MVC CAPITAL, INC. - 10-Q Quarterly Report

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549


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

For the quarterly period ended April 30, 2005


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

Commission File Number 000-28405

MVC Capital, Inc.

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

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


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

287 Bowman Avenue
2nd Floor
Purchase, New York		10577
(Address of principal		(Zip Code)
executive offices)

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

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


		Name of each exchange on
Title of each class		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

As of June 7, 2005, there were 19,085,740 shares of Registrant’s common stock, $.01 par value (the “Shares”), outstanding.

Part I. Consolidated Financial Information

Item 1. Consolidated Financial Statements

CONSOLIDATED FINANCIAL STATEMENTS

MVC Capital, Inc.

Consolidated Balance Sheets


	April 30,			October 31,
	2005			2004
	(Unaudited)
ASSETS
Assets
Cash	$	1,349,545		$	1,214,537
Cash equivalents		24,793,950			11,932,404
Investments in short term securities, at market value (cost $71,033,479 and $34,114,792, respectively)		71,033,479			34,114,792
Investments in debt instruments, at fair value (cost $45,947,598 and $28,795,958, respectively) (Note 4)		45,897,529			27,502,755
Investments in equity, at fair value (cost $108,349,881 and $122,786,256, respectively) (Note 4)		48,916,345			51,017,530
Interest and fees receivable		677,846			442,322
Prepaid expenses		548,380			219,772
Deferred tax		230,487			87,278
Other assets		53,174			45,445


Total assets	$	193,500,735		$	126,576,835


LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Revolving credit facility	$	—		$	10,025,000
Payable for investments purchased		7,946,508			—
Professional fees		293,926			223,069
Directors’ fees		19,214			17,815
Employee compensation and benefits		423,822			350,518
Consulting fees		75,605			71,845
Taxes payable		—			166,205
Accrued incentive compensation (Note 8)		394,528			—
Other accrued expenses and liabilities		279,323			155,039

Total liabilities		9,432,926			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		(141,513,316	)		(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		184,067,809			115,567,344


Total liabilities and shareholders’ equity	$	193,500,735		$	126,576,835


Net asset value per share	$	9.64		$	9.40

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

MVC Capital, Inc.

Consolidated Statements of Operations
(Unaudited)


	For the Period			For the Period
	November 1, 2004			November 1, 2003
	to April 30, 2005			to April 30, 2004
Investment Income:
Interest income	$	3,168,379		$	1,169,492
Dividend income		675,700			—
Fee income		307,275			50,001
Other income		283,111			5,059

Total investment income		4,434,465			1,224,552

Operating Expenses:
Employee compensation and benefits		985,726			453,748
Incentive compensation (Note 8)		394,528			—
Insurance		330,409			579,818
Legal fees		279,970			443,129
Directors fees		81,527			121,729
Audit fees		123,765			89,246
Public relations fees		65,442			73,859
Other expenses		223,827			232,305
Consulting fees		104,485			125,897
Administration		62,901			51,707
Facilities		173,438			(73,668	)
Printing and postage		35,537			54,666
Interest expense		12,359			—

Total operating expenses		2,873,914			2,152,436

Net investment income (loss) before taxes		1,560,551			(927,884	)


Tax Expense (Benefit):
Deferred tax expense (benefit)		(143,209	)		—
Current tax expense		325			—


Total tax expense (benefit)		(142,884	)		—


Net investment income (loss)		1,703,435			(927,884	)


Net Realized and Unrealized Gain (Loss) on Investments:

Net realized loss on
investments		(8,238,438	)		(10,304,739	)
foreign currency		(18,687	)		—

Net change in unrealized appreciation on investments		13,578,324			14,641,676


Net realized and unrealized gain on investments		5,321,199			4,336,937


Net increase in net assets resulting from operations	$	7,024,634		$	3,409,053


Net increase in net assets per share resulting from operations	$	0.41		$	0.25


Dividends declared per share	$	—		$	—

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

MVC Capital, Inc.

Consolidated Statements of Operations
(Unaudited)


	For the Quarter			For the Quarter
	February 1, 2005			February 1, 2004
	to April 30, 2005			to April 30, 2004
Investment Income:
Interest income	$	1,888,332		$	458,375
Dividend income		329,330			—
Fee income		127,592			50,001
Other income		93,785			—

Total investment income		2,439,039			508,376

Operating Expenses:
Employee compensation and benefits		581,589			211,967
Incentive compensation (Note 8)		394,528			—
Insurance		144,293			211,180
Legal fees		129,396			212,196
Directors fees		37,157			39,823
Audit fees		58,697			52,482
Public relations fees		32,218			32,491
Other expenses		116,470			42,699
Consulting fees		74,875			99,838
Administration		34,316			24,075
Facilities		104,575			66,365
Printing and postage		17,533			12,898
Interest expense		—			—

Total operating expenses		1,725,647			1,006,014

Net investment income (loss) before taxes		713,392			(497,638	)


Tax Expense (Benefit):
Deferred tax expense (benefit)		(108,376	)		—
Current tax expense		—			—


Total tax expense (benefit)		(108,376	)		—


Net investment income (loss)		821,768			(497,638	)


Net Realized and Unrealized Gain (Loss) on Investments:

Net realized gain (loss) on
investments		(1,012,067	)		35,959
foreign currency		(18,687	)		—

Net change in unrealized appreciation on investments		4,569,036			1,566,100


Net realized and unrealized gain on investments		3,538,282			1,602,059


Net increase in net assets resulting from operations	$	4,360,050		$	1,104,421


Net increase in net assets per share resulting from operations	$	0.23		$	0.09


Dividends declared per share	$	—		$	—

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

MVC Capital, Inc.

Consolidated Statements of Cash Flows
(Unaudited)


	For the Period			For the Period
	November 1, 2004			November 1, 2003
	to April 30, 2005			to April 30, 2004
Cash Flows from Operating Activities:
Net increase in net assets resulting from operations	$	7,024,634		$	3,409,053
Adjustments to reconcile net assets resulting from operations to net cash provided (used) by operating activities:
Realized loss		8,257,125			10,304,739
Net change in unrealized (appreciation)		(13,578,324	)		(14,641,676	)
Increase in accrued payment-in-kind dividends and interest		(573,672	)		—
Increase in allocation of flow-through income		(108,823	)		—
Changes in assets and liabilities:
Interest and fees receivable		(235,524	)		67,200
Prepaid expenses		(328,608	)		(171,738	)
Receivable for investment deposit		—			(100,000	)
Deferred tax		(143,209	)		—
Other assets		(7,729	)		(32,425	)
Liabilities		8,448,435			(469,998	)
Purchases of equity investments		(315,000	)		(450,000	)
Purchases of debt instruments		(20,514,050	)		(1,000,000	)
Purchases of short-term investments		(142,869,445	)		(165,089,498	)
Purchases of cash equivalents		(55,467,670	)		(53,301,844	)
Proceeds from equity investments		8,295,018			165,790
Proceeds from debt instruments		3,315,558			6,627,225
Sales/maturities of short-term investments		134,415,684			194,365,752
Sales/maturities of cash equivalents		26,929,027			52,851,689

Net cash provided (used) by operating activities		(37,456,573	)		32,534,269


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


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


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


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


Net change in cash and cash equivalents for the period		12,996,554			963,085


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


Cash and cash equivalents, end of period	$	26,143,495		$	969,935

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.

	-	During the six months ended April 30, 2005, MVC Capital, Inc. recorded payment in kind dividend and interest of $573,672. This amount is added to the principle balance of the investments and recorded as interest/dividend income.

	-	During the six months ended April 30, 2005, MVC Capital, Inc. was allocated $139,905 in flow-through income from its equity investment in Octagon Credit Investors, LLC. Of this amount, $31,082 was received in cash and the balance of $108,823 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.

MVC Capital, Inc.

Consolidated Statements of Shareholders’ Equity
(Unaudited)


	Fund					Additional									Total
	Shares			Common		Paid in			Treasury			Accumulated			Shareholders’
	Issued			Stock		Capital			Stock			Deficit			Equity
Balance at November 1, 2003		16,152,600		$	165,000	$	311,485,000		$	(2,894,917	)		(171,746,921	)		137,008,162
Return of capital statement of position reclass		—			—		(11,613,512	)		—			11,613,512			—
Treasury shares repurchased		(3,859,558	)		—		—			(31,571,184	)		—			(31,571,184	)
Net increase in net assets from operations		—			—		—			—			3,409,053			3,409,053

Balance at April 30, 2004		12,293,042		$	165,000	$	299,871,488		$	(34,466,101	)	$	(156,724,356	)	$	108,846,031


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	)
Net increase in net assets from operations		—			—		—			—			7,024,634			7,024,634

Balance at April 30, 2005		19,085,740		$	231,459	$	358,593,335		$	(33,243,669	)	$	(141,513,316	)	$	184,067,809

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

MVC Capital, Inc.

Consolidated Selected Per Share Data and Ratios


	For the Period			For the
	November 1, 2004			Year Ended
	to April 30, 2005			October 31, 2004
	(Unaudited)
Net asset value, beginning of period	$	9.40		$	8.48

Gain (loss) from investment operations:

Net investment income		0.09			—

Net realized and unrealized gain on investments		0.32			0.91


Total gain from investment operations		0.41			0.91


Less distributions from:

Income		—			—

Return of capital		—			(0.12	)


Total distributions		—			(0.12	)


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


Net asset value, end of period	$	9.64		$	9.40


Market value, end of period	$	9.41		$	9.24


Market discount		(2.39	)%		(1.70	)%

Total Return — At NAV (a)		2.55	%		12.26	%

Total Return — At Market (a)		1.84	%		15.56	%

Ratios and Supplemental Data:

Net assets, end of period (in thousands)	$	184,068		$	115,567

Ratios to average net assets:

Expenses excluding tax expense (benefit)		3.71	%(b)		3.36	%

Net investment income before tax expense (benefit)		2.01	%(b)		0.08	%

Expenses including tax expense (benefit)		3.52	%(b)		3.43	%

Net investment income after tax expense (benefit)		2.20	%(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.

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

MVC Capital, Inc.

Consolidated Schedule of Investments
April 30, 2005 (Unaudited)


				Date of
				Initial
	Description	Shares/Principal		Investment	Cost		Fair Value

Equity Investments – 26.58% (b, d) (Note 3, 4, 5)

	Automotive Dealerships – 3.26% (a, f)

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

	Confections Manufacturing and Distribution – 1.47% (a, f)

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

	Distributor – Landscaping and Irrigation Equipment – 2.44% (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 – 1.22% (a, f)

	Octagon Credit Investors, LLC, Membership Interest		5	June 2004		668,823		1,172,004

	Octagon Credit Investors, LLC, Warrant		1	May 2004		550,000		1,069,457


	Total Financial Services					1,218,823		2,241,461

	Iron Foundries – 1.52% (a, f)

*	Vestal Manufacturing Enterprises, Inc.,
	Common Stock (c)		81,000	Apr. 2004		1,850,000		2,800,000

	Manufacturer of Packaged Foods – 2.72% (a, f)

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

	Non-Alcoholic Beverages – 8.29% (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		10,259,884		10,259,884

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


	Total Non-Alcoholic Beverages					15,259,884		15,259,884

	Soil Remediation – 0.17% (a, f)

*	SGDA Sanierungsgesellschaft fur Deponien und Altlasten (c, j)		26,750	Feb. 2005		315,000		315,000

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

MVC Capital, Inc.
Consolidated Schedule of Investments (Continued)
April 30, 2005 (Unaudited)


				Date of
				Initial
	Description	Shares/Principal		Investment	Cost		Fair Value

	Technology Investments - 5.49% (f)

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

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

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

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

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

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

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

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

*	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		4,000,001		5,500,000

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

*	Vendio Services, Inc., Series A (a, c)		6,443,188	Jan. 2002		1,134,001		2,000,000

*	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					71,506,174		10,100,000


Total Equity Investments						108,349,881		48,916,345

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

MVC Capital, Inc.
Consolidated Schedule of Investments (Continued)
April 30, 2005 (Unaudited)


					Date of
					Initial
		Description	Shares/Principal		Investment	Cost		Fair Value

Debt Instruments - 24.93% (a, b, d)

		Automotive Dealerships - 2.44%

	*	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 - 2.78%

	*	Impact Confections, Inc. (i) 17.00%,07/30/2009		5,112,821	July 2004		5,008,207		5,112,821

		Distributor — Landscaping and Irrigation Equipment - 4.04%

	*	Timberland Machines & Irrigation, Inc., Loan (c) (i) 17.00%, 08/04/2009		6,178,501	Aug. 2004		6,086,482		6,178,501

	*	Timberland Machines & Irrigation, Inc., Subordinated Bridge Notes (c) 12.50%, 01/31/2006		1,250,000	Dec. 2004		1,223,110		1,250,000


		Total Distributor — Landscaping and Irrigation Equipment Investments					7,309,592		7,428,501


		Electrical Distribution - 1.64%

		JDC Lighting, LLC (i) 17.00%,01/31/2009		3,021,822	Jan. 2005		2,950,149		3,021,822

		Financial Services - 3.31%

		Octagon Credit Investors, LLC, Credit Facility 6.86%,05/06/2007		1,500,000	April 2005		1,500,000		1,500,000

		Octagon Credit Investors, LLC, Loan (i) 15.00%,05/07/2011		5,102,504	May 2004		4,486,300		4,596,198


		Total Financial Services					5,986,300		6,096,198


		Iron Foundries - 0.54%

	*	Vestal Manufacturing Enterprises, Inc. (c) 12.00%, 04/29/2011		1,000,000	Apr. 2004		1,000,000		1,000,000

		Laboratory Research Equipment - 5.71%

		SP Industries, Inc., Term Loan (i) 12.86%,03/31/2010		4,000,000	March 2005		3,920,983		4,000,000

		SP Industries, Inc., Mezzanine Loan (i) 17.00%,03/31/2012		6,500,000	March 2005		6,240,421		6,500,000


		Total Laboratory Research Equipment					10,161,404		10,500,000

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

MVC Capital, Inc.
Consolidated Schedule of Investments (Continued)
April 30, 2005 (Unaudited)


					Date of
					Initial
		Description	Shares/Principal		Investment	Cost		Fair Value

		Soil Remediation - 2.32%

	*	SGDA Sanierungsgesellschaft fur Deponien und Altlasten (c, j) 7.00%,08/25/2009		4,579,050	Feb. 2005	$	4,274,303	$	4,274,303

		Technology Investments - 2.15%

		Arcot Systems, Inc. (g) 10.75%,12/31/2005		2,805,552	Dec. 2002		2,798,615		2,000,000

		Integral Development Corporation (g) 10.75%,12/31/2005		1,963,884	Dec. 2002		1,959,028		1,963,884


		Total Technology Investments					4,757,643		3,963,884


Total Debt Instruments							45,947,598		45,897,529


								Market Value

Short-Term Securities - 38.59% (b)

		Commercial Paper - 15.15% (b)

		DaimlerChrysler AG 2.98%,06/02/2005		5,000,000	March 2005		4,986,844		4,986,844

		Dow Jones & Company, Inc. 3.08%,07/19/2005		5,000,000	April 2005		4,966,850		4,966,850

		General Electric Capital Corp. 2.03%,06/02/2005		4,000,000	March 2005		3,989,938		3,989,938

		General Motors Acceptance Corp. 3.03%,05/31/2005		4,000,000	March 2005		3,989,967		3,989,967

		The Procter & Gamble Co. 2.86%,06/01/2005		3,000,000	March 2005		2,992,659		2,992,659

		Sanofi-Aventis 2.86%,06/02/2005		4,000,000	March 2005		3,989,902		3,989,902

		SBC Communications, Inc. 3.11%,07/20/2005		3,000,000	April 2005		2,979,658		2,979,658


							27,895,818		27,895,818


		U.S. Government & Agency Securities - 23.44% (b)

		U.S. Treasury Bill 2.30%,05/19/2005		1,153,000	Feb. 2005		1,151,599		1,151,599

		U.S. Treasury Bill 2.56%,07/07/2005		35,200,000	April 2005		35,032,947		35,032,947

		U.S. Treasury Bill 2.88%,07/28/2005		7,000,000	April 2005		6,953,115		6,953,115


		Total U.S. Government & Agency Securities					43,137,661		43,137,661


Total Short-Term Securities							71,033,479		71,033,479

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

MVC Capital, Inc.
Consolidated Schedule of Investments (Continued)
April 30, 2005 (Unaudited)


				Date of
				Initial
	Description	Shares/Principal		Investment	Cost		Market Value

Cash Equivalents - 13.47% (b)

	Money Market Funds - 1.97% (b)

	First American Prime Obligations Fund - Class A		3,632,221	April 2005		3,632,221		3,632,221

	Time Deposits - 11.50% (b)

	LaSalle Enhanced Liquidity		21,161,729	Oct. 2004		21,161,729		21,161,729


Total Cash Equivalents						24,793,950		24,793,950


Total Investments - 103.57% (b)					$	250,124,908	$	190,641,303

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

(b)		Percentages are based on net assets of $184,067,809 as of April 30, 2005.

(c)		The Fund owns more than 25% of the outstanding voting securities of Baltic Motors 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.

*		Affiliated Issuers (Total Market Value of $68,790,509): companies in which the Fund owns at least 5% of the voting securities.

-		Denotes zero cost/fair value.

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

MVC Capital, Inc. (the “Fund”)

Notes to Consolidated Financial Statements

April 30, 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 49.0% of the Fund’s total assets at April 30, 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 Six month Period Ended April 30, 2005

During the six months ended April 30, 2005, the Fund made three new investments, totaling approximately $18 million. The investments were made in JDC Lighting, LLC (“JDC”), SGDA Sanierungsgesellschaft fur Deponien und Altasten mbH (“SGDA”) and SP Industries, Inc. (“SP”). The amounts invested were $3.0 million, $4.6 million and $10.5 million, respectively.

The Fund also made two follow-on investments in existing portfolio companies totaling $2.65 million in Timberland Machines & Irrigation, Inc. (“Timberland”) and Vestal Manufacturing Enterprises, Inc. (“Vestal”). The Fund invested $1.25 million in Timberland in the form of a subordinated bridge note. 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.

In addition, Octagon Credit Investors, LLC (“Octagon”) drew down $1.5 million from the senior secured credit facility provided to it by the Fund.

Also, during the six months ended April 30, 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 April 30, 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 it was unable to determine how many shares, if any, the Fund would receive from the escrow.

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

The Fund continued to receive the monthly principal repayments on the credit facilities of Integral Development Corporation (“Integral”) and Arcot Systems, Inc. (“Arcot”) Each made payments during the six months ended April 30, 2005, according to its respective credit facility agreement totaling the following amounts: Integral, $841,668 and Arcot $841,668.

During the six months ended April 30, 2005, the Valuation Committee increased the fair value of the Fund’s investments in Vestal’s common stock by $950,000, Octagon’s membership interest and warrant by $1,022,638 and Vendio Services, Inc. (“Vendio”) Series A preferred stock by $865,999. In addition, increases in the cost basis and fair value of the Octagon loan, Impact Confections, Inc. (“Impact”) loan, Timberland loan, Vitality Foodservice, Inc. (“Vitality”) Series A preferred stock and JDC loan were due to the receipt of payment in kind (PIK) interest/dividends totaling $537,672. Also during the six month period ended April 30, 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 $108,823.

At April 30, 2005, the fair value of all portfolio investments, exclusive of short-term securities, was $94.8 million with a cost of $154.3 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.

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 Technologies, Inc. (“Sygate”) by $1.5 million, BlueStar by $1.5 million, Vendio by $634,000 and Integral by $989,000 and wrote down the fair value of the Fund’s investments in Actelis Networks, Inc. (“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 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 $110,000 in fiscal year 2005, $220,000 in fiscal year 2006 and $73,000 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.

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 down $1.5 million from the credit facility provided to it by the Fund. As of April 30, 2005, the $1.5 million in borrowings remained outstanding.

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 Machines guarantees the repurchase of product from Transamerica, if a dealer defaults on payment and the underlying assets are repossessed. The Fund has agreed to be a co-guarantor of this repurchase commitment, but its maximum potential exposure as a result of the guarantee is contractually limited to $500,000.

On October 28, 2004, the Fund entered into a one-year, cash collateralized, $20 million revolving credit facility (the “Credit Facility”) with LaSalle Bank National Association (the “Bank”). On October 28, 2004, the Fund borrowed $10,025,000 under the Credit Facility. The proceeds from borrowings made under the Credit Facility were used for general corporate purposes. On November 12, 2004 the Fund repaid the $10,025,000 it borrowed from the Bank under the Credit Facility. The Fund has not drawn upon the Credit Facility since the repayment. The Credit Facility will expire on October 31, 2005, at which time all outstanding amounts under the Credit Facility, if any, will be due and payable. Borrowings under the Credit Facility, if any, will bear interest, at the Fund’s option, at either a fixed rate equal to the LIBOR rate (for one, two, three or six months), plus 1.00% per annum, or at a floating rate equal to the Bank’s prime rate in effect from time to time, minus a spread of 1.00% per annum.

The Fund 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 April 30, 2005, SGDA had not drawn down upon this facility. See “Subsequent Events” for more information.

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 six month period ended April 30, 2005, the Fund accrued $394,528 of incentive compensation as a current expense. This accrual of incentive compensation resulted from the determination of the Valuation Committee

to increase the fair value of two of the Fund’s portfolio investments, Vestal and Octagon, which are subject to the Fund’s agreement with Mr. Tokarz, by a total of $1,972,638. This accrued balance of $394,528 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 six month period ended April 30, 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. 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.

The following table presents book basis segment data for the six month period ended April 30, 2005:



	MVC			MVCFS			Consolidated
Interest and dividend income	$	3,842,686		$	1,393		$	3,844,079
Fee income		122,086			185,189			307,275
Other income		283,111			—			283,111
Total operating income		4,247,883			186,582			4,434,465

Total operating expenses		2,745,414			128,500			2,873,914

Net operating income before taxes		1,502,469			58,082			1,560,551
Tax expense (benefit)		—			(142,884	)		(142,884	)
Net investment income		1,502,469			200,966			1,703,435
Net realized gain (loss) on investments and foreign currency		(8,257,125	)		—			(8,257,125	)
Net change in unrealized appreciation on investments		13,578,324			—			13,578,324
Net increase in net assets resulting from operations	$	6,823,668		$	200,966		$	7,024,634

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

11. Subsequent Events

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.

On May 16, 2005, SGDA drew down $380,250 from the revolving credit facility provided to it by the Fund. The credit facility bears interest at 7% and expires on August 25, 2006.

On June 2, 2005, the Fund made an investment in BP Clothing, LLC (“BP”) a Pico Rivera, CA based company which designs, manufactures, markets and distributes, Baby Phat®, a line of women’s clothing. The Fund’s investment in BP consists of a four year, $10 million, second lien loan, bearing interest at LIBOR plus 8% for the first year and variable rates for the remainder of the loan.

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

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

SELECTED CONSOLIDATED FINANCIAL DATA:

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

Selected Consolidated Financial Data


	Period Ended			Period Ended			Year Ended
	April 30,			April 30,			October 31,
	2005			2004			2004
	(Unaudited)			(Unaudited)
	(In thousands, except per share data)
Operating Data:
Interest and related portfolio income:
Interest and dividends	$	3,844		$	1,170		$	3,086
Fee income		307			—			836
Other income		283			55			64


Total interest and related portfolio income		4,434			1,225			3,986

Expenses:
Employee		986			454			1,366
Incentive compensation (Note 8)		395			—			—
Administrative		1,493			1,699			2,523


Total operating expenses		2,874			2,153			3,889


Net investment income (loss) before taxes		1,560			(928	)		97

Tax expense (benefit)		(143	)		—			79


Net investment income (loss)		1,703			(928	)		18

Net realized and unrealized gains (losses):
Net realized losses		(8,257	)		(10,305	)		(37,795	)
Net change in unrealized appreciation		13,578			14,642			49,382


Net realized and unrealized gains on investments		5,321			4,337			11,587


Net increase in net assets resulting from operations	$	7,024		$	3,409		$	11,605


Per Share:
Net increase in net assets per share resulting from operations	$	0.41		$	0.25		$	0.91
Dividends per share	$	—		$	—		$	0.12
Balance Sheet Data:
Portfolio at value	$	94,814		$	23,121		$	78,520
Portfolio at cost		154,297			130,923			151,582
Total assets		193,501			109,248			126,577
Shareholders’ equity		184,068			108,846			115,567
Shareholders’ equity per share (net asset value)	$	9.64		$	8.85		$	9.40
Common shares outstanding at period end		19,086			12,293			12,293
Other Data:
Number of Investments funded in period		6			1			7
Investments funded ($) in period	$	22,229		$	1,450		$	55,710


	2005				2004										2003
	Qtr 2		Qtr 1		Qtr 4		Qtr 3⁽¹⁾		Qtr 2			Qtr 1			Qtr 4			Qtr 3			Qtr 2			Qtr 1
Quarterly Data (Unaudited):	(In thousands except per share data)
Total interest and related portfolio income		2,439		1,995		1,811		951		508			716			742			776			811			566
Net investment income (loss) before net realized and unrealized gains		821		882		665		281		(498	)		(430	)		(847	)		(559	)		(5,031	)		(2,055	)
Net increase (decrease) in net assets resulting from operations		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		0.23		0.18		0.27		0.41		0.09			0.14			(0.29	)		(0.89	)		(0.41	)		(1.83	)
Net asset value per share		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 his team are seeking to implement our investment objective (i.e., to maximize total return from capital appreciation and/or income) through making a broad range of private investments in a variety of industries. The investments can include senior or subordinated loans, convertible debt and convertible preferred securities, common or preferred stock, warrants or rights to acquire equity interests, and other private equity transactions. In the year ended October 31, 2004, we made seven new investments, totaling $55,710,000, pursuant to our new investment objective. In the six month period ended April 30, 2005, the Fund made three new investments and two additional investments in existing portfolio companies, totaling $20,729,050. Also, on April 5, 2005, Octagon drew down $1.5 million from the credit facility provided to it by the Fund bringing the total capital invested by the Fund during the six month period to $22,229,050.

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 April 30, 2005, 7.27% of the current fair value of our assets consisted of portfolio investments made by the Fund’s former management team pursuant to the prior investment objective. We are, however, seeking to manage these legacy investments to try and realize maximum returns. We generally seek to capitalize on opportunities to realize cash returns on these investments when presented with a potential “liquidity event,” i.e., a sale, public offering, merger or other reorganization.

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

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

Investment Income

For the Six month Periods Ended April 30, 2005 and 2004. Total investment income was approximately $4.4 million for the six month period ended April 30, 2005 and approximately $1.2 million for the six month period ended April 30, 2004, an increase of $3.2 million.

For the Six month Period Ended April 30, 2005

Total investment income was $4.4 million for the six month period ended April 30, 2005. The increase in investment income over the same six 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 Fund’s receipt of closing and monitoring fees from certain portfolio companies by the Fund and MVCFS. The Fund earned approximately $3.14 million in interest and dividend income from investments in portfolio companies. Of the $3.14 million recorded in interest and dividend income, approximately $574,000 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 investments were paying interest and dividends to the Fund at various rates from 7% to 17%. Also, the Fund earned approximately $674,000 in interest income on its cash equivalents and short-term investments during the six month period ended April 30, 2005. The Fund received fee income and other income from portfolio companies totaling approximately $307,000 and $283,000 respectively.

For the Six Month Period Ended April 30, 2004

Total investment income was approximately $1.2 for the six month period ended April 30, 2004. Interest income from cash equivalents and short-term investments was the main component of investment income during the six month period ended April 30, 2004.

Operating Expenses

For the Six month Periods Ended April 30, 2005 and 2004. Operating expenses were $2.9 million for the six month period ended April 30, 2005 and $2.2 million for the six month period ended April 30, 2004, an increase of approximately $700,000.

For the Six month Period Ended April 30, 2005

Operating expenses were $2.9 million for the six month period ended April 30, 2005. Significant components of operating expenses for the six month period ended April 30, 2005, include salaries and benefits of $985,726, facilities fees of $173,438, incentive compensation of $394,528, insurance premium expenses of $330,409 and legal fees of $279,970.

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 six month period ended April 30, 2005. This accrual of incentive compensation resulted from the determination of the Valuation Committee to increase the fair value of two of the Fund’s portfolio investments, Vestal and Octagon, which are subject to the Fund’s agreement with Mr. Tokarz, by a total of $1,972,638. This accrued balance of $394,528 will remain unpaid until these potential

net capital gains are realized, if ever, by the Fund. Only after a realization event, 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 six month period ended April 30, 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.

For the Six month Period Ended April 30, 2004

Operating expenses were $2.2 million for the six month period ended April 30, 2004.

Significant components of operating expenses for the six months ended April 30, 2004 include insurance premium expenses of $579,818, salaries and benefits of $453,748, legal fees of $443,129, and a facilities recovery of ($73,668).

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 six months ending April 30, 2004 was approximately $180,000.

In February 2003, the former management of the Fund (“Former Management”) had entered into new Directors & Officers/Professional Liability Insurance policies with a premium of approximately $1.4 million. The cost was amortized over the life of the policy, through February 2004. For the six month period ended April 30, 2004, the Fund expensed $579,818 in insurance premiums.

Realized Gains and Losses On Portfolio Securities

For the Six month Periods Ended April 30, 2005 and 2004. Net realized losses for the six month periods ended April 30, 2005 and 2004 were $8.3 million and $10.3 million, respectively, a decrease of $2 million.

For the Six month Period Ended April 30, 2005

Net realized losses for the six month period ended April 30, 2005 were $8.3 million. The significant components of the Fund’s net realized loss for the six month period ended April 30, 2005 were a realized gain on the Fund’s investment in Mentor Graphics which was offset by realized losses on CBCA and Phosistor.

During the six months ended April 30 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 April 30, 2005 the 82,283 remaining shares of Mentor Graphics owned by the Fund were held in escrow and therefore restricted as to their resale. The Fund’s Valuation Committee determined to carry the escrow shares at zero because it was unable to determine how many shares, if any, the Fund would receive from the escrow.

The Fund realized 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 six month period was zero.

For the Six month Period Ended April 30, 2004

Net realized losses for the six month period ended April 30, 2004 were $10.3 million. This resulted primarily from the return of capital by PTS Messaging to the holders of its preferred stock.

Unrealized Appreciation and Depreciation of Portfolio Securities

For the Six month Periods Ended April 30, 2005 and 2004. The Fund had a net decrease in unrealized depreciation of $13.6 million for the six month period ended April 30, 2005. The Fund had a net decrease in unrealized depreciation of $14.6 million for the six month period ended April 30, 2004.

For the Six month Period Ended April 30, 2005

Net decrease in unrealized depreciation for the six month period ended April 30, 2005 was $13.6 million. Such net decrease in unrealized depreciation on investment transactions for the six months ended April 30, 2005 resulted from: the Valuation Committee’s determinations to increase the fair value of the Fund’s investments in Vestal’s common stock by $950,000, Octagon’s membership interest and warrant by $1,022,638 and Vendio’s Series A preferred stock by $865,999 (the increase in the fair value of these portfolio investments resulted in a decrease in unrealized depreciation of approximately $2.8 million), the realization of a $4.8 million gain on the sales of the Fund’s shares of Mentor Graphics and the $13.0 million depreciation reclassification from unrealized to realized caused by the removal of CBCA and Phosistor from the Fund’s books.

For the Six month Period Ended April 30, 2004

Net increase in unrealized depreciation for the six month period ended April 30, 2004 was $14.6 million. The net decrease in unrealized depreciation on investment transactions for the six months ended April 30, 2004 resulted mainly from the $10.4 million depreciation reclassification from unrealized to realized effected by the return of capital of PTS Messaging. Such net decreases also resulted from the Valuation Committee’s determination to increase the fair value of the Fund’s investments in Sygate, 0-In, BlueStar, Vendio, and Integral by $4.9 million and to decrease the fair value of the Fund’s investments in Actelis and CBCA by $1.2 million.

Accumulated Deficit

For the Six month Period Ended April 30, 2005 and the Fiscal Year Ended October 31, 2004. The Fund’s total accumulated deficit for each of the periods ended April 30, 2005 and the year ended October 31, 2004 was $141.5 million and $148.5 million, respectively.

For the Six month Period Ended April 30, 2005

The Fund’s total accumulated deficit for the six months ended April 30, 2005, was $141.5 million. The decrease in accumulated deficit for the six months ended April 30, 2005 is due primarily to Fund’s increase in net assets from operations of $7.0 million.

For the Year Ended October 31, 2004

The Fund’s total accumulated deficit was $148.5 million for the year ended October 31, 2004. The decrease in accumulated deficit for the year ended October 31, 2004 is 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 Six month Period Ended April 30, 2005 and the Fiscal Year Ended October 31, 2004. The cost of equity investments held by the Fund at April 30, 2005 and at October 31, 2004 was $108.3 million and $122.8 million, respectively, a decrease of $14.5 million. The aggregate fair value of equity investments at April 30, 2005 and at October 31, 2004 was $48.9 million and $51.0 million, respectively, a decrease of $2.1 million. The cost of debt instruments (excluding short-term investments and cash equivalents) held by the Fund at April 30, 2005 and at October 31, 2004 was $45.9 million and $28.8 million, respectively, an increase of $17.1 million. The aggregate fair value of debt instruments at April 30, 2005 and at October 31, 2004 was $45.9 million and $27.5 million, respectively, an increase of $18.4 million. The cost and aggregated fair value of short-term securities held by the Fund at April 30, 2005 and at October 31, 2004 was $71 million and $34.1 million, respectively, an increase of $36.9 million. The cost and aggregate fair value of cash and cash equivalents held by the Fund at April 30, 2005 and at October 31, 2004 was $26.1 million and $13.2, respectively, an increase of approximately $12.9 million.

For the Six month Period Ended April 30, 2005

During the six months ended April 30, 2005, the Fund made three new investments, totaling approximately $18 million. The investments were made in JDC, SGDA and SP. The amounts invested were $3.0 million, $4.6 million and $10.5 million, respectively.

The Fund also made two follow-on investments in existing portfolio companies totaling $2.65 million in Timberland and Vestal. The Fund invested $1.25 million in Timberland in the form of a subordinated bridge note. 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.

In addition, Octagon drew down $1.5 million from the senior secured credit facility provided to it by the Fund.

Also, during the six months ended April 30, 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 April 30, 2005, the 82,283 remaining shares of Mentor Graphics owned by the Fund were held in escrow and therefore restricted as to their resale until September 1, 2005. The Fund’s Valuation Committee determined to carry the escrow shares at zero because it was unable to determine how many shares, if any, the Fund would receive from the escrow.

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

The Fund continued to receive the monthly principal repayments on the credit facilities of Integral and Arcot. Each made payments during the six months ended April 30, 2005, according to its respective credit facility agreement totaling the following amounts: Integral, $841,668 and Arcot $841,668.

During the six months ended April 30, 2005, the Valuation Committee increased the fair value of the Fund’s investments in Vestal’s common stock by $950,000, Octagon’s membership interest and warrant by $1,022,638 and Vendio Series A preferred stock by $865,999. In addition, increases in the cost basis and fair value of the Octagon loan, Impact loan, Timberland loan, Vitality Series A preferred stock and JDC loan were due to the receipt of “payment in kind” interest/dividends totaling $537,672. Also during the six month period ended April 30, 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 $108,823.

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 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.

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 six month period ended April 30, 2005, the Fund had active investments in the following portfolio companies:

Actelis Networks, Inc.

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

At October 31, 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.

Arcot Systems, Inc.

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

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

During the six month period ended April 30, 2005, Arcot made scheduled principal repayments totaling $841,668.

At April 30, 2005, the Fund’s investment in Arcot consisted of an outstanding balance on the loan of $2.81 million with a cost of $2.80 million. The loan has been assigned a fair value of $2.0 million and the warrants have been assigned a fair value of $0.

Baltic Motors Corporation

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

At October 31, 2004 and April 30, 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.

At April 30, 2005, the Fund’s investment in Baltic was assigned a fair value of $10.5 million. Michael Tokarz, Chairman of the Fund, Frances Spark and Bruce Shewmaker, officers of the Fund, serve as directors for Baltic.

CBCA, Inc.

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

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

During the six month period ended April 30, 2005, CBCA was purchased by an outside party for its outstanding liabilities and the Fund’s shares of Common Stock were cancelled without any consideration or payment.

At April 30, 2005, the Fund no longer held any investment in CBCA. As a result, a realized loss of approximately $12.0 million was recognized which was offset by a reduction in unrealized loss by the same $12.0 million. Therefore, the net effect of the cancellation of the common stock on this investment was zero.

Dakota Growers Pasta Company, Inc.

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

At October 31, 2004 and April 30, 2005, the Fund’s investment in Dakota consisted of 909,091 shares of Common Stock carried at a cost and assigned a fair value of $5.0 million.

Michael Tokarz, Chairman of the Fund, serves as a director of Dakota.

Determine Software, Inc.

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

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

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

As of April 30, 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 April 30, 2005, the Fund’s investment in DPHI consisted of 602,131 shares of Series A-1 Preferred Stock with a cost of $4.5 million. This investment has been assigned a fair value of $0.

Endymion Systems, Inc.

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

At October 31, 2004 and April 30, 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 April 30, 2005, the Fund’s investment in Foliofn consisted of 5,802,259 shares of Series C Preferred Stock with a cost of $15.0 million. The investment had been assigned a fair value of $0.

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

Impact Confections, Inc.

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

The Fund’s investment in Impact consists of 252 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.

At April 30, 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 $5.11 million. The cost basis of this loan at April 30, 2005 was approximately $5.01 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 April 30, 2005, the Fund’s investment in Impact had been assigned a combined fair value of $7.81 million.

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

Integral Development Corporation

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

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

During the six month period ended April 30, 2005, Integral made scheduled principal repayments totaling $841,668.

At April 30, 2005, the Fund’s investment in Integral consisted of an outstanding balance on the loan of $1.96 million with a cost of $1.96 million. The investment has been assigned a fair value of $1.96 million.

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 note has a $3 million principal face amount and was issued at a cost basis of $3 million. The loan’s cost basis was discounted to reflect loan origination fees received.

At April 30, 2005, the loan had an outstanding balance of $3.02 million with a cost of $2.95 million. The loan was assigned a fair value of $3.02 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 April 30, 2005, the Fund’s investment in Lumeta consisted of 384,615 shares of Series A Preferred Stock and 266,846 shares of Series B Preferred Stock with a combined cost of approximately $406,000. The investments have been assigned a fair value of $200,000, or approximately $0.11 per share of Series A Preferred Stock and approximately $0.59 per share of Series B Preferred Stock.

Mainstream Data, Inc.

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

At October 31, 2004 and April 30, 2005, the Fund’s investment in Mainstream consisted of 5,786 shares of Common Stock with a cost of $3.75 million. The investment has been assigned a fair value of $0.

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

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

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

During the six month period ended April 30, 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.

At April 30, 2005 all 82,283 remaining shares of Mentor Graphics owned by the Fund were held in escrow and therefore restricted as to their resale. These shares had a cost basis of approximately $480,000 and were assigned a fair value of $0. The Fund’s Valuation Committee determined to carry the escrow shares at zero because it was unable to determine how many shares, if any, the Fund would receive from the escrow.

During the six month period ended April 30, 2005, the Fund recorded approximately $143,000 from the multi-year-earn-out related to the sale of 0-In.

Octagon Credit Investors, LLC

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

The Fund’s investment in Octagon consists of a $5,000,000 Senior Subordinated Loan, bearing interest at 15% over a seven year term. The loan has a $5,000,000 principal face amount and was issued at a discounted cost basis of $4,450,000. The loan included detachable warrants with a cost basis of $550,000. The Fund also entered into a $5,000,000 senior secured credit facility with Octagon. This credit facility expires on May 7, 2009 and bears interest at LIBOR plus 4%. 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 April 30, 2005, the loan had an outstanding balance of $5.10 million with a cost of $4.49 million. The loan was carried at a fair value of $4.60 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 down $1.5 million from the credit facility provided to it by the Fund. As of April 30, 2005, the $1.5 million in borrowings remained outstanding.

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 $108,000 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 April 30, 2005, the equity investment and detachable warrants were assigned a fair value of $1,172,004 and $1,069,457, respectively.

Phosistor Technologies, Inc.

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

Phosistor ceased operations in 2003.

At October 31, 2004, 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 six month period ended April 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.

At April 30, 2005, the Fund no longer held any investment in Phosistor. 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.

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 April 30, 2005, the Fund’s investments in ProcessClaims consisted of 6,250,000 shares of Series C Preferred Stock, 849,257 shares of Series D Preferred Stock, and 873,362 warrants to purchase 873,362 shares of Series E Convertible Preferred Stock with a combined cost of $2.4 million. The investment in the Series C Preferred Stock has been assigned a fair value of $2.0 million, or approximately $0.32 per share of Series C Preferred Stock, the investment in the Series D Preferred Stock has been assigned a fair value of $400,000 or approximately $0.471 per share of Series D Preferred Stock, and the investment in the Series E warrants has been assigned a fair value of $0.

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

SafeStone Technologies PLC

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

At October 31, 2004 and April 30, 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 April 30, 2005, SGDA had not drawn down upon this facility. See “Subsequent Events” for more details.

At April 30, 2005, the term loan had an outstanding balance of $4.58 million with a cost of $4.27 million. The term loan was carried at a fair value of $4.27 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.

At October 31, 2004 and April 30, 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 April 30, 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 April 30, 2005, the mezzanine loan and the term loan had outstanding balances of $6.5 million and $4.0 million respectively with cost basis of $6.24 million and $3.92 million respectively. The mezzanine loan and term loan were assigned fair values of $6.5 million and $4.0 million respectively.

Sygate Technologies, Inc.

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

At October 31, 2004 and April 30, 2005, the Fund’s investment in Sygate consisted of 9,756,098 shares of Series D Preferred Stock with a cost of $4.0 million. The investment has been assigned a fair value of $5.5 million, or approximately $0.56 per share.

Timberland Machines & Irrigation, Inc.

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

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 six month period ended April 30, 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 six month period ended April 30, 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.

At April 30, 2005, the Fund’s mezzanine loan had an outstanding balance of $6.18 million with a cost of $6.09 million. The mezzanine loan was assigned a fair value of $6.18 million. The Subordinated Bridge Note had an outstanding balance of $1.25 million with a cost basis of $1.22 million. The note was assigned a fair value of $1.25 million. The increase in the outstanding balance, cost and fair value of the loan and bridge note is due to the amortization of loan origination fees and the capitalization of “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.

At April 30, 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 $2.0 million, $0 per share for the Common Stock and approximately $0.31 per share for the Series A Preferred Stock.

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

Vestal Manufacturing Enterprises, Inc.

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

The Fund’s 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.

At April 30, 2005, the Senior Subordinated Promissory Note had an outstanding balance, cost, and fair value of $1.0 million. 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

Michael Tokarz, Chairman of the Fund, Bruce Shewmaker, an officer of the Fund, 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 $5,000,000 and 1,000,000 shares of Series A Convertible Preferred Stock at a cost of $10.00 per share or $10,000,000. The Convertible Preferred Stock has a liquidation date of September 24, 2011 and has a dividend rate of 13%. The Convertible Preferred Stock also has detachable warrants granting the Fund the right to purchase 211,243 shares of Common Stock at the price of $0.01 per share.

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

At April 30, 2005, the investment in Vitality consisted of 500,000 shares of Common Stock at a cost of $5,000,000 and 1,000,000 shares of Series A Convertible Preferred Stock at a cost of $10,259,884. 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 $5,000,000, $10,259,884 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.

At October 31, 2004 and April 30, 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 April 30, 2005, the Fund had investments in equities totaling $48.9 million and investments in debt instruments totaling $45.9 million. Also, at April 30, 2005, the Fund had investments in short-term securities totaling approximately $71.0 million and investments in cash equivalents totaling approximately $24.8 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.

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:

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.

Subsequent Events

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.

On May 16, 2005, SGDA drew down $380,250 from the revolving credit facility provided to it by the Fund. The credit facility bears interest at 7% and expires on August 25, 2006.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

Investing in private companies involves a high degree of risk.

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

Our investments in portfolio companies are generally illiquid.

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

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

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

At April 30, 2005, approximately 49.0% of our total assets represented portfolio investments recorded at fair value.

There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. We specifically value each individual investment and record unrealized depreciation for an investment that we believe has become impaired, including where collection of a loan or realization of an equity security is doubtful. Conversely, we will record unrealized appreciation if we have an indication (based on an objective development) that the underlying portfolio company has appreciated in value and, therefore, our equity security has also appreciated in value, where appropriate. Without a readily ascertainable market value and because of the inherent uncertainty of fair valuation, fair value of our investments may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.

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

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

Many of the companies in which we have made or will make investments may be susceptible to economic slowdowns or recessions. An economic slowdown may affect the ability of a company to engage in a liquidity

event. These conditions could lead to financial losses in our portfolio and a decrease in our revenues, net income and assets.

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

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

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

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

Our investment strategy contemplates investments in mezzanine and other debt securities of privately held companies. “Mezzanine” investments typically are structured as subordinated loans (with or without warrants) that carry a fixed rate of interest. We may also make senior secured and other types of loans or debt investments. Our debt investments are typically not rated by any rating agency, but we believe that if such investments were rated, they would be below investment grade quality (rated lower than “Baa3” by Moody’s or lower than “BBB-” by Standard & Poor’s, commonly referred to as “junk bonds”). Loans of below investment grade quality have predominantly speculative characteristics with respect to the borrower’s capacity to pay interest and repay principal. Our debt investments in portfolio companies may thus result in a high level of risk and volatility and/or loss of principal.

We may not realize gains from our equity investments.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our common stock price can be volatile.

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

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

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

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

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

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

•   general economic conditions and trends;

•   loss of a major funding source; or

•   departures of key personnel.

We are subject to market discount risk.

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

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

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

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

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

ITEM 4. CONTROLS AND PROCEDURES

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

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

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

Part II. Other Information

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

Pursuant to an exemption from registration under the Securities Act of 1933, as amended, provided for by Regulation E, the Fund issued 146,750 shares of its common stock on April 15, 2005 at the Fund’s net asset value per share of $9.54 to Hatfield Amalgamated LLC (f/k/a Nebraska Heavy Industries LLC) in exchange for 40,500 shares of common stock of Vestal.

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

On April 11, 2005, the Fund held its Annual Meeting of Shareholders. Of the 18,938,990 shares outstanding and entitled to vote, 17,273,806 were represented at the meeting by proxy or in person. At the meeting the shareholders were asked to re-elect Emilio Dominianni, Robert Everett, Gerald Hellerman, Robert Knapp, and Michael Tokarz to serve on the Fund’s Board of Directors. For Emilio Dominianni, 17,230,213 of shares voted for his re-election, with 44,193 shares voted withheld. For Robert Everett, 17,232,993 shares voted for his re-election, with 41,412 share votes withheld. For Gerald Hellerman, 17,230,558 shares voted for his re-election, with 43,848 share votes withheld. For Robert Knapp, 17,232,993 shares voted for his re-election, with 41,412 share votes withheld. For Michael Tokarz, 17,232,493 shares voted for his re-election, with 41,912 share votes withheld. All of the directors received a majority of the votes cast and were subsequently reelected as directors of the Fund until 2006.

Item 6. Exhibits

(a) Exhibits


Exhibit No.		Exhibit
10		Sublease by and between MVC Capital, Inc. and Fano Securities, LLC dated as of February 16, 2005.

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 Statement on Form N-2 (Reg. No. 333-119625) 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).


		MVC Capital, Inc.

Date: 6/7/2005		/s/ Michael Tokarz

		Michael Tokarz

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

		MVC Capital, Inc.

Date: 6/7/2005		/s/ Frances Spark

		Frances Spark

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


	Page
Part I. Consolidated Financial Information

Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - - April 30, 2005 and October 31, 2004		1
Consolidated Statements of Operations - - For the Period November 1, 2004 to April 30, 2005 and the Period November 1, 2003 to April 30, 2004		2
Consolidated Statements of Operations - - For the Period February 1, 2005 to April 30, 2005 and the Period February 1, 2004 to April 30, 2004		3
Consolidated Statements of Cash Flows - - For the Period November 1, 2004 to April 30, 2005 and the Period November 1, 2003 to April 30, 2004		4
Consolidated Statements of Shareholders’ Equity - - For the Period November 1, 2004 to April 30, 2005 and the Period November 1, 2003 to April 30, 2004		5
Consolidated Selected Per Share Data and Ratios - - For the Period November 1, 2004 to April 30, 2005 and the Year ended October 31, 2004		6
Consolidated Schedule of Investments - - April 30, 2005		7
Notes to Consolidated Financial Statements		12

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3. Quantitative and Qualitative Disclosures about Market Risk		34

Item 4. Controls and Procedures		39

Part II. Other Information

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		40

Item 4. Submission of Matter to a Vote of Security Holders		40

Item 6. Exhibits		40

SIGNATURE		41

Exhibits		42
Sublease
Rule 13a-14(a) Certifications
Section 1350 Certification

	•	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.