MEVC DRAPER FISHER JURVETSON FUND I INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended October 31, 2002
---------------------------------------------

or

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

For the transition period from ______________________ to ______________________

Commission file number 000-28405
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MEVC DRAPER FISHER JURVETSON FUND INC.
D/B/A MVC CAPITAL
(Exact name of registrant as specified in its charter)

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

3000 Sand Hill Road, Building 1, Suite 155, Menlo Park, California 94025
- ------------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (650) 926 7000
--------------

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

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

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

- --------------------------------------------------------------------------------
(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [X] No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ('SS' 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [_]

Approximate aggregate market value of common stock held by non-affiliates of the
registrant: $135,454,118, computed on the basis of $8.32 per share, closing
price of the common stock on the New York Stock Exchange ("NYSE") on January 9,
2003. For purposes of calculating this amount only, all directors and executive
officers of the registrant have been treated as affiliates. There were
16,500,000 shares of the registrant's common stock, $.01 par value, outstanding
as of January 9, 2003. The net asset value of a share at October 31, 2002 was
$11.84.

meVC Draper Fisher Jurvetson Fund I, Inc.
(A Delaware Corporation)
Index

Part I Page

Item 1. Business................................................................. 1
Item 2. Properties............................................................... 12
Item 3. Legal Proceedings........................................................ 12
Item 4. Submission of Matters to a Vote of Security Holders...................... 13

Part II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.... 14
Item 6. Selected Financial Data.................................................. 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 15
Item 7A. Quantitative and Qualitative Disclosure about Market Risk................ 32
Item 8. Financial Statements and Supplementary Data.............................. 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures..................................... 51

Part III

Item 10. Directors and Executive Officers of the Registrant....................... 51
Item 11. Executive Compensation................................................... 52
Item 12. Security Ownership of Certain Beneficial Owners and Management........... 54
Item 13. Certain Relationships and Related Transactions........................... 54
Item 14. Controls and Procedures.................................................. 55

Part IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......... 55

SIGNATURE............................................................................. 57

Certifications........................................................................ 58

Part I

Factors That May Affect Future Results

This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of the federal securities laws that involve substantial
uncertainties and risks. The Fund's future results may differ materially from
its historical results and actual results could differ materially from those
projected in the forward-looking statements as a result of certain risk factors.
Readers should pay particular attention to the considerations described in the
section of this report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Readers should also carefully
review the risk factors described in the other documents the Fund files, or has
filed, from time to time with the Securities and Exchange Commission.

Item 1. Business

meVC Draper Fisher Jurvetson Fund I, Inc. (the "Fund") is a Delaware
Corporation organized on December 2, 1999 and which commenced operations on
March 31, 2000. The Fund seeks capital appreciation and increased streams of
income by making investments in equity and equity-oriented securities issued by
privately-owned, information-technology companies in transactions negotiated
directly with such companies ("Portfolio Companies") and entering into venture
lending by providing debt financing to late stage venture capital backed
information technology companies. The Fund's equity investments in Portfolio
Companies will consist of equity securities such as common and preferred stock,
other equity-oriented securities such as debt convertible into common or
preferred stock, options or other rights to acquire common or preferred stock
and debt securities consisting of senior notes, senior subordinated notes and
junior subordinated notes. Venture lending involves providing non-conventional
debt financing to private venture backed companies. A portion of the lender's
consideration is generally taken in the form of warrants for common or preferred
stock exercisable into shares of the borrower and, in addition, the lender
receives interest on the loans and receives origination fees. Generally, the
loans will be collateralized by a senior security interest in the borrower's
assets. The Fund has elected to be treated as a business development company
under the Investment Company Act of 1940, as amended ("Investment Company Act").

The Fund currently has thirteen employees engaged in performing the duties
and functions required, including the provision of management services to
Portfolio Companies (the "Management"). The Fund has five members on the Board
of Directors. Four of the directors are not interested persons (the "Independent
Directors") as defined by the Investment Company Act. The directors are
responsible for providing overall guidance and supervision of the Fund,
approving the valuation of the Fund's investments and performing various duties
imposed on directors of a business development company by the Investment Company
Act. Among other things, the Independent Directors supervise the management
arrangements for the Fund, the custody arrangements with respect to portfolio
securities, the selection of independent public accountants, fidelity bonding
and any transactions with affiliates.

On December 4, 2002, the Fund announced it had commenced doing business
under the name MVC Capital.

The Fund's principal executive office is located at 3000 Sand Hill Road,
Building 1, Suite 155, Menlo Park, California 94025, its telephone number is
(650) 926-7000 and its website is www.mvccapital.com. Copies of the Fund's
annual regulatory filings on Form 10-K, quarterly regulatory filings on
Form 10-Q and 8-K regulatory filings may be obtained from the Fund's website,
free of charge.

1

ORGANIZATION

From inception through June 19, 2002, meVC Advisers, Inc., a Delaware
Corporation (the "former Advisor" or "meVC Advisers") provided certain
management and administrative services necessary for the operation of the Fund
subject to the supervision of the directors. The former Advisor arranged for
third parties to perform certain management, administrative and other services,
including the hiring of Fleet Investment Advisors, Inc. to manage the Fund's
cash and short term interest bearing investments, and the hiring of State Street
Bank and Trust Co, Inc. to handle all functions of administration, accounting
and custodial work necessary for the operations of the Fund. The former Advisor
provided the Fund, at the former Advisor's expense, with the office space,
facilities, equipment, and personnel (whose salaries and benefits were paid by
the former Advisor) necessary to enable the Fund to conduct the operational
aspects of its business. The former Advisor also hired a sub-advisor, Draper
Fisher Jurvetson MeVC Management Co., LLC ("the former Sub-Advisor"), who
provided the Fund, at the former Sub-Advisor's expense, with the office space,
facilities, equipment, and personnel (whose salaries and benefits were paid by
the former Sub-Advisor) necessary to enable the Fund to conduct the investment
management aspects of its business.

At the Annual Meeting of the Fund held on March 27, 2002 two proposals
pertaining to the re-approval of the former Advisor and the former Sub-Advisor
failed to receive the necessary votes for approval. The Fund's Board of
Directors then determined that meVC Advisers, Inc. and Draper Fisher Jurvetson
MeVC Management Co., LLC would continue to serve as the Fund's investment
adviser and sub-adviser, respectively, pursuant to interim agreements, which
under SEC rules may remain in effect for a period of up to 150 days from March
27, 2002. The Board of Directors then undertook a thorough review of
alternatives for investment management and administration.

On June 17, 2002, Peter S. Freudenthal, then the President, Chief Executive
Officer and Chairman of the Board of the former Advisor of the Fund and of the
parent entity of the former Advisor, resigned from his positions as Vice
Chairman, President and a Director of the Fund. At the same time Paul D.
Wozniak, then the Vice President of Operations for the former Advisor and the
Chief Operating Officer and Chief Financial Officer of the parent entity of the
former Advisor, resigned from his positions as Vice President, Chief Financial
Officer, Treasurer and Secretary of the Fund. Messrs. Freudenthal and Wozniak
also resigned from the former Advisor.

From inception through June 19, 2002, the Fund was charged a management fee
by meVC Advisers at a rate of 2.5% of the average weekly net assets of the Fund,
paid monthly in arrears. meVC Advisers had agreed to pay compensation to the
directors and officers for any and all services rendered to the Fund and had
agreed to pay all Fund expenses above and beyond the 2.5% management fee paid to
meVC Advisers by the Fund. On June 19, 2002, meVC Advisers resigned without
prior notice to the Fund, effective immediately, as the Fund's investment
adviser. This resignation resulted in the automatic termination of the agreement
between the former Advisor and the former Sub-Advisor to the Fund. As a
consequence, the agreement with the former Advisor where the former Advisor
agreed to pay all Fund expenses above and beyond the 2.5% paid to the former
Adviser by the Fund also terminated.

Subsequent to the resignation of meVC Advisers, the Fund determined that
meVC Advisers had not paid certain vendors for services performed on behalf of
the Fund, which meVC Advisers had agreed to pay. On August 30, 2002, the Fund
paid or accrued $463,535.48 in expenses to pay those vendors, which resulted in
a $0.028 decrease in net asset value per share. The Fund is considering legal
actions that it may take against meVC Advisers to recover these expenses that
the Fund was forced to assume and pay.

Subsequently on June 19, 2002, the Board of Directors of the Fund met to
make prompt determinations with respect to the appropriate arrangements for the
Fund's continued operations, specifically in the areas of portfolio management,
cash management and administration. Upon a consideration of options then
available to the Fund,

2

the then current independent directors of the Fund concluded that internalizing
the management of the Fund's operations was a reasonable alternative, and the
most viable option under the circumstances. The full Board, and the then current
independent directors voting separately, then appointed Mr. John M. Grillos to
serve as the interim Chief Executive Officer and to conduct the day to day
operations of the Fund, and to hire employees, vendors and consultants necessary
to perform all operations of the Fund, including cash management, investment of
the Fund's assets, and all necessary administrative, legal and compliance
functions not then already performed by a third party.

The full Board, and the then current independent directors voting
separately, also authorized the Fund to hire Ms. Ann Oglanian as a consultant to
assist the Fund through the process of internalizing management and to consult
with the Fund regarding ongoing administrative and operational matters. Ms.
Oglanian also served as Acting Chief Operating Officer of the Fund from June
2002 through November 2002. Certain individuals who had been employed by the
former Advisor or the former Sub-Advisor were hired by the Fund to enable the
Fund to continue to provide portfolio management, as well as cash management and
administrative services. Mr. Nino Marakovic, a Principal and Partner of the
former Sub-Advisor, was hired as an employee and appointed as Secretary of the
Fund.

In October 2002, the independent directors completed their due diligence
regarding the investment management and administration alternatives for the
Fund. The independent directors stated their commitment to maintaining the
Fund's investment objective of long term capital appreciation from venture
capital investments in information technology companies and that it was in the
best interest of the Fund and its shareholders to continue to conduct the
Fund's investment operations through internal management. The independent
directors also agreed that it would be in the Fund's best interest to consider
engaging in venture lending activities in addition to its venture equity
investments. The independent directors then unanimously, a) appointed John
Grillos, the then Chairman of the Board and CEO, to serve as the Fund's Chief
Investment Officer; b) elected William Del Biaggio III as President of the Fund;
c) agreed to consider investing in debt instruments issued by information
technology companies; and d) agreed to continue to conduct the Fund's operations
through internal management by the Fund's Board of Directors, officers and
employees. Mr. Del Biaggio brings expertise in debt financings for privately
held companies. Mr. Del Biaggio will focus on the Fund's new lending program for
private companies backed by top-tier venture capitalists.

In November 2002, Mr. Michael D. Stewart was hired as Acting Chief
Financial Officer of the Fund.

Subject to the supervision of the directors, the Management performs
services necessary for the operations of the Fund. The investment team is
charged with identifying, evaluating, structuring, monitoring, and disposing of
the Fund's investments in Portfolio Companies and managing the Fund's cash and
short-term, interest-bearing investments. Subject to the supervision of the
directors, Management has arranged for third parties to perform certain of the
administrative services and other services necessary for the operations of the
Fund. Management had engaged State Street Bank and Trust Co, Inc. (the "Fund
Administrator", the "Fund Accounting Agent", the "Custodian"), to handle all
functions of administration, accounting, and custodial work necessary for the
operations of the Fund until October 31, 2002. Effective November 1, 2002,
Management has engaged US Bancorp Fund Services LLC (the "new Fund
Administrator", the "new Fund Accounting Agent"), to handle all functions of
administration and accounting work, and engaged U.S. Bank National Association
(the "new Custodian") to handle all custodial work necessary for the operations
of the Fund. The Fund directly incurs expenses for all office space, facilities,
equipment and personnel necessary to conduct its business.

3

INVESTMENT PRACTICES

Substantially all of the net assets of the Fund are invested, or are
intended to be invested, in securities or debt instruments of Portfolio
Companies. Substantially all amounts not invested in securities of Portfolio
Companies are invested in short-term, highly liquid investments consisting of
interest bearing certificates of deposit or securities issued or guaranteed as
to interest and principal by the United States or by a person or entity
controlled or supervised by and acting as an instrumentality of the government
of the United States that have maturities of less than one year from the date of
the investment or other short-term, highly liquid investments providing, in the
opinion of Management, appropriate safety of principal.

The Fund's investments in Portfolio Companies are structured in private
transactions negotiated directly with the owner or issuer of the securities
acquired.

The Fund is concentrating its investment efforts on companies of a type and
size that, in Management's view, provide opportunities for significant capital
appreciation and prudent diversification of risk. By investing in debt
securities, the Fund seeks to provide current interest and fee income from these
financings, as well as the potential for long term capital growth through the
appreciation in the value of warrants or other equity instruments that it
receives in connection with making the loan. Venture lending is an asset class
that may allow the Fund to participate in the potential upside of venture
capital investments with a greater level of protection against the downside risk
of an equity investment. The upside is typically achieved through warrants or
convertible features, while the downside protection is typically achieved
through liquidation preference over equity investors, principal amortization and
covenants.

The Fund is attempting to reduce certain risks inherent in private
equity-oriented investments by investing in a portfolio of companies involved in
different sectors of the Information Technology industry. The Fund has limited
its initial investment (whether in the form of equity or debt securities,
commitments to purchase securities or debt guaranties) in any Portfolio Company
to no more than 5% of the Fund's net assets. However, if a follow-on investment
is available or required, as discussed below, the Fund's investment in a
particular Portfolio Company may exceed those initial investment limitations.
Also, investments in certain Portfolio Companies may be in excess of the Fund's
initial investment limitations due to increases in the value of such investments
or decreases in the value of the other Fund assets.

INVESTMENT CRITERIA

Prospective investments are evaluated by Management based upon criteria
that may be modified from time to time. The criteria currently being used by
Management in determining whether to make an investment in a prospective
Portfolio Company include, but are not limited to:

-- The presence or availability of strong management teams;

-- Favorable industry and competitive dynamics;

-- Markets characterized by rapid growth and new product adaptation;

-- Strong revenue traction to support the venture lending strategy.

CO-INVESTMENTS

The Fund has co-invested in certain Portfolio Companies with affiliates of
its former investment advisor and sub-advisor in the Draper Fisher Jurvetson
network (the "Draper Network"). The Fund and Management obtained an order from
the Securities and Exchange Commission (the "SEC") exempting the Fund from
certain prohibitions contained in the Investment Company Act relating to
co-investments by the Fund and the Draper

4

Network. Under the terms of the order, Portfolio Companies purchased by the Fund
and the Draper Network are required to be approved by the Independent Directors
and are required to satisfy certain conditions established by the SEC. In
accordance with the conditions of the order, the Fund has co-invested with
certain affiliates of Draper Fisher Jurvetson in the following Portfolio
Companies of the Fund: IQdestination, Lumeta Corporation, Mediaprise, Inc. and
Phosistor, Inc.

Further, John M. Grillos, Chief Executive Officer of the Fund, is a limited
partner investor in Osprey Ventures ("Osprey"), a venture capital fund investing
primarily in early stage technology companies. Mr. Grillos owns less than 0.09%
of the outstanding limited partnership interests in Osprey. Osprey is a
co-investor in two MVC portfolio companies, BlueStar Solutions, Inc., and
ShopEaze Systems, Inc.

INVESTMENT OPERATIONS

The investment operations of the Fund consist principally of the following
basic activities:

IDENTIFYING INVESTMENTS. Investment opportunities are identified for the
Fund by the investment team. Investment proposals may, however, come to the Fund
from many other sources, and may include unsolicited proposals from the public
and from referrals from banks, lawyers, accountants and other members of the
financial community.

EVALUATING INVESTMENT OPPORTUNITIES. Prior to committing funds to an
investment opportunity, due diligence is conducted to assess the prospects and
risks of the potential investment. See "Investment Criteria" above.

STRUCTURING INVESTMENTS. Portfolio Company investments typically are
negotiated directly with the prospective Portfolio Company or its affiliates.
The investment team structures the terms of a proposed investment, including the
purchase price, the type of security to be purchased or financing to be provided
and the future involvement of the Fund and affiliates in the Portfolio Company's
business (including potential representation on its board of directors). The
investment team seeks to structure the terms of the investment so as to provide
for the capital needs of the Portfolio Company and at the same time maximize the
Fund's opportunities for capital appreciation and interest income in its
investments.

PROVIDING MANAGEMENT ASSISTANCE AND MONITORING OF INVESTMENTS. Private
equity investors often assist Portfolio Companies with various aspects of their
business operations and BDC's are required to offer such assistance to qualified
portfolio companies. In some cases, officers and directors of the Fund serve as
members of the board of directors of Portfolio Companies. The Fund often
provides guidance and management assistance to Portfolio Companies with respect
to such matters as budgets, profit goals, business and financing strategy,
management additions or replacements and plans for liquidity events for
Portfolio Company investors such as a merger or initial public offering.

TEMPORARY INVESTMENTS

Pending investment in Portfolio Companies, the Fund invests its available
funds in interest-bearing bank accounts, money market mutual funds, U.S.
Treasury securities and/or certificates of deposit with maturities of less than
one year (collectively, "Temporary Investments"). Temporary Investments may also
include commercial paper and other short-term securities. Temporary Investments
constituting cash, cash items, securities issued or guaranteed by the U.S.
Treasury or U.S. Government agencies and high quality debt securities
(commercial paper rated in the highest rating category by Moody's Investor
Services, Inc. or Standard and Poor's Corporation) will qualify in determining
whether the Fund has 70% of its total assets invested in

5

Managed Companies (as hereafter defined) or in qualified Temporary Investments
for purposes of the business development company provisions of the Investment
Company Act. See "Regulation" below.

FOLLOW-ON INVESTMENTS

Following its initial investment in a Portfolio Company, the Fund may be
requested to make follow-on investments in the company. Follow-on investments
may be made to take advantage of warrants or other preferential rights granted
to the Fund or otherwise to increase the Fund's position in a successful or
promising Portfolio Company. The Fund may also be called upon to provide
additional equity or loans needed by a Portfolio Company to fully implement its
business plans, to develop a new line of business or to recover from unexpected
business problems.

DISPOSITION OF INVESTMENTS

The method and timing of the disposition of the Fund's portfolio
investments is critical to the realization of capital appreciation and to the
minimization of any capital losses. The Fund expects to dispose of its portfolio
securities through a variety of transactions, including the negotiated private
sales of such securities to other investors, the sales of portfolio securities
in underwritten public offerings, and public sales of such securities. The Fund
expects the debt financings to be repaid with interest and hopes to realize
further appreciation from the warrants or other equity type instruments it
receives in connection with making the loan. The Fund bears the costs of
disposing of investments to the extent not paid by a Portfolio Company.

OPERATING EXPENSES

The Fund, at its own expense, bears the costs of obtaining office space,
facilities, equipment and personnel necessary to conduct the Fund's business.
The Fund also bears other costs relating to the Fund's operations, including
fees and expenses of the Independent Directors; fees of unaffiliated transfer
agents, registrars and disbursing agents; legal and accounting expenses; costs
of printing and mailing proxy materials and reports to shareholders; New York
Stock Exchange fees; custodian fees; litigation costs; costs of disposing of
investments including brokerage fees and commissions; and other extraordinary or
nonrecurring expenses and other expenses properly payable by the Fund.

VALUATION

Investments in Portfolio Companies are carried at fair value with the net
change in unrealized appreciation or depreciation included in the determination
of net assets. Cost is used to approximate fair value of these investments until
significant developments affecting an investment provide a basis for valuing
such investment at a number other than cost.

The fair value of investments for which no market exists and for which the
Fund's Board of Directors has determined that the original cost of the
investment is no longer an appropriate valuation will be determined on the basis
of procedures established by management in good faith and approved by the Board
of Directors. Valuations will be based upon such factors as the performance of
the company relative to planned budgets/forecasts, the issuer's financial
condition and the markets in which it does business, the prices of any recent
transactions or offerings regarding such securities or any proxy securities, any
material analysis, media, or other reports or information regarding the issuer,
or the markets or industry in which it operates. In the case of unsuccessful
operations, the valuation may be based upon anticipated liquidation proceeds.

6

Because of the inherent uncertainty of the valuation of portfolio
securities which do not have readily ascertainable market values, the Fund's
estimate of fair value may significantly differ from the fair market value that
would have been used had a ready market existed for the securities. Such values
do not reflect brokers' fees or other normal selling costs which might become
payable on disposition of such investments.

Investments in companies whose securities are publicly traded are valued at
their quoted market price, less a discount to reflect the estimated effects of
restrictions on the sale of such securities ("Valuation Discount"), if
applicable.

Short-term investments having maturities of 60 days or less are stated at
amortized cost, which approximates fair value. Other fixed income securities are
stated at fair value. Fair value of these securities is determined at the most
recent bid or yield equivalent from dealers that make markets in such
securities.

The directors review the valuations on a quarterly basis or more frequently
if deemed necessary to determine their appropriateness.

CUSTODIAN

Prior to October 31, 2002, the Fund had entered into an agreement with
State Street Bank and Trust Company to act as the Fund's custodian with respect
to the safekeeping of its securities. The principal business office of the
former custodian was 225 Franklin Street, Boston, Massachusetts, 02110.
Effective November 1, 2002, the Fund has entered into an agreement with US Bank
National Association to act as the custodian with respect to the safekeeping of
the Fund's securities. The principal business office of the current custodian is
425 Walnut Street, Cincinnati, OH 45202.

TRANSFER AGENT AND DISBURSING AGENT

The Fund employs EquiServe as its transfer agent to record transfers of the
shares, maintain proxy records and to process distributions. The principal
business office of such company is 150 Royall Street, Canton, Massachusetts,
02021.

FACTORS THAT MAY AFFECT FUTURE RESULTS, THE MARKET PRICE OF COMMON STOCK, AND
THE ACCURACY OF FORWARD-LOOKING STATEMENTS

In the normal course of its business, the Fund, in an effort to keep its
stockholders and the public informed about the Fund's operations and portfolio
of investments, may from time-to-time issue certain statements, either in
writing or orally, that contain or may contain forward-looking information.
Generally, these statements relate to business plans or strategies of the Fund
or Portfolio Companies in which it invests, projected or anticipated benefits or
consequences of such plans or strategies, projected or anticipated benefits of
new or follow-on investments made by or to be made by the Fund, or projections
involving anticipated purchases or sales of securities or other aspects of the
Fund's operating results. Forward-looking statements are not guarantees of
future performance and are subject to risks and uncertainties that could cause
actual results to differ materially. As noted elsewhere in this report, the
Fund's operations and portfolio of investments are subject to a number of
uncertainties, risks, and other influences, many of which are outside the
control of the Fund, and any one of which, or a combination of which, could
materially affect the results of the Fund's operations or net asset value, the
market price of its common stock, and whether forward-looking statements made by
the Fund ultimately prove to be accurate.

The following discussion outlines certain factors that in the future could
affect the Fund's results for 2003 and beyond and cause them to differ
materially from those that may be set forth in any forward-looking statement
made by or on behalf of the Fund:

7

LONG-TERM OBJECTIVE. The Fund is intended for investors seeking long-term
capital growth. The Fund is not meant to provide a vehicle for those who wish to
play short-term swings in the stock market. The Portfolio Companies acquired by
the Fund generally require several or many years to reach maturity and generally
are illiquid. An investment in shares of the Fund should not be considered a
complete investment program. Each prospective purchaser should take into account
their investment objectives as well as their other investments when considering
the purchase of shares of the Fund.

NON-DIVERSIFIED STATUS; NUMBER OF INVESTMENTS. The Fund is classified as a
"non-diversified" investment company under the Investment Company Act, which
means the Fund is not limited in the proportion of its assets that may be
invested in the securities of a single issuer. Generally, the Fund does not
intend to initially invest more than 5% of the value of its net assets in a
single Portfolio Company. However, follow-on investments or a disproportionate
increase in the value of one Portfolio Company or decrease in the value of other
assets may result in greater than 5% of the Fund's net assets being invested in
a single Portfolio Company. While these restrictions limit the exposure of the
capital of the Fund in any single investment, to the extent the Fund takes large
positions in the securities of a small number of issuers, the Fund will be
exposed to a greater risk of loss and the Fund's net asset value and the market
price of its common stock may fluctuate as a result of changes in the financial
condition, the stock price of, or in the market's assessment of any single
Portfolio Company to a greater extent than would be the case if it were a
"diversified" company holding numerous investments. As of October 31, 2002, the
Fund has investments in 20 Portfolio Companies, one of which, CBCA, Inc, exceeds
5% of the Fund's net asset value.

LACK OF LIQUIDITY OF PORTFOLIO INVESTMENTS. The portfolio investments of
the Fund consist principally of securities that are subject to restrictions on
sale because they were acquired from the issuer in "private placement"
transactions or because the Fund is deemed to be an affiliate of the issuer.
Generally, the Fund may not be able to sell these securities publicly. Any
public sale of these securities would demand the expense and time required to
register the securities under the Securities Act and applicable state securities
law unless an exemption from such registration requirements is available. In
addition, contractual or practical limitations may restrict the Fund's ability
to liquidate its securities in Portfolio Companies since in many cases the
securities of such companies will be privately held and the Fund may own a
relatively large percentage of the issuer's outstanding securities. Sales may
also be limited by securities market conditions, which may be unfavorable for
sales of securities of particular issuers or issuers in particular industries.
The above limitations on liquidity of the Fund's securities could preclude or
delay any disposition of such securities or reduce the amount of proceeds that
might otherwise be realized.

DEBT FINANCINGS IN PORTFOLIO INVESTMENTS. The portfolio investments of the
Fund will also consist of debt financing to late stage venture capital backed
information technology companies. The borrower's ability to repay the loan may
be adversely impacted by a number of factors and consequently the loan may not
be fully repaid. Furthermore, the Fund's security interest in any collateral
over the borrower's assets may not realize a sufficient amount to make up any
shortfall.

NEED FOR FOLLOW-ON INVESTMENTS IN PORTFOLIO COMPANIES. After its initial
investment in a Portfolio Company, the Fund may be called upon from time to time
to provide additional funds to such company or have the opportunity to increase
its investment in a successful situation, e.g., the exercise of a warrant to
purchase common stock. There is no assurance that the Fund will make, or have
sufficient funds to make, follow-on investments. Any decision by the Fund not to
make a follow-on investment or any inability on its part to make such an
investment may have a negative impact on a Portfolio Company in need of such an
investment or may result in a missed opportunity for the Fund to increase its
participation in a successful operation and may dilute the Fund's equity
interest in or reduce the expected yield on its investment. In many cases, if a
Portfolio Company is unable to secure a follow-on investment from its investors,
it is likely that the outcome will be the

8

Portfolio Company's requirement to cease operations due to the lack of working
capital available to that Portfolio Company.

COMPETITION FOR INVESTMENTS. The Fund encounters competition from other
persons or entities with similar investment objectives. These competitors
include venture capital firms, small business investment companies, large
industrial and financial companies investing directly or through affiliates,
other business development companies, foreign investors of various types and
individuals. Many of these competitors have greater financial resources and more
personnel than the Fund and may be subject to different and frequently less
stringent regulation.

LOSS OF CONDUIT TAX TREATMENT. The Fund may cease to qualify for conduit
tax treatment if it is unable to comply with the diversification requirements
contained in Subchapter M of the Internal Revenue Code of 1986. Subchapter M
requires that at the end of each quarter (i) at least 50% of the value of the
Fund's assets must consist of cash, government securities and other securities
of any one issuer that do not represent more than 5% of the value of the Fund's
total assets and 10% of the outstanding voting securities of such issuer, and
(ii) no more than 25% of the value of the Fund's assets may be invested in the
securities of any one issuer (other than United States government securities),
or of two or more issuers that are controlled by the Fund and are engaged in the
same or similar or related trades or businesses. If the Fund fails to satisfy
such diversification requirements and ceases to qualify for conduit tax
treatment, the Fund will be subject to income tax on its income and gains and
stockholders will be subject to income tax on distributions. The Fund may also
cease to qualify for conduit tax treatment, or be subject to a 4% excise tax, if
it fails to distribute a sufficient portion of its net investment income and net
realized capital gains.

MARKET VALUE AND NET ASSET VALUE. The shares of the Fund's common stock are
listed on the NYSE. Investors desiring liquidity may trade their shares of
common stock on the NYSE at current market value, which may differ from the then
current net asset value (Shareholders' Equity). Shares of closed-end investment
companies frequently trade at a discount from net asset value. This
characteristic of shares of a closed-end fund is a risk separate and distinct
from the risk that the Fund's net asset value will decrease. The risk of
purchasing shares of a closed-end fund that might trade at a discount is more
pronounced for investors who wish to sell their shares in a relatively short
period of time because for those investors, realization of a gain or loss on
their investments is likely to be more dependent upon the existence of a premium
or discount than upon portfolio performance. The Fund's shares have traded at a
significant discount to net asset value since they began trading. For
information concerning the trading history of the Fund's shares see "Market for
Registrant's Common Stock and Related Stockholder Matters."

VALUATION OF INVESTMENTS. The Fund's net asset value is based on the value
assigned to its portfolio investments. Investments in companies whose securities
are publicly traded are valued at their quoted market price, less a discount to
reflect the estimated effects of restrictions on the sale of such securities, if
applicable. The Fund adjusts its net asset value for changes in the value of its
publicly held securities, if any, on a daily basis. The value of the Fund's
investments in securities for which market quotations are not available is
determined as of the end of each fiscal quarter but monitored daily in case
there is a significant event requiring a change in valuation in the interim.
Cost is used to approximate fair value of such investments until significant
developments affecting an investment provide a basis for valuing an investment
at other than cost. Thereafter, such portfolio investments are carried at fair
values as determined at least quarterly. Due to the inherent uncertainty of the
valuation of portfolio securities which do not have readily ascertainable market
values, the Fund's estimate of fair value may significantly differ from the fair
value that would have been used had a ready market existed for the securities.
At October 31, 2002, 100% of the preferred stocks and subordinated notes in
Portfolio Companies held by the Fund, representing approximately 25.65% and
2.09%, respectively, of the Fund's net assets, were invested in securities for
which market quotations were not readily available. See "Valuation".

9

POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Fund's common
stock could be subject to significant fluctuations in response to variations in
the net asset value of the Fund, its quarterly operating results, and other
factors. The market price of the common stock may be significantly affected by
such factors as the announcement of new or follow-on investments in Portfolio
Companies, the sale or proposed sale of a portfolio investment, the results of
operations or fluctuations in the market prices or appraised value of one or
more of the Fund's Portfolio Companies, changes in earnings estimates by market
analysts, speculation in the press or analyst community and general market
conditions or market conditions specific to particular industries. From time to
time in recent years, the securities markets have experienced significant price
and volume fluctuations that have often been unrelated or disproportionate to
the operating performance of particular companies. These broad fluctuations may
adversely affect the market price of the common stock. In addition, the Fund is
subject to the risk of the securities markets in which the portfolio securities
of the Fund are traded. Securities markets are cyclical and the prices of the
securities traded in such markets rise and fall at various times. These cyclical
periods may extend over significant periods of time.

REGULATION

The Fund has elected to be treated as a business development company under
the Investment Company Act. Accordingly, it may provide for incentive
compensation in the form of one of the following: (i) a performance fee based on
the capital appreciation of the Fund's investments, (ii) a profit-sharing plan
based on the Fund's income, or (iii) a stock option plan. The Fund does not
currently have any form of incentive compensation in place.

The Fund may not withdraw its election to be treated as a business
development company without first obtaining the approval of a majority in
interest of its shareholders. The following brief description of the Investment
Company Act is qualified in its entirety by reference to the full text of the
Investment Company Act and the rules thereunder.

A business development company must be operated for the purpose of
investing in the securities of certain present and former "eligible Portfolio
Companies" or certain bankrupt or insolvent companies and must make available
significant managerial assistance to Portfolio Companies. An eligible Portfolio
Company generally is a company that (i) is organized under the laws of, and has
its principal place of business in, any state or states, (ii) is not an
investment company and (iii)(a) does not have a class of securities registered
on an exchange or included in the Federal Reserve Board's over-the-counter
margin list, (b) is actively controlled by the business development company
acting either alone or as part of a group acting together and an affiliated
person of the business development company is a member of the Portfolio
Company's board of directors or (c) meets such other criteria as may be
established by the SEC. Control is presumed to exist where the business
development company owns more than 25% of the outstanding voting securities of a
Portfolio Company.

"Making available significant managerial assistance" is defined under the
Investment Company Act to mean (i) any arrangement whereby a business
development company, through its directors, officers or employees, offers to
provide and, if accepted, does provide significant guidance and counsel
concerning the management, operations or business objectives or policies of a
Portfolio Company or (ii) the exercise of a controlling influence over the
management or policies of a Portfolio Company by the business development
company acting individually or as part of a group of which the business
development company is a member acting together which controls such company
("Managed Company"). A business development company may satisfy the requirements
of clause (i) with respect to a Portfolio Company by purchasing securities of
such a company as part of a group of investors acting together if one person in
such group provides the type of assistance described in such clause. However,
the business development company will not satisfy the general requirement of
making available significant managerial assistance if it in all cases provides
such assistance only indirectly through an investor group. A business
development company need only extend significant managerial assistance with

10

respect to Portfolio Companies which are treated as Qualifying Assets (as
defined below) for the purpose of satisfying the 70% test discussed below.

The Investment Company Act prohibits or restricts the Fund from investing
in certain types of companies, such as brokerage firms, insurance companies,
investment banking firms and investment companies. Moreover, the Investment
Company Act limits the type of assets that the Fund may acquire to "Qualifying
Assets" and certain assets necessary for its operations (such as office
furniture, equipment and facilities) if, at the time of the acquisition, less
than 70% of the value of the Fund's total assets consists of qualifying assets.
Qualifying Assets include (i) securities of companies that were eligible
Portfolio Companies at the time that the Fund acquired their securities; (ii)
securities of companies that are actively controlled by the Fund; (iii)
securities of bankrupt or insolvent companies that are not otherwise eligible
Portfolio Companies; (iv) securities acquired as follow-on investments in
companies that were eligible Portfolio Companies at the time of the Fund's
initial acquisition of their securities but are no longer eligible Portfolio
Companies, provided that the Fund has maintained a substantial portion of its
initial investment in such companies; (v) securities received in exchange for or
distributed on or with respect to any of the foregoing; and (vi) cash items,
government securities and high-quality, short-term debt. The Investment Company
Act also places restrictions on the nature of the transactions in which, and the
persons from whom, securities can be purchased in order for such securities to
be considered Qualifying Assets. As a general matter, Qualifying Assets may only
be purchased from the issuer or an affiliate in a transaction not constituting a
public offering. The Fund may not purchase any security on margin, except such
short-term credits as are necessary for the clearance of portfolio transactions,
or engage in short sales of securities.

The Fund is permitted by the Investment Company Act, under specified
conditions, to issue multiple classes of senior debt and a single class of
preferred stock senior to the common stock if its asset coverage, as defined in
the Investment Company Act, is at least 200% after the issuance of the debt or
the senior stockholders' interests. In addition, provisions must be made to
prohibit any distribution to common shareholders or the repurchase of any shares
unless the asset coverage ratio is at least 200% at the time of the distribution
or repurchase.

The Fund generally may sell its securities at a price that is below the
prevailing net asset value per share only upon the approval of the policy by
shareholders holding a majority of the shares issued by the Fund, including a
majority of shares held by nonaffiliated shareholders. The Fund may, in
accordance with certain conditions established by the SEC, sell shares below net
asset value in connection with the distribution of rights to all of its
stockholders. The Fund may also issue shares at less than net asset value in
payment of dividends to existing shareholders.

Since the Fund is a closed-end business development company, stockholders
have no right to present their shares to the Fund for redemption. Recognizing
the possibility that the Fund's shares might trade at a discount, the Board of
Directors of the Fund has determined that it would be in the best interest of
stockholders for the Fund to be authorized to attempt to reduce or eliminate a
market value discount from net asset value. Accordingly, the Fund from time to
time may, but is not required to, repurchase its shares (including by means of
tender offers) to attempt to reduce or eliminate any discount or to increase the
net asset value of its shares, or both.

Many of the transactions involving the Fund and its affiliates (as well as
affiliates of such affiliates) require the prior approval of a majority of the
Independent Directors and a majority of the Independent Directors having no
financial interest in the transactions. However, certain transactions involving
closely affiliated persons of the Fund would require the prior approval of the
SEC. In general (a) any person who owns, controls or holds with power to vote
more than 5% of the outstanding shares, (b) any director or executive officer
and (c) any person who directly or indirectly controls, is controlled by or is
under common control with such person, must obtain the prior approval of a
majority of the Independent Directors and, in some situations, the prior
approval of the SEC, before engaging in certain transactions involving the Fund
or any company controlled by the Fund. In

11

accordance with the Investment Company Act, a majority of the directors must be
persons who are not "interested persons" as defined in such act. Except for
certain transactions which must be approved by the Independent Directors, the
Investment Company Act generally does not restrict transactions between the Fund
and its Portfolio Companies.

The Fund has applied for a license as a commercial finance lender under the
California Finance Lenders Law, and anticipates that the application will be
processed in a timely manner by the California Department of Corporations.

Item 2. Properties

The Fund does not own any real estate or other physical property. Its
principal executive office, located at 3000 Sand Hill Road, Building 1, Suite
155, Menlo Park, California 94025, is occupied under a three-year lease, which
is scheduled to expire on October 31, 2005.

Item 3. Legal Proceedings

On February 20, 2002, Millenco LP ("Millenco'), a Cayman-based hedge fund,
filed a complaint in the United States District Court for the District of
Delaware against the former Advisor and the Fund. The Fund was designated a
"nominal" defendant for purposes of effectuating the relief sought in the
complaint. The complaint alleges that the fees received by the former Advisor
for the year prior to the filing of the complaint were excessive, in violation
of Section 36(b) of the Investment Company Act of 1940. Neither the former
Sub-Advisor nor any of the Fund's directors or officers is named as a defendant
in the case. The Fund moved to dismiss the complaint against it, on the ground
that it may not be named as a defendant in a Section 36(b) suit. During a
telephonic hearing with the court, Millenco said it did not oppose dismissal of
the suit against the Fund, but it vigorously opposed dismissal or transfer of
the suit against the former Advisor.

On April 3, 2002, Millenco filed a complaint against the Fund in the Court
of Chancery, New Castle County, Delaware, seeking a judicial determination of
the stockholder's vote of March 27, 2002, to approve investment advisory
agreements between the Fund and the former Advisor and between the Fund and the
former Sub-Advisor. On April 5, 2002, Millenco moved to accelerate the trial of
the case. However, on April 8, 2002, the Fund informed the Chancery Court that
the Fund's Board of Directors decided that the proposals for shareholder
approval of the advisory and sub-advisory agreements had failed, that a
stockholder's meeting would not be reconvened on this matter, and that plaintiff
had withdrawn its request to accelerate the trial. Subsequently, on April 17,
2002, the Fund moved to dismiss the suit as moot. Millenco never filed a
response to that motion, and the Court never acted upon it.

On July 30, 2002, Millenco filed an amended complaint against the Fund and
the Fund's directors in the Court of Chancery, New Castle County, Delaware,
seeking to (i) invalidate the election of two of the Fund's four directors, John
M. Grillos and Larry Gerhard, at the 2001 and 2002 Annual Meetings of
Stockholders, to three-year terms expiring 2004 and 2005, respectively; and the
election of former director Peter Freudenthal, at the 2001 Annual Meeting, to a
three-year term expiring 2004; and (ii) require the Fund to hold a special
Meeting of Stockholders, for the purpose of holding new elections to fill the
board seats currently held by Mr. Grillos and Mr. Gerhard and the board seat
vacated by Peter Freudenthal due to his resignation in June 2002.

On August 21, 2002, Judge Farnan of the U.S. District Court for the
District of Delaware issued an order granting the Fund's motion to dismiss the
Fund from the February 20, 2002 federal lawsuit. Judge Farnan agreed with the
Fund that an action to recover excess compensation under Section 36(b) of the
Investment

12

Company Act of 1940 may not be brought against any person other than the
recipient of such compensation, and Millenco did not allege that the Fund was a
recipient of such compensation.

On August 23, 2002, Millenco moved for leave to file a second amended
complaint in Chancery Court, in which it proposed to add another allegation to
its first amended complaint. On September 4, 2002, Millenco moved for leave to
file a re-written version of its proposed second amended complaint, in which it
added two more allegations to its first amended complaint.

On September 11, 2002, Vice Chancellor Stephen Lamb of the Chancery Court
(1) granted the Fund's motion to dismiss the claims in the first amended
complaint for an expedited proceeding to invalidate the director elections and
order new elections, (2) denied Millenco's motion for a "status quo" order that
would have prevented the Fund from internally hiring a Fund manager without
shareholder approval, (3) allowed Millenco to file the September 4th version of
its second amended complaint, subject to a motion by the Fund to dismiss several
of the claims in it, and (4) denied the Fund's motion to dismiss a breach of
fiduciary duty claim in the second amended complaint based on the Fund's alleged
failure to disclose in past proxy statements certain outside relationships of
several of the Fund's directors.

The following events occurred after the fiscal year ended October 31, 2002:

On December 19, 2002, Vice Chancellor Lamb granted Millenco's motion for
summary judgment on its claim that the directors breached their duty of
disclosure under Delaware law by omitting material facts concerning the business
relationship among three of the directors (directors Grillos, Gerhard and
Hughes) at eVineyard, Inc. (a privately held corporation) from the 2001 and 2002
proxy statements. Director Grillos, an "interested" director of the Fund by
reason of being its CEO and managing member of the Former Sub-Advisor, was
Chairman of the Board and Chairman of the Compensation Committee of eVineyard at
the same time that directors Gerhard and Hughes, "non-interested" directors of
the Fund, were officers of eVineyard. Vice Chancellor Lamb, finding that the
omissions rendered the proxy statements false and misleading, ordered the Fund
to hold new elections for the seats held by directors Grillos and Gerhard and
former director Freudenthal, to be conducted either in conjunction with the
Fund's upcoming annual meeting in 2003 (at which two other director seats are up
for election) if that meeting is held within 60 days of the date of the Vice
Chancellor's order, or separately on or before February 15, 2003. The Vice
Chancellor noted without comment Millenco's statement that the remaining claims
in Millenco's latest amended complaint were no longer at issue in the case.

On December 22, 2002 the Fund filed a motion for re-argument of the Vice
Chancellor's order with respect to the date by which the Fund must hold an
annual or special meeting for the election to fill the three directors' seats.
On January 8, 2003, the Vice Chancellor issued an order granting the Fund's
motion to re-argue and extending the last date for that election to February 28,
2003.

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

No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year ended October 31, 2002.

13

Part II

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

The Fund's shares of common stock began to trade on the New York Stock
Exchange (NYSE) on June 26, 2000, under the symbol "MVC". The Fund had
approximately 13,000 shareholders at January 9, 2003.

The following table reflects, for the periods indicated the high and low
closing prices per share of the Fund's common stock on the New York Stock
Exchange, by quarter.

QUARTER
ENDED HIGH LOW
-------- ------- -------
FISCAL YEAR 2002
01/31/02 $ 10.06 $ 9.18
04/30/02 $ 10.06 $ 8.80
07/31/02 $ 9.50 $ 7.50
10/31/02 $ 8.05 $ 7.25
FISCAL YEAR 2001
01/31/01 $12.875 $9.9375
04/30/01 $ 12.49 $ 10.16
07/31/01 $ 12.20 $ 10.70
10/31/01 $ 11.05 $ 9.20

DIVIDENDS

As a regulated investment company under Subchapter M of the Code, the Fund
is required to distribute to its shareholders, in a timely manner, at least 90%
of its taxable net investment income each year. If the Fund distributes, in a
timely manner, 98% of its taxable net capital gains and 98% of its taxable net
investment income each year (as well as any portion of the respective 2%
balances not distributed in the previous year), it will not be subject to the 4%
non-deductible federal excise tax on certain undistributed income of regulated
investment companies.

On December 4, 2001, the Fund announced an ordinary income cash dividend of
$0.044163 per share, payable on January 3, 2002, to stockholders of record at
the close of business on December 10, 2001. The Fund went ex-dividend on
December 6, 2001. Distributions can be made payable by the Fund in the form of
either a cash distribution or a stock dividend. On the Fund's ex-dividend date,
the Fund was trading on the NYSE at a discount to net asset value. In accordance
with the Dividend Reinvestment Plan, the Dividend Distribution Agent purchased
shares on the open market of the NYSE for those shareholders electing to take
their distributions in the form of stock dividends.

The Fund is investing in companies that it believes have a high potential
for capital appreciation, and the Fund intends to realize the majority of its
profits upon the sale of its investments in Portfolio Companies. Consequently,
it is likely that few or none of the companies in which the Fund invests will
have established policies of paying annual dividends. The Fund also intends to
invest its capital in debt securities by providing debt financing to late stage
venture capital backed Information Technology companies. In a typical loan the

14

lender receives interest on the loans, origination fees, as well as warrants, or
other equity instruments, for the purchase of the borrowers stock.

The Fund reserves the right to retain net long-term capital gains in
excess of net short-term capital losses for reinvestment or to pay contingencies
and expenses. Such retained amounts, if any, will be taxable to the Fund as
long-term capital gains and shareholders will be able to claim their
proportionate share of the federal income taxes paid by the Fund on such gains
as a credit against their own federal income tax liabilities. Stockholders will
also be entitled to increase the adjusted tax basis of their Fund shares by the
difference between their undistributed capital gains and their tax credit.

Item 6. Selected Financial Data

The following selected financial data for the fiscal years ended October
31, 2002 and 2001 and the period from March 31, 2000 (commencement of
operations) through October 31, 2000 are derived from the financial statements,
which have been audited by PricewaterhouseCoopers, LLP, independent accountants.
The data should be read in conjunction with the financial statements and notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this report.

- ------------------------------------------------------------------------------------------------------------------
Period From
Year Ended Year Ended March 31, 2000
October 31, 2002 October 31, 2001 To October 31, 2000
- ------------------------------------------------------------------------------------------------------------------

Total investment income $ 3,739,893 $ 9,046,526 $ 9,325,822
- ------------------------------------------------------------------------------------------------------------------
Total operating expenses $ 6,861,850 $ 7,388,061 $ 4,615,284
- ------------------------------------------------------------------------------------------------------------------
Net investment (loss) income $ (3,121,957) $ 1,658,465 $ 4,710,538
- ------------------------------------------------------------------------------------------------------------------
Net realized (loss) gain on investment transactions $(33,469,122) $ 5,123 $ (789)
- ------------------------------------------------------------------------------------------------------------------
Net unrealized depreciation on investment transactions $(21,765,310) $(52,994,121) $ (4,913,010)
- ------------------------------------------------------------------------------------------------------------------
Dividends declared per share $ 0.04 $ 0.34 $ 0
- ------------------------------------------------------------------------------------------------------------------
Balance Sheet data:
- ------------------------------------------------------------------------------------------------------------------
Total assets $196,511,000 $255,049,783 $312,114,878
- ------------------------------------------------------------------------------------------------------------------
Total liabilities $ 1,124,523 $ 578,227 $ 668,139
- ------------------------------------------------------------------------------------------------------------------
Total Shareholders Equity $195,386,477 $254,471,556 $311,446,739
- ------------------------------------------------------------------------------------------------------------------
Net asset value per share $ 11.84 $ 15.42 $ 18.88
- ------------------------------------------------------------------------------------------------------------------

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

This report contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Fund and
its investment in Portfolio Companies. Words such as "may," "will," "expect,"
"believe," "anticipate," "intend," "could," "estimate," "might," or "continue"
or 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 only predictions
and the actual events or results may differ materially from the results
discussed in the forward-looking statements. Factors that could cause or
contribute to

15

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 Commission.
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 operation 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.

OVERVIEW

The Fund is a non-diversified investment company that is regulated as a
business development company under the Investment Company Act. The Fund provides
equity and debt financing to privately held venture capital backed information
technology companies. The primary investment objective is to achieve long-term
capital appreciation in the value of its investments.

Historically the Fund's investing activities have focused on private equity
securities. Generally, private equity investments are structured as preferred
stock. Generally portfolio companies do not pay dividends and consequently
current income is not a significant part of the equity portfolio. Private equity
investments typically range from $5 million to $10 million and the Fund
generally expects these investments to achieve liquidity within three to five
years. Typically a cash return on the investment is not received until a
liquidity event occurs.

On September 30, 2002 the Fund announced a new strategic initiative to
enhance shareholder value by investing its capital in debt securities by
providing debt financing to late stage venture capital backed information
technology companies. By investing in debt securities, the Fund will seek to
obtain current interest income from these financings, as well as seek long term
capital growth through the appreciation in the value of warrants or other equity
instruments that it will receive in connection with making the loan.

We expect our loans typically will range from $3 million to $10 million,
mature in no more than five years and accrue interest at a fixed or variable
rate that exceeds the prime rate. Our loans generally will be collateralized by
a security interest in the borrower's assets. Interest payments will be due
monthly or quarterly with amortization of the principal generally being deferred
for a period of time usually one year. We anticipate receiving warrants and an
origination fee in consideration for making the loan.

We had not funded any debt financing under this initiative as of the end of
our most recently completed fiscal year, but anticipate it becoming a
significant part of our business in the future.

GENERAL INVESTMENT CLIMATE

During the reporting year, we continued to encounter a challenging
investment climate characterized by reduced M&A activity and public markets that
were all but closed to new technology issues. Moreover, concerns regarding
geo-political risk and corporate profitability led to continued declines in both
the public and private equity markets. Our cautious investment pace, as
reflected in the new investments made throughout the Fund's fiscal year 2002, is
indicative of our concern over the uncertainty in the market, limited exit
opportunities, and what we perceived to be a general overvaluation of private
equity deals during the period.

Recent data from Venture Economics indicates that the amount of venture
money being deployed is at pre-1998 levels, demonstrating that venture
capitalists by and large continue to stay on the sidelines. The Fund's
investment pace was similarly reduced as we focused our efforts on ensuring the
continued financial well-being

16

of our portfolio companies. Toward that end, we have worked extensively with our
companies to help them manage cash burn through restructurings and cost
reductions. Our strategy from a portfolio management perspective has been to
concentrate on the companies that we feel are the most capable of emerging
strongly from the downturn and, where possible, increase our ownership stake in
those companies.

With respect to new investments, we took a defensive posture over the last
year as valuations in the private equity market continued to decline. We intend
to maintain extreme selectivity when considering new opportunities, seeking to
ensure that prospective companies are appropriately valued and well equipped to
face the current challenging operating conditions. That being said, we believe
it is a good time to make strategic investments in private equity since
valuations have become more attractive as we near the bottom of a venture cycle.
It is our opinion that the Fund is well positioned to take advantage of this
situation, especially given our significant cash position.

Nevertheless, tough economic conditions and inactive capital markets meant
that we had to continue to write down the carrying value for a number of our
investments during the reporting period. Furthermore, unhealthy IPO and M&A
markets have limited exit opportunities making it difficult for venture
capitalists to realize gains on investments. It is for this reason that we view
our recent addition of a venture debt strategy as an appropriate complement to
the equity portion of the portfolio. Venture lending can generate interest
income, which in turn can help bridge the gap of increased liquidity time
horizons for venture equity investments.

Looking ahead, we are optimistic that the economy and market are
demonstrating signs of recovery. The fact that the U.S. economy experienced
increased growth in GDP during the reporting period is encouraging, especially
given the dramatic blow we were dealt on September 11 of last year. We were
particularly pleased that the M&A market saw some resurgence towards the end of
the reporting period. With the addition of our new venture debt strategy and a
substantial cash position to invest, we are confident that the Fund should be
poised to benefit from an opportunistic investment climate and improving market.

RESULTS OF OPERATIONS

As explained in Item 1 under the section entitled "Organization" the Fund,
from inception through June 19, 2002 operated under an advisory agreement with
meVC Advisers. The Fund was charged a management fee at an annual rate of 2.5%
of the weekly net assets of the Fund, by the former Adviser. The former Advisor
agreed to pay all Fund expenses above and beyond the 2.5% paid to the former
Adviser by the Fund. The former Advisor resigned without notice on June 19, 2002
and as a result the Board of Directors for the Fund voted to internalize all
management and administrative functions of the Fund effective immediately.
Consequently since June 19, 2002 the Fund directly incurs all of its own
operating expenses for all office space, facilities, equipment and personnel
necessary to conduct its business including management of the Fund's
investments.

INVESTMENT INCOME

Dividend and interest income for the years ended October 31, 2002 and 2001
were $3.7 million and $9.0 million, respectively. The reduction in dividend and
interest income during the year ended October 31, 2002 was primarily due to the
redeployment of both cash available for short term investing and the decline in
short-term interest rates.

OPERATING EXPENSES

Operating expenses for the years ended October 31, 2002 and 2001 were $6.9
million and $7.4 million, respectively. The reduction in operating expenses
during the year ended October 31, 2002 was primarily due to the reduction in
management fees paid to the former Advisor in part due to the resignation of the
former Advisor on June 19, 2002 and the internalization of all management and
administrative functions as of that date, and in

17

part due to the decline in overall compensation level paid to the former Advisor
due to the decline in the net asset value of the Fund.

Other significant components of operating expenses include salaries and
benefits for the period from June 19, 2002 through October 31, 2002 of $696,000,
consulting and public relation fees for the period from June 19, 2002 through
October 31, 2002 of $547,000, directors fees for the period from June 19, 2002
through October 31, 2002 of $307,000, professional fees, for the period from
June 19, 2002 through October 31, 2002 comprising audit fees of $155,000 and
legal fees of $998,000, insurance for the period from June 19, 2002 through
October 31, 2002 of $134,000 and facilities for the period from June 19, 2002
through October 31, 2002 of $166,000. Prior to June 19, 2002, all Fund
expenses, including compensation to the directors and officers, were paid by
the former Advisor.

On an annualized basis operating expenses are not expected to increase,
though it is not possible to predict with any degree of accuracy the future
level of legal costs associated with contesting the various actions brought
against the Fund.

REALIZED GAINS AND LOSSES ON SALES OF PORTFOLIO SECURITIES

For the year ended October 31, 2002, the Fund had a net realized loss of
$33.5 million. Such loss was realized mainly from the transactions involving the
assets of infoUSA.com, Inc. being acquired by infoUSA, Inc., the parent company
of infoUSA.com, Inc., resulting in a realized loss of $3.3 million, the
disbursement of assets from EXP Systems, Inc. to its preferred shareholders
resulting in a realized loss of $8 million, the write-off of Personic Software,
Inc. ("Personic") due to the irreversible dilution of the Fund's equity position
resulting in a realized loss of $10.8 million, the write-off of InfoImage, Inc.
("InfoImage") due to the company filing for Chapter 7 of the US Code resulting
in a realized loss of $ 2.4 million, the write-off of IQdestination due to the
cessation of operations and subsequent dissolution of the company resulting in a
realized loss of $3.5 million, the acquisition of the assets of Annuncio
Software, Inc. ("Annuncio") by PeopleSoft resulting in a realized loss of $3.4
million, and the write-off of Mediaprise, Inc. ("Mediaprise") due to the
cessation of operations and subsequent dissolution of the company resulting in a
realized loss of $2 million. Management expects the unrealized loss of $6
million relating to the Fund's investments in ShopEaze Systems, Inc. to be
realized as soon as dissolution papers are completed and signed by the
company's respective inside investors.

For the year ended October 31, 2001, the Fund had a net realized gain of
$5,000. There were no portfolio company exit events during the year ended
October 31, 2001 to create any significant realized gains or losses.

18

UNREALIZED APPRECIATION AND DEPRECIATION OF PORTFOLIO SECURITIES

During the year ended October 31, 2002, the Fund had a net increase in
unrealized depreciation on investment transactions of $21.8 million. Such
depreciation resulted mainly from the Valuation Committee of the Board of
Directors' (the "Valuation Committee") decision to mark down the value of the
Fund's investments in Actelis Networks, Inc., AuctionWatch.com, Inc., BlueStar
Solutions, Inc., Cidera, Inc., DataPlay, Inc., Endymion Systems, Inc., Foliofn,
Inc., Ishoni Networks, Inc., Pagoo, Inc., SafeStone Technologies PLC, ShopEaze
Systems, Inc., Sonexis, Inc., and Yaga, Inc. The Valuation Committee decided to
write down the carrying value of the investments for a variety of reasons
including, but not limited to, company performance, prospects of a particular
sector, the likelihood of a company being able to attract further financing, or
a third party valuation event.

For the year ended October 31, 2002, the increase in the Fund's retained
deficit was $59.1 million and the total retained deficit since inception is
$116.3 million; the retained deficit is due primarily to the Fund's mark down of
the valuations of certain Portfolio Company investments, as private companies
experienced a decline in valuations similar to that of public companies.
Management expects the unrealized losses of the Fund's investments in ShopEaze
Systems, Inc. to be realized as soon as dissolution papers are completed and
signed by the company's respective inside investors.

During the year ended October 31, 2001, the Fund had a net increase in
unrealized depreciation of $53 million. Such depreciation also resulted mainly
from the Fund's mark down of the value of the Fund's investments in certain
Portfolio Companies. During the year ended October 31, 2001, the increase in the
Fund's retained deficit was $57 million and the total retained deficit since
inception was $57.2 million. Such deficit also resulted mainly from the mark
down of the value of the Fund's investments in certain portfolio companies.

PORTFOLIO INVESTMENTS

At October 31, 2002, the cost of equity and equity-linked security
investments held by the Fund to date was $127.5 million, and their aggregate
fair value was estimated to be $50.1 million. In addition the Fund held
subordinated notes in portfolio companies with a cost of $6.3 million and
aggregate fair value of $4.1 million. While the current values of certain
Portfolio Companies have been greatly reduced, Management believes that a number
of the companies identified have upside potential for long-term growth in sales
and earnings. The Investment Team continuously evaluates opportunities to
realize value for the Fund and its stockholders. In that regard the Investment
Team will periodically evaluate potential acquisitions, financing transactions,
initial public offerings, strategic alliances and sale opportunities involving
the Fund's Portfolio Companies. These transactions, while reflected in the
Fund's calculation of net asset value, are generally not disclosed to the Fund's
stockholders and the investing public until such time as the transactions are
publicly announced or completed, as the case may be.

At October 31, 2002, the Fund had active investments in the following
Portfolio Companies:

0-In Design Automation, Inc.

0-In Design Automation, Inc. ("0-In"), San Jose, California, is an
electronic design automation (EDA) company providing functional verification
products that help verify multi-million gate application specific integrated
circuit (ASIC) and system-on-chip (SOC) chip designs. 0-In products extend the
value of simulation by using assertion-based verification technology.
Assertion-based technology uses the design's internal structure to provide more
thorough verification by attacking the primary problems in functional
verification -- inadequate observability and controllability.

On November 29, 2001 the Fund invested $4 million in 0-In, consisting of
2,239,291 shares of Series E Convertible Preferred Stock ("Series E Preferred
Stock ") at $1.7863 per share.

19

The Series E Preferred Stock ranks senior, with respect to liquidation
preference, to any series of Preferred Stock issued prior to the Series E
Preferred Stock and senior to the Common Stock. In the event of a Qualified
Initial Public Offering (Qualified IPO), the Series E Preferred Stock, as
converted to common stock, will not be transferred in a public distribution
prior to one hundred and eighty days after the date of the final prospectus used
in such Qualified IPO.

At October 31, 2002, the Fund's investment in 0-In consisted of 2,239,291
shares of Series E Preferred Stock at a cost of approximately $4 million. The
investment has been assigned a fair value of $4 million, or $1.7863 per share.
Mr. Gerhard, a director of the Fund through January 16, 2003, when he resigned,
serves as a director of 0-In.

Actelis Networks, Inc.

Actelis Networks, Inc. ("Actelis"), Fremont, California, enables
telecommunications carriers and service providers to deliver high-speed,
high-quality broadband services over the existing copper wire infrastructure.

On May 21, 2001, the Fund invested $5 million in Actelis, consisting of
1,506,025 shares of Series C Convertible Preferred Stock ("Series C Preferred
Stock") at $3.32 per share.

At October 31, 2001, the Fund's investment in Actelis was assigned a fair
value, which approximated cost, of $5 million.

On October 29, 2002, the Valuation Committee of the Board of Directors (the
"Valuation Committee") marked down the value of the Fund's investment in the
Series C Preferred Stock issue of Actelis by 50%. At October 31, 2002, the
Fund's investment in Actelis consisted of 1,506,025 shares of Series C Preferred
Stock at a cost of approximately $5 million. The investment has been assigned a
fair value of approximately $2.5 million, or $1.66 per share.

AuctionWatch.com, Inc.

AuctionWatch, Inc. ("AuctionWatch"), San Bruno, California, enables small
businesses and entrepreneurs to build Internet sales channels by providing
software solutions to help these merchants efficiently market, sell and
distribute their products.

On June 20, 2000, the Fund invested $5.5 million in AuctionWatch consisting
of 1,047,619 shares of Series C Convertible Preferred Stock ("Series C Preferred
Stock") at $5.25 per share.

On April 20, 2001, the Valuation Committee marked down the valuation of the
Fund's $5.5 million investment in the Series C Preferred Stock issue of
AuctionWatch by 25%. The Fund's investment then consisted of 1,047,619 shares of
Series C Preferred Stock at a valuation of $3.94 per share.

On July 25, 2001, the Valuation Committee marked down the valuation of the
Fund's $5.5 million investment in the Series C Preferred Stock issue of
AuctionWatch by another 25%. The Fund's investment then consisted of 1,047,619
shares of Series C Preferred Stock at a valuation of $2.625 per share.

On October 23, 2001, the Valuation Committee marked down the remaining
value of the Fund's $5.5 million investment in the Series C Preferred Stock
issue of AuctionWatch by approximately 16%.

At October 31, 2001, the Fund's investment then consisted of 1,047,619
shares of Series C Preferred Stock at a valuation of $2.2148 per share.

On November 19, 2001, the Valuation Committee marked down the remaining
valuation of the Fund's investment in the Series C Preferred Stock issue of
AuctionWatch by 11%. The Fund's investment then consisted of 1,047,619 shares of
Series C Preferred Stock at a valuation of $1.9688 per share.

On January 31, 2002 the Fund entered into a follow-on investment at a cost
of $1.1 million in AuctionWatch, consisting of 6,443,188 shares of Series A
Convertible Preferred Stock ("Series A Preferred Stock") at $0.176 per share.

The Series A ranks senior, with respect to liquidation preference, to any
series of Preferred Stock issued prior to the Series A and senior to the Common
Stock. In the event of a Qualified Initial Public Offering ("Qualified IPO"),
the Series A Preferred Stock, as converted to common stock, will not be
transferred in a public distribution prior to one hundred and eighty days after
the date of the final prospectus used in such Qualified IPO.

20

Pursuant to the terms of the financing, the Series C Preferred Stock was
converted into 10,476 shares of Common Stock, along with the entirety of
AuctionWatch's previously outstanding Series A Preferred Stock, Series B
Convertible Preferred Stock, and all other Series C Preferred Stock.

At October 31, 2002, the Fund's investment in AuctionWatch 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 investment has been assigned a fair value of
approximately $1.1 million, or $0.00 per share for the Common Stock and $0.176
per share for the Series A Preferred Stock, respectively. Nino Marakovic, an
Officer of the Fund, serves as a director of AuctionWatch.

BlueStar Solutions, Inc. (formerly eOnline, Inc.)

BlueStar Solutions, Inc. (formerly eOnline, Inc.) ("BlueStar"), Cupertino,
California, is a provider of enterprise applications outsourcing services.
BlueStar delivers complete end-to-end services for managing SAP applications.

On May 26, 2000, the Fund invested $10 million in BlueStar, consisting of
1,360,544 shares of Series C Convertible Preferred Stock ("Series C Preferred
Stock") at $7.35 per share. The Fund also received 136,054 warrants to purchase
136,054 shares of Series C Preferred Stock at a purchase price of $7.35 per
share (as adjusted). The warrants expire at the earlier of (i) May 26, 2003 or
(ii) BlueStar's Qualified IPO.

On October 23, 2001, the Valuation Committee marked down the valuation of
the Fund's approximately $10,000,000 investment in the Series C Preferred Stock
issue of BlueStar by 75%.

At October 31, 2001, the Fund's investment was assigned a fair value of $
2.5 million and consisted of 1,360,544 shares of Series C Preferred Stock at a
valuation of $1.8375 per share and 136,054 warrants at a valuation of $0.00 per
share.

On February 28, 2002 the Fund entered into a follow-on investment of $3
million in BlueStar, consisting of 4,545,455 shares of Series D Convertible
Preferred Stock ("Series D Preferred Stock") at $0.66 per share.

The Series D Preferred Stock ranks senior, with respect to liquidation
preference, to any series of Preferred Stock issued prior to the Series D and
senior to the Common Stock. In the event of a Qualified IPO, the Series D
Preferred Stock, as converted to common stock, will not be transferred in a
public distribution prior to one hundred and eighty days after the date of the
final prospectus used in such Qualified IPO.

Pursuant to the terms of the financing, (i) the Fund's Series C Preferred
Stock was recapitalized in an 1-for-11 reverse split, along with the entirety of
BlueStar's Common Stock, Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock, and all other Series C Preferred Stock, and (ii)
the Fund's Series C Preferred Stock was partially effected by a "pay-to-play"
provision pursuant to which the preferred stock of certain existing preferred
shareholders was converted to Common Stock, along with certain of BlueStar's
Series A Convertible Preferred Stock, Series B Convertible Preferred Stock, and
other Series C Preferred Stock.

At October 31, 2002, the Fund's investment in BlueStar, with a cost of $13
million, has been assigned a fair value of $4.5 million, consisting of 74,211
shares of Series C Preferred Stock at $20.2125 per share, 4,545,455 shares of
Series D Preferred Stock at $0.66 per share, 49,474 shares of Common Stock at
$0.00 per share, and 136,054 warrants to purchase 136,054 shares of Series C
Preferred Stock at a purchase price of $7.35 per share (as adjusted) carried at
$0.

CBCA, Inc.

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

During April 2002, the Fund invested approximately $10,000,000 in CBCA,
consisting of 4,774,636 shares of Series E Convertible Preferred Stock ("Series
E Preferred Stock") at $2.0944 per share.

The Series E Preferred Stock ranks senior, with respect to liquidation
preference, to any series of Preferred Stock issued prior to the Series E
Preferred Stock and senior to the Common Stock. In the event of a Qualified IPO,
the Series E Preferred Stock, as converted to common stock, will not be
transferred in a public distribution prior to one hundred and eighty days after
the date of the final prospectus used in such Qualified IPO.

21

At October 31, 2002, the Fund's investment in CBCA consisted of 4,774,636
shares of Series E Preferred Stock with a cost of approximately $10 million. The
investment has been assigned a fair value of approximately $10,000,000, or
$2.0944 per share. Mr. Grillos, the Chief Executive Officer of the Fund, serves
as a director of CBCA.

Cidera, Inc.

Cidera, Inc. ("Cidera"), Laurel, Maryland, provides satellite-based
delivery of broadband content to the edge of the Internet.

On August 31, 2000, the Fund invested $7.5 million in Cidera consisting of
857,192 shares of Series D Convertible Preferred Stock ("Series D Preferred
Stock") at $8.7495 per share.

On April 20, 2001, the Valuation Committee marked down the valuation of the
Fund's $7.5 million investment in the Series D Preferred Stock issue of Cidera
by 50%.

On October 31, 2001, the Fund's investment, assigned a fair value of $3.8
million, consisted of 857,192 shares of Series D Preferred Stock at a valuation
of $4.3748 per share.

On January 31, 2002, the Valuation Committee marked down the remaining
value of the Fund's investment in the Series D Preferred Stock by 76%. The
Fund's investment then consisted of 857,192 shares of Series D Preferred Stock
at a valuation of $1.0499 per share.

On April 19, 2002, the Valuation Committee marked down the remaining value
of the Fund's investment in the Series D Preferred Stock to 56%. The Fund's
investment then consisted of 857,192 shares of Series D Preferred Stock at a
valuation of $0.5833 per share.

At October 31, 2002, the Fund's investment in Cidera consisted of 857,192
shares of Series D Preferred Stock with a cost of approximately $7,500,000. The
investment has been assigned a fair value of approximately $500,000, or $0.5833
per share.

DataPlay, Inc.

DataPlay, Inc. ("DataPlay"), Boulder, Colorado, is a developer of new ways
of enabling consumers to record and play digital content.

On June 4, 2001, the Fund invested $7.5 million in DataPlay consisting of
2,500,000 shares of Series D Convertible Preferred Stock ("Series D Preferred
Stock") at $3.00 per share.

On October 31, 2001, the Fund's investment, assigned a fair value of $7.5
million, consisted of 2,500,000 shares of Series D Preferred Stock at a
valuation of $3.00 per share.

On May 9, 2002 the Fund entered into a follow-on investment of $2,000,000
in DataPlay. The Fund's investment consisted of a Convertible Promissory Note
(the "Note") with a face value of $2,000,000 and a stated interest rate of 6%
per annum. The Note is due and payable on May 10, 2005.

On June 14, 2002 the Fund entered into a follow-on investment of $500,000
in DataPlay. The Fund's investment consisted of a Convertible Promissory Note
(the "Note") with a face value of $500,000 and a stated interest rate of 6% per
annum. The Note is due and payable on June 17, 2005.

On June 26, 2002 the Fund entered into a follow-on investment of $1,000,000
in DataPlay. The Fund's investment consisted of a Convertible Promissory Note
(the "Note") with a face value of $1,000,000 and a stated interest rate of 6%
per annum. The Note is due and payable on June 27, 2005.

On July 31, 2002, the Valuation Committee marked down the value of the
Fund's investment in the Series D Preferred Stock of DataPlay by 66%. The Fund's
investment then consisted of 2,500,000 shares of Series D Preferred Stock at a
valuation of $1.00 per share.

On August 15, 2002 the Fund entered into a follow-on investment of $200,000
in DataPlay. The Fund's investment consisted of a Convertible Promissory Note
(the "Note") with a face value of $200,000 and a stated interest rate of 6% per
annum. The Note is due and payable on August 16, 2005.

On August 23, 2002 the Fund entered into a follow-on investment of $400,000
in DataPlay. The Fund's investment consisted of a Convertible Promissory Note
(the "Note") with a face value of $400,000 and a stated interest rate of 6% per
annum. The Note is due and payable on August 26, 2005.

22

On August 30, 2002 the Fund entered into a follow-on investment of $200,000
in DataPlay. The Fund's investment consisted of a Convertible Promissory Note
(the "Note") with a face value of $200,000 and a stated interest rate of 6% per
annum. The Note is due and payable on September 3, 2005.

On September 23, 2002 the Fund entered into a follow-on investment of
$200,000 in DataPlay. The Fund's investment consisted of a Convertible
Promissory Note (the "Note") with a face value of $200,000 and a stated interest
rate of 6% per annum. The Note is due and payable on September 24, 2005.

On October 10, 2002, the Valuation Committee marked down the remaining
value of the Fund's investment in the Series D Preferred Stock of DataPlay by
100%. The Fund's investment then consisted of 2,500,000 shares of Series D
Convertible Preferred Stock ("Series D Preferred Stock") at a valuation of $0.00
per share.

On October 30, 2002, the Valuation Committee marked down the value of the
Fund's investment in all of the Promissory Notes issued by DataPlay by 50%.

At October 31, 2002, the Fund's total investment in DataPlay, with a cost
basis of approximately $12,000,000, consisted of 2,500,000 shares of Series D
Preferred Stock and seven promissory notes with a combined cost of approximately
$4,500,000. The investment has been assigned a fair value of approximately
$2,250,000, comprising $0.00 per share for the Series D Preferred Stock and 50%
of the face value of the promissory notes.

On November 20, 2002, DataPlay filed for bankruptcy under Chapter 11 of the
US Code.

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.

On June 2, 2000, the Fund invested $7 million in Endymion consisting of
7,156,760 shares of Series A Convertible Preferred Stock ("Series A Preferred
Stock") at $.9781 per share.

On October 26, 2001, the Valuation Committee marked down the valuation of
the Fund's $7 million investment in the Series A Preferred Stock issue of
Endymion by 25%.

At October 31, 2001, the Fund's investment, assigned a fair value of $5.3
million consisted of 7,156,760 shares of Series A Preferred Stock at a valuation
of $0.7336 per share.

On April 19, 2002, the Valuation Committee marked down the remaining value
of the Fund's investment in the Series A Preferred Stock by 43%. The Fund's
investment then consisted of 7,156,760 shares of Series A Preferred Stock at a
valuation of $0.4192 per share.

On July 31, 2002, the Valuation Committee marked down the remaining value
of the Fund's investment in the Series A Preferred Stock issue of Endymion by
33%.

At October 31, 2002, the Fund's investment in Endymion consisted of
7,156,760 shares of Series A Preferred Stock with a cost of approximately
$7,000,000. The investment has been assigned a fair value of $2 million, or
$0.2795 per share.

EXP Systems, Inc.

EXP Systems, Inc. ("EXP"), Menlo Park, California, is a provider of
enterprise software that helps companies improve sales and service through their
Web sites by enabling buyers to engage with real people in real time who can
assist them in answering questions and making purchase decisions.

On June 6, 2000, the Fund invested $10 million in EXP, consisting of
1,748,252 shares of Series C Convertible Preferred Stock ("Series C Preferred
Stock") at $5.72 per share.

On April 20, 2001, the Valuation Committee marked down the valuation of the
Fund's $10 million investment in the Series C Preferred Stock issue of EXP by
25%. The Fund's investment then consisted of 1,748,252 shares of Series C
Preferred Stock at a valuation of $4.29 per share.

On October 23, 2001, the Valuation Committee marked down the valuation of
the Fund's $10 million investment in the Series C Preferred Stock issue of EXP
by 50%.

At October 31, 2001, the Fund's investment, assigned a fair value of $3.8
million, consisted of 1,748,252 shares of Series C Preferred Stock at a
valuation of $2.1450 per share.

23

On January 31, 2002, the Valuation Committee marked down the remaining
value of the Fund's investment in the Series C Preferred Stock by 33%. The
Fund's investment then consisted of 1,748,252 shares of Series C Preferred Stock
at a valuation of $1.43 per share.

On May 17, 2002, the Valuation Committee marked down the remaining
valuation of the Fund's investment in the Series C Preferred Stock by 26%. The
Valuation Committee's decision was based on the announcement of an impending
disbursement of capital by EXP. The Fund's investment then consisted of
1,748,252 shares of Series C Preferred Stock at a valuation of $1.0582 per
share, believed to be what the Fund would receive at the completion of the
disbursement of capital.

On June 19, 2002 the Fund agreed to certain assets of EXP being disbursed
pro rata to the shareholders of each of the Series A Convertible Preferred
Stock, Series B Convertible Preferred Stock, and Series C Preferred Stock. In
return, the Fund received proceeds of approximately $1,500,000 in cash. The
entire transaction resulted in a realized loss of $6.6 million for the Fund. The
Fund's investment then consisted of 330,750 shares of Series C Preferred Stock
at a valuation of $1.0582 per share.

On October 3, 2002, the Valuation Committee marked down the remaining
valuation of the Fund's investment in the Series C Preferred Stock by 36%. The
Valuation Committee's decision was based on new information surrounding future
disbursements of capital by EXP. The Fund's investment then consisted of 330,750
shares of Series C Preferred Stock at a valuation of $0.6803 per share, then
believed to be what the Fund would receive at the completion of the disbursement
of capital.

On October 3, 2002 the Fund agreed to certain assets of EXP being disbursed
pro rata to the shareholders of each of the Series A Convertible Preferred
stock, Series B Convertible Preferred Stock, and Series C Preferred Stock. In
return, the Fund received proceeds of approximately $200,000 in cash. The entire
transaction resulted in a realized loss of $1.5 million for the Fund.

At October 31, 2002, the Fund's investment in EXP consisted of 36,750
shares of Series C Preferred Stock with a cost of $210,000. The investment has
been assigned a fair value of $25,000, or $0.6803 per share.

FOLIOfn, Inc.

FOLIOfn, Inc. ("FOLIOfn"), Vienna, Virginia, is a financial services
technology company that delivers leading-edge investment solutions to financial
services firms and investors. Through its registered broker-dealer subsidiary,
FOLIOfn Investments, Inc., the company offers an integrated brokerage platform
featuring its unique basket-trading capability and state-of-the-art execution,
clearance and settlement services.

On June 21, 2000, the Fund invested $15 million in FOLIOfn, Inc.,
consisting of 5,802,259 shares of Series C Convertible Preferred Stock ("Series
C Preferred Stock") at $2.585 per share.

On July 25, 2001, the Valuation Committee marked down the valuation of the
Fund's $15 million investment in the Series C Preferred Stock issue of FOLIOfn
by 25%. The Fund's investment then consisted of 5,802,259 shares of Series C
Preferred Stock at a valuation of $1.9389 per share.

On October 26, 2001, the Valuation Committee marked down the valuation of
the Fund's $15 million investment in the Series C Preferred Stock issue of
FOLIOfn by another 25%.

At October 31, 2001, the Fund's investment, assigned a fair value of $7.5
million, consisted of 5,802,259 shares of Series C Preferred Stock at a
valuation of $1.2926 per share.

On January 31, 2002, the Valuation Committee marked down the remaining
value of the Fund's investment in the Series C Preferred Stock by 33%. The
Fund's investment then consisted of 5,802,259 shares of Series C Preferred Stock
at a valuation of $0.8617 per share.

On July 31, 2002, the Valuation Committee marked down the remaining value
of the Fund's investment in the Series C Preferred Stock by 40%.

At October 31, 2002, the Fund's investment in FOLIOfn consisted of
5,802,259 shares of Series C Preferred Stock with a cost of $15,000,000. The
investment has been assigned a fair value of approximately $3,000,000, or $0.517
per share. Mr. Grillos, the Chief Executive Officer of the Fund, serves as a
director of FOLIOfn.

24

infoUSA.com, Inc.

On June 2, 2000, the Fund invested $10 million in infoUSA.com, Inc.
("infoUSA.com"), consisting of 2,145,922 shares of Series B Convertible
Preferred Stock ("Series B Preferred Stock") at $4.66 per share.

On September 28, 2001, the Valuation Committee marked down the valuation of
the Fund's $10 million investment in the Series B Preferred Stock issue of
infoUSA.com by 32.5%.

At October 31, 2001, the Fund's investment, assigned a fair value of $6.7
million, consisted of 2,145,922 shares of Series B Preferred Stock at a
valuation of $3.1455 per share.

On December 29, 2001 the Fund agreed to the acquisition of the assets of
infoUSA.com. by infoUSA, Inc., the parent company of infoUSA.com. In return, the
Fund received proceeds of $6.7 million made up of $4.9 million in cash and $1.8
million in the form of a promissory note from infoUSA, Inc. The Fund shall
receive interest on the unpaid principal balance of the Note at the rate of 6%
per annum, paid quarterly. The Note is due and payable on September 29, 2003.
The entire transaction resulted in a realized loss of $3.3 million for the Fund.

Ishoni Networks, Inc.

Ishoni Networks, Inc. ("Ishoni"), Santa Clara, California, is a developer
of highly integrated Broadband Engines that allow customer premises equipment
(CPE) manufacturers and service providers to offer integrated voice, data and
security services over a single broadband connection to residential and business
customers.

On November 6, 2000 the Fund invested $10 million in Ishoni, consisting of
2,003,607 shares of Series C Convertible Preferred Stock (Series C Preferred
Stock") at $4.991 per share.

On July 25, 2001, the Valuation Committee marked down the valuation of the
Fund's $10 million investment in the Series C Preferred Stock issue of Ishoni by
25%.

On October 31, 2001, the Fund's investment, assigned a fair value of $7.5
million, consisted of 2,003,607 shares of Series C Preferred Stock at a
valuation of $3.7433 per share.

On January 31, 2002, the Valuation Committee marked down the remaining
value of the Fund's investment in the Series C Preferred Stock by 33%. The
Fund's investment then consisted of 2,003,607 shares of Series C Preferred Stock
at a valuation of $2.4955 per share.

On July 31, 2002, the Valuation Committee marked down the remaining value
of the Fund's investment in the Series C Preferred Stock by 50%.

At October 31, 2002, the Fund's investment in Ishoni consisted of 2,003,607
shares of Series C Preferred Stock with a cost of $10 million. The investment
has been assigned a fair value of $2.5 million, or $1.2477 per share.

Lumeta Corporation

Lumeta Corporation ("Lumeta"), Somerset, New Jersey, is a developer of
network management, security, and auditing solutions. The company provides
businesses with a comprehensive analysis of their network security that reveals
the vulnerabilities and inefficiencies of their corporate intranets.

On October 30, 2000, the Fund invested $250,000 investment in Lumeta,
consisting of 384,615 shares of Series A Convertible Preferred Stock ("Series A
Preferred Stock") at $0.65 per share.

On October 31, 2001, the Fund's investment, assigned a fair value of
$250,000 consisted of 384,615 shares of Series A Preferred Stock at $0.65 per
share.

On February 13, 2002 the Fund entered into a follow-on investment of
approximately $30,000 in Lumeta. The Fund's investment consisted of a
Convertible Promissory Note (the "Note") with a face value of $30,000 and
earning interest at a rate of 12% per annum. The Note was due and payable on May
31, 2002.

On June 10, 2002, the Fund entered into a follow-on investment of $126,000
in Lumeta, consisting of 180,266 shares of Series B Convertible Preferred Stock
("Series B Preferred Stock") at $0.70 per share. In conjunction with the Series
B Preferred Stock financing, the Fund converted its $30,000 note into 86,580
shares of Series B Preferred Stock at $0.35 per share.

The Series B Preferred Stock ranks senior, with respect to liquidation
preference, to any series of Preferred Stock issued prior to the Series B
Preferred Stock and senior to the Common Stock. In the event of a Qualified

25

Initial Public Offering ("Qualified IPO"), the Series B Preferred Stock, as
converted to common stock, will not be transferred in a public distribution
prior to one hundred and eighty days after the date of the final prospectus used
in such Qualified IPO.

Due to the investment in the Series B Preferred Stock at a higher price per
share than the Series A Preferred Stock, the value of the Series A Preferred
Stock was subsequently marked up in accordance with the valuation policies
established by management and approved by the Board of Directors.

At October 31, 2002, 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 cost of approximately $406,000. The investment has been assigned a
fair value of approximately $456,000, or $0.70 per share for each the Series A
and B Preferred Stock.

Pagoo, Inc.

Pagoo, Inc. ("Pagoo"), Lafayette, California, is a developer of Internet
voice technologies offering Internet services direct to the consumer.

On July 11, 2000, the Fund invested $10 million Pagoo consisting of
3,412,969 shares of Series C Convertible Preferred Stock ("Series C Preferred
Stock") at $2.93 per share.

On February 26, 2001, the Fund entered into a follow-on investment of $4
million in the Series D Convertible Preferred Stock (Series D Preferred Stock)
financing of Pagoo. The Fund's investment consisted of 2,098,636 shares of
Series D Preferred Stock at $1.906 per share.

Due to the investment in Series D Preferred Stock at a lower price per
share than the Series C Preferred Stock, the value of the Series C Preferred
Stock was subsequently marked down. The markdown considers the anti-dilutive
covenants of the Series C Preferred Stock as contained in Pagoo's Articles of
Incorporation.

At October 31, 2001, the Fund's investments, assigned a fair value of $11.5
million, then consisted of 3,412,969 shares of Series C Preferred Stock at $2.21
per share and 2,098,636 shares of Series D Preferred Stock at $1.906 per share,
respectively.

On January 31, 2002, the Valuation Committee marked down the remaining
value of the Fund's investment in the Series C Preferred Stock by 54%. The
Fund's investments then consisted of 3,412,969 shares of Series C Preferred
Stock at a valuation of $1.0255 per share and 2,098,636 shares of Series D
Preferred Stock at a valuation of $1.906 per share.

On May 16, 2002, the Valuation Committee marked down the remaining value of
the Fund's investment in the Series C Preferred Stock by 100% and marked down
the value of the Fund's investment in the Series D Preferred Stock by 35%. The
Fund's investments then consisted of 3,412,969 shares of Series C Preferred
Stock at a valuation of $0.00 per share and 2,098,636 shares of Series D
Preferred Stock at a valuation of $1.2389 per share.

On September 13, 2002, the Fund agreed to the partial return of capital for
Pagoo in the amount of $2.4 million. In conjunction with the return of capital,
the Fund's Series C Preferred Stock and Series D Preferred Stock was
re-capitalized into Series A-1 Convertible Preferred Shares, along with the
entirety of Pagoo's Common Stock, Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock. The Series D-1 Convertible Preferred Stock was re-capitalized into Series
A-2 Convertible Preferred Stock.

At October 31, 2002, the Fund's investment in Pagoo consisted of 1,956,026
shares of Series A-1 Convertible Preferred Stock with a cost of approximately
$11.6 million. The investment has been assigned a fair value of approximately
$170,000, or $0.08688 per share. Nino Marakovic, an Officer of the Fund, serves
as a director of Pagoo.

Phosistor Technologies, Inc.

Phosistor Technologies, Inc. ("Phosistor"), Pleasanton, California, designs
and develops integrated semiconductor components and modules for global
telecommunications and data communications networks. The company utilizes an
advanced process technology that enables low-cost manufacturing of photonic

26

integrated circuits containing both active and passive devices on a single chip,
and a packaging technology that reduces the cost of optical packaging for these
photonic integrated circuits.

On January 24, 2002 the Fund invested $1 million in Phosistor consisting of
6,666,667 shares of Series B Convertible Preferred Stock (Series B") at $0.15
per share.

The Series B ranks pari passu, with respect to liquidation preference, to
any series of Preferred Stock issued prior to the Series B and senior to the
Common Stock. In the event of a Qualified IPO, the Series B, as converted to
common stock, will not be transferred in a public distribution prior to one
hundred and eighty days after the date of the final prospectus used in such
Qualified IPO.

At October 31, 2002, the Fund's investment in Phosistor consisted of
6,666,667 shares of Series B Convertible Preferred Stock with a cost of $1
million. The investment has been assigned a fair value of approximately $1
million, or $0.15 per share.

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.

On June 13, 2001, the Fund invested $2 million in ProcessClaims, consisting
of 6,250,000 shares of Series C Convertible Preferred Stock ("Series C Preferred
Stock") at $0.32 per share.

On October 31, 2001, the Fund's investment, assigned a fair value of $2
million, consisted of 6,250,000 shares of Series C Preferred Stock at $0.32 per
share.

On May 7, 2002, the Fund entered into a $400,000 follow-on investment in
ProcessClaims. The Fund's investment consisted of 849,257 shares of Series D
Convertible Preferred Stock ("Series D Preferred Stock") at $0.471 per share.
The Fund's investment also consisted of 873,362 warrants to purchase Series E
Convertible Preferred Stock at $0.000023 per share. The warrants expire on
December 31, 2005.

The Series D Preferred Stock ranks pari passu, with respect to liquidation
preference, to the Series C Preferred Stock and the Series E Convertible
Preferred Stock and senior to any series of Preferred Stock issued prior to the
Series C Preferred Stock and senior to the Common Stock. In the event of a
Qualified IPO, the Series D Preferred Stock, as converted to common stock, will
not be transferred in a public distribution prior to one hundred and eighty days
after the date of the final prospectus used in such Qualified IPO.

Due to the investment in the Series D Preferred Stock at a higher price per
share than the Series C Preferred Stock, the value of the Series C Preferred
Stock was subsequently marked up in accordance with the valuation policies
established by management and approved by the Board of Directors.

At October 31, 2002, the Fund's investment in ProcessClaims, valued at $3.3
million with a cost of $2.4 million, consisted of 6,250,000 shares of Series C
Preferred Stock at $0.471 per share, 849,257 shares of Series D Preferred Stock
at $0.471 per share, and 873,362 warrants to purchase 873,362 shares of Series E
Convertible Preferred Stock. Nino Marakovic, an Officer of the Fund, serves as a
director of ProcessClaims.

SafeStone Technologies PLC

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

On December 22, 2000, the Fund invested $3.5 million in SafeStone,
consisting of 650,401 shares of Series A Convertible Preferred Stock ("Series A
Preferred Stock") at $5.38 per share. The Fund's investment also consists of a
warrant for the right to subscribe at par for Series A preference shares of
(pound)0.01 each in accordance with the terms of the Warrant Agreement.

On October 26, 2001, the Valuation Committee marked down the valuation of
the Fund's $3.5 million investment in the Series A Preferred Stock issue of
SafeStone by 25%.

On October 31, 2001, the Fund's investment, assigned a fair value of $2.6
million, consisted of 650,401 shares of Series A Preferred Stock at a valuation
of $4.0350 per share.

27

On July 3, 2002, Fund entered into a $500,000 follow-on investment in
SafeStone. The Fund's investment consisted of 391,923 shares of Series B
Convertible Preferred Stock ("Series B Preferred Stock") at $1.2758 per share.
In conjunction with the Series B Preferred Stock financing, the Fund exercised
its Series A Share Anti-Dilution Warrant, purchasing 1,064,054 shares of Series
A Preferred Stock at $0.01526 per share.

Due to the investment in the Series B Preferred Stock at a lower price per
share than the Series A Preferred Stock, the value of the Series A Preferred
Stock was subsequently marked down in accordance with the valuation policies as
set forth in the Fund's Registration Statement.

At October 31, 2002, the Fund's investment in SafeStone, with a cost basis