10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended July 31, 2005 or
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	94-3346760
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
287 Bowman Avenue 2nd Floor Purchase, New York	10577 (Zip Code)
(Address of principal executive offices)

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

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

Title of each class	Name of each exchange on which registered
Common Stock	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

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

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

      As of September 8, 2005, there were 19,086,566 shares of Registrant’s common stock, $.01 par value (the “Shares”), outstanding.

MVC Capital, Inc.

(A Delaware Corporation)

Index

			Page
Part I.	Consolidated Financial Information
	Item 1.	Consolidated Financial Statements
		Consolidated Balance Sheets — July 31, 2005 and October 31, 2004		2
		Consolidated Statements of Operations — For the Period November 1, 2004 to July 31, 2005 and the Period November 1, 2003 to July 31, 2004		3
		Consolidated Statements of Operations — For the Period May 1, 2005 to July 31, 2005 and the Period May 1, 2004 to July 31, 2004		4
		Consolidated Statements of Cash Flows — For the Period November 1, 2004 to July 31, 2005 and the Period November 1, 2003 to July 31, 2004		5
		Consolidated Statements of Shareholders’ Equity — For the Period November 1, 2004 to July 31, 2005 and the Period November 1, 2003 to July 31, 2004		6
		Consolidated Selected Per Share Data and Ratios — For the Period November 1, 2004 to July 31, 2005, — For the Period November 1, 2003 to July 31, 2004 and — the Year ended October 31, 2004		7
		Consolidated Schedule of Investments
		— July 31, 2005		8
		— October 31, 2004		12
		Notes to Consolidated Financial Statements		16
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		44
	Item 4.	Controls and Procedures		48
Part II.	Other Information
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		48
	Item 6.	Exhibits		49
SIGNATURE				50
Exhibits				51
Certification of CEO and CFO
Certification of CEO and CFO

1

Part I. Consolidated Financial Information

Item 1. Consolidated Financial Statements

Consolidated Financial Statements

MVC Capital, Inc.

Consolidated Balance Sheets

	July 31,			October 31,
	2005			2004
	(Unaudited)
ASSETS
Assets
Cash	$	2,393,183		$	1,214,537
Cash equivalents		37,049,166			11,932,404
Investments in short term securities, at market value (cost $37,357,540 and $34,114,792, respectively)		37,357,540			34,114,792
Investments in debt instruments, at fair value (cost $56,133,606 and $28,795,958, respectively) (Note 4)		57,026,490			27,502,755
Investments in equity, at fair value (cost $125,511,547 and $122,786,256, respectively) (Note 4)		72,991,912			51,017,530
Interest and fees receivable		823,227			442,322
Prepaid expenses		495,496			219,772
Deferred tax		315,837			87,278
Other assets		96,500			45,445
Total assets	$	208,549,351		$	126,576,835
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Revolving credit facility	$	14,000,000		$	10,025,000
Payable for investments purchased		325,000			—
Professional fees		325,143			223,069
Directors’ fees		5,283			17,815
Employee compensation and benefits		560,584			350,518
Consulting fees		16,000			71,845
Taxes payable		152,063			166,205
Accrued incentive compensation (Note 8)		797,328			—
Other accrued expenses and liabilities		279,903			155,039
Total liabilities		16,461,304			11,009,491
Shareholders’ equity
Common stock, $0.01 par value; 150,000,000 shares authorized; 19,085,740 and 12,293,042 shares outstanding, respectively		231,459			165,000
Additional paid in capital		358,593,335			298,406,395
Accumulated deficit		(133,493,078	)		(148,537,950	)
Treasury stock, at cost, 4,060,208 and 4,206,958 shares held, respectively		(33,243,669	)		(34,466,101	)
Total shareholders’ equity		192,088,047			115,567,344
Total liabilities and shareholders’ equity	$	208,549,351		$	126,576,835
Net asset value per share	$	10.06		$	9.40

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

2

MVC Capital, Inc.

Consolidated Statements of Operations

		For the Period			For the Period
		November 1, 2004			November 1, 2003
		to July 31,			to July 31,
		2005			2004
		(Unaudited)
Investment Income:
	Interest income	$	5,576,611		$	1,876,852
	Dividend income		1,009,146			—
	Fee income		1,396,461			293,099
	Other income		856,318			5,060
Total investment income			8,838,536			2,175,011
Operating Expenses:
	Employee compensation and benefits		1,619,238			724,185
	Incentive compensation (Note 8)		797,328			—
	Insurance		460,773			773,454
	Legal fees		426,501			690,604
	Directors fees		106,275			148,723
	Audit fees		214,569			122,830
	Public relations fees		98,746			104,885
	Other expenses		368,452			258,051
	Consulting fees		145,939			216,147
	Administration		99,197			76,849
	Facilities		312,762			8,250
	Printing and postage		53,661			67,674
	Interest expense		20,415			—
Total operating expenses			4,723,856			3,191,652
	Litigation recovery of management fees (Note 12, 13)		—			(370,000	)
Net investment income (loss) before taxes			4,114,680			(646,641	)
Tax Expense (Benefit):
	Deferred tax expense (benefit)		(228,559	)		—
	Current tax expense		160,064			—
Total tax expense (benefit)			(68,495	)		—
Net investment income (loss)			4,183,175			(646,641	)
Net Realized and Unrealized Gain (Loss) on Investments:
Net realized loss on
	investments		(8,264,505	)		(21,397,019	)
	foreign currency		(18,687	)		—
Net change in unrealized appreciation on investments			21,435,178			30,375,036
Net realized and unrealized gain on investments			13,151,986			8,978,017
Net increase in net assets resulting from operations		$	17,335,161		$	8,331,376
Net increase in net assets per share resulting from operations		$	0.99		$	0.64
Dividends declared per share		$	0.12		$	—

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

3

MVC Capital, Inc.

Consolidated Statements of Operations

		For the Quarter			For the Quarter
		May 1, 2005 to			May 1, 2004 to
		July 31,			July 31,
		2005			2004
		(Unaudited)
Investment Income:
	Interest income	$	2,408,232		$	707,360
	Dividend income		333,446			—
	Fee income		1,089,186			243,099
	Other income		573,207			—
Total investment income			4,404,071			950,459
Operating Expenses:
	Employee compensation and benefits		633,512			270,437
	Incentive compensation (Note 8)		402,800			—
	Insurance		130,364			193,636
	Legal fees		146,531			247,475
	Directors fees		24,748			26,994
	Audit fees		90,804			33,584
	Public relations fees		33,304			31,026
	Other expenses		144,625			25,746
	Consulting fees		41,454			90,250
	Administration		36,296			25,142
	Facilities		139,324			81,918
	Printing and postage		18,124			13,008
	Interest expense		8,056			—
Total operating expenses			1,849,942			1,039,216
	Litigation recovery of management fees (Note 12, 13)		—			(370,000	)
Net investment income before taxes			2,554,129			281,243
Tax Expense (Benefit):
	Deferred tax expense (benefit)		(85,350	)		—
	Current tax expense		159,739			—
Total tax expense (benefit)			74,389			—
Net investment income			2,479,740			281,243
Net Realized and Unrealized Gain (Loss) on Investments:
Net realized gain (loss) on
	investments		(26,161	)		(11,092,280	)
	foreign currency		—			—
Net change in unrealized appreciation on investments			7,856,948			15,733,360
Net realized and unrealized gain on investments			7,830,787			4,641,080
Net increase in net assets resulting from operations		$	10,310,527		$	4,922,323
Net increase in net assets per share resulting from operations		$	0.58		$	0.41
Dividends declared per share		$	0.12		$	—

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

4

MVC Capital, Inc.

Consolidated Statements of Cash Flows

				For the Period			For the Period
				November 1, 2004			November 1, 2003
				to July 31,			to July 31,
				2005			2004
				(Unaudited)
Cash Flows from Operating Activities:
	Net increase in net assets resulting from operations			$	17,335,161		$	8,331,376
	Adjustments to reconcile net increase in net assets resulting from operations to net cash provided (used) by operating activities:
		Realized loss			8,283,192			21,397,019
		Net change in unrealized (appreciation)			(21,435,178	)		(30,375,036	)
		Increase in accrued payment-in-kind dividends and interest			(969,023	)		(38,194	)
		Increase in allocation of flow-through income			(142,141	)		—
		Changes in assets and liabilities:
			Interest and fees receivable		(380,905	)		(52,804	)
			Prepaid expenses		(275,724	)		15,622
			Receivable for investment deposit		—			(12,500	)
			Deferred tax		(228,559	)		—
			Other assets		(51,055	)		(51,628	)
			Liabilities		1,151,813			(214,549	)
		Purchases of equity investments			(17,315,000	)		(14,710,000	)
		Purchases of debt instruments			(36,977,408	)		(14,715,617	)
		Purchases of short-term investments			(209,023,429	)		(248,045,000	)
		Purchases of cash equivalents			(82,215,015	)		(57,418,119	)
		Purchases of warrants			—			(550,000	)
		Proceeds from equity investments			8,295,018			171,286
		Proceeds from debt instruments			9,750,277			7,637,226
		Sales/maturities of short-term investments			223,472,801			304,662,299
		Sales/maturities of cash equivalents			64,857,745			56,775,616
		Net cash provided (used) by operating activities			(35,867,430	)		32,806,997
Cash Flows from Financing Activities:
	Issuance of capital stock				60,478,127			—
	Repurchases of capital stock				—			(31,571,184	)
	Current dividends/distributions to shareholders				(2,290,289	)		—
	Borrowings from revolving credit facility				14,000,000			—
	Repayments to revolving credit facility				(10,025,000	)		—
		Net cash provided (used) for financing activities			62,162,838			(31,571,184	)
Net change in cash and cash equivalents for the period					26,295,408			1,235,813
Cash and cash equivalents, beginning of period					13,146,941			6,850
Cash and cash equivalents, end of period				$	39,442,349		$	1,242,663

Non-Cash Activity:

—  On April 15, 2005, MVC Capital, Inc. re-issued $1,400,000 of its treasury stock in exchange for 40,500 shares of Vestal Manufacturing Enterprises, Inc. (See Note 6).

—  During the nine months ended July 31, 2005 and 2004, MVC Capital, Inc. recorded payment in kind dividend and interest of $969,023 and $38,194, respectively. These amounts are added to the principal balance of the investments and recorded as interest/dividend income.

—  During the nine months ended July 31, 2005, MVC Capital, Inc. was allocated $198,052 in flow-through income from its investment in Octagon Credit Investors, LLC. Of this amount, $55,911 was received in cash and the balance of $142,141 was undistributed and therefore increased the cost and fair value of the investment.

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

5

MVC Capital, Inc.

Consolidated Statements of Shareholders’ Equity

	Fund					Additional									Total
	Shares			Common		Paid in			Treasury			Accumulated			Shareholders’
	Issued			Stock		Capital			Stock			Deficit			Equity
	(Unaudited)
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		—			—		—			—			8,331,376			8,331,376
Balance at July 31, 2004		12,293,042		$	165,000	$	299,871,488		$	(34,466,101	)	$	(151,802,033	)	$	113,768,354
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			66,459		60,411,668			—			—			60,478,127
Re-issuance of treasury stock		146,750			—		177,568			1,222,432			—			1,400,000
Offering expenses		—			—		(402,296	)		—			—			(402,296	)
Current dividends/distributions to shareholders from income		—			—		—			—			(2,290,289	)		(2,290,289	)
Net increase in net assets from operations		—			—		—			—			17,335,161			17,335,161
Balance at July 31, 2005		19,085,740		$	231,459	$	358,593,335		$	(33,243,669	)	$	(133,493,078	)	$	192,088,047

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

6

MVC Capital, Inc.

Consolidated Selected Per Share Data and Ratios

		For the Period			For the Period			For the Year
		November 1, 2004			November 1, 2003			Ended
		to July 31,			to July 31,			October 31,
		2005			2004			2004
		(Unaudited)			(Unaudited)
Net asset value, beginning of period		$	9.40		$	8.48		$	8.48
Gain from investment operations:
	Net investment income		0.24			(0.05	)		—
	Net realized and unrealized gain on investments		0.75			0.69			0.91
	Total gain from investment operations		0.99			0.64			0.91
Less dividends/distributions from:
	Income		(0.12	)		—			—
	Return of capital		—			—			(0.12	)
	Total dividends/distributions		(0.12	)		—			(0.12	)
Capital share transactions:
	Anti-dilutive effect of Share Repurchase Program		—			0.13			0.13
	Dilutive effect of issuance of capital stock		(0.21	)		—			—
Net asset value, end of period		$	10.06		$	9.25		$	9.40
Market value, end of period		$	11.10		$	9.60		$	9.24
Market premium (discount)			10.34	%		3.78	%		(1.70	)%
Total Return — At NAV (a)			8.30	%		9.08	%		12.26	%
Total Return — At Market (a)			21.43	%		18.52	%		15.56	%
Ratios and Supplemental Data:
Net assets, end of period (in thousands)		$	192,088		$	113,768		$	115,567
Ratios to average net assets:
	Expenses excluding tax expense (benefit)		3.81	%(b)		3.68	%(b)(c)		3.68	%(c)
	Net investment income before tax expense (benefit)		3.31	%(b)		(0.75	)%(b)		0.08	%
	Expenses including tax expense (benefit)		3.75	%(b)		3.68	%(b)(c)		3.74	%(c)
	Net investment income after tax expense (benefit)		3.37	%(b)		(0.75	)%(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 period.
(b)	Annualized.
(c)	The expense ratio for the nine month period ended July 31, 2004 and the year ended October 31, 2004, included a one time expense recovery of approximately $250,000 (See Note 13). For the nine month period ended July 31, 2004, without this one time recovery, the expense ratio excluding and including tax expense would have been 3.97%. For the year ended October 31, 2004, without this one time recovery, the expense ratio, excluding and including tax expense would have been 3.89% and 3.95%, respectively.

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

7

MVC Capital, Inc.

Consolidated Schedule of Investments

July 31, 2005

				Date of
				Initial
Description		Shares/Principal		Investment		Cost		Fair Value
		(Unaudited)
Equity Investments – 38.00% (b, d) (Note 3, 4, 5)
	Automotive Dealerships – 3.90% (a, f)
	*Baltic Motors Corporation, Common Stock (c, j)		54,947		June 2004	$	6,000,000	$	7,500,000
	Confections Manufacturing and Distribution – 1.41% (a, f)
	*Impact Confections, Inc., Common Stock		252		July 2004		2,700,000		2,700,000
	Distributor – Landscaping and Irrigation Equipment – 2.34% (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 – 1.18% (a, f)
	Octagon Credit Investors, LLC, Membership Interest		5		June 2004		702,141		1,205,322
	Octagon Credit Investors, LLC, Warrant		1		May 2004		550,000		1,069,457
	Total Financial Services						1,252,141		2,274,779
	Iron Foundries – 1.46% (a, f)
	*Vestal Manufacturing Enterprises, Inc., Common Stock(c)		81,000		Apr. 2004		1,850,000		2,800,000
	Manufacturer of Packaged Foods – 2.88% (a, f)
	*Dakota Growers Pasta Company, Inc., Common Stock		909,091		July 2004		5,000,000		5,514,000
	Medical Device Manufacturer – 8.85% (a, f)
	*Ohio Medical Corporation, Common Stock(c)		5,520		June 2005		17,000,000		17,000,000
	Non-Alcoholic Beverages – 8.01% (a)
	*Vitality Foodservice, Inc., Common Stock(f)		500,000		Sept. 2004		5,000,000		5,000,000
	*Vitality Foodservice, Inc., Series A(i)		1,000,000		Sept. 2004		10,388,133		10,388,133
	*Vitality Foodservice, Inc., Warrants(f)		1,000,000		Sept. 2004		—		—
	Total Non-Alcoholic Beverages						15,388,133		15,388,133
	Soil Remediation – 0.16% (a, f)
	*SGDA Sanierungsgesellschaft fur Deponien und Altlasten (c, j)		26,750		Feb. 2005		315,000		315,000
	Technology Investments – 7.81% (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

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

8

MVC Capital, Inc.

Consolidated Schedule of Investments

July 31, 2005 — (Continued)

				Date of
				Initial
Description		Shares/Principal		Investment		Cost		Fair Value
		(Unaudited)
	MainStream Data, Common Stock(a)		5,786		Aug. 2002	$	3,750,000	$	—
	Mentor Graphics Corp.(h)		82,283		Nov. 2001		480,008		—
	*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, j)		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		—
	*Sygate Technologies, Inc., Series D(a)		9,756,098		Oct. 2002		4,000,000		9,700,000
	*Vendio Services, Inc., Common Stock (a, c)		10,476		June 2000		5,500,000		—
	*Vendio Services, Inc., Series A (a, c)		6,443,188		Jan. 2002		1,134,001		2,700,000
	*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						71,506,273		15,000,000
Total Equity Investments							125,511,547		72,991,912
Debt Instruments – 29.68% (a, b, d)
	Apparel – 5.10%
	BP Clothing, LLC 11.34%, 06/02/2009		9,791,667		June 2005		9,602,194		9,791,667
	Automotive Dealerships – 2.34%
	*Baltic Motors Corporation (c, j) 10.00%, 06/24/2007		4,500,000		June 2004		4,500,000		4,500,000
	Confections Manufacturing and Distribution – 2.86%
	*Impact Confections, Inc., Secured Promissory Note 7.51%, 07/29/2008		325,000		July 2005		318,500		325,000
	*Impact Confections, Inc., Loan(i) 17.00%, 07/30/2009		5,170,183		July 2004		5,069,848		5,170,183
	Total Confections Manufacturing and Distribution						5,388,348		5,495,183
	Distributor – Landscaping and Irrigation Equipment – 4.72%
	*Timberland Machines & Irrigation, Inc., Junior Revolving Note(c) 12.50%, 07/07/2007		2,830,137		July 2005		2,830,137		2,830,137
	*Timberland Machines & Irrigation, Inc., Loan(c)(i) 17.00%, 08/04/2009		6,247,819		Aug. 2004		6,159,481		6,247,819
	Total Distributor – Landscaping and Irrigation Equipment						8,989,618		9,077,956
	Electrical Distribution – 1.59%
	JDC Lighting, LLC(i) 17.00%, 01/31/2009		3,055,724		Jan. 2005		2,987,493		3,055,724

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

9

MVC Capital, Inc.

Consolidated Schedule of Investments

July 31, 2005 — (Continued)

				Date of
				Initial
Description		Shares/Principal		Investment		Cost		Fair Value
		(Unaudited)
	Financial Services – 2.41%
	Octagon Credit Investors, LLC,(i) 15.00%, 05/07/2011		5,124,044		May 2004	$	4,523,321	$	4,630,305
	Iron Foundries – 0.47%
	*Vestal Manufacturing Enterprises, Inc.(c) 12.00%, 04/29/2011		900,000		Apr. 2004		900,000		900,000
	Laboratory Research Equipment – 5.51%
	SP Industries, Inc., Term Loan(i) 13.34%, 03/31/2010		4,010,231		March  2005		3,934,130		4,010,231
	SP Industries, Inc., Mezzanine Loan(i) 17.00%, 03/31/2012		6,574,750		March  2005		6,320,240		6,574,750
	Total Laboratory Research Equipment						10,254,370		10,584,981
Manufacturer of Precision-Machined Components – 1.29%
	Amersham Corp. 10.00%, 06/29/2010		2,473,521		July 2005		2,473,521		2,473,521
	Soil Remediation – 2.59%
	*SGDA Sanierungsgesellschaft fur Deponien und Altlasten, (c, j) Revolving Credit Facility, 7.00%, 08/25/2006		684,700		May 2005		684,700		684,700
	*SGDA Sanierungsgesellschaft fur Deponien und Altlasten, Loan (c, j) 7.00%, 08/25/2009		4,579,050		Feb. 2005		4,289,403		4,289,403
	Total Soil Remediation						4,974,103		4,974,103
	Technology Investments – 0.80%
	Integral Development Corporation(g) 11.25%, 12/31/2005		1,543,050		Dec. 2002		1,540,638		1,543,050
Total Debt Instruments							56,133,606		57,026,490
								Market Value
Short-Term Securities – 19.45% (b)
	Commercial Paper – 8.83% (b)
	DaimlerChrysler AG 3.40%, 08/31/2005		6,000,000		June 2005		5,983,000		5,983,000
	General Electric Capital Corp. 3.21%, 08/30/2005		6,000,000		June 2005		5,984,485		5,984,485
	The Procter & Gamble Co. 3.19%, 09/01/2005		5,000,000		June 2005		4,986,265		4,986,265
	Total Commercial Paper						16,953,750		16,953,750
	U.S. Government & Agency Securities – 10.62% (b)
	U.S. Treasury Bill 2.93%, 09/01/2005		3,300,000		June 2005		3,291,986		3,291,986
	U.S. Treasury Bill 2.94%, 09/08/2005		2,000,000		June 2005		1,993,983		1,993,983
	U.S. Treasury Bill 3.09%, 09/29/2005		8,700,000		July 2005		8,658,285		8,658,285
	U.S. Treasury Bill 3.07%, 10/13/2005		6,500,000		July 2005		6,459,536		6,459,536
	Total U.S. Government & Agency Securities						20,403,790		20,403,790
Total Short-Term Securities							37,357,540		37,357,540

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

10

MVC Capital, Inc.

Consolidated Schedule of Investments

July 31, 2005 — (Continued)

				Date of
				Initial
Description		Shares/Principal		Investment		Cost		Market Value
		(Unaudited)
Cash Equivalents – 19.29% (b)
	Money Market Funds – 0.91% (b)
	First American Prime Obligations Fund – Class A		1,747,374		July 2005	$	1,747,374	$	1,747,374
	Time Deposits – 18.38% (b)
	LaSalle Enhanced Liquidity(k)		35,301,792		Oct. 2004		35,301,792		35,301,792
Total Cash Equivalents							37,049,166		37,049,166
Total Investments – 106.42% (b)						$	256,051,859	$	204,425,108

(a)	These securities are restricted from public sale without prior registration under the Securities Act of 1933. The Fund may negotiate 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 $192,088,047 as of July 31, 2005.
(c)	The Fund owns more than 25% of the outstanding voting securities of Baltic Motors Corporation, Ohio Medical Corporation, SGDA Sanierungsgesellschaft fur Deponien und Altlasten, Timberland Machines & Irrigation, Inc., Vendio Services, Inc., and Vestal Manufacturing Enterprises, Inc. Accordingly, as “control” is defined in the Investment Company Act of 1940, the Fund is presumed to own controlling interests in these portfolio companies.
(d)	All of the Fund’s equity and debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940, except Baltic Motors Corporation, SafeStone Technologies PLC and SGDA Sanierungsgesellschaft fur Deponien und Altlasten. 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 “payment in kind” interest/dividends which is capitalized to the investment.
(j)	The principal operations of these portfolio companies are located outside of the United States.
(k)	All or a portion of these securities have been committed as collateral for the revolving credit facility with LaSalle Bank, N.A. See Note 5 for more information.
*	Affiliated Issuers (Total Market Value of $95,464,375): 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.

11

MVC Capital, Inc.

Consolidated Schedule of Investments

October 31, 2004

				Date of
				Initial
Description		Shares/Principal		Investment		Cost		Fair Value
Equity Investments – 44.14% (c, e) (Note 3, 4, 5)
	Automotive Dealerships – 5.19% (a, g)
	*Baltic Motors Corporation, Common Stock (d, k)		54,947		June 2004	$	6,000,000	$	6,000,000
	Confections Manufacturing and Distribution – 2.33% (a, g)
	*Impact Confections, Inc., Common Stock		252		July 2004		2,700,000		2,700,000
	Distributor – Landscaping and Irrigation Equipment – 3.89% (a, g)
	*Timberland Machines & Irrigation, Inc., Common Stock(d)		450		Aug. 2004		4,500,000		4,500,000
	*Timberland Machines & Irrigation, Inc., Warrants(d)		150		Aug. 2004		—		—
	Total Distributor – Landscaping and Irrigation Equipment						4,500,000		4,500,000
	Financial Services – 0.96% (a, g)
	Octagon Credit Investors, LLC, Membership Interest		5		June 2004		560,000		560,000
	Octagon Credit Investors, LLC, Warrants		1		May 2004		550,000		550,000
	Total Financial Services						1,110,000		1,110,000
	Iron Foundries – 0.39% (a, g)
	*Vestal Manufacturing Enterprises, Inc.,
	Common Stock(d)		40,500		Apr. 2004		450,000		450,000
	Manufacturer of Packaged Foods – 4.33% (a, g)
	*Dakota Growers Pasta Company, Inc.,
	Common Stock		909,091		July 2004		5,000,000		5,000,000
	Non-Alcoholic Beverages – 12.98% (a)
	*Vitality Foodservice, Inc., Common Stock(g)		500,000		Sept. 2004		5,000,000		5,000,000
	*Vitality Foodservice, Inc., Series A(j)		1,000,000		Sept. 2004		10,000,000		10,000,000
	*Vitality Foodservice, Inc., Warrants(g)		1,000,000		Sept. 2004		—		—
	Total Non-Alcoholic Beverages						15,000,000		15,000,000
	Technology Investments – 14.07% (g)
	Actelis Networks, Inc. Series C(a)		1,506,025		May 2001		5,000,003		—
	CBCA, Inc., Common Stock(a)		753,350		Apr. 2002		11,999,995		—
	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.(b)		603,396		Nov. 2001		3,519,988		7,023,529
	Mentor Graphics Corp.(i)		82,283		Nov. 2001		480,008		—
	*Phosistor Technologies, Inc., Series B (a, f)		6,666,667		Jan. 2002		1,000,000		—

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

12

MVC CAPITAL, INC.

Consolidated Schedule of Investments

October 31, 2004 — (Continued)

				Date of
				Initial
Description		Shares/Principal		Investment		Cost		Fair Value
	*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, k)		2,106,378		Dec. 2000		4,015,402		—
	*ShopEaze Systems, Inc., Series B (a, f)		2,097,902		May 2000		6,000,000		—
	*Sonexis, Inc., Common Stock (a)		131,615		June 2000		10,000,000		—
	*Sygate Technologies, Inc., Series D (a)		9,756,098		Oct. 2002		4,000,000		5,500,000
	*Vendio Services, Inc., Common Stock (a, d)		10,476		June 2000		5,500,000		—
	*Vendio Services, Inc., Series A (a, d)		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						88,026,256		16,257,530
Total Equity Investments							122,786,256		51,017,530
Debt Instruments – 23.80% (a, c)
	Automotive Dealerships – 3.89%
	Baltic Motors Corporation (d, k) 10.0000%, 06/24/2007		4,500,000		June 2004		4,500,000		4,500,000
	Confections Manufacturing and Distribution – 4.33%
	Impact Confections, Inc. (j) 17.0000%, 07/30/2009		5,000,000		July 2004		4,887,382		5,000,000
	Distributor – Landscaping and Irrigation Equipment – 5.23%
	Timberland Machines & Irrigation, Inc. (d, j) 17.0000%, 08/04/2009		6,042,164		Aug. 2004		5,943,114		6,042,164
	Financial Services – 3.92%
	Octagon Credit Investors, LLC (j) 15.0000%, 05/07/2011		5,059,696		May 2004		4,414,971		4,530,286
	Iron Foundries – 0.87%
	Vestal Manufacturing Enterprises, Inc. (d) 12.0000%, 04/29/2011		1,000,000		Apr. 2004		1,000,000		1,000,000
	Technology Investments – 5.56%
	Arcot Systems, Inc. (h) 10.0000%, 12/31/2005		3,647,220		Dec. 2002		3,631,940		2,000,000
	Determine Software, Inc. 12.0000%, 01/31/2006		1,632,222		Feb. 2003		1,624,753		1,624,753
	Determine Software, Inc., Series C Warrants (g)		2,229,955		Feb. 2003		—		—

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

13

MVC CAPITAL, INC.

Consolidated Schedule of Investments

October 31, 2004 — (Continued)

					Date of
					Initial
Description			Shares/Principal		Investment		Cost		Fair Value
	Integral Development Corporation (h) 10.0000%, 12/31/2005			2,805,552		Dec. 2002	$	2,793,798	$	2,805,552
		Total Technology Investments						8,050,491		6,430,305
Total Debt Instruments								28,795,958		27,502,755
Short-Term Securities – 29.52% (c)

							Market Value
	U.S. Government & Agency Securities – 29.52% (c)
		U.S. Treasury Bill 1.0000%, 11/04/2004	400,000	Aug. 2004		399,956		399,956
		U.S. Treasury Bill 1.4350%, 11/18/2004	1,064,000	Aug. 2004		1,063,332		1,063,332
		U.S. Treasury Bill 1.4700%, 11/26/2004	700,000	Aug. 2004		699,319		699,319
		U.S. Treasury Bill 1.6200%, 01/06/2005	3,490,000	Oct. 2004		3,480,147		3,480,147
		U.S. Treasury Bill 1.8000%, 01/27/2005	28,600,000	Oct. 2004		28,472,038		28,472,038
	Total U.S. Government & Agency Securities					34,114,792		34,114,792
Total Short-Term Securities						34,114,792		34,114,792
Cash Equivalents – 10.33% (c)
	Money Market Funds – 1.59% (c)
	First American Prime Obligations Fund – Class A		1,834,229	Oct. 2004		1,834,229		1,834,229
	Time Deposits – 8.74% (c)
	LaSalle Enhanced Liquidity(l)		10,098,175	Oct. 2004		10,098,175		10,098,175
Total Cash Equivalents						11,932,404		11,932,404
Total Investments – 107.79% (c)					$	197,629,410	$	124,567,481

(a)	These securities are restricted from public sale without prior registration under the Securities Act of 1933. The Fund may negotiate certain aspects of the method and timing of the disposition of these investments, including registration rights and related costs.
(b)	These shares are freely tradable with no restrictions to their sale.
(c)	Percentages are based on net assets of $115,567,344 as of October 31, 2004.
(d)	The Fund owns more than 25% of the outstanding voting securities of Baltic Motors Corporation, Timberland Machines & Irrigation, Inc., Vendio Services, Inc., and Vestal Manufacturing Enterprises, Inc. Accordingly, as “control” is defined in the Investment Company Act of 1940, the Fund is presumed to own controlling interests in these portfolio companies.
(e)	All of the Fund’s equity 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.
(f)	Company in dissolution.
(g)	Non-income producing assets.

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

14

MVC CAPITAL, INC.

Consolidated Schedule of Investments

October 31, 2004 — (Continued)

(h)	Also received warrants to purchase a number of shares of preferred stock to be determined upon exercise.
(i)	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.
(j)	These securities accrue a portion of their interest/dividends in “payment in kind” interest/dividends which is capitalized to the investment.
(k)	The principal operations of these portfolio companies are located outside of the United States.
(l)	All or a portion of these securities have been committed as collateral for the revolving credit facility with LaSalle Bank, N.A. See Note 5 for more information.
*	Affiliated Issuers (Total Market Value of $42,684,001): 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.

15

MVC Capital, Inc. (the “Fund”)

Notes to Consolidated Financial Statements

July 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, the Fund’s portfolio companies and other entities. 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 62.3% of the Fund’s total assets at July 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, or other high quality, highly liquid investments. The Fund’s cash balances, if not large enough to be invested in 90-day Treasury Bills or other high quality, highly liquid investments, are swept into designated money market accounts.

4. Portfolio Investments

For the Nine month Period Ended July 31, 2005

      During the nine months ended July 31, 2005, the Fund made six new investments, committing capital totaling approximately $48.8 million. The investments were made in JDC Lighting, LLC (“JDC”), SGDA Sanierungsgesellschaft fur Deponien und Altasten mbH (“SGDA”), SP Industries, Inc. (“SP”), BP Clothing, LLC (“BP”), Ohio Medical Corporation (“Ohio”) and Amersham Corp. (“Amersham”). The amounts invested were $3.0 million, $5.8 million, $10.5 million, $10 million, $17 million and $2.5 million respectively.

16

MVC Capital, Inc. (the “Fund”)

Notes to Consolidated Financial Statements — (Continued)

      The Fund also made three follow-on investments in existing portfolio companies committing capital totaling approximately $5.0 million. In December 2004 and January 2005, the Fund invested a total of $1.25 million in Timberland Machines & Irrigation, Inc. (“Timberland”) in the form of subordinated bridge notes. On April 15, 2005, the Fund re-issued 146,750 shares of its treasury stock at the Fund’s net asset value per share of $9.54 in exchange for 40,500 shares of common stock of Vestal Manufacturing Enterprises, Inc. (“Vestal”). On July 8, 2005 the Fund extended Timberland a $3.25 million junior revolving note. According to the terms of the note, Timberland immediately drew $1.3 million from the revolving note and used the proceeds to repay the subordinated bridge notes in full. The repayment included all outstanding principal and accrued interest. On July 29, 2005, the Fund invested an additional $325,000 in Impact Confections, Inc. (“Impact”) in the form of a secured promissory note.

      In April 2005, Octagon Credit Investors, LLC (“Octagon”) drew $1.5 million from the senior secured credit facility provided to it by the Fund and repaid it in full during June 2005.

      During May and June 2005, SGDA drew $684,700 from the revolving credit facility provided to it by the Fund. As of July 31, 2005, all amounts drawn from the facility remained outstanding.

      On July 14, 2005, Timberland drew an additional $1.5 million from the revolving note mentioned above. As of July 31, 2005, the total amount outstanding on the note was approximately $2.8 million.

      Also, during the nine months ended July 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 July 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 (“Valuation Committee”) determined to carry the escrow shares at zero because they were unable to determine how many shares, if any, the Fund would receive from the escrow and the market value of the shares received.

      The Fund also realized losses on CBCA, Inc. (“CBCA”) and Phosistor Technologies, Inc. (“Phosistor”) totaling approximately $13 million. The Fund received no proceeds from the dissolution of these companies and the investments have been removed from the Fund’s portfolio. The fair values of CBCA and Phosistor were previously written down to zero and therefore the net effect of their removal was zero on the current period’s consolidated statement of operations and net asset value.

      On December 21, 2004, Determine Software, Inc. (“Determine”) prepaid 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 accrued interest. Under the terms of the early repayment, the Fund returned its 2,229,955 Series C warrants for no consideration.

      On July 5, 2005, Arcot Systems, Inc. (“Arcot”) prepaid its senior credit facility from the Fund in full. The amount of proceeds the Fund received from the repayment was approximately $2.55 million. This amount included all outstanding principal and accrued interest. Under the terms of the early repayment, the Fund returned its warrants to Arcot for no consideration.

      The Fund continued to receive the monthly principal repayments on the credit facility of Integral Development Corporation (“Integral”). Integral made payments during the nine months ended July 31, 2005, according to its credit facility agreement totaling $1,262,502.

      During the nine months ended July 31, 2005, the Valuation Committee increased the fair value of the Fund’s investments in Baltic Motors Corporation (“Baltic”) common stock by $1.5 million, Dakota Growers Pasta Company, Inc. (“Dakota”) common stock by $514,000, Octagon’s membership interest and warrant by $1,022,638, Sygate Technologies, Inc. (“Sygate”) Series D preferred stock by $4.2 million, Vendio Services, Inc. (“Vendio”) Series A preferred stock by $1,565,999 and Vestal’s common stock by $950,000. In addition,

17

MVC Capital, Inc. (the “Fund”)

Notes to Consolidated Financial Statements — (Continued)

increases in the cost basis and fair value of the Octagon loan, Impact loan, Timberland loan, Vitality Foodservice, Inc. (“Vitality”) Series A preferred stock, JDC loan and SP loans were due to the receipt of payment in kind (PIK) interest/dividends totaling $969,023. Also during the nine month period ended July 31, 2005, the undistributed allocation of flow through income from the Fund’s equity investment in Octagon increased the cost basis and fair value of the investment by $142,141.

      At July 31, 2005, the fair value of all portfolio investments, exclusive of short-term securities, was $130 million with a cost of $181.6 million. At October 31, 2004, the fair value of all portfolio investments, exclusive of short-term securities, was $78.5 million with a cost of $151.6 million.

For the Year Ended October 31, 2004

      During the year ended October 31, 2004, the Fund made seven new investments, totaling $55.7 million. The investments were made as follows: Vestal, $1,450,000, Octagon, $5,560,000, Baltic Motors Corporation (“Baltic”), $10,500,000, Dakota Growers Pasta Company, Inc. (“Dakota”), $5,000,000, Impact, $7,700,000, Timberland, $10,500,000 and Vitality, $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 freely tradable shares were then valued at their market price and at October 31, 2004, the market value of the 603,396 freely tradable shares was approximately $7 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.

18

MVC Capital, Inc. (the “Fund”)

Notes to Consolidated Financial Statements — (Continued)

      The Fund received the monthly principal repayments on the credit facilities of Integral, Arcot, and Determine. Each made payments according to its respective credit facility agreement totaling the following amounts: Integral $1,683,336, Arcot $1,402,780 and Determine $392,778.

      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 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. (“Actelis”) by $1,000,000, CBCA by $500,000, and Sonexis, Inc. (“Sonexis”) by $500,000.

      At October 31 2004, the fair and market value of all portfolio investments, exclusive of short-term securities, was $78.5 million with a cost of $151.6 million.

5. Commitments and Contingencies

      On May 7, 2004, the Fund entered into a $5,000,000 senior secured credit facility with Octagon. This credit facility expires on May 6, 2007 and can be automatically extended until May 6, 2009. The credit facility bears interest at LIBOR plus 4%. 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 April 5, 2005, Octagon drew $1.5 million from the credit facility and repaid it in full on June 15, 2005. As of July 31, 2005, no outstanding borrowings remained.

      On October 28, 2004, the Fund entered into a one-year, cash collateralized, $20,000,000 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. On July 20, 2005, the Fund amended its revolving credit facility agreement with the Bank. The maximum aggregate loan amount under the Agreement was increased from $20,000,000 to $30,000,000. Additionally, the maturity date was extended from October 31, 2005 to August 31, 2006. All other material terms of the Agreement remained unchanged. On July 28, 2005, the Fund borrowed $14,000,000 under the Credit Facility. 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.

      On February 16, 2005, the Fund entered into a sublease (the “Sublease”) for a larger space in the building in which the Fund’s current executive offices are located. The Sublease is scheduled to expire on February 28, 2007. Future payments under the Sublease total approximately $55,000 in fiscal year 2005, $223,000 in fiscal year 2006 and $75,000 in fiscal year 2007. The Fund’s previous lease was terminated effective March 1, 2005, without penalty. The building in which the Fund’s executive offices are located, 287 Bowman Avenue, is owned by Phoenix Capital Partners, LLC, an entity which is 97% owned by Mr. Tokarz. See Note 7 for more information on Mr. Tokarz.

      During February 2005, the Fund made available to SGDA, a $1,308,300 revolving credit facility that bears interest at 7%. The credit facility expires on August 25, 2006. During April and May 2005, SGDA drew $684,700 from the credit facility provided to it by the Fund. As of July 31, 2005, the $684,700 in borrowings remained outstanding.

      On July 8, 2005 the Fund extended Timberland a $3.25 million junior revolving note that bears interest at 12.5% and expires on July 7, 2007. The Fund also receives a fee of 0.25% on the unused portion of the note. According to the terms of the note, Timberland immediately drew $1.3 million from the revolving note and used the proceeds to repay their subordinated bridge notes, held by the Fund, in full. The repayment included all outstanding principal and accrued interest. On July 14, 2005, Timberland drew an additional $1.5 million

19

MVC Capital, Inc. (the “Fund”)

Notes to Consolidated Financial Statements — (Continued)

from the revolving note. As of July 31, 2005, the total amount outstanding on the note was approximately $2.8 million.

      Timberland also 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 limited co-guarantor for up to $500,000 on this repurchase commitment.

      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

      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 in excess of the 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 $402,000.

      On April 15, 2005, the Fund re-issued 146,750 shares of its treasury stock at the Fund’s net asset value per share of $9.54 in exchange for 40,500 shares of common stock of Vestal.

7. Management

      On November 6, 2003, Michael Tokarz assumed his positions 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 incentive compensation in 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. Mr. Tokarz has determined to allocate a portion of the incentive compensation to certain employees of the Fund. For the year ended October 31, 2004, Mr. Tokarz received no cash or other compensation from the Fund pursuant to his contract. Please see Note 8 “Incentive compensation” for more information.

8. Incentive compensation

      Under the terms of the Fund’s agreement with Mr. Tokarz, as discussed in Note 7 “Management”, during the nine month period ended July 31, 2005, the Fund accrued $797,328 of incentive compensation as a current expense. This accrual of incentive compensation resulted from the determination of the Valuation

20

MVC Capital, Inc. (the “Fund”)

Notes to Consolidated Financial Statements — (Continued)

Committee to increase the fair value of four of the Fund’s portfolio investments: Baltic, Dakota, Octagon, and Vestal, which are subject to the Fund’s agreement with Mr. Tokarz, by a total of $3,986,638. This accrued balance of $797,328 will remain unpaid until these potential net capital gains are realized, if ever, by the Fund. Only after a realization event, will the incentive compensation be paid under the agreement with Mr. Tokarz. Mr. Tokarz has determined to allocate a portion of the incentive compensation to certain employees of the Fund. During the nine month period ended July 31, 2005, Mr. Tokarz was paid no cash or other compensation.

9. 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 need not be distributed.

10. Dividends and Distributions to Shareholders

      Dividends and capital gain distributions, if any, are recorded on the ex-dividend date. Dividends and capital gain distributions are generally declared and paid quarterly. An additional distribution may be paid by the Fund to avoid imposition of federal income tax on any remaining undistributed net investment income and capital gains. Distributions can be made payable by the Fund either in the form of a cash distribution or a stock dividend. The amount and character of income and capital gain distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences are due primarily to differing treatments of income and gain on various investment securities held by the Fund, timing differences and differing characterizations of distributions made by the Fund. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications and may affect the allocation between net investment income, net realized gain (loss) and paid in capital.

For the Nine month Period Ended July 31, 2005

      On July 11, 2005, the Fund’s Board of Directors announced that it has approved the Fund’s establishment of a policy seeking to pay quarterly dividends to shareholders. For the quarter, the board of directors declared a dividend of $.12 per share payable on July 29, 2005 to shareholders of record on July 22, 2005. The ex-dividend date was July 20, 2005. The total distribution amounted to $2,290,289.

11. Segment Data

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

21

MVC Capital, Inc. (the “Fund”)

Notes to Consolidated Financial Statements — (Continued)

      The following table presents book basis segment data for the nine month period ended July 31, 2005:

	MVC			MVCFS			Consolidated
Interest and dividend income	$	6,579,586		$	6,171		$	6,585,757
Fee income		148,481			1,247,980			1,396,461
Other income		856,318			—			856,318
Total operating income		7,584,385			1,254,151			8,838,536
Total operating expenses		4,527,403			196,453			4,723,856
Net operating income before taxes		3,056,982			1,057,698			4,114,680
Tax expense (benefit)		—			(68,495	)		(68,495	)
Net investment income		3,056,982			1,126,193			4,183,175
Net realized gain (loss) on investments and foreign currency		(8,283,192	)		—			(8,283,192	)
Net change in unrealized appreciation on investments		21,435,178			—			21,435,178
Net increase in net assets resulting from operations	$	16,208,968		$	1,126,193		$	17,335,161

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

12. Legal Proceedings

      On February 20, 2002, Millenco LP (“Millenco”), a stockholder, filed a complaint in the United States District Court for the District of Delaware on behalf of the Fund against the meVC Advisers, Inc. (the “Former Advisor”). The complaint alleged that the fees received by the Former Advisor, beginning one year prior to the filing of the complaint, were excessive, and in violation of Section 36(b) of the Investment Company Act. The case was settled for $370,000 from which the Company received net proceeds in July 2004 of $245,213 after payment of legal fees and expenses.

      During the year ended October 31, 2003, the Fund paid or accrued $4.0 million for legal and proxy solicitation fees and expenses, which included $2.2 million accrued and paid at the direction of the Board of Directors, to reimburse the legal and proxy solicitation fees and expenses of two major Fund shareholders, Millenco, L.P. and Karpus Investment Management, including their costs of obtaining a judgment against the Fund in the Delaware Chancery Court and costs associated with the proxy process and the election of the current Board of Directors. The Fund made a claim against its insurance carrier, Federal Insurance Company (“Federal”) for its right to reimbursement of such expenses. On June 13, 2005, the Fund reached a settlement with Federal in the amount of $473,968 which has been recorded as Other Income in the Consolidated Statement of Operations. Legal fees and expenses associated with reaching this settlement were $47,171.

13. Recovery of Expenses and Unusual Income Items

      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 as a result of the property manager’s ability to reach an agreement with a new tenant for the space. 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 nine months ended July 31, 2004 would have been approximately $258,250.

      On July 13, 2004, the Fund received $370,000 from the settlement of the case Millenco L.P. v. meVC Advisers, Inc. (See Note 12 Legal Proceedings). The actual cash received was $245,213, after payment of

22

MVC Capital, Inc. (the “Fund”)

Notes to Consolidated Financial Statements — (Continued)

legal fees and expense. This settlement was the reimbursement of management fees received by the Former Advisor which were alleged to be excessive.

      During the year ended October 31, 2003, the Fund paid or accrued $4.0 million for legal and proxy solicitation fees and expenses, which included $2.2 million accrued and paid at the direction of the Board of Directors, to reimburse the legal and proxy solicitation fees and expenses of two major Fund shareholders, Millenco, L.P. and Karpus Investment Management, including their costs of obtaining a judgment against the Fund in the Delaware Chancery Court and costs associated with the proxy process and the election of the current Board of Directors. The Fund made a claim against its insurance carrier, Federal Insurance Company (“Federal”) for its right to reimbursement of such expenses. On June 13, 2005, the Fund reached a settlement with Federal in the amount of $473,968 which has been recorded as Other Income in the Consolidated Statement of Operations. Legal fees and expenses associated with reaching this settlement were $47,171.

14. Subsequent Events

      The $14 million borrowed under the Credit Facility provided by LaSalle was repaid in full by August 8, 2005.

      On August 16, 2005, Sygate and Symantec Corporation (“Symantec”) entered into a definitive acquisition agreement pursuant to which Sygate would be acquired, for cash, by Symantec. As a result of the acquisition, the Fund expects to receive gross proceeds of $16 million in cash of which $1.6 million or 10% will be deposited in an escrow account for approximately one year. Accordingly, the Valuation Committee increased the fair value of its investment in Sygate by $3.3 million or 90% of the gross proceeds expected to be received by the Fund (excluding any amount deposited in escrow). Due to the contingencies associated with the escrow, the Fund did not place any value on the proceeds deposited in escrow and therefore did not factor such proceeds into the Fund’s NAV. The remaining 10% of the gross proceeds to be received is expected to be added to the Fund’s NAV upon the closing of the acquisition.

      On September 6, 2005, all 82,283 common shares of Mentor Graphics held in escrow were released. As of September 7, 2005, the market value of these freely-tradable shares was $698,583.

23

Item 2.     Management’s Discussion and Analysis 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.

24

Selected Consolidated Financial Data

		Nine Month			Nine Month			Fiscal Year
		Period Ended			Period Ended			Ended
		July 31,			July 31,			October 31,
		2005			2004			2004
		(Unaudited)			(Unaudited)
		(In thousands, except per share data)
Operating Data:
Interest and related portfolio income:
	Interest and dividends	$	6,586		$	1,877		$	3,086
	Fee income		1,396			293			836
	Other income		856			5			64
Total interest and related portfolio income			8,838			2,175			3,986
Expenses:
	Employee		1,619			940			1,366
	Incentive compensation (Note 8)		797			—			—
	Administrative		2,307			2,252			2,893
Total operating expenses			4,723			3,192			4,259
Litigation recovery of management fees (Note 12,13)			—			(370	)		(370	)
Net investment income (loss) before taxes			4,115			(647	)		97
Tax expense (benefit)			(68	)		—			79
Net investment income (loss)			4,183			(647	)		18
Net realized and unrealized gains (losses):
	Net realized losses		(8,283	)		(21,397	)		(37,795	)
	Net change in unrealized appreciation		21,435			30,375			49,382
Net realized and unrealized gains on investments			13,152			8,978			11,587
Net increase in net assets resulting from operations		$	17,335		$	8,331		$	11,605
Per Share:
Net increase in net assets per share resulting from operations		$	0.99		$	0.64		$	0.91
Dividends per share		$	0.12		$	—		$	0.12
Balance Sheet Data:
Portfolio at fair value		$	130,018		$	55,342		$	78,520
Portfolio at cost			181,645			147,411			151,582
Total assets			208,549			114,426			126,577
Shareholders’ equity			192,088			113,768			115,567
Shareholders’ equity per share (net asset value)		$	10.06		$	9.25		$	9.40
Common shares outstanding at period end			19,086			12,293			12,293
Other Data:
Number of Investments funded in period			9			5			7
Capital Committed($) in period		$	53,836		$	35,210		$	60,710

25

	2005						2004										2003
	Qtr 3		Qtr 2		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		4,404		2,439		1,995		1,811		951		508			716			742			776			811			566
Net investment income (loss) before net realized and unrealized gains		2,480		821		882		665		281		(498	)		(430	)		(847	)		(559	)		(5,031	)		(2,055	)
Net increase (decrease) in net assets resulting from operations		10,310		4,360		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		0.58		0.23		0.18		0.27		0.41		0.09			0.14			(0.29	)		(0.89	)		(0.41	)		(1.83	)
Net asset value per share		10.06		9.64		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 the Fund’s investment professionals 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, committing capital totaling $60,710,000, pursuant to our new investment objective. In the nine month period ended July 31, 2005, the Fund made six new investments and three additional investments in existing portfolio companies, committing capital totaling $53,835,871.

      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 July 31, 2005, 7.93% 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.

26

Investment Income

      For the Nine Month Periods Ended July 31, 2005 and 2004. Total investment income was approximately $8.8 million for the nine month period ended July 31, 2005 and approximately $2.2 million for the nine month period ended July 31, 2004, an increase of $6.6 million.

For the Nine Month Period Ended July 31, 2005

      Total investment income was $8.8 million for the nine month period ended July 31, 2005. The increase in investment income over the same nine month period last year is due to the increase in the number of investments that provide the Fund with current income. The main components of investment income are the interest income earned on loans to portfolio companies and the receipt of closing and monitoring fees from certain portfolio companies by the Fund and MVCFS. The Fund earned approximately $5.19 million in interest and dividend income from investments in portfolio companies. Of the $5.19 million recorded in interest and dividend income, approximately $969,000 was “payment in kind” interest/dividends. The “payment in kind” interest/dividends are computed at the contractual rate specified in each investment agreement and added to the principal balance of each investment. The Fund’s yielding investments were paying interest and dividends to the Fund at various rates from 7% to 17%. Also, the Fund earned approximately $1.40 million in interest income on its cash equivalents and short-term investments during the nine month period ended July 31, 2005. The Fund received fee income and other income from portfolio companies totaling approximately $1.4 million and $856,000 respectively. Included in other income is a legal settlement of $473,968. See Note 12 “Legal Proceedings” for more information. Without the receipt of this settlement, other income earned for the nine months ended July 31, 2005, would have been $382,350.

For the Nine Month Period Ended July 31, 2004

      Total investment income was approximately $2.2 million for the nine month period ended July 31, 2004. The main components of investment income were interest on debt investments and fee income during the nine months ended July 31, 2004. This was the result of the Fund beginning to make new investments in portfolio companies paying different rates of interest and the receipt of closing and monitoring fees from certain portfolio companies by the Fund and MVCFS.

Operating Expenses

      For the Nine Month Periods Ended July 31, 2005 and 2004. Operating expenses were $4.7 million for the nine month period ended July 31, 2005 and $3.2 million for the nine month period ended July 31, 2004, an increase of approximately $1.5 million.

For the Nine Month Period Ended July 31, 2005

      Operating expenses were $4.7 million for the nine month period ended July 31, 2005. Significant components of operating expenses for the nine month period ended July 31, 2005 include salaries and benefits of $1,619,238, incentive compensation of $797,328, insurance premium expenses of $460,773, legal fees of $426,501 and facilities related expenses of $312,762.

      The increase in the Fund’s operating expenses comparing 2005 with 2004 was due to increases in certain variable expenses. The Fund’s salaries and benefits expense increased due to the addition of several new employees. Also, the Fund’s rent and other facility related expenses increased primarily due to the Fund’s procurement of larger office space to accommodate the Fund’s new employees. See Note 5 “Commitments and Contingencies” for more information.

      Incentive compensation was first accrued in the nine month period ended July 31, 2005. This accrual of incentive compensation resulted from the determination of the Valuation Committee to increase the fair value of four of the Fund’s portfolio investments: Baltic, Dakota, Octagon, and Vestal, which are subject to the Fund’s agreement with Mr. Tokarz, by a total of $3,986,638. This accrued balance of $797,328 will remain unpaid until these potential net capital gains are realized, if ever, by the Fund. Only after a realization event,

27

will the incentive compensative be paid under the agreement with Mr. Tokarz. Mr. Tokarz has determined to allocate a portion of the incentive compensation to certain employees of the Fund. During the nine month period ended July 31, 2005, Mr. Tokarz was paid no cash or other compensation. Please see Note 8 “Incentive compensation” for more information.

      In February 2005, the Fund renewed its Directors & Officers/ Professional Liability Insurance policies at an expense of approximately $517,000 which is amortized over the twelve month life of the policy. The prior policy premium was $719,000.

      During the nine month period ended July 31, 2005, the Fund paid or accrued $426,501 in legal fees. Legal expenses included fees of $47,171 incurred while pursuing a claim against Federal Insurance Company. See Note 12 “Legal Proceedings” for more information. The settlement from this legal action was $473,968 which was recorded into other income. After fees and expenses the cash received from the settlement was $426,797. Without the legal fees related to the litigation the Fund would have paid or accrued $379,330 in legal fees.

For the Nine Month Period Ended July 31, 2004

      Operating expenses were $3.1 million for the nine month period ended July 31, 2004.

      Significant components of operating expenses for the nine months ended July 31, 2004 include insurance premium expenses of $773,454, salaries and benefits of $724,158, legal fees of $690,604, and facilities expense of $8,250.

      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, at which time at new policy was entered into with a premium of approximately $719,000. For the nine month period ended July 31, 2004, the Fund expensed $773,454 in insurance premiums.

      During the nine month period ended July 31, 2004, the Fund paid or accrued $810,848 in legal fees (compared to $1.5 million in 2003). Legal expenses included fees of $124,787 incurred while pursuing action against the Fund’s Former Advisor for the reimbursement of management fees which were alleged to be excessive. See Note 12 “Legal Proceedings” for more information. The settlement from this legal action was $370,000; after fees and expenses the cash received by the Fund was $245,213. Without the legal fees related to this litigation, the Fund would have paid or accrued $565,817 in legal fees. The legal expenses for the nine month period ended July 31, 2004 were reflective of a decreased need for legal counsel due to the redefinition of the Fund’s direction by Management.

      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 nine months ending July 31, 2004 would have been approximately $258,000.

Realized Gains and Losses On Portfolio Securities

      For the Nine Month Periods Ended July 31, 2005 and 2004. Net realized losses for the nine month periods ended July 31, 2005 and 2004 were $8.3 million and $21.4 million, respectively, a decrease of $13.1 million.

For the Nine Month Period Ended July 31, 2005

      Net realized losses for the nine month period ended July 31, 2005 were $8.3 million. The significant components of the Fund’s net realized loss for the nine month period ended July 31, 2005 were a realized gain on the Fund’s investment in Mentor Graphics which was offset by realized losses on CBCA and Phosistor.

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      During the nine months ended July 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 July 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 they were unable to determine how many shares, if any, the Fund would receive from the escrow and the market value of the shares received.

      The Fund realized losses on CBCA of approximately $12 million and on Phosistor of approximately $1 million. The Fund received no proceeds from these companies and they have been removed from the Fund’s portfolio. The fair values of CBCA and Phosistor had been previously written down to zero and as a result, the realized losses were offset by reductions in unrealized losses. Therefore, the net effect of the transactions on the Fund’s consolidated statement of operations and net asset value for the nine month period was zero.

For the Nine Month Period Ended July 31, 2004

      Net realized losses for the nine month period ended July 31, 2004 were $21.4 million. This resulted primarily from the return of capital by PTS Messaging to the holders of its preferred stock and the sale of Ishoni. These sales resulted in losses of $11.6 million and $10.0 million respectively. The fair values of PTS Messaging and Ishoni had been previously written down to zero and as a result, the realized losses were offset by reductions in unrealized losses. Therefore, the net effect of the transactions on the Fund’s consolidated statement of operations and net asset value for the nine month period was zero.

Unrealized Appreciation and Depreciation of Portfolio Securities

      For the Nine Month Periods Ended July 31, 2005 and 2004. The Fund had a net decrease in unrealized depreciation of $21.4 million for the nine month period ended July 31, 2005. The Fund had a net decrease in unrealized depreciation of $30.4 million for the nine month period ended July 31, 2004.

For the Nine Month Period Ended July 31, 2005

      Net decrease in unrealized depreciation for the nine month period ended July 31, 2005 was $21.4 million. Such net decrease in unrealized depreciation on investment transactions for the nine months ended July 31, 2005 primarily resulted from the Valuation Committee’s determinations to increase the fair value of the Fund’s investments in Baltic’s common stock by $1.5 million, Dakota’s common stock by $514,000, Octagon’s membership interest and warrant by $1,022,638, Sygate’s Series D preferred stock by $4.2 million, Vendio’s Series A preferred stock by $1,565,999 and Vestal’s common stock by $950,000. The increase in the fair value of these portfolio investments resulted in a decrease in unrealized depreciation of approximately $9.8 million. Other key components were the realization of a $4.8 million gain on the sales of the Fund’s shares of Mentor Graphics, the $13.0 million depreciation reclassification from unrealized to realized caused by the removal of CBCA and Phosistor from the Fund’s books and the $500,000 decrease in unrealized caused by repayment in full of the Arcot loan which was being carried below cost.

For the Nine Month Period Ended July 31, 2004

      Net decrease in unrealized depreciation for the nine month period ended July 31, 2004 was $30.4 million. The net decrease in unrealized depreciation on investment transactions for the nine months ended July 31, 2004 resulted mainly from the $21.6 million reclassification from unrealized depreciation to realized loss caused by the disbursement of assets from PTS Messaging and Ishoni Networks. Such net decrease also resulted from the determinations of the Valuation Committee to increase the fair value of the Fund’s investments in Sygate, 0-In, BlueStar, Vendio and Integral by $9.6 million and to decrease the fair value of the Fund’s investments in Actelis, CBCA, and Sonexis by $2.0 million.

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Accumulated Deficit

      For the Nine Month Period Ended July 31, 2005 and the Fiscal Year Ended October 31, 2004. The Fund’s total accumulated deficit for the period ended July 31, 2005 and the year ended October 31, 2004 was $133.5 million and $148.5 million, respectively, a decrease of $15 million.

For the Nine Month Period Ended July 31, 2005

      The Fund’s total accumulated deficit for the nine months ended July 31, 2005, was $133.5 million. The decrease in accumulated deficit for the nine months ended July 31, 2005 is due primarily to Fund’s increase in net assets from operations of $17.4 million offset by the $2.3 million dividend paid to shareholders on July 29, 2005.

For the Year Ended October 31, 2004

      The Fund’s total accumulated deficit was $148.5 million for the year ended October 31, 2004. There was a decrease in accumulated deficit for the year ended October 31, 2004 that was due primarily to the return of capital statement of position (“ROCSOP”) adjustment and the Valuation Committee’s net increase of the fair valuations of certain portfolio company investments and the unrealized appreciation of Mentor Graphics. This increase in investment value of approximately $11.6 million, net investment income of $18,467, and the reclassification of previously repurchased treasury shares caused the decrease in the Fund’s total accumulated deficit.

Portfolio Investments

      For the Nine Month Period Ended July 31, 2005 and the Fiscal Year Ended October 31, 2004. The cost of equity investments held by the Fund at July 31, 2005 and at October 31, 2004 was $125.5 million and $122.8 million, respectively, an increase of $2.7 million. The aggregate fair value of equity investments at July 31, 2005 and at October 31, 2004 was $73.0 million and $51.0 million, respectively, an increase of $22 million. The cost of debt instruments (excluding short-term investments and cash equivalents) held by the Fund at July 31, 2005 and at October 31, 2004 was $56.1 million and $28.8 million, respectively, an increase of $27.3 million. The aggregate fair value of debt instruments at July 31, 2005 and at October 31, 2004 was $57.0 million and $27.5 million, respectively, an increase of $29.5 million. The cost and aggregated fair value of short-term securities held by the Fund at July 31, 2005 and at October 31, 2004 was $37.4 million and $34.1 million, respectively, an increase of $3.3 million. The cost and aggregate fair value of cash and cash equivalents held by the Fund at July 31, 2005 and at October 31, 2004 was $39.4 million and $13.2, respectively, an increase of approximately $26.2 million.

For the Nine Month Period Ended July 31, 2005

      During the nine months ended July 31, 2005, the Fund made six new investments, committing capital totaling approximately $48.8 million. The investments were made in JDC, SGDA, SP, BP, Ohio and Amersham. The amounts invested were $3.0 million, $5.8 million, $10.5 million, $10 million, $17 million and $2.5 million respectively.

      The Fund also made three follow-on investments in existing portfolio companies committing capital totaling approximately $5.0 million. In December 2004 and January 2005, the Fund invested a total of $1.25 million in Timberland in the form of subordinated bridge notes. On April 15, 2005, the Fund re-issued 146,750 shares of its treasury stock at the Fund’s net asset value per share of $9.54 in exchange for 40,500 shares of common stock of Vestal. On July 8, 2005 the Fund extended Timberland a $3.25 million junior revolving note. According to the terms of the note, Timberland immediately drew $1.3 million from the revolving note and used the proceeds to repay the subordinated bridge notes in full. The repayment included all outstanding principal and accrued interest. On July 29, 2005, the Fund invested an additional $325,000 in Impact in the form of a secured promissory note.

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      In April 2005, Octagon drew $1.5 million from the senior secured credit facility provided to it by the Fund and repaid it in full during June 2005.

      During May and June 2005, SGDA drew $684,700 from the revolving credit facility provided to it by the Fund. As of July 31, 2005, all amounts drawn from the facility remained outstanding.

      On July 14, 2005, Timberland drew an additional $1.5 million from the revolving note mentioned above. As of July 31, 2005, the total amount outstanding on the note was approximately $2.8 million.

      Also, during the nine months ended July 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 July 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 they were unable to determine how many shares, if any, the Fund would receive from the escrow and the market value of the shares received. The Fund also realized losses on CBCA and Phosistor totaling approximately $13 million. The Fund received no proceeds from the dissolution of these companies and the investments have been removed from the Fund’s portfolio. The fair values of CBCA and Phosistor were previously written down to zero and therefore the net effect of their removal was zero on the current period’s consolidated statement of operations and net asset value.

      On December 21, 2004, Determine prepaid 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 accrued interest. Under the terms of the early repayment, the Fund returned its 2,229,955 Series C warrants for no consideration.

      On July 5, 2005, Arcot prepaid its senior credit facility from the Fund in full. The amount of proceeds the Fund received from the repayment was approximately $2.55 million. This amount included all outstanding principal and accrued interest. Under the terms of the early repayment, the Fund returned its warrants to Arcot for no consideration.

      The Fund continued to receive the monthly principal repayments on the credit facility of Integral. Integral made payments during the nine months ended July 31, 2005, according to its credit facility agreement totaling $1,262,502.

      During the nine months ended July 31, 2005, the Valuation Committee increased the fair value of the Fund’s investments in Baltic common stock by $1.5 million, Dakota common stock by $514,000, Octagon’s membership interest and warrant by $1,022,638, Sygate Series D preferred stock by $4.2 million, Vendio Series A preferred stock by $1,565,999 and Vestal’s common stock by $950,000. In addition, increases in the cost basis and fair value of the Octagon loan, Impact loan, Timberland loan, Vitality Series A preferred stock, JDC loan and SP loans were due to the receipt of payment in kind (PIK) interest/dividends totaling $969,023. Also during the nine month period ended July 31, 2005, the undistributed allocation of flow through income from the Fund’s equity investment in Octagon increased the cost basis and fair value of the investment by $142,141.

      At July 31, 2005, the fair value of all portfolio investments, exclusive of short-term securities, was $130 million with a cost of $181.6 million. At October 31, 2004, the fair value of all portfolio investments, exclusive of short-term securities, was $78.5 million with a cost of $151.6 million.

For the Year Ended October 31, 2004

      During the year ended October 31, 2004, the Fund made seven new investments, totaling $55.7 million. The investments were made as follows: Vestal, $1,450,000, Octagon, $5,560,000, Baltic, $10,500,000, Dakota, $5,000,000, Impact, $7,700,000, Timberland, $10,500,000 and Vitality, $15,000,000. No additional investments were made in existing portfolio companies.

      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

31

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 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.

      On September 1, 2004, Mentor Graphics acquired the Fund’s portfolio company 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 freely tradable shares were then valued at their market price and at October 31, 2004, the market value of the 603,396 freely tradable shares was approximately $7 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 received the monthly principal repayments on the credit facilities of Integral, Arcot, and Determine. Each made payments according to its respective credit facility agreement totaling the following amounts: Integral $1,683,336, Arcot $1,402,780 and Determine $392,778.

      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 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 by $1,000,000, CBCA by $500,000, and Sonexis by $500,000.

      At October 31 2004, the fair and market value of all portfolio investments, exclusive of short-term securities, was $78.5 million with a cost of $151.6 million.

Portfolio Companies

      During the nine month period ended July 31, 2005, the Fund had 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, 2004 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 April 30, 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.

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Amersham Corp.

      Amersham Corp. (“Amersham”), Louisville, Colorado, is a manufacturer of precision machined components for the automotive, furniture, security and medical device markets.

      The Fund’s investment in Amersham consists of $2.5 million in purchased notes, bearing interest at 10%. The notes have a maturity date of June 29, 2010. The notes have a principal face amount and cost basis of $2.5 million.

      At July 31, 2005, the notes had an outstanding balance, cost and fair value of $2.5 million.

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.

      On July 5, 2005, Arcot repaid its loan from the Fund in full. The amount of proceeds the Fund received from the repayment was approximately $2.55 million. This amount included all outstanding principal and accrued interest. Under the terms of the early repayment, the Fund returned its warrants for no consideration. As of July 31, 2005, the Fund no longer held any investment in Arcot.

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 July 31, 2005, the Fund’s investment in Baltic consisted of 54,947 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 24, 2007 and earns interest at 10% per annum.

      Effective July 29, 2005, the Valuation Committee increased the fair value of the Fund’s equity investment in Baltic by $1.5 million from $6 million to $7.5 million.

      At July 31, 2005, the Fund’s investment in Baltic was assigned a fair value of $12 million. Michael Tokarz, Chairman of the Fund, Frances Spark, an officer of the Fund and Chris Sullivan, an employee of the Fund, serve as directors for Baltic.

BP Clothing, LLC

      BP Clothing, LLC (“BP”), Pico Rivera, California, is a company which designs, manufactures, markets and distributes, Baby Phat®, a line of women’s clothing.

      The Fund’s investment in BP consists of a $10 million second lien loan bearing interest at LIBOR plus 8% for the first year and variable interest rates for the remainder of the four year term. The loan has a $10 million principal face amount and was issued at a cost basis of $10 million. The loan’s cost basis was subsequently discounted to reflect loan origination fees received.

      On June 30, 2005, the Fund received it first quarterly principal repayment of approximately $208,000. The first repayment was prorated for the amount of the quarter the loan was outstanding. All subsequent quarterly principal repayments will total $625,000 with the remaining balance due upon maturity.

      At July 31, 2005, the loan had an outstanding balance of $9.79 million with a cost of $9.60 million. The loan was assigned a fair value of $9.79 million.

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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 nine month period ended July 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.

      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. At July 31, 2005, the Fund no longer held any investment in CBCA.

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 July 31, 2005, the Fund’s investment in Dakota consisted of 909,091 shares of Common Stock carried at a cost of $5.0 million.

      Effective July 29, 2005, the Valuation Committee increased the fair value of the Fund’s equity investment in Dakota by $514,000 from $5 million to $5,514,000.

      At July 31, 2005, the Fund’s investment in Dakota was assigned a fair value of $5.5 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, 2004, 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 accrued interest. Under the terms of the early repayment, the Fund returned its 2,229,955 Series C warrants for no consideration.

      As of July 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 July 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.

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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 July 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 July 31, 2005, the Fund’s investment in Foliofnconsisted 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 shares of Common Stock at a cost of $10,714.28 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.

      On July 29, 2005, the Fund made a $325,000 follow-on investment in Impact in the form of a secured promissory note which bears interest at LIBOR plus 4%. The promissory note has a three year term. The note has a $325,000 principal face amount and was issued at a cost basis of $325,000. The note’s cost basis was then discounted to reflect loan origination fees received.

      At July 31, 2005, the Fund’s investment in Impact consisted of 252 shares of Common Stock at a cost of $10,714.28 per share or $2.7 million and the loan to Impact with an outstanding balance of $5.17 million. The cost basis of this loan at July 31, 2005 was approximately $5.07 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 “payment in kind” interest.

      At July 31, 2005, the equity investment, loan and secured promissory note were assigned fair values of $2.7 million, $5.17 million and $325,000 respectively.

      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 nine month period ended July 31, 2005, Integral made scheduled principal repayments totaling $1,262,502.

      At July 31, 2005, the Fund’s investment in Integral consisted of an outstanding balance on the loan of $1.54 million with a cost of $1.54 million. The investment has been assigned a fair value of $1.54 million.

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JDC Lighting, LLC

      JDC Lighting, LLC (“JDC”), New York, New York, is 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 loan 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 July 31, 2005, the loan had an outstanding balance of $3.06 million with a cost of $2.99 million. The loan was assigned a fair value of $3.06 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 “payment in kind” interest.

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 July 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 information companies. Mainstream Data networks deliver text news, streaming stock quotations, and digital images to subscribers around the world.

      At October 31, 2004 and July 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 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 nine month period ended July 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 were approximately $8.3 million. The Fund realized a gain on the shares sold of approximately $4.8 million.

      During the nine month period ended July 31, 2005, the Fund recorded approximately $184,000 from the multi-year-earn-out related to the sale of 0-In.

      At July 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 they were unable to determine how many shares, if any, the Fund would receive from the escrow and the market value of the shares received. Please see “Subsequent Events” for more information.

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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%. 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 “payment 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 July 31, 2005, the loan had an outstanding balance of $5.12 million with a cost of $4.52 million. The loan was carried at a fair value of $4.63 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 “payment in kind” interest.

      On April 5, 2005, Octagon drew $1.5 million from the credit facility provided to it by the Fund. As of July 31, 2005, the $1.5 million in borrowings had been repaid in full along with all accrued interest.

      Effective April 29, 2005, the Valuation Committee determined to increase the fair value of the Fund’s equity investment in and detachable warrants of Octagon by $503,181 and $519,457 respectively. The cost basis and fair value of the equity investment was also increased by approximately $142,000 to account for the Fund’s allocated portion of the flow-through income, from its membership interest in Octagon, which was not distributed to members. This flow-through income is recorded by the Fund as “other income”.

      At July 31, 2005, the equity investment and detachable warrants had a cost basis of $702,141 and $550,000 respectively. The equity investment and detachable warrants were assigned a fair value of $1,205,322 and $1,069,457, respectively.

Ohio Medical Corporation

      Ohio Medical Corporation (“Ohio”), Gurnee, Illinois, is a manufacturer and supplier of suction and oxygen therapy products, as well as medical gas equipment.

      On July 1, 2005, the Fund invested $17 million and sponsored the acquisition of General Electric’s Ohmeda Brand Suction and Oxygen Therapy business unit (“GE-SOT”), a leading global supplier of suction and oxygen therapy products. On July 14, 2005, in conjunction with this transaction, the Fund acquired GE-SOT’s largest supplier, Squire Cogswell/ Aeros Instruments, Inc. and merged both businesses creating Ohio Medical Corporation.

      The Fund’s investment in Ohio consists of a 5,520 shares of common stock with a cost basis of $17 million.

      As of July 31, 2005, the investment has been assigned a fair value of $17 million.

      Michael Tokarz, Chairman of the Fund, Dave Hadani and Peter Seidenberg, employees of the Fund, serve as directors of Ohio.

Phosistor Technologies, Inc.

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

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      Phosistor ceased operations in 2003.

      At October 31, 2004, 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.

      During the nine month period ended July 30, 2005, Phosistor was determined to no longer be an active company in its state of incorporation (Delaware). Subsequent to this action, the Fund removed the investment from its books.

      As a result, a realized loss of approximately $1.0 million was recognized which was offset by a reduction in unrealized loss by the same $1.0 million. Therefore, the net effect of the cancellation of the preferred stock on the Fund was zero. At July 31, 2005, the Fund no longer held any investment in Phosistor.

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 July 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.

      Bruce Shewmaker, an officer 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 July 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.

SGDA Sanierungsgesellschaft fur Deponien und Altasten mbH

      SGDA Sanierungsgesellschaft fur Deponien und Altasten mbH (“SGDA”), Zella-Mehlis, Germany, is a company that is in the business of landfill remediation and revitalization of contaminated soil.

      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 term loan 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 25, 2006. As of July 31, 2005, SGDA had drawn $684,700 upon this facility.

      At July 31, 2005, the term loan had an outstanding balance of $4.58 million with a cost of $4.29 million. The term loan was carried at a fair value of $4.29 million. The increase in the cost and fair value of the loan is due to the accretion of the market discount of the term loan. The ownership interest in SGDA has been assigned a fair value of $315,000 which is its cost basis.

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.

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      At October 31, 2004 and July 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 July 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.

SP Industries, Inc.

      SP Industries, Inc. (“SP”), Warminster, Pennsylvania, is a designer, manufacturer, and marketer of laboratory research and process equipment, glassware and precision glass components, and configured-to-order manufacturing equipment.

      The Fund’s investment in SP consists of a $6.5 million mezzanine loan and a $4.0 million term loan. The mezzanine loan bears interest at 17% over a seven year term. The mezzanine loan has a $6.5 million principal face amount and was issued at a cost basis of $6.5 million. The mezzanine loan’s cost basis was discounted to reflect loan origination fees received. The term loan bears interest at LIBOR plus 10% over a five year term. The term loan has a $4.0 million principal face amount and was issued at a cost basis of $4.0 million. The term loan’s cost basis was discounted to reflect loan origination fees received by the Fund.

      At July 31, 2005, the mezzanine loan and the term loan had outstanding balances of $6.57 million and $4.01 million respectively with cost basis of $6.32 million and $3.93 million respectively. The mezzanine loan and term loan were assigned fair values of $6.57 million and $4.01 million respectively. 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 “payment in kind” interest.

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, the Fund’s investment in Sygate consisted of 9,756,098 shares of Series D Preferred Stock with a cost of $4.0 million and was assigned a fair value of $5.5 million.

      Effective July 29, 2005, the Valuation Committee increased the fair value of the Fund’s equity investment in Sygate by $4.2 million from $5.5 million to $9.7 million.

      At July 31, 2005, the Fund’s investment in Sygate has been assigned fair value of $9.7 million. Please see “Subsequent Events” for more information.

Timberland Machines & Irrigation, Inc.

      Timberland Machines & Irrigation, Inc. (“Timberland”), Enfield, Connecticut, 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.

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      Timberland 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 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 nine month period ended July 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 from January 31, 2005.

      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 “payment 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 nine month period ended July 31, 2005, Timberland borrowed $1.25 million from the Fund using the Subordinated Bridge Note mentioned above. The cost basis of the note 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. On July 8, 2005, the Fund extended Timberland a $3.25 million junior revolving note. According to the terms of the note, Timberland immediately drew $1.3 million from the note and used the proceeds to repay the subordinated bridge notes in full. The repayment included all outstanding principal and accrued interest. On July 14, 2005, Timberland drew an additional $1.5 million from the revolving note mentioned above. As of July 31, 2005, the total amount outstanding on the note was approximately $2.8 million.

      At July 31, 2005, the Fund’s mezzanine loan had an outstanding balance of $6.25 million with a cost of $6.16 million. The mezzanine loan was assigned a fair value of $6.25 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 “payment 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, 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. 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.

      Effective April 29, 2005, the Valuation Committee determined to increase the fair value of the Series A Preferred Stock by, approximately $866,000 from $1.134 million to $2.0 million.

      Effective July 29, 2005, the Valuation Committee determined to increase the fair value of the Series A Preferred Stock by $700,000 from $2.0 million to $2.7 million.

      At July 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 total cost of $6.6 million. The investments were assigned a fair value of $2.7 million, $0 per share for the Common Stock and approximately $0.42 per share for the Series A Preferred Stock.

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      Bruce Shewmaker, an officer of the Fund, has been nominated to serve 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 initial 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, the Fund’s investment in Vestal had a cost and fair value of $1,450,000.

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

      On April 15, 2005, the Fund re-issued 146,750 shares of MVC Capital’s treasury stock at the Fund’s net asset value per share of $9.54 in exchange for 40,500 shares of common stock of Vestal.

      On May 10, 2005, Vestal prepaid $100,000 against its senior subordinated promissory note. After this payment, the amount outstanding on the note was $900,000.

      At July 31, 2005, the Senior Subordinated Promissory Note had an outstanding balance, cost, and fair value of $900,000. The 81,000 shares of common stock of Vestal that had a cost basis of $1.85 million were assigned a fair value of $2.8 million.

      Dave Hadani and Ben Harris, employees 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 million and 1,000,000 shares of Series A Convertible Preferred Stock at a cost of $10.00 per share or $10 million. 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 million.

      At July 31, 2005, the investment in Vitality consisted of 500,000 shares of Common Stock at a cost of $5 million and 1,000,000 shares of Series A Convertible Preferred Stock at a cost of $10.39 million. The increase in the cost and fair value of the Series A Convertible Preferred Stock is due to the capitalization of “payment in kind” dividends. The Common Stock, Series A Convertible Preferred Stock and warrants were assigned fair values of $5 million, $10.39 million and $0, respectively.

      Dave Hadani, an employee of the Fund, serves 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.

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      At October 31, 2004 and July 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 July 31, 2005, the Fund had investments in equities totaling $73.0 million and investments in debt instruments totaling $57.0 million. Also, at July 31, 2005, the Fund had investments in short-term securities totaling approximately $37.4 million and investments in cash equivalents totaling approximately $39.4 million. The Fund considers all money market and other 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 nine months ended July 31, 2005, the Fund made six new investments, committing capital totaling approximately $48.8 million. The investments were made in JDC, SGDA, SP, BP, Ohio and Amersham. The amounts invested were $3.0 million, $5.8 million, $10.5 million, $10 million, $17 million and $2.5 million respectively.

      The Fund also made three follow-on investments in existing portfolio companies totaling approximately $5.0 million. In December 2004 and January 2005, the Fund invested a total of $1.25 million in Timberland in the form of subordinated bridge notes. On April 15, 2005, the Fund re-issued 146,750 shares of its treasury stock at the Fund’s net asset value per share of $9.54 in exchange for 40,500 shares of common stock of Vestal. On July 8, 2005 the Fund extended Timberland a $3.25 million junior revolving note. According to the terms of the note, Timberland immediately drew $1.3 million from the revolving note and used the proceeds to repay the subordinated bridge notes in full. The repayment included all outstanding principal and accrued interest. On July 29, 2005, the Fund invested an additional $325,000 in Impact in the form of a secured promissory 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 in excess 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 $402,000.

      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:

      On May 7, 2004, the Fund entered into a $5,000,000 senior secured credit facility with Octagon. This credit facility expires on May 6, 2007 and can be automatically extended until May 6, 2009. The credit facility bears interest at LIBOR plus 4%. 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 April 5, 2005, Octagon drew $1.5 million from the credit facility and repaid it in full on June 15, 2005. As of July 31, 2005, no outstanding borrowings remained.

      On October 28, 2004, the Fund entered into a one-year, cash collateralized, $20,000,000 revolving credit facility with LaSalle Bank National Association. 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. On July 20, 2005, the Fund amended its revolving credit facility agreement with the Bank. The maximum aggregate loan amount under the Agreement was increased from $20,000,000 to $30,000,000.

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Additionally, the maturity date was extended from October 31, 2005 to August 31, 2006. All other material terms of the Agreement remained unchanged. On July 28, 2005, the Fund borrowed $14,000,000 under the Credit Facility. 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.

      On February 16, 2005, the Fund entered into a sublease for a larger space in the building in which the Fund’s current executive offices are located. The sublease is scheduled to expire on February 28, 2007. Future payments under the Sublease total approximately $55,000 in fiscal year 2005, $223,000 in fiscal year 2006 and $75,000 in fiscal year 2007. The Fund’s previous lease was terminated effective March 1, 2005, without penalty. The building in which the Fund’s executive offices are located, 287 Bowman Avenue, is owned by Phoenix Capital Partners, LLC, an entity which is 97% owned by Mr. Tokarz. See Note 7 for more information on Mr. Tokarz.

      During February 2005, the Fund made available to SGDA, a $1,308,300 revolving credit facility that bears interest at 7%. The credit facility expires on August 25, 2006. During April and May 2005, SGDA drew$684,700 from the credit facility provided to it by the Fund. As of July 31, 2005, the $684,700 in borrowings remained outstanding.

      On July 8, 2005 the Fund extended Timberland a $3.25 million junior revolving note that bears interest at 12.5% and expires on July 7, 2007. The Fund also receives a fee of 0.25% on the unused portion of the note. According to the terms of the note, Timberland immediately drew $1.3 million from the revolving note and used the proceeds to repay their subordinated bridge notes, held by the Fund, in full. The repayment included all outstanding principal and accrued interest. On July 14, 2005, Timberland drew an additional $1.5 million from the revolving note. As of July 31, 2005, the total amount outstanding on the note was approximately $2.8 million.

      Timberland also 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 limited co-guarantor for up to $500,000 on this repurchase commitment.

      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.

Subsequent Events

      The $14 million borrowed under the Credit Facility provided by LaSalle was repaid in full by August 8, 2005.

      On August 16, 2005, Sygate and Symantec Corporation (“Symantec”) entered into a definitive acquisition agreement pursuant to which Sygate would be acquired, for cash, by Symantec. As a result of the acquisition, the Fund expects to receive gross proceeds of $16 million in cash of which $1.6 million or 10% will be deposited in an escrow account for approximately one year. Accordingly, the Valuation Committee increased the fair value of its investment in Sygate by $3.3 million or 90% of the gross proceeds expected to be received by the Fund (excluding any amount deposited in escrow). Due to the contingencies associated with the escrow, the Fund did not place any value on the proceeds deposited in escrow and therefore did not factor such proceeds into the Fund’s NAV. The remaining 10% of the gross proceeds to be received is expected to be added to the Fund’s NAV upon the closing of the acquisition.

      On September 6, 2005, all 82,283 common shares of Mentor Graphics held in escrow were released. As of September 7, 2005, the market value of these freely-tradable shares was $698,583.

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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 the Fund’s investment team to obtain appropriate information in connection with our investment decisions.

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 July 31, 2005, approximately 62.3% 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.”

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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

45

	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.

46

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

47

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.

Part II.     Other Information

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

      We intend to use the net proceeds from selling securities pursuant to our registration statement filed on Form N-2 effective August 29, 2005, for general corporate purposes, which includes investing in portfolio companies in accordance with our investment objective and strategies and, pending such investments, investing all or a portion of such net proceeds in short term, highly liquid investments or holding such net proceeds in cash or cash equivalents. Supplements to the registration statement that relate to an offering will more fully identify the use of the proceeds from such offering.

48

      We anticipate that substantially all of the net proceeds of an offering of securities will be used for the above purposes within two years, depending on the availability of appropriate investment opportunities consistent with our investment objective and market conditions.

      Our portfolio currently consists of common and preferred stock and warrants or rights to acquire equity interests, senior and subordinated loans, or convertible securities.

Item 6.     Exhibits

      (a) Exhibits

Exhibit No.		Exhibit
	31	Rule 13a-14(a) Certifications.
	32	Section 1350 Certification.

      Other required Exhibits are included in this Form 10-Q or have been previously filed with the Securities and Exchange Commission (the “SEC”) in the Fund’s Registration Statements on Form N-2 (Reg. Nos. 333-119625 and 333-125953) or the Fund’s Annual Report on Form 10-K for the year ended October 31, 2004, as filed with the Securities and Exchange Commission (the “SEC”) on January 14, 2005 (File No. 814-00201).

49

      Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed by the undersigned, thereunto duly authorized.

MVC Capital, Inc.

/s/ Michael Tokarz

Michael Tokarz

In the capacity of the officer who performs the functions of Principal Executive Officer.

Date: 9/8/2005

MVC Capital, Inc.

/s/ Frances Spark

Frances Spark

In the capacity of the officer who performs the functions of Principal Financial Officer.

Date: 9/8/2005

50 EX-31 2 c98286exv31.htm CERTIFICATION OF CEO AND CFO

EXHIBIT 31

RULE 13a-14(a) CERTIFICATIONS

I, Michael Tokarz, certify that:

      1. I have reviewed this Quarterly report on Form 10-Q of MVC Capital, Inc.;

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

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

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

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

      b) omitted

      c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

      d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal Period that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financing reporting; and

      5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors:

      a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

      b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Michael Tokarz

Michael Tokarz

In the capacity of the officer who performs the
functions of Principal Executive Officer of
MVC Capital, Inc.

Dated: 9/8/2005

51

I, Frances Spark, certify that:

      1. I have reviewed this Quarterly report on Form 10-Q of MVC Capital, Inc.;

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

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

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

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

      b) omitted

      c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

      d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal Period that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financing reporting; and

      5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):

      a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

      b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Frances Spark

Frances Spark

In the capacity of the officer who performs the
functions of Principal Financial Officer of
MVC Capital, Inc.

Dated: 9/8/2005

52 EX-32 3 c98286exv32.htm CERTIFICATION OF CEO AND CFO

EXHIBIT 32

CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

      Michael Tokarz, in the capacity of the officer who performs the functions of Principal Executive Officer of MVC Capital, Inc., a Delaware corporation (the “Registrant”), certifies that:

      1. The Registrant’s Quarterly report on Form 10-Q for the period ended July 31, 2005 (the “Form 10-Q”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

      2. The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

In the capacity of the officer who performs the functions of Principal Executive Officer for MVC Capital, Inc.

/s/ Michael Tokarz

Michael Tokarz

Date: 9/8/2005

      Frances Spark, in the capacity of the officer who performs the functions of Principal Financial Officer, of MVC Capital, Inc., a Delaware corporation (the “Registrant”), certifies that:

      1. The Registrant’s Quarterly report on Form 10-Q for the period ended July 31, 2005 (the “Form 10-Q”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

      2. The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

In the capacity of the officer who performs the functions of Principal Financial Officer for MVC Capital, Inc.

/s/ Frances Spark

Frances Spark

Date: 9/8/2005

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