and fund administration.

For the Year Ended October 31, 2004

On November 6, 2003, Michael Tokarz assumed his position as Chairman, Portfolio Manager and Director of the Fund. As Portfolio Manager, Mr. Tokarz will be compensated by the Fund based upon his performance as the Portfolio Manager. Under the terms of his agreement with the Fund, the Fund will pay Mr. Tokarz an amount equal to the lesser of (a) 20% of the net income of the Fund for the fiscal year; or (b) the sum of (i) 20% of the net capital gains realized by the Fund in respect of the investments made during his tenure as Portfolio Manager; and (ii) the amount, if any, by which the Fund’s total expenses for a fiscal year were less than two percent of the Fund’s net assets (determined as of the last day of the period). Any payments to be made shall be calculated based upon the audited financial statements of the Fund for the applicable fiscal year and shall be paid as soon as practicable following the completion of such audit. For the year ended October 31, 2004, Mr. Tokarz received no compensation from the Fund pursuant to his contract.

On January 12, 2004, Frances Spark was appointed Chief Financial Officer and Jaclyn Shapiro was appointed Secretary of the Fund.

On October 4, 2004, Scott Schuenke was appointed Chief Compliance Officer of the Fund.

8. Tax Matters

On October 31, 2004, the Fund had a net capital loss carryforward of $75,484,412 of which $33,469,122 will expire in the year 2010, $4,220,380 will expire in the year 2011 and $37,794,910 will expire in the year 2012. Capital loss carryforwards may be subject to additional limitations as a result of capital share activity. To the extent future capital gains are offset by capital loss carryforwards, such gains will not be distributed.

9. Segment Data

The Fund’s reportable segments are its investing operations as a business development company, MVC Capital, Inc. (“MVC”), and the financial advisory operations of its wholly owned subsidiary, MVC Financial Services, Inc. (“MVCFS”).

The following table presents book basis segment data for the quarter ended January 31, 2005:



	MVC		MVCFS		Consolidated
Interest and dividend income		1,625,840		577		1,626,417
Fee income		104,834		74,849		179,683
Other income		189,326		—		189,326
Total operating income		1,920,000		75,426		1,995,426



	MVC			MVCFS			Consolidated
Total operating expenses		1,128,143			20,124			1,148,267

Net operating income before taxes		791,857			55,302			847,159
Tax expense (benefit)		—			(34,508	)		(34,508	)
Net investment income		791,857			89,810			881,667
Net realized loss on investments		(7,226,371	)		—			(7,226,371	)
Net change in unrealized appreciation on investments		9,009,288			—			9,009,288
Net increase in net assets resulting from operations		2,574,774			89,810			2,664,584

In all periods prior to July 16, 2004, all business was conducted through MVC Capital, Inc.

11. Subsequent Events

On February 16, 2005, the Fund entered into a sublease (the “Sublease”) for a larger space in the Fund’s current executive offices located at 287 Bowman Avenue, Purchase, New York 10577. The Sublease is scheduled to expire on February 28, 2007. Future payments under the Sublease total approximately $445,000. The Fund’s previous lease was terminated effective March 1, 2005, without penalty. The building at 287 Bowman Avenue is owned by Phoenix Capital Partners, LLC, an entity which is 97% owned by Mr. Tokarz.

On February 24, 2005, the Fund made an investment in SGDA Sanierungsgesellschaft fur Deponien und Altasten mbH (“SGDA”) a company dealing in the regeneration of waste disposal sites and contaminated areas. The Fund’s investment in SGDA consists of a $4,579,050 Term Loan, bearing interest at 7% over a four and a half year term. The note has a $4,579,050 principal face amount and was issued at a discounted cost basis of $4,264,050. The loan included an ownership interest in SGDA with a cost basis of $315,000. The Fund also made available to SGDA a $1,308,300 revolving credit facility that bears interest at 7%. The credit facility expires on August 24, 2006. SGDA has not yet drawn upon this facility.

On March 10, 2005, the Valuation Committee increased the fair value of the Fund’s equity investment in Vestal Manufacturing Enterprises, Inc. by $950,000 from $450,000 to $1,400,000.

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

This report contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Fund and its investment portfolio companies. Words such as may, will, expect, believe, anticipate, intend, could, estimate, might and continue, and the negative or other variations thereof or comparable terminology, are intended to identify forward-looking statements. Forward-looking statements are included in this report pursuant to the “Safe Harbor” provision of the Private Securities Litigation Reform Act of 1995. Such statements are predictions only, and the actual events or results may differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those relating to investment capital demand, pricing, market acceptance, the effect of economic conditions, litigation and the effect of regulatory proceedings, competitive forces, the results of financing and investing efforts, the ability to complete transactions and other risks identified below or in the Fund’s filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Fund undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. The following analysis of the financial condition and results of operations of the Fund should be read in conjunction with the Financial Statements, the Notes thereto and the other financial information included elsewhere in this report.

SELECTED CONSOLIDATED FINANCIAL DATA:

Financial information for the fiscal year ended October 31, 2004 is derived from the consolidated financial statements, which have been audited by Ernst & Young LLP, the Fund’s independent registered public accountants. Quarterly financial information is derived from unaudited financial data, but in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments), which are necessary to present fairly the results for such interim periods.

Selected Consolidated Financial Data


	Quarter Ended			Quarter Ended			Year Ended
	January 31,			January 31,			October 31,
	2005			2004			2004
	(Unaudited)			(Unaudited)
	(In thousands, except per share data)
Operating Data:
Interest and related portfolio income:
Interest and dividends	$	1,626		$	711		$	3,086
Fee income		180			—			836
Other income		189			5			64


Total interest and related portfolio income		1,995			716			3,986

Expenses:
Employee		434			268			1,366
Administrative		714			878			2,523
Management fee		—			—			—


Total operating expenses		1,148			1,146			3,889


Net investment income (loss) before taxes		847			(430	)		97

Tax expense benefit		(35	)		—			79


Net investment income (loss)		882			(430	)		18

Net realized and unrealized gains (losses):
Net realized gains (losses)		(7,226	)		(10,341	)		(37,795	)
Net change in unrealized appreciation (depreciation)		9,009			13,076			49,382


Net realized and unrealized gains (losses) on investments		1,783			2,735			11,587


Net increase (decrease) in net assets resulting from operations	$	2,665		$	2,305		$	11,605


Per Share:
Net increase (decrease) in net assets per share resulting from operations	$	0.18		$	0.14		$	0.91
Dividends per share	$	—		$	—		$	0.12
Balance Sheet Data:
Portfolio at value	$	74,062		$	21,100		$	78,520
Portfolio at cost		138,115			130,468			151,582
Total assets		182,401			108,278			126,577
Shareholders’ equity		178,210			107,742			115,567
Shareholders’ equity per share (net asset value)	$	9.41		$	8.76		$	9.40
Common shares outstanding at period end		18,939			12,293			12,293
Other Data:
Number of Investments funded in period		2			—			7
Investments funded ($) in period	$	4,250		$	—		$	55,710


	2005		2004										2003
	Qtr 1		Qtr 4		Qtr 3 ⁽¹⁾		Qtr 2			Qtr 1			Qtr 4			Qtr 3			Qtr 2			Qtr 1
	(In thousands except per share data)
Quarterly Data (Unaudited):

Total interest and related portfolio income	$	1,995	$	1,811	$	951	$	508		$	716		$	742		$	776		$	811		$	566
Net investment income (loss) before net realized and unrealized gains		882		665		281		(498	)		(430	)		(847	)		(559	)		(5,031	)		(2,055	)
Net increase (decrease) in net assets resulting from operations		2,665		3,274		4,922		1,104			2,305			(4,660	)		(14,382	)		(6,649	)		(29,792	)
Net increase (decrease) in net assets resulting from operations per share		0.18		0.27		0.41		0.09			0.14			(0.29	)		(0.89	)		(0.41	)		(1.83	)
Net asset value per share		9.41		9.40		9.25		8.85			8.76			8.48			8.77			9.66			10.06

(1) Data for 2004 differs from that which was filed on Form 10-Q on September 9, 2004, due to a reclassification of investment income and related expenses which had previously been accrued for.

Overview

The Fund is a non-diversified closed-end management investment company that has elected to be regulated as a business development company under the 1940 Act. The Fund’s investment objective is to seek to maximize total return from capital appreciation and/or income.

On November 6, 2003, Mr. Tokarz assumed his position as Chairman and Portfolio Manager of the Fund. He and his team are seeking to implement our investment objective (i.e., to maximize total return from capital appreciation and/or income) through making a broad range of private investments in a variety of industries. The investments can include senior or subordinated loans, convertible debt and convertible preferred securities, common or preferred stock, warrants or rights to acquire equity interests, and other private equity transactions. In the year ended October 31, 2004, we made seven new investments, totaling $55,710,000, pursuant to our new investment objective. In the fiscal quarter ended January 31, 2005, the Fund made one new investment and one additional investment in an existing portfolio company, totaling $4,250,000.

Prior to the adoption of our current investment objective, the Fund’s investment objective had been to achieve long-term capital appreciation from venture capital investments in information technology companies. The Fund’s investments had thus previously focused on investments in equity and debt securities of information technology companies. As of January 31, 2005, 7.47% of the current fair value of our assets consisted of portfolio investments made by the Fund’s former management team pursuant to the prior investment objective. We are, however, seeking to manage these legacy investments to try and realize maximum returns. We generally seek to capitalize on opportunities to realize cash returns on these investments when presented with a potential “liquidity event,” i.e., a sale, public offering, merger or other reorganization.

Our new portfolio investments are made pursuant to our new objective and strategy. We are concentrating our investment efforts on small and middle-market companies that, in our view, provide opportunities to maximize total return from capital appreciation and/or income. Under our investment approach, we are permitted to invest, without limit, in any one portfolio company, subject to any diversification limits required in order for us to continue to qualify as a regulated investment company under Subchapter M of the Code.

We participate in the private equity business generally by providing privately negotiated long-term equity and/or debt investment capital to small and middle-market companies. Our financing is generally used to fund growth, buyouts, acquisitions, recapitalizations, note purchases, and/or bridge financings. We generally invest in private companies, though, from time to time, we may invest in public companies that may lack adequate access to public capital.

Investment Income

For the Quarters Ended January 31, 2005 and 2004. Total investment income was approximately $2.0 million for the quarter ended January 31, 2005 and approximately $700,000 for the quarter ended January 31, 2004, an increase of $1.3 million.

For the Quarter Ended January 31, 2005

Total investment income was $2.0 million for the quarter ended January 31, 2005. The significant components of the Fund’s investment income were interest income earned on loans to portfolio companies and the Fund’s receipt of closing and monitoring fees from certain portfolio companies by the Fund and MVCFS. The Fund earned approximately $1.35 million in interest and dividend income from investments in portfolio companies. These companies were paying interest and dividends to the Fund at various rates from 10% to 17.5%. Also, the Fund earned approximately $280,000 in interest income on its cash equivalents and short-term investments during the quarter ended January 31, 2005. The Fund received fee income and other income from portfolio companies totaling approximately $180,000 and $190,000 respectively.

For the Quarter Ended January 31, 2004

Total investment income was approximately $700,000 for the quarter ended January 31, 2004. Interest income from cash equivalents and short-term investments was the main component of investment income during the quarter ended January 31, 2004.

Operating Expenses

For the Quarters Ended January 31, 2005 and 2004. Operating expenses were $1.1 million for the quarter ended January 31, 2005 and $1.1 million for the quarter ended January 31, 2004.

For the Quarter Ended January 31, 2005

Operating expenses were $1.1 million for the quarter ended January 31, 2005.

Significant components of operating expenses for the quarter ended January 31, 2005 included insurance premium expenses of $186,116, salaries and benefits of $433,747, legal fees of $150,574, facilities fees of $68,863 and other expenses of $107,357.

The small change in the Fund’s operating expenses comparing 2005 with 2004 was due to increases in certain variable expenses and decreases in others. The Fund’s salaries and benefits expense increased due to the addition of new employees. While other costs, such as legal fees, have decreased because of a reduction in the need for legal counsel due to the stabilization of the Fund’s operations by Management.

In February 2004, the Fund renewed its Directors & Officers/Professional Liability Insurance policies at an expense of approximately $719,000 which was amortized over the life of the policy. The prior policy premium was $1.4 million.

During the quarter ended January 31, 2005, the Fund had $107,357 in other expenses. Included in this amount were expenses for professional fees related to deal expenses and other miscellaneous expenses.

For the Quarter Ended January 31, 2004

Operating expenses were $1.1 million for the quarter ended January 31, 2004.

Significant components of operating expenses for the three months ended January 31, 2004 include insurance premium expenses of $368,638, salaries and benefits of $267,840, legal fees of $230,933, and a facilities recovery of ($140,033).

On January 21, 2004, the Fund reached an agreement with the property manager at 3000 Sand Hill Road, Menlo Park, California to terminate its lease at such location. Under the terms of the agreement, the Fund bought-out its lease directly from the property manager, for an amount equal to $232,835. As a result, the Fund recovered approximately $250,000 of the remaining reserve established at October 31, 2003. Without the recovery of the reserve, the gross facilities expense for the three months ending January 31, 2004 was approximately $110,000.

In February 2003, the former management of the Fund (“Former Management”) had entered into new Directors & Officers/Professional Liability Insurance policies with a premium of approximately $1.4 million. The cost was amortized over the life of the policy, through February 2004. For the quarter ended January 31, 2004, the Fund expensed $368,638 in insurance premiums.

Realized Gains and Losses On Portfolio Securities

For the Quarters Ended January 31, 2005 and 2004. Net realized losses for the quarters ended January 31, 2005 and 2004 were $7.2 million and $10.3 million, respectively, a decreased loss of $3.1 million.

For the Quarter Ended January 31, 2005

Net realized losses for the quarter ended January 31, 2005 were $7.2 million. The significant components of the Fund’s net realized loss for the quarter ended January 31, 2005 were a realized gain on the Fund’s investment in Mentor Graphics and a realized loss on CBCA.

During the three months ended January 31 2005, the Fund sold 603,396 shares of Mentor Graphics at an average price of $13.75 per share and realized a gain on the shares sold of approximately $4.8 million. The total net proceeds received from the shares sold was approximately $8.3 million. At January 31, 2005 the 82,283 remaining shares of Mentor Graphics owned by the Fund were held in escrow and therefore restricted as to their resale. The Fund’s Valuation Committee determined to carry the escrow shares at zero because it was unable to determine how many shares, if any, the Fund would receive from the escrow.

The Fund realized a loss on CBCA of approximately $12 million. The Fund received no proceeds from the dissolution of this company and the investment has been removed from the Fund’s portfolio. The market value of CBCA was previously written down to zero. As this investment had previously been written down in value, the realized loss was offset by a reduction in unrealized losses. Therefore, the net effect of the transaction on the Fund’s books was zero.

For the Quarter Ended January 31, 2004

Net realized losses for the quarter ended January 31, 2004 were $10.3 million. This resulted mainly from the return of capital by PTS Messaging to the holders of its preferred stock.

Unrealized Appreciation and Depreciation of Portfolio Securities and Accumulated Deficit

For the Quarters Ended January 31, 2005 and 2004. The Fund had a net decrease in unrealized depreciation of $9.0 million for the quarter ended January 31, 2005 due mostly to the disposition of securities of unrealized losses. The Fund had a net decrease in unrealized depreciation of $13.1 million for the quarter ended January 31, 2004.

The Fund’s total accumulated deficit for each of the quarters ended January 31, 2005 and 2004 was $145.9 million and $157.8 million, respectively.

For the Quarter Ended January 31, 2005

Net decrease in unrealized depreciation for the quarter ended January 31, 2005 was $9.0 million.

Such net decrease in unrealized depreciation on investment transactions for the three months ended January 31, 2005 resulted mainly from the realization of a $4.8 million gain on the sales of the Fund’s shares of Mentor Graphics and the $12.0 million depreciation reclass from unrealized to realized caused by the removal of CBCA from the Fund’s books.

The Fund’s total accumulated deficit for the quarter ended January 31, 2005 was $145.9 million. The decrease in accumulated deficit for the quarter ended January 31, 2005 is due primarily to the return of capital statement of position (“ROCSOP”) adjustment and Fund’s increase in net assets from operations of $2.7 million.

For the Quarter Ended January 31, 2004

Net increase in unrealized depreciation for the quarter ended January 31, 2004 was $13.1 million.

The net decrease in unrealized depreciation on investment transactions for the three months ended January 31, 2004 resulted mainly from the $10.4 million depreciation reclass from unrealized to realized effected by the return of capital of PTS Messaging. Such net decrease also resulted from the determinations of the Valuation Committee to increase the fair value of the Fund’s investments in Sygate and 0-In by $2.5 million.

The Fund’s total accumulated deficit was $157.87 million for the quarter ended January 31, 2004. The decrease in accumulated deficit for the three months ended January 31, 2004 was due primarily to the Valuation Committee’s increase of the fair valuations of certain portfolio company investments by $2.5 million offset by a net investment loss of $430,246. The decrease is also due to the reclassification of previously repurchased treasury shares.

Portfolio Investments

For the Quarter Ended January 31, 2005 and the Fiscal Year Ended October 31, 2004. The cost of equity investments held by the Fund at January 31, 2005 and at October 31, 2004 was $107.5 million and $122.8 million, respectively, a decrease of $15.3 million. The aggregate fair value of equity investments at January 31, 2005 and at October 31, 2004 was $44.2 million and $51.0 million, respectively, a decrease of $6.8 million. The cost of debt instruments (excluding subordinated notes, short-term investments, and cash equivalents) held by the Fund at January 31, 2005 and at October 31, 2004 was $30.6 million and $28.8 million, respectively, an increase of $1.8 million. The aggregate fair value of debt instruments at January 31, 2005 and at October 31, 2004 was $29.9 million and $27.5 million, respectively, an increase of $2.4 million. The cost and aggregated fair value of short-term securities held by the Fund at January 31, 2005 and at October 31, 2004 was $81.2 million and $34.1 million, respectively, an increase of $47.1 million. The cost and aggregate fair value of cash and cash equivalents held by the Fund at January 31, 2005 and at October 31, 2004 was $26.4 million and $13.2, respectively, an increase of approximately $13.2 million.

For the Quarter Ended January 31, 2005

During the three months ended January 31, 2005, the Fund made one new investment, totaling $3 million, in JDC Lighting, LLC, in the form of a subordinated debt. The Fund also made a follow-on investment of $1.25 million in Timberland Machines in the form of a subordinated bridge note.

Also during the three months ended January 31 2005, the Fund sold 603,396 shares of Mentor Graphics at an average price of $13.75 per share. The total net proceeds received from the shares sold was approximately $8.3 million. The Fund realized a gain on the shares sold of approximately $4.8 million. At January 31, 2005 the 82,283 remaining shares of Mentor Graphics owned by the Fund were held in escrow and therefore restricted

as to their resale until September 1, 2005. The Fund’s Valuation Committee determined to carry the escrow shares at zero because it was unable to determine how many shares, if any, the Fund would receive from the escrow.

The Fund also realized a loss on CBCA of approximately $12 million. The Fund received no proceeds from the dissolution of this company and the investment has been removed from the Fund’s portfolio. The market value of CBCA was previously written down to zero.

The Fund also continued to receive the monthly principal repayments on the credit facilities of Integral and Arcot. Each made payments according to its respective credit facility agreement totaling the following amounts: Arcot $420,834 and Integral, $420,834.

For the three months ended January 31, 2005, the Valuation Committee did not increase or decrease the value of any of the of the Fund’s investments. The changes in the fair value of certain investments were due to the receipt of paid in kind (PIK) interest or flow through income from portfolio companies.

The cost and aggregated fair value of short-term securities held by the Fund at January 31, 2005 was $81.2 million. The cost and aggregate fair value of cash and cash equivalents held by the Fund at January 31, 2005 was $26.4 million.

For the Year Ended October 31, 2004

The Fund had a return of capital from PTS Messaging with proceeds totaling approximately $102,000 from the initial and final disbursement of assets and a realized loss totaling approximately $11.6 million. As of October 31, 2004 the Fund no longer held an investment in PTS Messaging. The market value of PTS Messaging had been previously written down to zero.

The Fund also realized a loss on Ishoni of approximately $10.0 million. The Fund received no proceeds from the dissolution of this company and the investment was removed from the Fund’s portfolio. The market value of Ishoni was previously written down to zero.

There was a gain of $39,630 representing proceeds received from the cashless exercise of the Fund’s warrants of Synhrgy in conjunction with the early repayment by Synhrgy of the $4.9 million remaining balance of the Fund’s credit facility.

On August 26, 2004, ACS acquired the Fund’s portfolio company BlueStar in a cash transaction. The Fund received approximately $4.5 million for its investment in BlueStar. The amount received includes contingent payments, to be held in escrow that may be received in late 2005 up to $459,000. The carrying value of the BlueStar investment was $3.0 million with zero value attributed to the contingent payments. The Fund realized a loss of approximately $8.8 million, which was offset by a decrease in unrealized loss by the same amount. The effect of the transaction on the Fund was an increase in assets by $1.1 million. After the sale, the Fund no longer held any investment in BlueStar.

approximately $0.6 million. The term of the acquisition also included a multi-year earn-out, based upon future revenues, under which the Fund may be entitled to receive additional cash consideration. After the exchange, the Fund no longer held any investment in 0-In. Management continues to evaluate opportunities for its portfolio companies to realize value for the Fund and its stockholders.

The cost and aggregated fair value of short-term securities held by the Fund at October 31, 2004 was $34.1 million. There was a return of $31.6 million in cash to the shareholders in January 2004 resulting from the completion of the Fund’s tender offer and several investments made in new portfolio companies both of which affected the Fund’s balance in short-term investments. The cost and aggregate value of cash and cash equivalents held by the Fund at October 31, 2004 was $14.6 million.

Portfolio Companies

During the quarter ended January 31, 2005, the Fund had active investments in the following portfolio companies:

Actelis Networks, Inc.

Actelis Networks, Inc. (“Actelis”), Fremont, California, provides authentication and access control solutions to secure the integrity of e-business in Internet-scale and wireless environments.

At October 31, 2003 the Fund’s investment in Actelis consisted of 1,506,025 shares of Series C Preferred Stock at a cost of $5.0 million. On December 2, 2004 the Fund’s shares in Actelis underwent a 10 for 1 reverse stock split as a part of a new financing in which the Fund did not participate. After the reverse split and at January 31, 2005, the Fund’s investment in Actelis consisted of 150,602 shares of Series C Preferred Stock at a cost of $5.0 million. The investment has been assigned a fair value of $0.

Arcot Systems, Inc.

Arcot Systems, Inc. (“Arcot”), Santa Clara, California, develops solutions to address the challenges of securing e-business applications in Internet-scale and transactional environments.

At October 31, 2004, the Fund’s investment in Arcot consisted of an outstanding balance on the loan of $3.65 million with a cost of $3.63 million. The investment was assigned a fair value of $2.0 million and the warrants were assigned a fair value of $0.

During the quarter ended January 31, 2005, Arcot made scheduled principal repayments totaling $420,834.

At January 31, 2005, the Fund’s investment in Arcot consisted of an outstanding balance on the loan of $3.23 million with a cost of $3.22 million. The investment has been assigned a fair value of $2.0 million and the warrants have been assigned a fair value of $0.

Baltic Motors Corporation

Baltic Motors Corporation (“Baltic”), Purchase, New York, is a U.S. company focused on the importation and sale of Ford and Land Rover vehicles and parts throughout Latvia, a member of the European Union.

At October 31, 2004 and January 31, 2005, the Fund’s investment in Baltic consisted of 54,947.37 shares of Common Stock at a cost of $109.20 per share or $6.0 million and a mezzanine loan with a cost basis of $4.5 million. The loan has a maturity date of June 25, 2007 and earns interest at 10% per annum.

At January 31, 2005, the Fund’s investment in Baltic was assigned a fair value of $10.5 million. Michael Tokarz, Chairman of the Fund, Frances Spark and Bruce Shewmaker, officers of the Fund, serve as directors for Baltic.

CBCA, Inc.

CBCA, Inc. (“CBCA”), Oakland, California, has developed an automated health benefit claims processing and payment system that includes full website functionality.

At October 31, 2004, the Fund’s investment in CBCA consisted of 753,350 shares of Common Stock with a cost of $12.0 million. The investment had a fair value of $0.

During the quarter ended January 31, 2005, CBCA was purchased by an outside party for its outstanding liabilities and the Fund’s shares of Common Stock were cancelled without any consideration or payment.

At January 31, 2005, the Fund no longer held any investment in CBCA. As a result, a realized loss of approximately $12.0 million was recognized which was offset by a reduction in unrealized loss by the same $12.0 million. Therefore, the net effect of the cancellation of the common stock on this investment was zero.

Dakota Growers Pasta Company, Inc.

Dakota Growers Pasta Company, Inc. (“Dakota”), Carrington, North Dakota, is the third largest manufacturer of dry pasta in North America and a market leader in private label sales. Dakota and its partners in DNA Dreamfields Company, LLC recently introduced a new process that is designed to reduce the number of digestible carbohydrates found in traditional pasta products.

At October 31, 2004 and January 31, 2005, the Fund’s investment in Dakota consisted of 909,091 shares of Common Stock carried at a cost and assigned a fair value of $5.0 million. Michael Tokarz, Chairman of the Fund, serves as a director of Dakota.

Determine Software, Inc.

Determine Software, Inc. (“Determine”), San Francisco, California, is a provider of web-based contract management software.

At October 31, 2004, the Fund’s investment in Determine consisted of a loan which had an outstanding balance of $1.63 million with a cost of $1.62 million. The investment had been assigned a fair value of $1.62 million and the warrants had been assigned a fair value of $0.

On December 21, 2005, Determine repaid its loan from the Fund in full. The amount of proceeds the Fund received from the repayment was approximately $1.64 million. This amount included all outstanding principal and any unpaid accrued interest. Under the terms of the early repayment, the Fund returned its 2,229,955 Series C warrants for no consideration.

As of January 31, 2005, the Fund no longer held any investment in Determine.

DPHI, Inc. (formerly DataPlay, Inc.)

DPHI, Inc. (“DPHI”), Boulder, Colorado, is trying to develop new ways of enabling consumers to record and play digital content.

At October 31, 2004 and January 31, 2005, the Fund’s investment in DPHI consisted of 602,131 shares of Series A-1 Preferred Stock with a cost of $4.5 million. This investment has been assigned a fair value of $0.

Endymion Systems, Inc.

Endymion Systems, Inc. (“Endymion”), Oakland, California, is a single source supplier for strategic, web-enabled, end-to-end business solutions that help its customers leverage Internet technologies to drive growth and increase productivity.

At October 31, 2004 and January 31, 2005, the Fund’s investment in Endymion consisted of 7,156,760 shares of Series A Preferred Stock with a cost of $7.0 million. The investment has been assigned a fair value of $0.

Foliofn, Inc.

Foliofn, Inc. (“Foliofn”), Vienna, Virginia, is a financial services technology company that offers investment solutions to financial services firms and investors.

At October 31, 2004 and January 31, 2005, the Fund’s investment in Foliofn consisted of 5,802,259 shares of Series C Preferred Stock with a cost of $15.0 million. The investment had been assigned a fair value of $0.

Bruce Shewmaker, an officer of the Fund, serves as a director of Foliofn.

Impact Confections, Inc.

Impact Confections, Inc. (“Impact”), Roswell, New Mexico founded in 1981, is a manufacturer and distributor of children’s candies.

The Fund’s investment in Impact consists of 252.472 shares of Common Stock at a cost of $10,694.26 per share or $2.7 million and a loan to Impact in the form of a Senior Subordinated Note with an outstanding balance of $5.0 million. The loan was issued at a cost basis of $5.0 million. The loan’s cost basis was then discounted to reflect loan origination fees received. At October 31, 2004, the Fund’s investment in Impact had a combined fair value of $7.7 million.

At January 31, 2005, the Fund’s investment in Impact consisted of 252.472 shares of Common Stock at a cost of $10,694.26 per share or $2.7 million and the loan to Impact with an outstanding balance of $5.06 million. The cost basis of this loan at January 31, 2005 was approximately $4.95 million. The increase in the outstanding balance, cost and fair value of the loan is due to the amortization of loan origination fees and the capitalization of “paid in kind” interest.

At January 31, 2005, the Fund’s investment in Impact had been assigned a combined fair value of $7.76 million.

Puneet Sanan and Shivani Khurana, employees of the Fund, serve as directors of Impact.

Integral Development Corporation

Integral Development Corporation (“Integral”), Mountain View, California, is a developer of technology for financial institutions to expand, integrate and automate their capital markets businesses and operations.

At October 31, 2004, the Fund’s investment in Integral consisted of an outstanding balance on the loan of $2.81 million with a cost of $2.79 million. The investment had been assigned a fair value of $2.81 million.

During the quarter ended January 31, 2005, Integral made scheduled principal repayments totaling $420,834.

At January 31, 2005, the Fund’s investment in Integral consisted of an outstanding balance on the loan of $2.38 million with a cost of $2.37 million. The investment has been assigned a fair value of $2.38 million.

JDC Lighting, LLC

On January 31, 2005, the Fund made an investment in JDC Lighting, LLC (“JDC”), a distributor of commercial lighting and electrical products.

The Fund’s investment in JDC consists of a $3 million Senior Subordinated Loan, bearing interest at 17% over a four year term. The note has a $3 million principal face amount and was issued at a cost basis of $3 million. The loan’s cost basis was discounted to reflect loan origination fees received. At January 31, 2005, the loan had an outstanding balance of $3 million with a cost of approximately $2.93 million. The loan was assigned a fair value of $3 million.

Lumeta Corporation

Lumeta Corporation (“Lumeta”), Somerset, New Jersey, is a developer of network management, security, and auditing solutions. The company provides businesses with an analysis of their network security that is designed to reveal the vulnerabilities and inefficiencies of their corporate intranets.

At October 31, 2004 and January 31, 2005, the Fund’s investment in Lumeta consisted of 384,615 shares of Series A Preferred Stock and 266,846 shares of Series B Preferred Stock with a combined cost of approximately

$406,000. The investments have been assigned a fair value of $200,000, or approximately $0.11 per share of Series A Preferred Stock and approximately $0.59 per share of Series B Preferred Stock.

Mainstream Data, Inc.

Mainstream Data, Inc. (“Mainstream”), Salt Lake City, Utah, builds and operates satellite, internet, and wireless broadcast networks for the world’s largest information companies. Mainstream Data networks deliver text news, streaming stock quotations, and digital images to subscribers around the world.

At October 31, 2004 and January 31, 2005, the Fund’s investment in Mainstream consisted of 5,786 shares of Common Stock with a cost of $3.75 million. The investment has been assigned a fair value of $0.

Mentor Graphics Corp. (formerly 0-In Design Automation, Inc.)

Mentor Graphics Corp. (“Mentor Graphics”), Wilsonville, Oregon, is a world leader in electronic hardware and software design solutions.

At October 31, 2004, the Fund’s investment Mentor Graphics consisted of 603,396 shares of freely tradable Common Stock and 82,283 shares held in escrow until September 1, 2005. The combined cost of the freely tradable and escrow shares was $4.0 million. The market value of the Fund’s freely tradable shares of Mentor Graphics Corp. as of October 31, 2004 was $7,023,529. The fair value of the escrow shares was zero. Also during the fiscal year ended October 31, 2004, the Fund had recorded approximately $9,000 from the multi-year earn-out related to the sale of 0-In Design Automation, Inc. (“0-In”)

During the quarter ended January 31, 2005, the Fund sold 603,396 shares of Mentor Graphics at an average price of $13.75 per share. The total net proceeds received from the shares sold was approximately $8.3 million. The Fund realized a gain on the shares sold of approximately $4.8 million.

At January 31, 2005 all 82,283 remaining shares of Mentor Graphics owned by the Fund were held in escrow and therefore restricted as to their resale. These shares had a cost basis of approximately $480,000 and were assigned a fair value of $0. The Fund’s Valuation Committee determined to carry the escrow shares at zero because it was unable to determine how many shares, if any, the Fund would receive from the escrow.

During the quarter ended January 31, 2005, the Fund recorded approximately $118,000 from the multi-year-earn-out related to the sale of 0-In.

Octagon Credit Investors, LLC

Octagon Credit Investors, LLC (“Octagon”), is a New York-based asset management company that manages leveraged loans and high yield bonds through collateralized debt obligations (“CDO”) funds.

The Fund’s investment in Octagon consists of a $5,000,000 Senior Subordinated Loan, bearing interest at 15% over a seven year term. The loan has a $5,000,000 principal face amount and was issued at a discounted cost basis of $4,450,000. The loan included detachable warrants with a cost basis of $550,000. The Fund also entered into a $5,000,000 senior secured credit facility with Octagon. This credit facility expires on May 7, 2009 and bears interest at LIBOR plus 4%. Octagon has not yet drawn down on this facility. The Fund receives a 0.50% unused facility fee on an annual basis and a 0.25% servicing fee on an annual basis for maintaining the credit facility. The Fund also made a $560,000 equity investment in Octagon which provides the Fund a membership interest in Octagon.

At October 31, 2004, the loan had an outstanding balance of $5.06 million with a cost of $4.41 million. The loan was carried at a fair value of $4.53 million. The increase in the outstanding balance, cost and fair value of the loan is due to the accretion of the market discount, the amortization of loan origination fees and the capitalization of “paid in kind” interest. The equity investment and detachable warrants in Octagon had been assigned a fair value of $560,000 and $550,000 respectively.

At January 31, 2005, the loan had an outstanding balance of $5.08 million with a cost of $4.45 million. The loan was carried at a fair value of $4.56 million. The increase in the outstanding balance, cost and fair value of the loan is due to the accretion of the market discount, the amortization of loan origination fees and the

capitalization of “paid in kind” interest. The equity investment and detachable warrants in Octagon have been assigned a fair value of $629,525 and $550,000 respectively.

Phosistor Technologies, Inc.

Phosistor Technologies, Inc. (“Phosistor”), Pleasanton, California, designed and developed integrated semiconductor components and modules for global telecommunications and data communications networks.

Phosistor ceased operations in 2003.

At October 31, 2004 and January 31, 2005, the Fund’s investment in Phosistor consisted of 6,666,667 shares of Series B Preferred Stock with a cost of $1.0 million. The investment has been assigned a fair value of $0.

ProcessClaims, Inc.

ProcessClaims, Inc. (“ProcessClaims”), Manhattan Beach, California, provides web-based solutions and value added services that streamline the automobile insurance claims process for the insurance industry and its partners.

At October 31, 2004 and January 31 2005, the Fund’s investments in ProcessClaims consisted of 6,250,000 shares of Series C Preferred Stock, 849,257 shares of Series D Preferred Stock, and 873,362 warrants to purchase 873,362 shares of Series E Convertible Preferred Stock with a combined cost of $2.4 million. The investment in the Series C Preferred Stock has been assigned a fair value of $2.0 million, or approximately $0.32 per share of Series C Preferred Stock, the investment in the Series D Preferred Stock has been assigned a fair value of $400,000 or approximately $0.471 per share of Series D Preferred Stock, and the investment in the Series E warrants has been assigned a fair value of $0.

Nino Marakovic, an employee of the Fund, serves as a director of ProcessClaims.

SafeStone Technologies PLC

SafeStone Technologies PLC (“SafeStone”), Old Amersham, UK, provides organizations with technology designed to secure access controls across the extended enterprise, enforcing compliance with security policies and enabling effective management of the corporate IT and e-business infrastructure.

At October 31, 2004 and January 31, 2005, the Fund’s investments in SafeStone consisted of 2,106,378 shares of Series A Ordinary Stock with a cost of $4.0 million. The investment has been assigned a fair value of $0.

ShopEaze Systems, Inc.

ShopEaze Systems, Inc. (“ShopEaze”), Sunnyvale, California, partnered with established retailers to help them build online businesses to complement their existing brick-and-mortar businesses.

At October 31, 2004 and January 31, 2005, the Fund’s investment in ShopEaze consisted of 2,097,902 shares of Series B Preferred Stock with a cost of $6.0 million. The investment has been assigned a fair value of $0. ShopEaze ceased operations during 2002.

Sonexis, Inc.

Sonexis, Inc. (“Sonexis”), Tewksbury, Massachusetts, is the developer of a new kind of conferencing solution—Sonexis ConferenceManager—a modular platform that supports a breadth of audio and web conferencing functionality to deliver rich media conferencing.

At October 31, 2004 and January 31, 2005, the Fund’s investment in Sonexis consisted of 131,615 shares of Common Stock with a cost of $10.0 million. The investment has been assigned a fair value of $0.

Sygate Technologies, Inc.

Sygate Technologies, Inc. (“Sygate”), Fremont, California, is a provider of enterprise-focused security policy enforcement solutions designed to provide the infrastructure to maintain an unbroken chain of control to IT Management.

At October 31, 2004 and January 31, 2005, the Fund’s investment in Sygate consisted of 9,756,098 shares of Series D Preferred Stock with a cost of $4.0 million. The investment has been assigned a fair value of $5.5 million, or approximately $0.56 per share.

Timberland Machines & Irrigation, Inc.

Timberland Machines & Irrigation, Inc. (“Timberland”) is a distributor of landscaping outdoor power equipment and irrigation products.

The Fund’s investment in Timberland consists of a $6,000,000 Senior Subordinated Loan, bearing interest at 17% over a five year term. The note has a $6,000,000 principal face amount and was issued at a cost basis of $6,000,000. The loan’s cost basis was then discounted to reflect loan origination fees received. The Fund also owns 450 shares of Common Stock for a $4,500,000 equity investment in Timberland. The Fund also owns a no cost warrant to purchase an additional 150 shares of Common Stock at a price of $10,000 per share.

Timberland Machines has a floor plan financing program administered by Transamerica Commercial Finance Corporation. As is typical in this industry, under the terms of the dealer financing arrangement, Timberland guarantees the repurchase of product from Transamerica, if a dealer defaults on payment and the underlying assets are repossessed. The Fund has agreed to be a co-guarantor of this repurchase commitment, but its maximum potential exposure as a result of the guarantee is contractually limited to $0.5 million.

The Fund also provided Timberland Machines with a facility for a Subordinated Bridge Note which permits Timberland to borrow up to $750,000 at any time after November 1, 2004 until January 31, 2005, for a period of three months. The note will pay an interest rate of 12.5%. During the quarter ended January 31, 2005, this provision was amended to allow Timberland to borrow up to $1.25 million for a period of no more than one year.

At October 31, 2004, the Fund’s mezzanine loan had an outstanding balance of $6.04 million with a cost of $5.94 million. The mezzanine loan was assigned a fair value of $6.04 million. The increase in the outstanding balance, cost and fair value of the loan is due to the amortization of loan origination fees and the capitalization of “paid in kind” interest. The common stock had been assigned a fair value of $4,500,000. The warrant has been assigned a fair value of $0.

During the quarter ended January 31, 2005, Timberland Machines borrowed $1.25 million from the Fund using the Subordinated Bridge Note mentioned above. The note’s cost basis was discounted to reflect origination fees received. The note pays an interest rate of 12.5% and has a maturity date of January 31, 2006.

At January 31, 2005, the Fund’s mezzanine loan had an outstanding balance of $6.11 million with a cost of $6.02 million. The mezzanine loan was assigned a fair value of $6.11 million. The Subordinated Bridge Note had an outstanding balance of $1.25 million with a cost basis of $1.21 million. The note was assigned a fair value of $1.25 million. The increase in the outstanding balance, cost and fair value of the loan and bridge note is due to the amortization of loan origination fees and the capitalization of “paid in kind” interest. The common stock had been assigned a fair value of $4,500,000. The warrant has been assigned a fair value of $0.

Michael Tokarz, Chairman of the Fund, and Puneet Sanan, an employee of the Fund, serve as directors of Timberland.

Vendio Services, Inc.

Vendio Services, Inc. (“Vendio”), San Bruno, California, offers small businesses and entrepreneurs resources to build Internet sales channels by providing software solutions designed to help these merchants efficiently market, sell and distribute their products.

At October 31, 2004 and January 31, 2005, the Fund’s investments in Vendio consisted of 10,476 shares of Common Stock and 6,443,188 shares of Series A Preferred Stock at a cost of $6.6 million.

At October 31, 2004 and January 31, 2005, the investments were assigned a fair value of $1.134 million, $0 per share for the Common Stock and approximately $0.176 per share for the Series A Preferred Stock.

Nino Marakovic, an employee of the Fund, serves as a director of Vendio.

Vestal Manufacturing Enterprises, Inc.

Vestal Manufacturing Enterprises, Inc. (“Vestal”), Sweetwater, Tennessee, is a market leader for steel fabricated products to brick and masonry segments of the construction industry. It is believed to be the only U.S. company which manufactures and sells both cast iron and fabricated steel specialty products used in the construction of single-family homes.

The Fund’s investment in Vestal consists of 40,500 shares of Common Stock at a cost of $11.11 per share or $450,000 and a loan of $1,000,000 to Vestal in the form of a Senior Subordinated Promissory Note. The loan has a maturity date of April 29, 2011 and earns interest at 12% per annum.

At October 31, 2004 and January 31, 2005, the Fund’s investment in Vestal had a cost and fair value of $1,450,000.

Michael Tokarz, Chairman of the Fund, and Bruce Shewmaker, an officer of the Fund, serve as directors of Vestal.

Vitality Foodservice, Inc.

Vitality Foodservice, Inc. (“Vitality”), Tampa, Florida, is a market leader in the processing and marketing of dispensed and non-dispensed juices and frozen concentrate liquid coffee to the foodservice industry. With an installed base of over 42,000 dispensers worldwide, Vitality sells its frozen concentrate through a network of over 350 distributors to such market niches as institutional foodservice, including schools, hospitals, cruise ships, hotels and restaurants.

The Fund’s investment in Vitality consists of 500,000 shares of Common Stock at a cost of $10.00 per share or $5,000,000 and 1,000,000 shares of Series A Convertible Preferred Stock at a cost of $10.00 per share or $10,000,000. The Convertible Preferred Stock has a liquidation date of September 24, 2011 and has a dividend rate of 13%. The Convertible Preferred Stock also has detachable warrants granting the Fund the right to purchase 211,243 shares of Common Stock at the price of $0.01 per share

At October 31, 2004, the Fund’s investment in Vitality had a cost and fair value of $15,000,000.

At January 31, 2005, the investment in Vitality consisted of 500,000 shares of Common Stock at a cost of $10.00 per share or $5,000,000 and 1,013,322 shares of Series A Convertible Preferred Stock at a cost of $10.00 per share or $10,133,219. The increase in the shares, cost and fair value of the Series A Convertible Preferred Stock is due to the capitalization of “paid in kind” dividends. The Common Stock, Series A Convertible Preferred Stock and warrants were assigned fair values of $5,000,000, $10,133,219 and $0, respectively.

The Fund has the right to nominate one person to the Board of Directors of Vitality. Currently, the Fund has selected Dave Hadani, a consultant to the Fund, to serve as a director of Vitality.

Yaga, Inc.

Yaga, Inc. (“Yaga”), San Francisco, California, provides a hosted application service provider (ASP) platform that is designed to address emerging revenue and payment infrastructure needs of online businesses. Yaga’s payment and accounting application supports micropayments, aggregated billing and stored value accounts while also managing royalty/affiliate accounting and split payments.

At October 31, 2004 and January 31, 2005, the Fund’s investment in Yaga consisted of 300,000 shares of Series A Preferred Stock and 1,000,000 shares of Series B with a combined cost of $2.3 million. The investments have been assigned a fair value of $0.0.

Liquidity and Capital Resources

At January 31, 2005, the Fund had $74.1 million of investments consisting of investments in equities totaling $44.2 million, investments in debt instruments totaling $29.9 million, and investments in short-term securities and cash and cash equivalents totaling approximately $107.6 million. The Fund considers all money market and other temporary cash investments purchased with an original maturity of less than three months to be cash equivalents. Cash held by MVCFS is normally held in an interest bearing account. U.S. government securities and cash equivalents are highly liquid. During the three months ended January 31, 2005, the Fund made one new investment, totaling $3 million, in JDC Lighting, LLC, in the form of a subordinated debt. The Fund also made a follow-on investment of $1.25 million in Timberland Machines in the form of a subordinated bridge note.

On December 3, 2004, the Fund commenced a rights offering to its stockholders of non-transferable subscription rights to purchase shares of the Fund’s common stock. Pursuant to the terms of the rights offering, each share of common stock held by a stockholder of record on December 3, 2004, entitled the holder to one right. For every two rights held, stockholders were able to purchase one share of the Fund’s common stock at the subscription price of 95% of the Fund’s net asset value per share on January 3, 2005. In addition, stockholders who elected to exercise all of their rights to purchase the Fund’s common stock received an over-subscription right to subscribe for additional shares that were not purchased by other holders of rights. Based on a final count by the Fund’s subscription agent, the rights offering was over-subscribed with 6,645,948 shares of the Fund’s common stock subscribed for. This was out of 6,146,521 shares available before the 25% oversubscription. Each share was subscribed for at a price of $9.10 which resulted in gross proceeds to the Fund of approximately $60.5 million before offering expenses of approximately $500,000.

Current balance sheet resources, which include the additional cash resources from the rights offering, are believed to be sufficient to finance current commitments. Current commitments include:

The Fund maintains a $5,000,000 senior secured credit facility with Octagon. This credit facility has a term of up to five years and bears interest at LIBOR plus 4%. Octagon has not yet drawn down on this facility. The Fund receives a 0.50% unused facility fee on an annual basis and a 0.25% servicing fee on an annual basis for maintaining the credit facility.

On October 28, 2004, the Fund entered into a one-year, cash collateralized, $20 million revolving credit facility (the “Credit Facility”) with LaSalle Bank National Association (the “Bank”). On October 28, 2004, the Fund borrowed $10,025,000 under the Credit Facility. The proceeds from borrowings made under the Credit Facility were used for general corporate purposes. On November 12, 2004 the Fund repaid the $10,025,000 it borrowed from the Bank under the Credit Facility. As of January 31, 2005, the Fund had not drawn upon the Credit Facility since the repayment. The Credit Facility will expire on October 31, 2005, at which time all outstanding amounts under the Credit Facility will be due and payable.

Subsequent Events

On March 10, 2005, the Valuation Committee increased the fair value of the Fund’s equity investment in Vestal Manufacturing Enterprises, Inc. by $950,000 from $450,000 to $1,400,000.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Historically the Fund has invested in small companies, and its investments in these companies are considered speculative in nature. The Fund’s investments often include securities that are subject to legal or contractual restrictions on resale that adversely affect the liquidity and marketability of such securities. As a result, the Fund is subject to risk of loss which may prevent our stockholders from achieving price appreciation, dividend distributions and return of capital.

In addition, the following risk factors relate to market risks impacting the Fund.

Investing in private companies involves a high degree of risk.

Our investment portfolio generally consists of loans to, and investments in, private companies. Investments in private businesses involve a high degree of business and financial risk, which can result in substantial losses and accordingly should be considered speculative. There is generally very little publicly available information about the companies in which we invest, and we rely significantly on the due diligence of Mr. Tokarz and the members of the Fund’s investment team to obtain appropriate information in connection with our investment decisions. In addition, some smaller businesses have narrower product lines and market shares than their competition, and may be more vulnerable to customer preferences, market conditions or economic downturns, which may adversely affect the return on, or the recovery of, our investment in such businesses.

Our investments in portfolio companies are generally illiquid.

We generally acquire our investments directly from the issuer in privately negotiated transactions. Most of the investments in our portfolio (other than cash or cash equivalents) are typically subject to restrictions on resale or otherwise have no established trading market. We may exit our investments when the portfolio company has a liquidity event, such as a sale, recapitalization or initial public offering. The illiquidity of our investments may adversely affect our ability to dispose of equity and debt securities at times when it may be otherwise advantageous for us to liquidate such investments. In addition, if we were forced to immediately liquidate some or all of the investments in the portfolio, the proceeds of such liquidation could be significantly less than the current fair value of such investments.

Substantially all of our portfolio investments are recorded at “fair value” and, as a result, there is a degree of uncertainty regarding the carrying values of our portfolio investments .

Pursuant to the requirements of the 1940 Act, because our portfolio company investments do not have readily ascertainable market values, we record these investments at fair value in accordance with Valuation Procedures adopted by our board of directors.

At January 31, 2005, approximately 40.60% of our total assets represented portfolio investments recorded at fair value.

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 while employing a consistently applied valuation process for the types of investments we make. We specifically value each individual investment and record unrealized depreciation for an investment that we believe has become impaired, including where collection of a loan or realization of an equity security is doubtful. Conversely, we will record unrealized appreciation if we have an indication (based on an objective development) that the underlying portfolio company has appreciated in value and, therefore, our equity security has also appreciated in value, where appropriate. Without a readily ascertainable market value and because of the inherent uncertainty of fair valuation, fair value of our investments 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.

Pursuant to our Valuation Procedures, our Valuation Committee (which is currently comprised of three independent directors) reviews, considers and determines fair valuations on a quarterly basis (or more frequently, if deemed appropriate under the circumstances). Any changes in valuation are recorded in the statements of operations as “Net unrealized gain (loss) on investments.”

Economic recessions or downturns could impair our portfolio companies and harm our operating results.

Many of the companies in which we have made or will make investments may be susceptible to economic slowdowns or recessions. An economic slowdown may affect the ability of a company to engage in a liquidity event. These conditions could lead to financial losses in our portfolio and a decrease in our revenues, net income and assets.

Our overall business of making private equity investments may be affected by current and future market conditions. The absence of an active mezzanine lending or private equity environment may slow the amount of private equity investment activity generally. As a result, the pace of our investment activity may slow, which could impact our ability to achieve our investment objective. In addition, significant changes in the capital markets could have an effect on the valuations of private companies and on the potential for liquidity events involving such companies. This could affect the amount and timing of any gains realized on our investments.

Our borrowers may default on their payments, which may have an effect on our financial performance.

We may make long-term unsecured, subordinated loans, which may involve a higher degree of repayment risk than conventional secured loans. We primarily invest in companies that may have limited financial resources and that may be unable to obtain financing from traditional sources. In addition, numerous factors may adversely affect a portfolio company’s ability to repay a loan we make to it, including the failure to meet a business plan, a downturn in its industry or operating results, or negative economic conditions. Deterioration in a borrower’s financial condition and prospects may be accompanied by deterioration in any related collateral.

Our investments in mezzanine and other debt securities may involve significant risks.

Our investment strategy contemplates investments in mezzanine and other debt securities of privately held companies. “Mezzanine” investments typically are structured as subordinated loans (with or without warrants) that carry a fixed rate of interest. We may also make senior secured and other types of loans or debt investments.

Our debt investments are typically not rated by any rating agency, but we believe that if such investments were rated, they would be below investment grade quality (rated lower than “Baa3” by Moody’s or lower than “BBB-” by Standard & Poor’s, commonly referred to as “junk bonds”). Loans of below investment grade quality have predominantly speculative characteristics with respect to the borrower’s capacity to pay interest and repay principal. Our debt investments in portfolio companies may thus result in a high level of risk and volatility and/or loss of principal.

We may not realize gains from our equity investments.

When we invest in mezzanine and senior debt securities, we may acquire warrants or other equity securities as well. We may also invest directly in various equity securities. Our goal is ultimately to dispose of such equity interests and realize gains upon our disposition of such interests. However, the equity interests we receive or invest in may not appreciate in value and, in fact, may decline in value. In addition, the equity securities we receive or invest in may be subject to restrictions on resale during periods in which it would be advantageous to resell. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.

Our investments in small and middle-market privately-held companies are extremely risky and you could lose your entire investment.

Investments in small and middle-market privately-held companies are subject to a number of significant risks including the following:

• Small and middle-market companies may have limited financial resources and may not be able to repay the loans we make to them. Our strategy includes providing financing to companies that typically do not have capital sources readily available to them. While we believe that this provides an attractive opportunity for us to generate profits, this may make it difficult for the borrowers to repay their loans to us upon maturity.

• Small and middle-market companies typically have narrower product lines and smaller market shares than large companies. Because our target companies are smaller businesses, they may be more vulnerable to competitors’ actions and market conditions, as well as general economic downturns. In addition, smaller companies may face intense competition, including competition from companies with greater financial resources, more extensive development, manufacturing, marketing and other capabilities, and a larger number of qualified managerial and technical personnel.

• There is generally little or no publicly available information about these privately-held companies. Because we seek to make investments in privately-held companies, there is generally little or no publicly available operating and financial information about them. As a result, we rely on our investment professionals to perform due diligence investigations of these privately-held companies, their operations and their prospects. We may not learn all of the material information we need to know regarding these companies through our investigations.

• Small and middle-market companies generally have less predictable operating results. We expect that our portfolio companies may have significant variations in their operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, may require substantial additional capital to support their operations, finance expansion or maintain their competitive position, may otherwise have a weak financial position or may be adversely affected by changes in the business cycle. Our portfolio companies may not meet net income, cash flow and other coverage tests typically imposed by their senior lenders.

• Small and middle-market businesses are more likely to be dependent on one or two persons. Typically, the success of a small or middle-market company also depends on the management talents and efforts of one or two persons or a small group of persons. The death, disability or resignation of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us.

• Small and middle-market companies are likely to have greater exposure to economic downturns than larger companies. We expect that our portfolio companies will have fewer resources than larger businesses and an economic downturn may thus more likely have a material adverse effect on them.

• Small and middle-market companies may have limited operating histories. We may make debt or equity investments in new companies that meet our investment criteria. Portfolio companies with limited operating histories are exposed to the operating risks that new businesses face and may be particularly susceptible to, among other risks, market downturns, competitive pressures and the departure of key executive officers.

Investments in foreign debt or equity may involve significant risks in addition to the risks inherent in U.S. investments.

Our investment strategy may result in some investments in debt or equity of foreign companies (subject to applicable limits prescribed by the 1940 Act). Investing in foreign companies can expose us to additional risks not typically associated with investing in U.S. companies. These risks include exchange rates, changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility.

The market for private equity investments can be highly competitive. In some cases, our status as a regulated business development company may hinder our ability to participate in investment opportunities.

We face competition in our investing activities from private equity funds, other business development companies, investment banks, investment affiliates of large industrial, technology, service and financial companies, small business investment companies, wealthy individuals and foreign investors. As a regulated business development company, we are required to disclose quarterly the name and business description of portfolio companies and the value of any portfolio securities. Many of our competitors are not subject to this disclosure requirement. Our obligation to disclose this information could hinder our ability to invest in certain portfolio companies. Additionally, other regulations, current and future, may make us less attractive as a potential investor to a given portfolio company than a private equity fund not subject to the same regulations. Furthermore, some of our competitors have greater resources than we do. Increased competition would make it more difficult for us to purchase or originate investments at attractive prices. As a result of this competition, sometimes we may be precluded from making certain investments.

Our common stock price can be volatile.

The trading price of our common stock may fluctuate substantially. The price of the common stock may be higher or lower than the price you pay for your shares, depending on many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include the following:

• price and volume fluctuations in the overall stock market from time to time;

• significant volatility in the market price and trading volume of securities of business development companies or other financial services companies;

•   volatility resulting from trading in derivative securities related to our common stock including puts, calls, long-term equity participation securities, or LEAPs, or short trading positions;

•   changes in regulatory policies or tax guidelines with respect to business development companies or RICs;

•   actual or anticipated changes in our earnings or fluctuations in our operating results or changes in the expectations of securities analysts;

•   general economic conditions and trends;

•   loss of a major funding source; or

•   departures of key personnel.

We are subject to market discount risk.

As with any stock, the price of our shares will fluctuate with market conditions and other factors. If shares are sold, the price received may be more or less than the original investment. Whether investors will realize gains or losses upon the sale of our shares will not depend directly upon our net asset value, but will depend upon the market price of the shares at the time of sale. Since the market price of our shares will be affected by such factors as the relative demand for and supply of the shares in the market, general market and economic conditions and other factors beyond our control, we cannot predict whether the shares will trade at, below or above our net asset value. Although our shares have recently traded at a premium to our net asset value, historically, our shares, as well as those of other closed-end investment companies, have frequently traded at a discount to their net asset value, which discount often fluctuates over time.

Changes in interest rates may affect our cost of capital and net investment income.

Because we may borrow money to make investments, our net investment income before net realized and unrealized gains or losses, or net investment income, may be dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of sharply rising interest rates, our cost of funds would increase, which could reduce our net investment income. We may use a combination of long-term and short-term borrowings and equity capital to finance our investing activities. We may utilize our short-term credit facilities as a means to bridge to long-term financing. Our long-term fixed-rate investments are financed primarily with equity and long-term fixed-rate debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act.

The war with Iraq, terrorist attacks and other acts of violence or war may affect any market for our common stock, impact the businesses in which we invest and harm our operations and our profitability.

The war with Iraq, its aftermath and the continuing occupation of Iraq are likely to have a substantial impact on the U.S. and world economies and securities markets. The nature, scope and duration of the war and occupation cannot be predicted with any certainty. Furthermore, terrorist attacks may harm our results of operations and your investment. We cannot assure you that there will not be further terrorist attacks against the United States or U.S. businesses. Such attacks and armed conflicts in the United States or elsewhere may impact the businesses in which we invest directly or indirectly, by undermining economic conditions in the United States. Losses resulting from terrorist events are generally uninsurable.

ITEM 4. CONTROLS AND PROCEDURES

The Fund recognizes management’s responsibility for establishing and maintaining adequate internal controls over financial reporting for the Fund. Within the 90 days prior to the filing date of this quarterly report on Form 10-Q, the Fund carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of management, including the individual who performs the functions of a Principal Executive Officer (the “CEO”) and the individual who performs the functions of a Principal Financial Officer (the “CFO”). Based upon that evaluation, the CEO and the CFO have concluded that our disclosure controls and procedures are adequate and effective.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out the evaluation discussed above.


	Page
Part I. Consolidated Financial Information

Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - January 31, 2005 and October 31, 2004		1
Consolidated Statement of Operations - For the Period November 1, 2004 to January 31, 2005 and the Period November 1, 2003 to January 31, 2004		2
Consolidated Statement of Cash Flows - For the Period November 1, 2004 to January 31, 2005 and the Period November 1, 2003 to January 31, 2004		3
Consolidated Statement of Shareholders’ Equity - For the Period November 1, 2004 to January 31, 2005 and the Period November 1, 2003 to January 31, 2004		4
Consolidated Selected Per Share Data and Ratios - For the Period November 1, 2004 to January 31, 2005 and the Year ended October 31, 2004		5
Consolidated Schedule of Investments - January 31, 2005		6
Notes to Consolidated Financial Statements		10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3. Quantitative and Qualitative Disclosures about Market Risk		30
Item 4. Controls and Procedures		35

Part II. Other Information

Item 6. Exhibits and Reports on Form 8-K		36

SIGNATURE		37

Exhibits		38
Certification
Certification


Exhibit No.		Exhibit
31		Rule 13a-14(a) Certifications.

32		Section 1350 Certification.


	MVC Capital, Inc.
Date: 3/11/2005	/s/ Michael Tokarz
	Michael Tokarz
	In the capacity of the officer who performs the functions of Principal Executive Officer.


	MVC Capital, Inc.
Date: 3/11/2005	/s/ Frances Spark
	Frances Spark
	In the capacity of the officer who performs the functions of Principal Financial Officer.

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	•	price and volume fluctuations in the overall stock market from time to time;

	•	significant volatility in the market price and trading volume of securities of business development companies or other financial services companies;

	•	volatility resulting from trading in derivative securities related to our common stock including puts, calls, long-term equity participation securities, or LEAPs, or short trading positions;

	•	changes in regulatory policies or tax guidelines with respect to business development companies or RICs;

	•	actual or anticipated changes in our earnings or fluctuations in our operating results or changes in the expectations of securities analysts;

	•	general economic conditions and trends;

	•	loss of a major funding source; or

	•	departures of key personnel.