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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2002

OR

For the transition period from                      to                     

Commission file number 000-21593

Western Pennsylvania Adventure Capital Fund, LLC

(Exact Name of Registrant as Specified in its Charter)

Registrant’s Telephone Number, Including Area Code (412) 279-1760

Securities Registered Pursuant to Section 12 (b) of the Act:

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  x  No  ¨             

Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

State the aggregate market value of the voting units held by nonaffiliates of the registrant at February 14, 2003: $3,209,381

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Documents Incorporated by Reference:

None

Western Pennsylvania Adventure Capital Fund, LLC

Table of Contents

2

PART 1

Item 1. Business

Western Pennsylvania Adventure Capital Fund, LLC (the “Registrant”) was incorporated in Pennsylvania on May 23, 1996 as Western Pennsylvania Adventure Capital Fund (a C Corporation). As of February 28, 2002, the Western Pennsylvania Adventure Capital Fund (a C Corporation) was merged into its wholly owned and heretofore inactive subsidiary, the Western Pennsylvania Adventure Capital Fund, LLC (an LLC organization). The Western Pennsylvania Adventure Capital Fund, LLC has continued all of the operations of the Western Pennsylvania Adventure Capital Fund (a C Corporation). The Registrant did not begin its primary business activities until November 17, 1997, at which time the Registrant made its first investment in an early stage development company in western Pennsylvania.

During 1997, the Registrant concluded an offering of its common stock, par value $0.01 (the “Common Stock”) under Regulation E of the Securities Act of 1933 (the “First Offering”). On September 10, 1999, the Registrant initiated a second offering of its Common Stock under Regulation E of the Securities Act of 1933 (the “Second Offering”). This Second Offering concluded January 31, 2000. On July 14, 2000, the Registrant initiated a third offering of its Common Stock under Regulation E of the Securities Act of 1933 (the “Third Offering”). This Third Offering has been extended through the earlier of March 31, 2001 or the sale of 875,000 shares of Common Stock. The Registrant intends to invest the net proceeds of the offerings primarily in the equity and/or debt securities (the “Portfolio Securities”) of development stage companies located in western Pennsylvania (the “Portfolio Companies”). The Registrant is seeking to identify companies with annual sales of less than $1 million which, in the opinion of management, have the potential within five years to achieve annual sales of at least $5 million and an internal rate of return on invested capital in excess of 30%. However, the Registrant may invest in Portfolio Companies which have higher initial sales or which do not meet these specified financial targets if management of the Registrant otherwise believes that the investment offers the potential for long-term capital appreciation. The Registrant does not have a policy of investing any specified percentage of its assets in debt or equity securities, and may invest 100% of its assets in either type of security.

The Registrant generally invests from $50,000 to $300,000 per Portfolio Company, but is not prohibited from making larger or smaller investments if management of the Registrant believes that it is in the interest of the Registrant to do so. For instance, the Registrant may make an initial investment within the above range and later find it necessary to make a “follow-on” investment if management determines that additional financing is required to enable a particular Portfolio Company to continue its operations or to complete an important contract or research and development project or other ongoing activity. Accordingly, although it is a policy of the Registrant to seek to diversify its investments (as to Portfolio Companies as well as types of industries), the Registrant is not prohibited from investing more than 10% of its funds available for investment in the Portfolio Securities of a single issuer or in Portfolio Companies engaged in a single industry. In certain circumstances, the Registrant may invest in particular Portfolio Companies on an installment, phase-in or staged basis with subsequent installments conditioned upon the Portfolio Company achieving specified performance milestones.

The Registrant has no policy with respect to concentrating in a particular industry or group of industries nor with respect to investing in a company with any particular investing partner. The Registrant intends to invest all or substantially all of its available assets (except assets invested in short-term obligations) in companies which are headquartered or conduct significant operations in western Pennsylvania. Furthermore, except for short-term investments, the Registrant intends initially to invest only in Portfolio Companies which constitute “eligible portfolio companies” within the meaning of such term under the Investment Company Act of 1940, as amended (the “1940 Act”). Generally, “eligible portfolio companies” are companies the securities of which are not publicly-traded. However, the Registrant shall be permitted to make additional investments (including “follow-on” investments) of up to 30% of its assets in the Portfolio Securities of companies which are not “eligible portfolio companies” so long as they were “eligible portfolio companies” when the Registrant originally invested in them. Such investments may be made through the exercise of warrants, the conversion of convertible debt securities, the purchase of debt or equity securities from the issuer or any holder of such securities or in any other manner permitted under the applicable provisions of the 1940 Act and the investments policies of the Registrant.

3

Item 2. Properties

The Registrant does not own any properties.

Item 3. Legal Proceedings

There are no legal proceedings to which the Registrant is a party.

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

The Registrant held an annual meeting of security holders on October 30, 2002. Proxies for the meeting were solicited pursuant to Regulation 14A under The Securities Exchange Act of 1934. The following matters were voted on at that meeting.

For 2,737,713 units, Against 0 units, Withheld 0 units.

4

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

The Registrant’s Units are not traded on any national or regional securities exchange, and the Registrant has no intention of causing the units to be qualified for listing on the NASDAQ National Market or Small Cap systems. The Registrant is aware of the following trades in its Common Stock from May 23, 1996 (date of inception) through February 14, 2003 as follows:

As of February 14, 2003, the Registrant had approximately 190 unitholders.

No dividends have been declared on the Registrant’s Common Units. Management does not have as a policy the regular payment of dividends to investors. Generally, Management may reinvest interest, dividends or other distributions received from Portfolio Companies and any proceeds realized from the sale of Portfolio Securities in other Portfolio Companies. Management may distribute a portion of these cash receipts to unitholders to help cover the unitholders’ personal income tax liabilities resulting from any allocation of income due to the Registrant’s status as a LLC organization. There are no dividend restrictions.

Item 6. Selected Financial Data

The Registrant was incorporated on May 23, 1996, and began active business operations in November, 1997.

5

6

WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND, LLC

SELECTED QUARTERLY FINANCIAL DATA

(Unaudited)

May 23, 1996

(Date of Inception)

Through

December 31, 1996

7

WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND, LLC

SELECTED QUARTERLY FINANCIAL DATA

(Unaudited)

8

WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND, LLC

SELECTED QUARTERLY FINANCIAL DATA

(Unaudited)

9

WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND

SELECTED QUARTERLY FINANCIAL DATA

(Unaudited)

10

WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND, LLC

SELECTED QUARTERLY FINANCIAL DATA

(Unaudited)

11

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

The Registrant was incorporated on May 23, 1996. The Registrant began, in late 1996, soliciting subscriptions for the purchase of a minimum of 1,000,000 shares and a maximum of 5,000,000 shares of its Common Stock through an Offering Circular dated November 7, 1996 under Regulation E of the Securities Act of 1933 (the “First Offering”). Under the terms of the First Offering, shares were being offered at $1.00 per share, with a minimum purchase of 10,000 shares per investor, subject to the discretion of the Registrant to accept subscriptions for fewer shares. The shares were being offered directly by the Registrant. There were no brokers, placement agents or other persons who received commissions or placement fees from the sale of shares under the First Offering.

During 1997, the Registrant sold 2,104,333 shares of its Common Stock under the First Offering, closed the First Offering, and began the process of identifying and evaluating prospective Portfolio Companies. Most of 1997 was devoted to soliciting subscriptions under the Offering, start up activities, and organizational matters. The Registrant made its initial investment in a Portfolio Company in November, 1997. Through December 31, 1998, the Registrant had invested in eight Portfolio Companies.

During 1999, the Registrant began soliciting subscriptions for the purchase of a maximum of 2,750,000 shares ($3,987,500) of its Common Stock under an Offering circular dated September 10, 1999 (the “Second Offering”). Under the terms of the Second Offering, shares were being offered at $1.45 per share, with a minimum purchase of 10,000 shares per investor, subject to the discretion of the Registrant to accept subscriptions for fewer shares. The shares were being offered directly by the Registrant. There were no brokers, placement agents or other persons who received commissions or placement fees from the sale of shares under the Second Offering.

The Fund concluded the sale of shares of its Common Stock under the Second Offering on January 31, 2000. During the course of this Second Offering, the Fund accepted subscriptions to purchase 2,057,787 shares ($2,983,792) of which 1,426,237 shares ($2,068,045) were received subsequent to December 31, 1999.

The Fund began offering for sale up to 875,000 shares of its Common Stock at $1.60 per share, or a maximum of $1,400,000, under an Offering Circular dated July 14, 2000 (“Third Offering Circular”). As of December 31, 2000, the Fund had received subscriptions to purchase 40,000 shares ($64,000). The Fund sold 62,750 shares of its Common Stock at $1.60 per share under the Third Offering Circular, and closed the Third Offering as of March 31, 2001.

Revenues in 2002 consisted of interest earned of $25,737 offset by net realized losses on dispositions of Portfolio Companies of $70,323 resulting in net revenues of $(44,586). The net realized losses consisted of a loss on the sale by Personity, Inc., of substantially all of its intellectual property, of $76,690, and a gain of $6,367 upon distribution of funds from escrow resulting from the acquisition of Applied Electro-Optics Corporation by AcceLight Networks, Inc. Both Personity, Inc. and Applied Electro-Optics Corporation were Portfolio Companies. The decrease in interest income in 2002 compared with 2001 was due to a deduction in the amount of temporary investments.

Revenues in 2001 amounted to $202,911 and consisted of interest earned on temporary investments of $53,335, interest earned on Portfolio Companies convertible debt of $18,423, management fees of $6,250 and net realized gains on sales of portfolio securities of $124,903. The net realized gains on sales of portfolio securities in 2001 consisted of a gain on sale of Medtrex Incorporated of $189,195 partially offset by a loss on sale of Laminar Software, Inc. of $64,292. Interest earned on temporary investments decreased in 2001 compared to 2000 due to a reduction in the amount of temporary investments. This reduction resulted from additional investments in Portfolio Securities.

Revenues in 2000 amounted to $274,234 and consisted of interest earned on temporary investments of $140,968, interest earned on Portfolio Companies convertible debt of $26,139, management fees of $25,000 and realized gains on sale of portfolio securities of $82,127. The decrease in management fees in 2001 resulted from the cancellation of the Registrant’s co-investment agreement with the Urban Redevelopment Authority of Pittsburgh. Management fees in 2000 included a full year’s fees. The realized gain in 2000 resulted from receipt of the first portion of proceeds form the sale of Medtrex Incorporated.

12

General and Administrative expenses in 2002, 2001 and 2000 amounted to $18,000, and consisted of directors fees.

Other operating Expenses in 2002 included professional fees (legal and accounting) of $60,839, insurance premiums of $28,338, income tax expense of $41,600, and other items of $57,161, primarily administrative and clerical support. The income tax expense in 2002 resulted primarily from the partial reversal of the deferred tax asset recorded at December 31, 2001, as a consequence of the Registrant’s becoming an LLC organization as of February 28, 2002. Other Operating Expenses in 2001 included professional fees (legal and accounting) of $110,325, insurance premiums of $23,742, and other items of $45,190, primarily administrative and clerical support. Other Operating Expenses in 2001 amounted to $179,257 compared with $202,375 in 2000. Other Operating Expenses in 2000 included professional fees (legal and accounting) of $77,634, advisory board fees of $52,096, insurance premiums of $20,490, and other items of $52,155, primarily administrative and clerical support. The increase in professional fees in 2001 compared with 2002 and 2000 resulted from additional work required in connection with the formation of a new wholly owned subsidiary and the merger of the Registrant with its wholly owned subsidiary. The elimination of investment advisory fees after 2000 resulted from the Registrant’s Board of Directors assuming full responsibility for these activities. The increase in other items in 2002 is partially due to the inclusion of Franchise Tax expense that previously had been included in Income Tax Expense. This change reflects the Registrants status as an LLC organization, effective as of February 28, 2002.

Income Tax Expense (Benefit) for 2002, 2001 and 2000 of $0, $(335,947) and $256,967, respectively, represent Federal and Pennsylvania income taxes on the Registrant’s pretax income (loss). The income tax benefit in 2001 resulted primarily from the reversal of previously recognized taxes on unrealized appreciation on portfolio securities due to the recognition of unrealized depreciation on portfolio securities.

During 2000, the Registrant recognized unrealized appreciation of $538,394 on Portfolio Securities based upon subsequent financing rounds by several Portfolio Companies at significantly higher valuations than the related carrying values of those investments. During 2002 and 2001, the Registrant recognized unrealized depreciation of $379,559 and $1,885,981, respectively, on Portfolio Securities based upon subsequent financing rounds by several Portfolio Companies at significantly lower valuations than the related carrying values of those investments and generally unfavorable economic conditions within certain industries within which the Registrant’s Portfolio Companies operate.

During 1997, the Registrant sold $2,104,333 of its Common Stock under the First Offering, and closed the First Offering. The Registrant closed the escrow account which had been used to accumulate the funds. A portion of these funds was disbursed to pay accumulated obligations whose payment was deferred until funds were withdrawn from escrow. During the year ending December 31, 1999, the Registrant sold $915,747 of its Common Stock under the Second Offering. The Second Offering closed January 31, 2000. The Registrant sold $2,983,792 of its Common Stock under the Second Offering. During the year ending December 31, 2000, the Registrant sold $64,000 of its Common Stock under the Third Offering. The Third Offering was extended through the earlier of March 31, 2001 or the date the Third Offering was fully subscribed. The Registrant sold $100,400 of its Common Stock under the Third Offering and closed the Third Offering on March 31, 2001. The balance of the funds from these offerings has been temporarily invested, pending investment in Portfolio Securities, in cash equivalents, government securities, and high quality debt securities. At December 31, 2002, the Registrant has invested $4,416,684 in twenty-five Portfolio Companies.

As of December 31, 2002, the Registrant had approximately $316,897 in cash and cash equivalents, and short term investments. Those funds were available, except for a relatively small amount for normal operating expenses, for investment in Portfolio Companies.

13

Financial Condition, Liquidity and Capital Resources

The Registrant, through its sale of its Common Stock, raised $2,104,333 under the First Offering, $2,983,792 under the Second Offering, and $100,400 under the Third Offering. Most of this amount, except for normal operating expenses, is available for investment in Portfolio Securities. At December 31, 2002, $4,416,684 had been invested in twenty-five Portfolio Companies. The balance of the funds has been temporarily invested in short-term high quality commercial paper and government securities. These funds are available for future investments in Portfolio Companies.

Inflation

The Registrant does not believe that inflation will have any significant effect on the Registrant’s operations or financial position.

14

Item 8. Financial Statements and Supplementary Data

Index to Financial Statements and Supplementary Financial Data

15

INDEPENDENT AUDITOR’S REPORT

To the Board of Directors and Shareholders

of the Western Pennsylvania Adventure Capital Fund, LLC

We have audited the accompanying statements of assets and liabilities of the Western Pennsylvania Adventure Capital Fund, LLC (a Pennsylvania corporation) as of December 31, 2002 and 2001, and the related statements of operations, changes in net assets, and cash flows for the years ended December 31, 2002, 2001, and 2000. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Western Pennsylvania Adventure Capital Fund, LLC as of December 31, 2002 and 2001, and the results of its operations, the changes in its net assets, and its cash flows for the years ended December 31, 2002, 2001, and 2000, in conformity with U.S. generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedule listed under item 14(a)(2) is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

Goff Backa Alfera & Company, LLC

Pittsburgh, Pennsylvania

February 14, 2003

16

Western Pennsylvania Adventure Capital Fund, LLC

Statements of Assets and Liabilities

As of

See Independent Auditor’s Report and accompanying notes to financial statements.

17

Western Pennsylvania Adventure Capital Fund, LLC

Statements of Operations

For the Periods

See Independent Auditor’s Report and accompanying notes to financial statements.

18

Western Pennsylvania Adventure Capital Fund, LLC

Statements of Changes in Net Assets

For the Periods

See Independent Auditor’s Report and accompanying notes to financial statements.

19

Western Pennsylvania Adventure Capital Fund, LLC

Statements of Cash Flows

For the Periods

See Independent Auditor’s Report and accompanying notes to financial statements.

20

Western Pennsylvania Adventure Capital Fund, LLC

Notes to Financial Statements

December 31, 2002

Note 1—Summary of Significant Accounting Policies:

This summary of significant accounting policies of Western Pennsylvania Adventure Capital Fund, LLC and its predecessor organization, the Western Pennsylvania Adventure Capital Fund, a C Corporation (collectively and/or individually the “Fund”) is presented to assist in understanding the Fund’s financial statements. These accounting policies conform with U.S. generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.

Nature of Operations

The Fund was incorporated on May 23, 1996, and began its primary business activities in November, 1997. The Fund has been formed to become a Business Development Company (“BDC”) and to be subject to the applicable provisions of the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund invests primarily in the equity and/or debt securities of development stage companies located in western Pennsylvania. The Fund seeks to make its investments in conjunction with a consortium of investment partners such as individual investors, other venture capital firms, private non-profit or for-profit companies or foundations, and federal, state or local public, quasi-public or publicly-supported economic development organizations, agencies or authorities which provide investment capital or low interest or other financing for economic development.

The Fund’s Board of Directors, which is elected by the members (previously by the shareholders) annually, has responsibility for management of the Fund, including authority to select portfolio securities for investment by the Fund. The Board is advised by the officers of the Fund and, through December 31, 1998, had been advised by The Enterprise Corporation of Pittsburgh (“Enterprise”), which served as the Fund’s investment advisor. Enterprise screened potential Portfolio Companies and presented them to the Fund’s Board for investment consideration, conducted due diligence reviews of investment candidates and managed the day-to-day operations of the Fund including, portfolio management, preparing reports to shareholders and performing administrative services. The recommendations of Enterprise as to investments were advisory only and were not binding on the Fund or its Board of Directors. Enterprise was a private, non-profit consulting firm founded in 1983 for the purpose of assisting entrepreneurs in developing new businesses in western Pennsylvania. As of December 31, 1998, Enterprise ceased operations and is no longer serving as the Fund’s investment advisor. The Fund’s Board of Directors now performs these activities.

Enterprise received a fee equal to 5% of the aggregate amount of assets invested by the Fund in portfolio securities for providing investment advisory and administrative services to the Fund. Enterprise may also have received compensation from investment partners or members of any investment consortium that invested with the Fund in portfolio securities, all on such basis as such other parties and Enterprise may have agreed.

Basis of Presentation—Net Assets

During 1996, the Fund began offering a total of 5,000,000 shares of its common stock, par value $.01, at a price of $1.00 per share under Regulation E of the Securities Act of 1933 (the “First Offering”). In connection with its services in organizing the formation and development of the Fund, Enterprise purchased 250,000 shares of common stock for $.01 per share, which represented 4.8% of the total potential outstanding shares of the Fund. The shares purchased by Enterprise represented founder’s shares. If less than 5,000,000 shares were sold in the First Offering, the Fund had the right to repurchase from Enterprise for $.01 per share such number of shares as would result in Enterprise’s ownership percentage in the Fund immediately following the First Offering being 4.8%.

21

During 1997, the Fund sold 2,104,333 shares of its common stock and closed the First Offering. As of December 31, 1997, the Fund repurchased 143,899 shares of its common stock from Enterprise, thereby reducing Enterprise’s ownership to 106,101 shares, which represented 4.8% of the then total shares issued and outstanding (2,210,434 shares). The repurchased shares are presented as Treasury Stock, at cost, at December 31, 2000 and December 31, 1999.

On September 10, 1999, the Fund began offering a total of 2,750,000 shares of its common stock, par value $.01, at a price of $1.45 per share under Regulation E of the Securities Act of 1933 (the “Second Offering”). The Second Offering was extended through January 31, 2000. The Fund sold 2,057,787 shares of its common stock and closed the Second Offering.

On July 14, 2000, the Fund began offering a total of 875,000 shares of its common stock, par value $0.01 at a price of $1.60 per share under Regulation E of the Securities Act of 1933 (the “Third Offering”). The Third Offering was extended through the earlier of March 31, 2001 or the date the Third Offering was fully subscribed. As of March 31, 2001, the Fund sold 62,750 shares of its common stock under the Third Offering and closed the Third Offering.

Syndication Costs

Legal, accounting and other costs of $149,220 incurred in connection with the Fund’s First Offering, Second Offering and Third Offering have been capitalized and reported as a permanent reduction of net assets in accordance with U.S. generally accepted accounting principles by year as follows:

Cash and Cash Equivalents

Cash and Cash Equivalents consist of cash in checking accounts and high quality money market instruments having or deemed to have remaining maturities of thirteen months or less.

Short Term Investments

The Fund’s short term investments consist of high quality commercial paper and U.S. Government securities. These investments generally are purchased at a discount from face value and are redeemed at maturity at face value. The difference represents interest income which will accrue over the period from date of acquisition to date of maturity. The Fund uses the effective yield to maturity method to recognize the accretion of interest income over the life of each individual short term investment. This method produces a rate of return which is constant over the period from acquisition to maturity. Using this method, the interest income recognized on each individual investment will increase over time as the carrying value of that investment increases. The Fund records these investments net of remaining unearned interest income.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” the Fund has classified all short term investments as held-to-maturity (“HTM”) as of December 31, 2002 and 2001.

22

Investments in Portfolio Companies

Investments are stated at value. Investments for which market quotations are readily available are valued at the last trade price on or within one local business day of the date of determination as obtained from a pricing source. If no such trade price is available, such investments are valued at the quoted bid price or the mean between the quoted bid and asked price on the date of determination as obtained from a pricing source. Securities for which market quotations are not readily available are valued at fair value in good faith using methods determined by or under the direction of the Fund’s Board of Directors.

Start-Up and Organization Costs

Costs incurred in connection with the start-up and organization of the Fund had been deferred and were being amortized ratably over a period of 60 months beginning January 1, 1998. During the three month period ended June 30, 2002, the Fund, as a result of the recent merger (See Note 2), wrote off the remaining balance of $2,280 of deferred Start-Up and Organization Costs. The balance of $3,040 at December 31, 2001 represents the remaining portion of these costs subject to amortization at that time.

Earnings Per Share/Unit

During 1997, the Fund adopted SFAS No. 128, “Earnings Per Share”. Its application is not expected to affect the calculations of basic and diluted earnings per share/unit.

Earnings per share/unit is computed using the weighted average number of shares/units outstanding during the respective periods, adjusted for outstanding stock/unit options. There are no other outstanding warrants, or other contingently issuable shares/units.

The Fund’s shareholders, at the annual meeting of shareholders held on November 17, 1999, approved a stock option plan which authorized the granting of options to purchase the Fund’s common stock to directors, officers, employees, and members of the advisory board of the Fund. Options to purchase 250,000 shares of the Fund’s common stock were granted to directors of the Fund under the terms of this stock option plan. On December 20, 2001, all of the directors returned their options to the Fund. The Fund may grant options to the directors at a future date.

The option committee on July 12, 2002 granted options to purchase 50,000 units of its members’ equity at an exercise price equal to the net asset value per unit as of June 30, 2002 to each of the Fund’s five directors (250,000 units in the aggregate). These options vest immediately. The net asset value per unit as of June 30, 2002 was $0.84 per unit.

Income Taxes

The Fund has adopted the SFAS Standard No. 109, “Accounting for Income Taxes”, from its inception. SFAS 109 requires an asset and liability approach that recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Fund’s financial statements or tax returns. In estimating future tax consequences, SFAS 109 generally considers all expected future events other than enactments of changes in the tax law or rates. During the years ended December 31, 2002, 2001 and 2000, the Fund recognized unrealized appreciation (depreciation) on its portfolio companies, and accordingly, recognized deferred taxes due to temporary timing differences in accordance with SFAS 109.

The Fund, as a result of becoming an LLC as of February 28, 2002, is treated as a “pass through” entity for income tax purposes, thus no income tax provision or related accruals is required. Any income tax liabilities incurred by the Fund are allocated to members of the Fund annually for inclusion in the members’ individual income tax returns. The Fund remains responsible for any Pennsylvania Capital Stock and Franchise Tax.

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Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes to those financial statements. Actual results could differ materially from these estimates.

Note 2—Merger

As of February 28, 2002, the Fund converted from the C Corporation to an LLC Organization via merger of the C Corporation into its wholly owned and previously inactive subsidiary – an LLC Organization. As a consequence, the LLC assumed all assets and liabilities of the C Corporation and is continuing all operations of the C Corporation.

Shareholders of the C Corporation have become members of the LLC, and hold the same number of ownership units in the LLC equal to the number of shares they held in the C Corporation, with no change in ownership percentage of the respective organizations.

Other Operating Expenses include a reversal of the deferred tax asset recorded at December 31, 2001 net of the tax refund receivable of $17,040, which is included in Receivables on the Balance Sheet. See Note 9 for additional information regarding deferred taxes. In addition, all tax accruals were eliminated due to the merger. The reversal of the deferred tax asset and elimination of the tax accruals resulted in an expense of $41,600.

Note 3—Sale of Securities

During 1997, the Fund sold 2,104,333 shares of its common stock at $1.00 per share, under an Offering Circular dated November 7, 1996 (“First Offering Circular”). The proceeds were required to be deposited in an escrow account with the Fund’s escrow agent, PNC Bank, until such time as the escrow account reached $1 million. At that time, the Fund was permitted to withdraw the funds from the escrow account and begin to invest in portfolio securities.

As of July 11, 1997, the proceeds in the escrow account totaled $1,860,100. On that date, the Fund withdrew substantially all of the funds from the escrow account.

The funds released from escrow were temporarily invested, pending investment in Portfolio Securities, in cash equivalents, government securities, and high quality debt securities. A portion of the funds released from escrow were disbursed to pay accumulated obligations whose payment was deferred until funds were released from escrow.

The Fund began offering for sale up to 2,750,000 shares of its Common Stock at $1.45 per share, or a maximum of $3,987,500, under an Offering Circular dated September 10, 1999 (“Second Offering Circular”). The Fund has used the proceeds from this sale of securities primarily to invest in the equity and/or debt securities of additional development stage companies located in western Pennsylvania, and to make follow on investments, as appropriate, in existing portfolio companies. The proceeds from this sale of securities have been temporarily invested, pending investments in portfolio companies, in cash equivalents, government securities, and high quality debt securities. A portion of these proceeds have been used for normal operating expenses. As of December 31, 1999, the Fund had received subscriptions to purchase 631,550 shares ($915,747). The Fund sold 2,057,787 shares of its common stock at $1.45 per share under the Second Offering Circular, and closed the Second Offering as of January 31, 2000.

24

The Fund began offering for sale up to 875,000 shares of its Common Stock at $1.60 per share, or a maximum of $1,400,000, under an Offering Circular dated July 14, 2000 (“Third Offering Circular”). The Fund intends to use the proceeds from this sale of securities primarily to invest in the equity and/or debt securities of additional development stage companies located in western Pennsylvania, and to make follow on investments, as appropriate, in existing portfolio companies. The proceeds from this sale of securities have been temporarily invested, pending investments in portfolio companies, in cash equivalents, government securities, and high quality debt securities. A portion of these proceeds have been used for normal operating expenses. As of December 31, 2000, the Fund had received subscriptions to purchase 40,000 shares ($64,000). The Fund sold 62,750 shares of its Common Stock at $1.60 per share under the Third Offering, and closed at the Third Offering as of March 31, 2001.

As of December 31, 2002, $4,416,684 ($4,130,939 at December 31, 2001) was invested in Portfolio Securities and the balance of the funds ($316,897) remained invested in cash equivalents, government securities, and high quality debt securities.

Note 4—Investments in Portfolio Companies

As of December 31, 2002, the Fund had invested a total of $4,416,684 in twenty-five Portfolio Companies ($4,130,939 in twenty-four Portfolio Companies at December 31, 2001). Also, see Schedule 1 for additional information on investments in Portfolio Companies.

Akustica, Inc.

On March 22, 2002, the Fund purchased $100,000 of Akustica, Inc. (“Akustica”) 8% Convertible Promissory Notes (“8% Notes”). The 8% Notes mature on December 31, 2003 and are convertible into the next round financing security at a price discount of 20-25 percent dependant upon the passage of time.

On September 5, 2002, Akustica sold $1,250,000 of Series A Convertible Preferred Stock (“Akustica A”) which triggered the conversion of the 8% Notes. The 8% Notes, principal and accrued interest were converted into 134,269 shares of Akustica A.

On December 6, 2002, the Fund purchased an additional 104,932 shares of Akustica A at $0.953 per share for a total investment of $100,000.