Oxford Square Capital Corp. - Quarter Report: 2005 September (Form 10-Q)

reasonable period of time between willing parties other than in a forced or liquidation sale. The liquidity event whereby we exit a private finance investment is generally the sale, the recapitalization or, in some cases, the initial public offering of the portfolio company.

There is no one methodology to determine enterprise value and, in fact, for any one portfolio company, enterprise value is best expressed as a range of fair values, from which we derive a single estimate of enterprise value. To determine the enterprise value of a portfolio company, we analyze its historical and projected financial results, as well as the nature and value of any collateral. We generally require portfolio companies to provide annual audited and quarterly unaudited financial statements, as well as annual projections for the upcoming fiscal year.

If there is adequate enterprise value to support the repayment of our debt, the fair value of our loan or debt security normally corresponds to cost unless the borrower's condition or other factors lead to a determination of fair value at a different amount. The fair value of equity interests in portfolio companies is determined based on various factors, including the enterprise value remaining for equity holders after the repayment of the portfolio company's debt and other preference capital, and other pertinent factors such as recent offers to purchase a portfolio company, recent transactions involving the purchase or sale of the portfolio company's equity securities, or other liquidation events. The determined equity values are generally discounted when we have a minority position, restrictions on resale, specific concerns about the receptivity of the capital markets to a specific company at a certain time, or other factors.

Our Board of Directors determines the value of our investment portfolio each quarter. In connection with that determination, members of our portfolio management team prepare portfolio company valuations using the most recent portfolio company financial statements and forecasts. Since March 2004, we have engaged the firm of Houlihan Lokey Howard & Zukin ("HLHZ") to independently evaluate our portfolio investments, although the Board of Directors ultimately determines the appropriate valuation of each such investment. On April 27, 2005, upon the recommendation of the our Valuation Committee, our Board of Directors approved a change in our valuation process, whereby HLHZ will not prepare valuations for any portfolio investments that, when combined with all other investments in the same portfolio company, have a fair value as of the previous quarter of less than $2 million. The Board uses the recommended valuations as prepared by management and HLHZ, respectively, as a component of the final fair value determination of our portfolio investments.

OVERVIEW

Our investment objective is to maximize our portfolio's total return, principally by investing in the debt and/or equity securities of technology-related companies. Our primary focus is seeking current income through investment in non-public debt and long-term capital appreciation by acquiring accompanying warrants or other equity securities. We may also invest in the publicly traded debt and/or equity securities of other technology-related companies. We operate as a closed-end, non-diversified management investment company, and have elected to be treated as a business development company under the Investment Company Act of 1940, as amended ("1940 Act"). We have elected to be treated for tax purposes as a regulated investment company ("RIC") under the Internal Revenue Code of 1986, as amended (the "Code"), beginning with our 2003 taxable year.

Our investment activities are managed by Technology Investment Management, LLC ("TIM"), a registered investment adviser under the Investment Advisers Act of 1940. TIM is owned by BDC Partners, LLC ("BDC Partners"), its managing member, and Royce & Associates, LLC ("Royce & Associates"). Jonathan H. Cohen, our chief executive officer, and Saul B. Rosenthal, our president and chief operating officer, are the members of BDC Partners, and Charles M. Royce, our non-executive chairman, is the president of Royce & Associates. Under the investment advisory agreement, we have agreed to pay TIM an annual base fee calculated on gross assets, and an incentive fee based upon our performance. Under an administration agreement, we have agreed to pay or reimburse BDC Partners, as administrator, for certain expenses incurred in operating the Company. Our executive officers and directors, and the executive officers of TIM and BDC Partners, serve or may serve as officers and directors of entities that operate in a line of business similar to our own. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might

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not be in the best interests of us or our stockholders. For more information, see "Risk Factors—There are significant potential conflicts of interest, which could impact our investment returns."

We concentrate our investments in companies having annual revenues of less than $200 million and/or a market capitalization of less than $300 million. We focus on companies that create products or provide services requiring advanced technology and companies that compete in industries characterized by such products or services, including companies in the following businesses: Internet, IT services, media, telecommunications, semiconductors, hardware, software and technology-enabled services.

While the structure of our investments will vary, we invest primarily in the debt of established target technology-related companies. We seek to invest in entities that, as a general matter, have been operating for at least one year prior to the date of our investment and that will, at the time of our investment, have employees and revenues. Many of these companies will have financial backing provided by private equity or venture capital funds or other financial or strategic sponsors at the time we make an investment.

We expect that our investments will generally range between $5 million and $25 million each, although this investment size may vary proportionately as the size of our capital base changes, and will accrue interest at fixed and variable rates. As of September 30, 2005, our debt investments had stated interest rates of between 5.5% and 14.0% and maturities of between 18 and 66 months. In addition, our total portfolio of debt investments had a weighted average interest rate of approximately 10.5% as of September 30, 2005.

Our loans may carry a provision for deferral of some or all of the interest payments, which will be added to the principal amount of the loan. This form of deferred interest is referred to as "payment-in-kind" or "PIK" interest and, when earned, is recorded as interest income and an increase in the principal amount of the loan. We had PIK interest of approximately $1.1 million and $3.1 million, respectively, for the three months and nine months ended September 30, 2005.

In addition, as a business development company under the 1940 Act, we are required to make available significant managerial assistance, for which we may receive fees, to our portfolio companies. These fees would be generally non-recurring, however in some instances they may have a recurring component. We have received no fee income for managerial assistance to date.

Prior to making an investment, we typically enter into a non-binding term sheet with the potential portfolio company. These term sheets are generally subject to a number of conditions, including but not limited to the satisfactory completion of our due diligence investigations of the company's business and legal documentation for the loan.

During the quarter ended September 30, 2005, our investments had a net unrealized appreciation of $239,000. In the third quarter of 2005, we closed approximately $70 million in portfolio investments, including an additional debt investment of $2 million to an existing portfolio company and $68 million of investments in new portfolio companies. A total of $600,000 of principal in debt investments was repaid by our existing portfolio companies during the quarter ended September 30, 2005.

To the extent possible, our loans will be collateralized by a security interest in the borrower's assets or guaranteed by a principal to the transaction. Interest payments, if not deferred, are normally payable quarterly with amortization of principal being deferred for several years. When we receive a warrant to purchase stock in a portfolio company, the warrant will typically have a nominal strike price, and will entitle us to purchase a modest percentage of the borrower's stock.

Set forth below is our current portfolio of investments as of September 30, 2005. As of September 30, 2005, we also had outstanding commitments to fund an additional $16 million to four portfolio companies.

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Portfolio Company (1)

Industry

Investment

Fair Value (2) (in thousands)

Questia Media, Inc.

digital media

senior secured notes (3)(4)

$10,724

MortgageIT, Inc.

financial services

senior secured notes

15,000

Advanced Aesthetics Institute

medical services

senior secured notes warrants to purchase common stock

10,000         —

The Endurance International Group

Webhosting

senior secured notes (4)(6) convertible preferred stock

12,711     345

DirectRevenue, LLC

internet advertising

senior secured notes (6)(7) warrants to purchase common units

3,734          0

Avue Technologies Corporation

Software

warrants to purchase common stock

13

TrenStar Inc.

logistics technology

senior secured notes (3) warrants to purchase convertible preferred stock

16,652       —

3001, Inc.

geospatial imaging

senior unsecured notes preferred stock (5) common stock (5)

10,000   2,000   1,000

Innovative Interactive, LLC

internet advertising

senior secured notes (4)(6) warrants to purchase common units

9,693     705

Segovia, Inc.

satellite communications

senior secured notes (6) warrants to purchase common stock

16,773      430

WHITTMANHART, INC.

IT consulting

senior secured notes (4) warrants to purchase common stock convertible preferred stock warrants to purchase convertible preferred stock

5,000     —         476       24

CrystalTech Web Hosting, Inc.

webhosting

senior secured notes

8,000

Falcon Communications, Inc.

satellite communications

senior unsecured notes common stock

6,000  2,000

Climax Group, Inc.

software

senior secured notes(6) warrants to purchase common stock

4,915     100

Willow CSN Incorporated

virtual workforce services

senior secured notes warrants to purchase preferred stock

13,310     200

NetQuote, Inc

web-based services

senior secured notes

15,000

StayOnline, Inc.

internet service provider

senior secured notes preferred stock

14,645     361

GenuTec Business Solutions, Inc.

software

9% cumulative preferred stock warrants to purchase common stock

19,901       100

Mortgagebot Acquisition, LLC

financial services

secured notes

11,000

Optimus Corp.

IT consulting

senior secured notes

7,000

Total Investments:

$217,812

(1)	We do not "control" and are not an "affiliate" of any of our portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, we would "control" a portfolio company if we owned 25% or more of its voting securities and would be an "affiliate" of a portfolio company if we owned 5% or more of its voting securities.

(2)	Fair value is determined in good faith by our Board of Directors.

(3)	Investment includes payment-in-kind interest.

(4)	Transaction also includes a commitment to fund additional notes and warrants upon satisfaction of certain specified conditions.

(5)	Preferred Stock and common stock are indirectly held through limited liability company interests.

(6)	Fair value reflects accretion of original issue discount.

(7)	Fair value reflects repayment of principal.

In addition, we believe that we have a strong pipeline of potential transactions in various stages. We continue to work diligently toward the consummation of additional investments, and our

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management is actively involved in identifying and evaluating potential opportunities. However, there can be no assurance when or if these transactions will close.

On September 23, 2005, we announced the resignation of four employees of TIM, our investment adviser, including Lee D. Stern, who was also the Chief Transaction Officers and an Executive Vice President of TICC. Mr. Stern remained with the Company through October 31, 2005. The other employee resignations were effective September 21, 2005. The Company has maintained an on-going recruiting process and has hired a senior level investment professional to supplement its internal resources. The Company is continuing to search for additional investment professionals to complement existing staffing; however, the Company believes that TIM has adequate resources to act as the Company's investment adviser.

Portfolio Grading

For the quarter ending September 30, 2005, we have adopted a credit grading system to monitor the quality of our debt investment portfolio. Grade 1 is for those investments which are trending ahead of expectations. Grade 2 is for investments where full repayment of principal and interest is expected. Grade 3 is for investments that require closer monitoring, but full repayment of principal and interest is expected. Grade 4 is for investments for which some reduction of interest income is expected, but no loss of principal is expected. Grade 5 is for investments for which some loss of principal is expected. As of September 30, 2005, our portfolio had a weighted average grade of 1.9, based upon the fair value of the debt investments in the portfolio. Equity securities are not graded.

At September 30, 2005, our debt investment portfolio was graded as follows:

				At September 30, 2005
Grade				Portfolio at Value				Percentage of Total Portfolio
($ in thousands)
1				$	62,177				32.7	%
2					82,679				43.5
3					45,302				23.8
4					—				—
5					—				—
				$	190,158				100.0	%

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RESULTS OF OPERATIONS

Comparison of our results of operations for the three months ended September 30, 2005 to the three months ended September 30, 2004.

Investment Income

Interest income from debt investments for the three months ended September 30, 2005 was approximately $4,725,000, compared to approximately $1,325,000 for the comparable period in 2004. This is a direct result of the number of portfolio investments entered into over the past year. A significant portion of our interest income from debt investments during each respective period was attributable to PIK interest received from debt investments that contain a PIK provision. PIK interest is added to the principal balance of our investment and is recorded as income. Specifically, for the three months ended September 30, 2005, interest from debt investments included approximately $1.1 million in PIK interest, compared to approximately $254,000 for the comparable period in 2004.

Interest income from cash and cash equivalents was approximately $218,000 for the three months ended September 30, 2005, compared to approximately $327,000 for the comparable period in September 30, 2004; the decrease is due to the lower level of cash balances as portfolio investments are made.

Other income totaled approximately $1.6 million for the three months ended September 30, 2005, representing primarily non-refundable closing fees associated with investments in portfolio companies. This represented a significant increase from other income of approximately $692,000 for the comparable period in 2004, directly related to the number of transactions closed.

Expenses

Total expenses for the three months ended September 30, 2005 were approximately $2,019,000, which represented an increase of approximately $1,021,000 over the comparable period in 2004. The increase was primarily due to an increase in investment advisory fees of approximately $328,000, reflecting the increase in the gross assets of the Company, an increase in salaries and benefits of $373,000, and an increase in professional fees of approximately $168,000.

The investment advisory fee for the third quarter of 2005 was approximately $1,027,000, compared to $698,000 for the comparable period in 2004, representing the base fee as provided for in the advisory agreement. The increase is directly related to the increase in the gross assets of the Company. There were no incentive fees earned under the agreement during either period.

Salaries and benefits for the three months ended September 30, 2005 and 2004 were approximately $428,000 and $55,000, respectively, reflecting the allocation of compensation expenses for the services of our chief financial officer, controller, office manager, and the vice president of business development. The increase from the prior year is primarily related to salary increases and bonuses, including the accrual of a $300,000 bonus for Patrick F. Conroy, our chief financial officer, chief compliance officer, treasurer and corporate secretary, during the third quarter of 2005, and the addition of the position of controller to the staff.

Professional fees, consisting of legal, audit, valuation and consulting fees, were approximately $294,000 for the three months ended September 30, 2005, compared to $126,000 for the comparable period in 2004. Valuation fees increased by approximately $64,000 as a result of the greater number of investments to be reviewed, and audit fees increased by approximately $54,000 as a result of the additional work required for compliance with the requirements of the Sarbanes-Oxley Act.

Interest expense associated with borrowings under the Company's credit facility were approximately $92,000 for the three months ended September 30, 2005; there were no borrowings or interest expense for the comparable period in 2004. General and administrative expenses, consisting primarily of office supplies, printing, facilities costs and other expenses, were approximately $91,000 for the three months ended September 30, 2005, compared to approximately $51,000 for the comparable period in 2004. General and administrative expenses are allocated to the Company under the terms of the administration agreement with TIM and BDC Partners. This increase is due primarily to fees related to establishing the Company's credit facility.

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Net Unrealized Appreciation on Investments

For the quarter ended September 30, 2005, the Company's investments had net unrealized appreciation of $239,000. This net change in the fair value of our investments was based upon the fair value determinations by the Board of Directors. In each case the investment consisted of warrants of a portfolio company. Warrant investments for Innovative Interactive and Segovia were increased in value by $309,000 and $170,000, respectively, while our investment in warrants issued by DirectRevenue was written down by $240,000.

Net Increase In Stockholders' Equity From Operations

We had a net increase in stockholders' equity resulting from operations of approximately $4,719,506 for the three months ended September 30, 2005, compared to an increase of approximately $1,374,156 for the comparable period in 2004. Based on a weighted-average of 13,393,082 (basic and diluted) shares outstanding, our net increase in stockholders' equity from operations per common share for the three months ended September 30, 2005 was approximately $0.35 for basic and diluted earnings.

Comparison of our results of operations for the nine months ended September 30, 2005 to the nine months ended September 30, 2004.

Investment Income

Interest income from debt investments for the nine months ended September 30, 2005 was approximately $11,583,000, compared to approximately $2,429,000 for the comparable period in 2004. This is a direct result of the number of portfolio investments entered into over the past year. A significant portion of our interest income from debt investments during each respective period was attributable to PIK interest received from debt investments that contain a PIK provision. PIK interest is added to the principal balance of our investment and is recorded as income. Specifically, for the nine months ended September 30, 2005, interest from debt investments included approximately $3.1 million in PIK interest, compared to approximately $665,000 for the comparable period in 2004.

Interest income from cash and cash equivalents was approximately $853,000 for the nine months ended September 30, 2005, compared to approximately $851,000 for the comparable period in 2004; higher interest rates on short-term investments were effectively offset by the lower level of cash balances as the portfolio became fully invested.

Other income totaled approximately $3,012,000 for the nine months ended September 30, 2005, representing primarily non-refundable closing fees associated with investments in portfolio companies. This represented an increase over non-recurring other fee income of approximately $1,222,000 for the comparable period in 2004, directly related to the number of transactions closed.

Expenses

Total expenses for the nine months ended September 30, 2005 were approximately $4,871,000, which represented an increase of approximately $1,947,000 over the comparable period in 2004. The increase was primarily due to an increase in investment advisory fees of approximately $684,000 due to the increase in the gross assets of the Company, an increase in salaries and benefits of $466,000, and an increase in professional fees of approximately $570,000.

The investment advisory fee for the nine months ended September 30, 2005 was approximately $2,761,000, compared to $2,077,000 for the comparable period in 2004, representing the base fee as provided for in the advisory agreement. The increase is directly related to the increase in the gross assets of the Company. There were no incentive fees earned under the agreement during either period.

Salaries and benefits for the nine months ended September 30, 2005 and 2004 were approximately $619,000 and $153,000, respectively, reflecting the allocation of compensation expenses for the services of our chief financial officer, controller, office manager, and the vice president of investor relations. The increase from the prior year is primarily related to salary increases and bonuses, including the accrual of a $300,000 bonus for Patrick F. Conroy, our chief financial officer, chief compliance officer, treasurer and corporate secretary, during the third quarter of 2005, and the addition of the position of controller to the staff.

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Professional fees, consisting of legal, audit, valuation and consulting fees, were approximately $924,000 for the nine months ended September 30, 2005, compared to $354,000 for the comparable period in 2004. Valuation fees increased by approximately $212,000 as a result of the greater number of investments to be reviewed, and audit fees increased by approximately $275,000 as a result of the additional work required for compliance with the requirements of the Sarbanes-Oxley Act.

Interest expense associated with borrowings under the Company's credit facility were approximately $92,000 for the nine months ended September 30, 2005; there were no borrowings or interest expense for the comparable period in 2004. General and administrative expenses, consisting primarily of office supplies, printing, facilities costs and other expenses, were approximately $226,000 for the nine months ended September 30, 2005, compared to approximately $137,000 for the comparable period in 2004. General and administrative expenses are allocated to the Company under the terms of the administration agreement with TIM and BDC Partners. This increase is due primarily to printing costs associated with the Company's first formal annual report to shareholders, and fees related to establishing the Company's credit facility.

Net Unrealized Appreciation on Investments

For the nine months ended September 30, 2005, the Company's investments had net unrealized appreciation of $239,000. This net change in the fair value of our investments was based upon the fair value determination of the Board of Directors. In each case the investment consisted of warrants of a portfolio company. Warrant investments for Innovative Interactive and Segovia were increased in value by $309,000 and $170,000, respectively, while our investment in warrants issued by DirectRevenue was written down by $240,000.

Net Increase In Stockholders' Equity From Operations

We had a net increase in stockholders' equity resulting from operations of approximately $10,815,468 for the nine months ended September 30, 2005, compared to an increase of approximately $1,576,618 for the comparable period in 2004. Based on a weighted-average of 13,056,977 (basic and diluted) shares outstanding, our net increase in stockholders' equity from operations per common share for the nine months ended September 30, 2005 was approximately $0.83 for basic and diluted earnings.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2005, we had investments in debt securities of eighteen companies, totaling approximately $190.2 million, and equity investments of approximately $27.7 million. The debt investment amount includes approximately $4.4 million in accrued PIK interest which, as described in the section above entitled "Overview," is added to the carrying value of our investments. Also included in equity investments is $20 million in 9% cumulative preferred stock which is convertible into debt, pending our receipt of a lending license in the state of California.

Cash provided by operating activities for the nine months ended September 30, 2005, consisting primarily of the items described in "Results of Operations," was approximately $7.5 million, reflecting the income resulting from operations, offset by non-cash income related to unrealized appreciation on investments, PIK interest, OID income and accrued interest receivable. Net cash used in investing activities was approximately $132.1 million, reflecting new investments purchased offset by principal repayments.

We raised net proceeds of approximately $41.5 million from a rights offering which closed in January 2005. Under the terms of the offering, each stockholder of record on December 29, 2004 was entitled to purchase an additional share of stock for each three shares of stock owned on that date. Pursuant to the rights offering, we issued 3,115,666 shares at a price of $14.029 per share.

On May 18, 2005 we entered into an uncommitted $35 million senior secured revolving credit facility with Bayerische Hypo-Und Vereinsbank AG, as administrative agent and a lender. The facility will supplement our equity capital and provide funding for additional portfolio investments, as well as general corporate matters. As of September 30, 2005, the Company had drawn down the full amount

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under this facility; amounts borrowed bear interest at variable rates, based upon either the prime rate, federal funds rate or LIBOR, plus an applicable margin. At September 30, 2005 all amounts borrowed were bearing interest at the respective 30-day LIBOR plus the applicable margin. Portfolio investments with a carrying value of $173.3 million have been pledged as collateral to secure amounts borrowed. All amounts borrowed under the facility will mature, and all accrued and unpaid interest thereunder will be due and payable within one year of the date of the borrowing; the facility has a termination date of May 18, 2007. The facility also contains customary representations, warranties, covenants and events of default.

On October 13, 2005, the Company entered into an agreement amending the credit facility to increase the credit facility from $35 million to $100 million, with Royal Bank of Canada as an additional lender under the amended credit facility. $35 million available under the amended credit facility may be borrowed prior to, and is payable in full on, May 18, 2007. The remaining $65 million available under the amended credit facility may be borrowed prior to, and is payable in full on, February 10, 2006.

During the nine months ended September 30, 2005, cash and cash equivalents decreased from approximately $57.3 million at the beginning of the period to approximately $43.4 million at the end of the period, including approximately $40 million pledged to creditors under a repurchase agreement.

In order to qualify as a RIC and to avoid corporate level tax on the income we distribute to our stockholders, we are required, under Subchapter M of the Code, to distribute at least 90% of our ordinary income and short-term capital gains to our stockholders on an annual basis. On October 26, 2005, our Board of Directors declared a cash dividend of $0.30 per share for the fourth quarter to stockholders of record as of December 9, 2005, payable on December 30, 2005.

RECENT DEVELOPMENTS

On October 13, 2005, the Company entered into an agreement amending its credit facility to increase the credit facility from $35 million to $100 million, with Royal Bank of Canada as an additional lender under the amended credit facility. $35 million available under the amended credit facility may be borrowed prior to, and is payable in full on, May 18, 2007. The remaining $65 million available under the amended credit facility may be borrowed prior to, and is payable in full on, February 10, 2006.

On October 26, 2005, the Board of Directors declared a cash dividend of $0.30 per share to holders of record on December 9, 2005, payable on December 30, 2005.

RISK FACTORS

An investment in our securities involves certain risks relating to our structure and investment objectives. The risks set forth below are not the only risks we face, and we face other risks which we have not yet identified, which we do not currently deem material or which are not yet predictable. If any of the following risks occur, our business, financial condition and results of operations could be materially adversely affected. In such case, our net asset value and the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Relating To Our Business And Structure

We are a new company with a limited operating history.

We were incorporated in July 2003 and have a limited operating history. We are subject to all of the business risks and uncertainties associated with any new business enterprise, including the risk that we will not achieve our investment objective and the value of your investment in us could decline substantially.

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Any failure on our part to maintain our status as a business development company would reduce our operating flexibility.

If we do not remain a business development company, we might be regulated as a closed-end investment company under the 1940 Act, which would subject us to substantially more regulatory restrictions under the 1940 Act and correspondingly decrease our operating flexibility.

We are dependent upon TIM's key management personnel for our future success, particularly Jonathan H. Cohen and Saul B. Rosenthal.

We depend on the diligence, skill and network of business contacts of the senior management of TIM. The senior management, together with other investment professionals, will evaluate, negotiate, structure, close, monitor and service our investments. Our future success will depend to a significant extent on the continued service and coordination of the senior management team, particularly Jonathan H. Cohen, the Chief Executive Officer of TIM, and Saul B. Rosenthal, the President and Chief Operating Officer of TIM. On September 21, 2005, we were notified that Lee D. Stern, our Chief Transaction Officer, would be resigning his position prior of the end of the year. On October 31, 2005, Mr. Stern ended his employment with us. Subsequent to Mr. Stern's departure only Mr. Rosenthal will devote the majority of his business time to our operations. Neither Mr. Cohen nor Mr. Rosenthal is subject to an employment contract. The departure of either of these individuals could have a material adverse effect on our ability to achieve our investment objective.

Our financial condition and results of operations will depend on our ability to manage our future growth effectively.

TIM is a recently formed investment adviser and, as discussed above, TICC is a recently organized company. As such, each entity is subject to the business risks and uncertainties associated with any new business enterprise, including the lack of experience in managing or operating a business development company. Our ability to achieve our investment objective will depend on our ability to grow, which will depend, in turn, on our investment adviser's ability to identify, analyze, invest in and finance companies that meet our investment criteria. Accomplishing this result on a cost-effective basis is largely a function of our investment adviser's structuring of the investment process, its ability to provide competent, attentive and efficient services to us and our access to financing on acceptable terms.

As we grow, we and TIM, through TIM's managing member, BDC Partners, will need to hire, train, supervise and manage new employees. Failure to manage our future growth effectively could have a material adverse effect on our business, financial condition and results of operations.

We operate in a highly competitive market for investment opportunities.

A large number of entities compete with us to make the types of investments that we make in technology-related companies. We compete with a large number of private equity and venture capital funds, other equity and non-equity based investment funds, investment banks and other sources of financing, including traditional financial services companies such as commercial banks and specialty finance companies. Many of our competitors are substantially larger than us and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a business development company. There can be no assurance that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objective.

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Our business model depends upon the development of strong referral relationships with private equity and venture capital funds and investment banking firms.

If we fail to maintain our relationships with key firms, or if we fail to establish strong referral relationships with other firms or other sources of investment opportunities, we will not be able to grow our portfolio of loans and achieve our investment objective. In addition, persons with whom we have informal relationships are not obligated to provide us with investment opportunities, and therefore there is no assurance that such relationships will lead to the origination of debt or other investments.

We may not realize gains from our equity investments.

When we invest in debt securities, we generally expect to acquire warrants or other equity securities as well. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.

Because our investments are generally not in publicly traded securities, there is uncertainty regarding the value of our investments, which could adversely affect the determination of our net asset value.

Our portfolio investments are generally not in publicly traded securities. As a result, the fair value of these securities is not readily determinable. We value these securities at fair value as determined in good faith by our Board of Directors based upon the recommendation of the Board's Valuation Committee. In connection with that determination, members of our portfolio management team prepare portfolio company valuations using the most recent portfolio company financial statements and forecasts. The Valuation Committee also utilizes the services of HLHZ, an independent valuation firm, which prepares valuations for each of our portfolio investments other than those that, when combined with all other investments in the same portfolio company, have a fair value as of the previous quarter of less than $2 million. However, the Board of Directors retains ultimate authority as to the appropriate valuation of each investment. The types of factors that the Valuation Committee takes into account in providing its fair value recommendation to the Board of Directors includes, as relevant, the nature and value of any collateral, the portfolio company's ability to make payments and its earnings, the markets in which the portfolio company does business, comparison to valuations of publicly traded companies, comparisons to recent sales of comparable companies, the discounted value of the cash flows of the portfolio company and other relevant factors. Because such valuations are inherently uncertain and may be based on estimates, our determinations of fair value may differ materially from the values that would be assessed if a readily available market for these securities existed.

The lack of liquidity in our investments may adversely affect our business.

As stated above, our investments are generally not in publicly traded securities. Substantially all of these securities are subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to sell such investments if the need arises. Also, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments.

In addition, because we generally invest in debt securities with a term of up to seven years and generally intend to hold such investments until maturity of the debt, we do not expect realization events, if any, to occur in the near-term. We expect that our holdings of equity securities may require several years to appreciate in value, and we can offer no assurance that such appreciation will occur.

We may experience fluctuations in our quarterly results.

We may experience fluctuations in our quarterly operating results due to a number of factors, including the rate at which we make new investments, the interest rates payable on the debt securities we acquire, the default rate on such securities, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter

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competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.

Even in the event the value of your investment declines, the management fee and, in certain circumstances, the incentive fee will still be payable.

The management fee is calculated as 2.0% of the value of our gross assets at a specific time. Accordingly, the management fee will be payable regardless of whether the value of our gross assets and/or your investment have decreased. Moreover, a portion of our incentive fee is payable if our net investment income for a calendar quarter exceeds a designated "hurdle rate." This portion of the incentive fee is payable without regard to any capital gain, capital loss or unrealized depreciation that may occur during the quarter. Accordingly, this portion of our adviser's incentive fee may also be payable notwithstanding a decline in net asset value that quarter. In addition, in the event we realize deferred loan interest income in excess of our available capital as a result of our receipt of payment-in-kind, or "PIK" interest, we may be required to liquidate assets in order to pay a portion of the incentive fee. TIM, however, is not required to reimburse us for the portion of any fees attributable to accrued deferred loan interest in the event of a default of the obligor.

We may borrow money, which would magnify the potential for gain or loss on amounts invested and may increase the risk of investing in us.

Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. We may borrow from and issue senior debt securities to banks, insurance companies, and other lenders. Lenders of these senior securities have fixed dollar claims on our assets that are superior to the claims of our common shareholders. If the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make common stock dividend payments. Leverage is generally considered a speculative investment technique.

We currently have $100 million available to us under a credit facility of which we have borrowed $35 million as of September 30, 2005.

Regulations governing our operation as a business development company affect our ability to, and the way in which we raise additional capital, which may expose us to risks, including the typical risks associated with leverage.

Our business will require a substantial amount of capital, which we may acquire from the following sources:

Senior Securities and Other Indebtedness

We may issue debt securities or preferred stock and/or borrow money from banks or other financial institutions, which we refer to collectively as "senior securities," up to the maximum amount permitted by the 1940 Act. Under the provisions of the 1940 Act, we are permitted, as a business development company, to issue senior securities in amounts such that our asset coverage ratio, as defined in the 1940 Act, equals at least 200% of gross assets less all liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. If we issue senior securities, including preferred stock and debt securities, we will be exposed to typical risks associated with leverage, including an increased risk of loss. If we incur leverage to make investments, a decrease in the value of our investments would have a greater negative impact on the value of our common stock. If we issue debt securities or preferred stock, it is likely that such securities will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. In addition, such securities may be rated by rating agencies, and in obtaining a rating for such securities, we may

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be required to abide by operating and investment guidelines that could further restrict our operating flexibility. As of September 30, 2005, we had approximately $35 million outstanding under a credit facility with Bayerische Hypo-Und Vereinsbank AG.

Our ability to pay dividends or issue additional senior securities would be restricted if our asset coverage ratio was not at least 200%. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous. Furthermore, any amounts that we use to service our indebtedness would not be available for distributions to our common stockholders.

Common Stock

We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current net asset value of our common stock if our Board of Directors determines that such sale is in the best interests of TICC and its stockholders, and our stockholders approve such sale. In certain limited circumstances, pursuant to an SEC staff interpretation, we may also issue shares at a price below net asset value in connection with a transferable rights offering so long as: (1) the offer does not discriminate among shareholders; (2) we use our best efforts to ensure an adequate trading market exists for the rights; and (3) the ratio of the offering does not exceed one new share for each three rights held. If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our stockholders at that time would decrease and they may experience dilution. Moreover, we can offer no assurance that we will be able to issue and sell additional equity securities in the future, on favorable terms or at all.

Our Board of Directors is authorized to reclassify any unissued shares of stock into one or more classes of preferred stock, which could convey special rights and privileges to its owners.

Our charter permits our Board of Directors to reclassify any authorized but unissued shares of stock into one or more classes of preferred stock. We are currently authorized to issue up to 100,000,000 shares of common stock, of which 13,463,852 shares are currently issued and outstanding. In the event our Board of Directors opts to reclassify a portion of our unissued shares of common stock into a class of preferred stock, those preferred shares would have a preference over our common stock with respect to dividends and liquidation. The class voting rights of any preferred shares we may issue could make it more difficult for us to take some actions that may, in the future, be proposed by the Board of Directors and/or the holders of our common stock, such as a merger, exchange of securities, liquidation, or alteration of the rights of a class of our securities, if these actions were perceived by the holders of preferred shares as not in their best interests. The issuance of preferred shares convertible into shares of common stock might also reduce the net income and net asset value per share of our common stock upon conversion. These effects, among others, could have an adverse effect on your investment in our common stock.

A change in interest rates may adversely affect our profitability.

A portion of our income will depend upon the difference between the rate at which we borrow funds (if we do borrow) and the interest rate on the debt securities in which we invest. We anticipate using a combination of equity and long-term and short-term borrowings to finance our investment activities. As of September 30, 2005, we had approximately $35 million outstanding under a credit facility with Bayerische Hypo-Und Vereinsbank AG. Some of our investments in debt securities are at fixed rates and others at variable rates. We may, but will not be required to, hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts, subject to applicable legal requirements. These activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations. Also, we have limited experience in entering into hedging transactions, and we will initially have to purchase or develop such expertise.

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We will be subject to corporate-level income tax if we are unable to qualify as a RIC.

To remain entitled to the tax benefits accorded RICs under the Code, we must meet certain income source, asset diversification and annual distribution requirements. In order to qualify as a RIC, we must derive each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale of stock or other securities, or other income derived with respect to our business of investing in such stock or securities. The annual distribution requirement for a RIC is satisfied if we distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, to our stockholders on an annual basis. Because we may use debt financing in the future, we may be subject to certain asset coverage ratio requirements under the 1940 Act and financial covenants under loan and credit agreements that could, under certain circumstances, restrict us from making distributions necessary to satisfy the annual distribution requirement. If we are unable to obtain cash from other sources, we may fail to qualify for special tax treatment as a RIC and, thus, may be subject to corporate-level income tax on all our income. To qualify as a RIC, we must also meet certain asset diversification requirements at the end of each calendar quarter. Failure to meet these tests may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because most of our investments will be in private companies, any such dispositions could be made at disadvantageous prices and may result in substantial losses. If we fail to qualify as a RIC for any reason and remain or become subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions. Such a failure would have a material adverse effect on us and our stockholders.

We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.

For federal income tax purposes, we will include in income certain amounts that we have not yet received in cash, such as original issue discount, which may arise if we receive warrants in connection with the making of a loan or possibly in other circumstances, or contracted PIK interest, which represents contractual interest added to the loan balance and due at the end of the loan term. A significant portion of our interest income from debt investments since our inception has been attributable to PIK interest received from our debt investments that contain a PIK provision. We also may be required to include in income certain other amounts that we will not receive in cash.

Because in certain cases we may recognize income before or without receiving cash representing such income, we may have difficulty satisfying the annual distribution requirement applicable to RICs. Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investments to meet these distribution requirements. If we are not able to obtain cash from other sources, we may fail to qualify for RIC tax treatment and thus be subject to corporate-level income tax.

There are significant potential conflicts of interest, which could impact our investment returns.

Our executive officers and directors, and the executive officers of our investment adviser, TIM, and its managing member, BDC Partners, serve or may serve as officers and directors of entities that operate in a line of business similar to our own. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders. For example, Jonathan H. Cohen, the Chief Executive Officer of TIM, BDC Partners and TICC, is the principal of JHC Capital Management, LLC, a registered investment adviser. Mr. Cohen also manages the Royce Technology Value Fund. Steven P. Novak, one of our independent directors, is also the President of Palladio Capital Management, LLC, the manager of an equity-oriented hedge fund. Charles M. Royce, the non-executive Chairman of our Board of Directors, is the President and Chief Investment Officer of Royce & Associates, LLC, the non-managing member of our investment adviser.

In addition, Messrs. Cohen and Rosenthal serve as Chief Executive Officer and President, respectively, of TAC Acquisition Corp., a special purpose acquisition company formed for the purpose of acquiring one or more operating companies in the technology-related sector. Messrs. Cohen,

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Rosenthal and Novak also serve on the Board of Directors, and Messrs. Cohen , Rosenthal and Royce are significant shareholders, of TAC Acquisition Corp. Likewise, Messrs. Cohen and Rosenthal, currently serve as Chief Executive Officer, and President, respectively, for T2 Advisers LLC, an investment adviser to a fund, T2 Income Fund Limited, a Guernsey fund, established and operated for the purpose of investing primarily in the debt and equity securities of foreign companies operating in the technology-related sector. BDC Partners is the managing member, and Royce & Associates is a non-managing member, of T2 Advisers LLC. In addition, Patrick F. Conroy, the Chief Financial Officer, Chief Compliance Officer, Treasurer and Corporate Secretary of TIM, BDC Partners and TICC, serves as Chief Financial Officer, Chief Compliance Officer and Treasurer for both T2 Income Fund Limited and T2 Advisers LLC. Messrs. Rosenthal and Conroy also each serve as a non-independent director of T2 Income Fund Limited. Because of these possible conflicts of interest, these individuals may direct potential business and investment opportunities to other entities rather than to us or such individuals may undertake or otherwise engage in activities or conduct on behalf of such other entities that is not in, or which may be adverse to, our best interests. In addition, TAC Acquisition Corp. may decide to acquire one or more of our portfolio companies, subject to the limitations imposed upon such an acquisition by the 1940 Act.

In order to minimize the potential conflicts of interest that might arise, we have adopted a policy that prohibits us from making investments in, or otherwise knowingly doing business with, any company in which any fund or other client account managed by JHC Capital Management, Royce & Associates, LLC, or Palladio Capital Management holds a long or short position. The investment focus of each of these entities tends to be different from our investment objective. Nevertheless, it is possible that new investment opportunities that meet our investment objective may come to the attention of one of these entities in connection with another investment advisory client or program, and, if so, such opportunity might not be offered, or otherwise made available, to us. Also, our investment policy precluding the investments referenced above could cause us to miss out on some investment opportunities. However, our executive officers, directors and investment adviser intend to treat us in a fair and equitable manner over time consistent with their applicable duties under law so that we will not be disadvantaged in relation to any other particular client. In addition, we have adopted a formal Code of Ethics that governs the conduct of our officers and directors. Our officers and directors also remain subject to the fiduciary obligations imposed by both the 1940 Act and applicable state corporate law. Finally, we pay BDC Partners our allocable portion of overhead and other expenses incurred by BDC Partners in performing its obligations under the administration agreement, including a portion of the rent and the compensation of our chief financial officer, controller, vice president of investor relations and other administrative support personnel, which creates conflicts of interest that our Board of Directors must monitor.

Changes in laws or regulations governing our operations may adversely affect our business.

We and our portfolio companies are subject to regulation by laws at the local, state and federal levels. These laws and regulations, as well as their interpretation, may be changed from time to time. Any change in these laws or regulations could have a material adverse effect on our business.

Our ability to invest in private companies may be limited in certain circumstances.

If we are to maintain our status as a business development company, we must not acquire any assets other than "qualifying assets" unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. If we acquire debt or equity securities from an issuer that has outstanding marginable securities at the time we make an investment, these acquired assets cannot be treated as qualifying assets. This result is dictated by the definition of "eligible portfolio company" under the 1940 Act, which in part looks to whether a company has outstanding marginable securities.

Amendments promulgated in 1998 by the Federal Reserve expanded the definition of a marginable security under the Federal Reserve's margin rules to include any non-equity security. Thus, any debt securities issued by any entity are marginable securities under the Federal Reserve's current margin rules. As a result, the staff of the SEC has raised the question to the business development

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company industry as to whether a private company that has outstanding debt securities would qualify as an "eligible portfolio company" under the 1940 Act.

The SEC has recently issued proposed rules to correct the unintended consequence of the Federal Reserve's 1998 margin rule amendments of apparently limiting the investment opportunities of business development companies. In general, the SEC's proposed rules would define an eligible portfolio company as any company that does not have securities listed on a national securities exchange or association. We are currently in the process of reviewing the SEC's proposed rules and assessing their impact, to the extent such proposed rules are subsequently approved by the SEC, on our investment activities. We do not believe that these proposed rules will have a material adverse effect on our operations.

Until the SEC or its staff has taken a final public position with respect to the issue discussed above, we will continue to monitor this issue closely, and may be required to adjust our investment focus to comply with and/or take advantage of any future administrative position, judicial decision or legislative action.

Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock.

Our charter and bylaws, as well as certain statutory and regulatory requirements, contain certain provisions that may have the effect of discouraging a third party from making an acquisition proposal for us. These anti-takeover provisions may inhibit a change of control in circumstances that could give the holders of our common stock the opportunity to realize a premium over the market price for our common stock.

Risks Related To Our Investments

Our portfolio may be concentrated in a limited number of portfolio companies in the technology-related sector, which will subject us to a risk of significant loss if any of these companies defaults on its obligations under any of its debt securities that we hold or if the technology-related sector experiences a market downturn.

A consequence of our limited number of investments is that the aggregate returns we realize may be significantly adversely affected if a small number of investments perform poorly or if we need to write down the value of any one investment. Beyond our income tax asset diversification requirements, we do not have fixed guidelines for diversification, and our investments could be concentrated in relatively few issuers. In addition, we intend to concentrate in the technology-related sector and to invest, under normal circumstances, at least 80% of the value of our net assets (including the amount of any borrowings for investment purposes) in technology-related companies. As a result, a market downturn in the technology-related sector could materially adversely affect us.

The technology-related sector is subject to many risks, including volatility, intense competition, decreasing life cycles and periodic downturns.

We invest in companies in the technology-related sector, some of which may have relatively short operating histories. The revenues, income (or losses) and valuations of technology-related companies can and often do fluctuate suddenly and dramatically. Also, the technology-related market is generally characterized by abrupt business cycles and intense competition. Since mid-2000, there has been substantial excess capacity and a significant slowdown in many industries in the technology-related sector. In addition, this overcapacity, together with a cyclical economic downturn, resulted in substantial decreases in the market capitalization of many technology-related companies. While such valuations have recovered to some extent, we can offer no assurance that such decreases in market capitalizations will not recur, or that any future decreases in technology company valuations will be insubstantial or temporary in nature. Therefore, our portfolio companies may face considerably more risk of loss than companies in other industry sectors.

In addition, because of rapid technological change, the average selling prices of products and some services provided by the technology-related sector have historically decreased over their

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productive lives. As a result, the average selling prices of products and services offered by our portfolio companies may decrease over time, which could adversely affect their operating results and their ability to meet their obligations under their debt securities, as well as the value of any equity securities, that we may hold. This could, in turn, materially adversely affect our business, financial condition and results of operations.

Our investments in the technology-related companies that we are targeting may be extremely risky and we could lose all or part of our investments.

Although a prospective portfolio company's assets are one component of our analysis when determining whether to provide debt capital, we generally do not base an investment decision primarily on the liquidation value of a company's balance sheet assets. Instead, given the nature of the companies that TICC invests in, we also review the company's historical and projected cash flows, equity capital and "soft" assets, including intellectual property (patented and non-patented), databases, business relationships (both contractual and non-contractual) and the like. Accordingly, considerably higher levels of overall risk will likely be associated with TICC's portfolio compared with that of a traditional asset-based lender whose security consists primarily of receivables, inventories, equipment and other tangible assets. Interest rates payable by our portfolio companies may not compensate for these additional risks.

Specifically, investment in the technology-related companies that we are targeting involves a number of significant risks, including:

	•	these companies may have limited financial resources and may be unable to meet their obligations under their debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any value from the liquidation of such collateral;

	•	they typically have limited operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors' actions and market conditions, as well as general economic downturns;

	•	because they tend to be privately owned, there is generally little publicly available information about these businesses; therefore, although TIM's agents will perform "due diligence" investigations on these portfolio companies, their operations and their prospects, we may not learn all of the material information we need to know regarding these businesses;

	•	they are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us; and

	•	they generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position.

A portfolio company's failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its assets, which could trigger cross-defaults under other agreements and jeopardize our portfolio company's ability to meet its obligations under the debt securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company. In addition, if a portfolio company goes bankrupt, even though we may have structured our interest as senior debt, depending on the facts and circumstances, including the extent to which we actually provided significant "managerial assistance" to that portfolio company, a bankruptcy court might recharacterize our debt holding and subordinate all or a portion of our claim to that of other creditors.

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Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio.

Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as "follow-on" investments, in order to: (1) increase or maintain in whole or in part our equity ownership percentage; (2) exercise warrants, options or convertible securities that were acquired in the original or subsequent financing; or (3) attempt to preserve or enhance the value of our investment.

We may elect not to make follow-on investments or otherwise lack sufficient funds to make those investments. We have the discretion to make any follow-on investments, subject to the availability of capital resources. The failure to make follow-on investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase our participation in a successful operation. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on investment because we may not want to increase our concentration of risk, because we prefer other opportunities, or because we are inhibited by compliance with business development company requirements or the desire to maintain our tax status.

Our incentive fee may induce TIM to make speculative investments.

The incentive fee payable by us to TIM may create an incentive for TIM to make investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement. The way in which the incentive fee payable to TIM is determined, which is calculated as a percentage of the return on invested capital, may encourage TIM to use leverage to increase the return on our investments. Under certain circumstances, the use of leverage may increase the likelihood of default, which would disfavor holders of our common stock. Similarly, because TIM will receive the incentive fee based, in part, upon the capital gains realized on our investments, the investment adviser may invest more than would otherwise be appropriate in companies whose securities are likely to yield capital gains, as compared to income producing securities. Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during cyclical economic downturns.

Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.

We intend to invest primarily in senior debt securities, but may also invest in subordinated debt securities, issued by our portfolio companies. In some cases portfolio companies will be permitted to have other debt that ranks equally with, or senior to, the debt securities in which we invest. By their terms, such debt instruments may provide that the holders thereof are entitled to receive payment of interest or principal on or before the dates on which we are entitled to receive payments in respect of the debt securities in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligations to us. In the case of debt ranking equally with debt securities in which we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company. In addition, we will not be in a position to control any portfolio company by investing in its debt securities. As a result, we are subject to the risk that a portfolio company in which we invest may make business decisions with which we disagree and the management of such companies, as representatives of the holders of their common equity, may take risks or otherwise act in ways that do not best serve our interests as debt investors.

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Because we generally do not hold controlling equity interests in our portfolio companies, we may not be in a position to exercise control over our portfolio companies or to prevent decisions by management of our portfolio companies that could decrease the value of our investments.

Although we may do so in the future, to date we have not taken controlling equity positions in our portfolio companies. As a result, we are subject to the risk that a portfolio company may make business decisions with which we disagree, and the stockholders and management of a portfolio company may take risks or otherwise act in ways that are adverse to our interests. Due to the lack of liquidity for the debt and equity investments that we typically hold in our portfolio companies, we may not be able to dispose of our investments in the event we disagree with the actions of a portfolio company, and may therefore suffer a decrease in the value of our investments.

Risks Related To An Investment In Our Common Stock

Our common stock price may be volatile.

The trading price of our common stock may fluctuate substantially. The price of the common stock that will prevail in the market in the future may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include, but are not limited to, the following:

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

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

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

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

	•	general economic conditions and trends;

	•	loss of a major funding source; or

	•	departures of key personnel.

In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been brought against that company. Due to the potential volatility of our stock price, we may therefore be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management's attention and resources from our business.

Our shares may trade at discounts from net asset value or at premiums that are unsustainable over the long term.

Shares of business development companies may trade at a market price that is less than the net asset value that is attributable to those shares. The possibility that our shares of common stock will trade at a discount from net asset value or at premiums that are unsustainable over the long term are separate and distinct from the risk that our net asset value will decrease. It is not possible to predict whether our shares will trade at, above, or below net asset value.

There is a risk that you may not receive dividends or that our dividends may not grow over time.

We cannot assure you that we will achieve investment results or maintain a tax status that will allow or require any specified level of cash distributions or year-to-year increases in cash distributions.

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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are subject to certain market risks. Our primary market risk exposure relates to fluctuations in interest rates. At September 30, 2005, three debt investments in our portfolio were at fixed rates, and the remaining fifteen debt investments were at variable rates, representing $29.5 million and $160.6 million in principal debt respectively. Variable rates are generally based upon the five-year US Treasury note. We expect that out future debt investments will generally be made at variable rates.

To illustrate the potential impact of a change in the underlying interest rate on our net increase in stockholders' equity resulting from operations, we have assumed a 1% increase in the underlying five-year US Treasury note, and no other change in our portfolio as of September 30, 2005. Under this analysis, the impact would be an approximately $400,000 increase in our investment income for the quarter.

We may in the future hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments. We did not engage in any hedging activities during the first nine months of 2005.

ITEM 4.    CONTROLS AND PROCEDURES.

As of September 30, 2005, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective in timely alerting management, including the Chief Executive Officer and Chief Financial Officer, of material information about us required to be included in periodic SEC filings. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter ended September 30, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS.

We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be a party to certain legal proceedings incidental to the normal course of our business including the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our business, financial condition or results of operations.

ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

While we did not engage in unregistered sales of equity securities during the three months ended September 30, 2005, we issued a total of 71,548 shares of common stock under our dividend reinvestment plan. This issuance was not subject to the registration requirements of the Securities Act of 1933. The aggregate valuation price for the shares of common stock issued under the dividend reinvestment plan was approximately $1.1 million.

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

ITEM 5.     OTHER INFORMATION.

Not applicable.

ITEM 6.     EXHIBITS.

(a)     EXHIBITS

The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:

3.1				Articles of Incorporation (Incorporated by reference to the Registrant's Registration Statement on Form N-2 (File No. 333-109055), filed on September 23, 2003).
3.2				Amended and Restated Bylaws (Incorporated by reference to Pre-Effective Amendment No. 2 to the Registrant's Registration Statement on Form N-2 (File No. 333-109055), filed on November 19, 2003).
4.1				Form of Share Certificate (Incorporated by reference to the Registrant's Registration Statement on Form N-2 (File No. 333-109055), filed on September 23, 2003).
10.1				Form of Amended and Restated Investment Advisory Agreement between Registrant and Technology Investment Management, LLC (Incorporated by reference to Appendix B to the Registrant's Proxy Materials on Schedule 14A (File No. 000-50398) filed on May 18, 2004).
10.2				Custodian Agreement between Registrant and State Street Bank and Trust Company (Incorporated by reference to Pre-Effective Amendment No. 2 to the Registrant's Registration Statement on Form N-2 (File No. 333-109055), filed on November 19, 2003).

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10.3				Administration Agreement between Registrant and BDC Partners, LLC (Incorporated by reference to Pre-Effective Amendment No. 2 to the Registrant's Registration Statement on Form N-2 (File No. 333-109055), filed on November 19, 2003).
10.4				Dividend Reinvestment Plan (Incorporated by reference to Pre-Effective Amendment No. 1 to the Registrant's Registration Statement on Form N-2 (File No. 333-109055), filed on November 6, 2003).
10.5				Credit Agreement between Registrant and Bayerische Hypo-Und Vereinsbank, AG (Incorporated by reference to Current Report on Form 8-K (File No. 000-50398) filed on May 24, 2005).
11				Computation of Per Share Earnings (included in the notes to the audited financial statements contained in this report).
31.1*				Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.
31.2*				Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.
32.1*				Certification of Chief Executive Officer pursuant to section 906 of The Sarbanes-Oxley Act of 2002.
32.2*				Certification of Chief Financial Officer pursuant to section 906 of The Sarbanes-Oxley Act of 2002.

*Filed herewith.

36

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

								Technology Investment Capital Corp.
Date: November 4, 2005								By:    /s/ Jonathan H. Cohen                                                   Jonathan H. Cohen           Chief Executive Officer
Date: November 4, 2005								By:    /s/ Patrick F. Conroy                                                       Patrick F. Conroy           Chief Financial Officer           (Principal Accounting and Financial Officer)

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