Unassociated Document
 
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 December 31, 2004 or

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

Commission File No. 33-75758

RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
(Exact name of Registrant as specified in its charter)

Texas
75-2533518
(State of incorporation or organization)
(I.R.S. Employer Identification No.)

Suite 210, LB 59, 8080 North Central Expressway, Dallas, Texas
75206
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code (214) 891-8294

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

 
Name of each exchange
Title of each class
on which registered
None
None

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

Common Stock ($1.00 par value)
(Title of Class)

Indicate by check mark whether the Registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.
Yes o No x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x
 
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 o No x

Indicate by check mark if disclosure by delinquent filers pursuant to Item 405 of Regulation S-K 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 statement to this Form 10-K.
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. (Check one):

Large Accelerated Filer o    Accelerated Filer o    Non-accelerated filer x

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates, based on the closing price of such the Registrant’s Common Stock as of June 30, 2006, was $43,467,879. As of September 1, 2006, there were 4,463,967 of Registrant’s Common Stock outstanding.
 
 
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F-1
F-2 TO F-29

 
Part I

Certain of the statements included below, including those regarding future financial performance or results that are not historical facts, contain “forward-looking” information as that term is defined in the Securities Exchange Act of 1934, as amended. The words “expect,” “believe,” “anticipate,” “project,” “estimate,” and similar expressions are intended to identify forward-looking statements. The Fund cautions readers that any such statements are not guarantees of future performance or events and that such statements involve risks, uncertainties and assumptions, including but not limited to industry conditions, general economic conditions, interest rates, competition, ability of the Fund to successfully manage its growth, and other factors discussed or included by reference in this Annual Report on Form 10-K. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, those actual results and outcomes may differ materially from those indicated in the forward-looking statements.

Item 1. Business.

GENERAL

Renaissance Capital Growth & Income Fund III, Inc., (the “Fund” or the “Registrant”) is a non-diversified, closed-end fund that has elected to be treated as a business development company (a “BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund, a Texas corporation, was organized and commenced operations in 1994.

Our Internet website address is www.rencapital.com/index2.html. You can review the filings we have made with the U.S. Securities and Exchange Commission (“SEC”), free of charge, by linking to the Electronic Data Gathering, Analysis, and Retrieval System of the SEC (“EDGAR”) at www.sec.gov/index.htm. From EDGAR, you should be able to access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.

The investment objective of the Fund is to provide its shareholders with current income and long-term capital appreciation by investing primarily in privately placed convertible securities and equity securities of emerging growth companies.

The Fund seeks to provide returns to shareholders through cash dividends of net investment income and through distributions of realized gains. Pursuant to its annual distribution policy, the Fund currently pays to its shareholders a minimum annual distribution of $0.40 per share, payable quarterly. Through December 31, 2004, the Fund had declared a total of $12.08 per share in cash to its shareholders since inception in 1994.
 
RENN Capital Group, Inc. (“RENN Group” or the “Investment Adviser”), a Texas corporation, serves as the investment adviser to the Fund. In this capacity, RENN Group is primarily responsible for the selection, evaluation, structure, valuation, and administration of the Fund’s investment portfolio. RENN Group is a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”).

Generally, investments are, and will continue to be, in companies that have their common stock registered for public trading under the Securities Exchange Act of 1934, as amended (the “1934 Act”), or companies that in the opinion of the Investment Adviser have the ability to effect a public offering within three to five years. The Fund generally invests in privately placed preferred stock or debentures of a company the Fund holds in its portfolio (“Portfolio Company”), which securities typically are convertible into or exchangeable for common stock of the Portfolio Company. While such common stock of the Portfolio Company may be publicly traded, the common stock acquired by the Fund is often unregistered. Therefore, such securities are restricted from distribution or sale to the public except in compliance with certain holding periods and exemptions under the Securities Act of 1933, as amended (the “1933 Act”), or after registration pursuant to the 1933 Act. The Fund also purchases shares of small and micro cap issuers in the secondary markets. These shares are freely tradable and have no restrictions on resale.

From inception through December 31, 2004, the Fund had made investments in sixty-six (66) different Portfolio Companies having an aggregate cost of $87,662,840. The Fund had active investments in thirty (32) Portfolio Companies at December 31, 2004. The Fund does not focus on particular industry segments. Instead, the Fund makes investment decisions using a bottom-up analysis of the potential Portfolio Company, with no predetermined industry bias.

Under the provisions of the 1940 Act, a Business Development Company generally is required to invest at least 70% or more of its assets in “Eligible Portfolio Investments,” defined generally as direct placements to “Eligible Portfolio Companies” and temporary investments in “cash items” pending other investments. The Fund determines whether any prospective investment is in an “Eligible Portfolio Company” at the time the investment is made, and the calculation of the requisite percentage is also made at that time and is based on the most recent valuation of the Fund’s assets. Under and pursuant to the provisions of the 1940 Act, a Business Development Company may invest up to 30% of its funds in investments that do not qualify as “Eligible Portfolio Investments.” In the event the Fund has less than 70% of its assets in Eligible Portfolio Investments, then the Fund will be prohibited from making non-eligible investments until such time as the percentage of eligible investments again are at least equal to the 70% threshold.

Pending investment in securities of eligible Portfolio Companies or other Portfolio Companies, the Registrant’s funds are invested in short-term investments consisting primarily of cash or U.S. Government and agency obligations.
 
At December 31, 2004, the Fund’s investment assets were classified by amount as follows:

       
Percentage
  
Classification
  
Value
  
Of Assets
  
           
Eligible Portfolio Investments
(including cash and cash equivalents)
  
$
101,423,316
    
89.4
%
Other Portfolio Investments
    
12,058,857
    
10.6
%
   
$
113,482,173
    
100.00
%
 
INVESTMENT OBJECTIVE

The investment objective of the Fund is to provide its shareholders with current income and long-term capital appreciation by investing primarily in privately placed convertible securities and equity securities of emerging growth public companies. The Fund seeks to provide returns to shareholders through cash dividends of net investment income and through distributions of realized gains.
 
The Fund has elected the special income tax treatment available to a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code in order to be relieved of federal income tax on that part of its net investment income and realized capital gains that it pays out to shareholders. If a RIC meets certain diversification and distribution requirements under the Internal Revenue Code, the RIC qualifies for pass-through tax treatment. The Fund would be unable to qualify for pass-through tax treatment if it were unable to comply with these requirements. Failure to qualify as a RIC would subject the Fund to federal income tax as if the Fund were an ordinary corporation, which could result in a substantial reduction in both the Fund’s net assets and the amount of income available for distribution to shareholders.

GENERAL INVESTMENT POLICIES

The Fund invests in the securities of emerging growth companies that are generally not available to the public and which typically require substantial financial commitment. An emerging growth company is generally considered to have the following attributes: (1) either a publicly held company with a relatively small market capitalization or a privately held company; (2) an established operating history but of a limited period so as to not have fully developed its market potential for the products or services offered; and (3) a provider of a new or unique product or service that allows the company an opportunity for exceptional growth. Emerging growth companies typically require non-conventional sources of financing because the extent and nature of the market for their products or services is not fully known. Consequently, there is uncertainty as to the rate and extent of growth and also uncertainty as to the capital and human resources required to achieve the goals sought.

With respect to investments in emerging growth companies, the Fund emphasizes investing in convertible debentures or convertible preferred stock of publicly held companies that the Fund anticipates will be converted into common stock and registered for public sale within three to five years after the private placement. In addition, the Fund will invest in privately

placed common stock of publicly traded issuers that are initially restricted from trading. To a lesser extent, the Fund may participate in bridge financings in the form of loans or other preferred securities which are convertible into common stock of the issuer or issued together with equity participation, or both, for companies which the Fund anticipates will complete a stock offering or other financing within one or more years from the date of the investment. The Fund may also make bridge loans, either secured or unsecured, intended to carry the borrower to a private placement or an initial public offering, or to a merger, acquisition, or other strategic transaction.

Generally, the securities of Portfolio Companies have an initial fixed term of five to seven years, with no amortization of the principal amount for the initial two to three years. Further, privately-placed investments in Portfolio Companies will be individually negotiated, non-registered for public trading, and will be subject to legal and contractual investment restrictions. Accordingly, the Fund’s securities of Portfolio Companies are generally considered non-liquid.

The Fund has no fixed policy concerning the types of businesses or industry groups in which it may invest or as to the amount of funds that it will invest in any one issuer. However, the Fund will generally seek to limit its investment in securities of any single Portfolio Company to approximately 15% of the Portfolio Company’s net assets at the time of the investment.

In the event the Fund elects to participate as a member of the Portfolio Company’s Board of Directors, either through advisory or full membership, the Fund’s nominee to the board will generally be selected from among the officers of RENN Group. When, at the discretion of RENN Group, a suitable nominee is not available from among its officers, RENN Group will select, as alternate nominees, outside consultants who have prior experience as an independent outside director of a public company. At December 31, 2004, officers of the Fund served as directors of six of the Fund’s portfolio companies. The Fund makes available significant managerial assistance to its portfolio companies through participating in discussions with management and review of various management reports.

Although the Fund has no intent to change its current investment objectives, they may be changed without a vote of the holders of a majority of the Fund’s common stock.

It is the policy of the Fund not to structure off-balance sheet arrangements.

REGULATION UNDER THE INVESTMENT COMPANY ACT OF 1940

The 1940 Act was enacted to regulate investment companies. In 1980, the 1940 Act was amended by the adoption of the Small Business Investment Incentive Act. The purpose of the amendment was to remove regulatory burdens on professionally managed investment companies engaged in providing capital to smaller companies. The Small Business Investment Incentive Act established a new type of investment company specifically identified as a Business Development Company as a way to encourage financial institutions and other major investors to provide a new source of capital for small developing businesses.

BUSINESS DEVELOPMENT COMPANY

A business development company (“BDC”) is a closed-end management investment company that generally makes 70% or more of its investments in “Eligible Portfolio Companies” and “cash items” pending other investment. Under the 1940 Act, only certain companies may qualify as “Eligible Portfolio Companies.” To be an “Eligible Portfolio Company,” the company must satisfy the following:
 
 
·
it must be organized under the laws of, and has its principal place of business in, any state or states of the United States of America;

 
·
it is neither an investment company as defined in Section 3 of the 1940 Act (other than a small business investment company which is licensed by the Small Business Administration to operate under the Small Business Investment Act of 1958 and which is a wholly-owned subsidiary of the business development company) nor a company which would be an investment company under the 1940 Act except for the exclusion from the definition of investment company in Section 3(c) of the 1940 Act; and

 
·
it satisfies one of the following:

 
Ø
it does not have any class of securities with respect to which a member of a national securities exchange, broker, or dealer may extend or maintain credit to or for a customer pursuant to rules or regulations adopted by the Board of Governors of the Federal Reserve System under Section 7 of the Securities Exchange Act of 1934;

 
Ø
it is controlled by a business development company, either alone or as part of a group acting together, and such business development company in fact exercises a controlling influence over the management or policies of such Eligible Portfolio Company and, as a result of such control, has an affiliated person who is a director of such Eligible Portfolio Company;

 
Ø
it has total assets of not more than $4,000,000, and capital and surplus (shareholders’ equity less retained earnings) of not less than $2,000,000, except that the Securities and Exchange Commission (the “SEC”) may adjust such amounts by rule, regulation, or order to reflect changes in one or more generally accepted indices or other indicators for small businesses; or

 
Ø
it meets such other criteria as the SEC may, by rule, establish as consistent with the public interest, the protection of investors, and the purposes fairly intended by the policy and provisions of this title.
 
Therefore, the Investment Adviser believes that “Eligible Portfolio Companies” are, generally, those companies that, while being publicly held, may not have or do not have a broad based market for their securities, or the securities that they wish to offer are restricted from
 
public trading until registered. Further, while the 1940 Act allows a BDC to “control” a Portfolio Company, it is not the general policy of the Fund to acquire a controlling position in its portfolio companies. The Fund only provides managerial assistance, and in certain circumstances seeks to limit its “control” position by contracting for the right to have a designee of the Fund be elected to the board of directors of the Portfolio Company, or be selected an advisory director. While these are the Fund’s general policies, the application of these policies, of necessity, varies with each investment situation.

1940 ACT REQUIREMENTS

The BDC election exempts the Fund from some provisions of the 1940 Act. However, except for those specific provisions, the Fund will continue to be subject to all provisions of the 1940 Act not exempted, including the following:


 
·
restrictions on the Fund from changing the nature of business so as to cease to be, or to withdraw its election as, a BDC without the majority vote of the shares outstanding;

 
·
restrictions against certain transactions between the Fund and affiliated persons;

 
·
restrictions on issuance of senior securities, such not being prohibited by the 1940 Act but being restricted as a percentage of capital;

 
·
compliance with accounting rules and conditions as established by the SEC, including annual audits by independent accountants;

 
·
compliance with fiduciary obligations imposed under the 1940 Act; and

 
·
requirement that the shareholders ratify the selection of the Fund’s independent public accountants and the approval of the Fund’s Advisory Agreement with the Investment Adviser or similar contracts and amendments thereto.

CO-INVESTMENTS WITH ADVISOR AFFILIATED FUNDS

In accordance with the conditions of an exemptive order of the SEC permitting co-investments (the “Co-investment Order”), many of the Fund’s acquisitions and dispositions of investments are made in participation with two funds that are advised or managed by RENN Group (“Advisor Affiliated Funds”).
 
The Co-investment Order provides that the Investment Adviser will review private placement investment opportunities on behalf of the Fund, including investments being considered on behalf of its Advisor Affiliated Funds. If the Investment Adviser determines that any such investment is an eligible co-investment opportunity, the Fund must be offered the opportunity to invest in such investment in an amount recommended by the Adviser. Securities purchased by the Fund in a co-investment transaction with Advisor Affiliated Funds will consist of the same class of securities and will have the same rights, price, terms and conditions. Any such co-investment transaction must be approved by the Fund’s Board of Directors, including a majority of its independent directors. The Fund will not make any direct investment in the securities of any issuers in which the Advisor Affiliated Funds, but not the Fund, has previously
 
made a private placement, except for follow-on investments that meet the same requirements. To the extent that the amount of a follow-on investment opportunity is not based on the amount of the Fund’s and the Advisor Affiliated Funds’ initial investments, the relative amount of investment by the Advisor Affiliated Funds and the Fund will be based on the ratio of the Fund’s remaining funds available for investment to the aggregate of the Fund’s and the Advisor Affiliated Funds’ remaining funds available for investment. The Co-investment Order also provides that the Fund will have the opportunity to dispose of any securities in which the Fund and the Advisor Affiliated Funds have invested at the same price, terms and conditions. The Fund will participate in any such disposition to the extent that a majority of its independent directors believe it is in its best interest. The Fund will bear no more than its own transaction costs.
 
INVESTMENT ADVISERS ACT OF 1940 AND THE ADVISORY AGREEMENT

RENN Group is the investment adviser to the Fund pursuant to the Advisory Agreement, as amended (the “Advisory Agreement”). RENN Group is registered as an investment adviser under the Advisers Act and is subject to its filing and other requirements. The Advisers Act also provides restrictions on the activities of registered advisers in order to protect clients from manipulative or deceptive practices.

The Advisory Agreement is further subject to the 1940 Act, which requires that the Advisory Agreement, in addition to having to be initially ratified by the holders of a majority of the outstanding shares of the Fund, must precisely describe all compensation to be paid to RENN Group, must be approved annually by a majority vote of the Board of Directors of the Fund, may be terminated without penalty on not more than 60 days notice by a vote of the holders of a majority of the outstanding shares of the Fund, and must automatically terminate in the event of assignment. The Board of Directors has determined that the Advisory Agreement shall be construed in compliance with the applicable provisions of the Advisers Act and the 1940 Act.

FUND PORTFOLIO INVESTMENTS

At December 31, 2004, the Fund had active investments in the following companies:

AdStar, Inc. (NASDAQ:ADST)
4553 Glencoe Avenue, Suite 325, Marina del Rey, CA 90292

AdStar, Inc. is a leading provider of remote advertising technology products and services to the classified advertising industry. The company transforms publishers’ websites into full service classified ad sales channels for their print and on-line classified ad departments.

At December 31, 2004, the Fund owned 269,231 shares of common stock in the company, having a cost basis of $350,000.

Bovie Medical Corporation (AMEX: BVX)
734 Walt Whitman Road, Melville, NY 11747
 
Bovie Medical Corporation manufactures, markets and develops medical products and related technologies. The company also manufactures a variety of specialty lighting instruments for use in opthalmology, general surgery, hip replacement surgery and for the placement of
 
endotracheal tubes.
 
During the third quarter of 2004, the Fund acquired 300,000 shares of the company’s common stock for $1.75 per share.
 
At December 31, 2004, the Fund owned 300,000 shares of common stock in the company, having a cost basis of $525,000.
 
Business Process Outsourcing (Private)
11150 Santa Monica Boulevard, Suite 350, Los Angeles, CA 90025
 
Business Process Outsourcing is a privately held business process outsourcing firm that specializes in finance and accounting services, other administrative functions, and high volume transaction processing services. The company’s services are designed to empower clients with a competitive advantage by enabling them to focus on their core activities.
 
At December 31, 2004, the Fund owned a warrant to purchase 4,587 shares of the company’s common stock at a rate of $4.36 per share.
 
CaminoSoft Corporation (OTC:CMSF)
 
600 North Hampshire Road, Suite 105, West Lake Village, CA 91361
 
CaminoSoft Corporation creates intelligent data storage and management infrastructures by facilitating data storage, retrieval, protection, and performance measurement and management.
 
During the third quarter of 2004, the Fund purchased a 2-year, 7% senior secured promissory note from the company for $250,000. As part of that transaction, the Fund received warrants to purchase 471,698 shares of the company’s common stock at a price of $0.53.
 
At December 31, 2004, the Fund held a $250,000 promissory note. The Fund also owned 3,539,414 shares of common stock in the company, having a basis of $5,275,000. Additionally, the Fund owned warrants to purchase 2,052,779 shares common at exercise prices ranging from $0.53 per share to $1.11 per share, with varying terms dates, and options to purchase 120,700 shares common with strike prices ranging from $0.41 per share to $0.95 per share.
 
CNE Group, Inc. (AMEX:CNE)
200 West 57th Street, Suite 507, New York, NY 10019
 
CNE Group, Inc., through its subsidiaries, is a provider of solar-powered wireless communication solutions for the intelligent traffic systems market.
 
During the first quarter of 2004, the Fund received warrants to purchase 125,000 shares of the company’s common stock. During the third quarter of 2004, the Fund sold 125,000 shares of the company’s common stock for a net loss of $219,921.
 
At December 31, 2004, the Fund owned warrants to purchase 62,500 shares of the company’s common stock with an exercise price of $6.00 per share and warrants to purchase 125,000 shares of the company’s common stock with an exercise price of $3.00 per share.
 
Comtech Group, Inc. (Nasdaq:COGO)
Room 1001 Tower C Skyworth Building High-Tech Industrial Park Nanshan, Shenzhen, China 518057
 
Comtech Group, Inc. provides design solutions to telecom equipment, mobile device and consumer electronic manufacturers in China.
 
During the fourth quarter of 2004, the Fund bought 480,000 shares of the company’s common stock at a price of $1.75 per share.
 
At December 31, 2004, the Fund held 480,000 shares of the company’s common stock, with a cost basis of $840,000.
 
Cybex International (AMEX:CYB)
10 Trotter Drive, Medway, MA 02053
 
Cybex International, Inc. designs and manufactures strength and cardiovascular fitness equipment. The company offers a full line of commercial and consumer products, based on the sciences of biomechanics and ergonomics to ensure proper body movement and optimum results.
 
During the third quarter of 2004, the Fund bought 145,000 shares of the company’s common stock at a price of $3.30 per share.
 
At December 31, 2004, the Fund held 145,000 shares of the company’s common stock, with a cost basis of $478,500.
 
Dave & Buster’s, Inc. (NYSE:DAB)
2481 Manana Drive, Dallas, TX 75220
 
Dave & Buster’s, Inc. operates restaurant entertainment complexes under the Dave & Buster’s name. The complexes offer a full menu of food and beverage items combined with an array of entertainment attractions such as pocket billiards, interactive simulators, virtual reality systems and traditional carnival style games of skill.
 
At December 31, 2004, the Fund held 100,000 shares of the company’s common stock, with a cost basis of $653,259.
 
Digital Learning Management Corporation (OTC:DGTL)
19950 Mariner Avenue, Torrence, CA 90503
 
Digital Learning Management Corporation offers post-secondary school education. The company grants bachelor degrees in information technology, business and management, telecommunications and applied industrial technologies. Digital Learning Management’s CourseMate Virtual University e-learning platform links its locations.
 
During the first quarter of 2004, the Fund bought a $1,000,000 7% debenture, convertible into common stock at $0.447 per share.
 
At December 31, 2004, the Fund owned a $1,000,000 convertible debenture.
 
eOriginal, Inc. (Private)
351 West Camden Street, Suite 800, Baltimore, MD 21201
 
eOriginal, Inc. has a patented process for creating, executing, storing and retrieving legal documents in an electronic format.
 
During the third quarter of 2004, the Fund made follow-on investments in eOriginal by purchasing 16,057 shares of the company’s Series D Convertible Preferred Stock for $500,000. In addition to these shares, at December 31, 2004, the Fund owned 10,680 shares Series A Convertible Preferred Stock having a cost basis of $4,692,207; 25,646 shares Series B Convertible Preferred Stock with a cost basis of $620,329; 51,249 shares Series C Convertible Preferred Stock with a cost basis of $1,059,734; warrants to purchase 2,258 shares of Series A Convertible Preferred Stock at $0.01 per share and warrants to purchase 7,713 shares of common stock of the company at $0.01 per share. Each series of preferred of the company is convertible one-for-one into common stock of eOriginal Holdings, and the warrants have an exercise price of $0.01 per share.
 
Gaming & Entertainment Group, Inc. (OTC:GMEI) 
6094 South Sandhill Road, Suite 400, Las Vegas, NV 89120
 
Gaming & Entertainment Group, Inc. designs and develops gaming systems, software, game content and networks. The company is a supplier of gaming systems and interactive electronic bingo games to the Native American gaming markets in the United States and Canada. GMEI’s gaming systems and game libraries are in amusement arcades, casinos, betting shops and bingo halls.
 
During the first quarter of 2004, the Fund purchased 500,000 shares of the company’s common stock and options to purchase an additional 500,000 shares of the company’s common stock for $500,000.
 
At December 31, 2004, the Fund owned 500,000 common shares having a cost of $500,000 and warrants to purchase an additional 500,000 common shares at $1.50 per share.

Gasco Energy, Inc. (AMEX:GSX) 
14 Inverness Drive East, Suite H-236, Englewood, CO 80112
 
Gasco Energy, Inc. is an oil and gas company whose focus is exploration and development of domestic natural gas properties located in the Rocky Mountain regions of Utah and Wyoming.
 
In the first quarter of 2004, the Fund purchased 250,000 shares of the company’s common stock and options to purchase 12,500 shares of common stock for $375,000. In the third quarter of 2004, the Fund received options to purchase 6,250 shares of the company’s common stock. In the fourth quarter of 2004, the Fund converted a $625,000 promissory note into 1,041,666 shares of the company’s common stock.
 

-13-
 
At December 31, 2004, the Fund owned 1,541,667 shares common stock (acquired via private placements) having a cost of $1,250,000 and 750,000 shares of common stock (acquired via open market purchases) having a cost of $639,105. The fund also held options to buy 18,751 shares of the company’s common stock at exercise prices ranging from $1.00 to $2.15.

Global Axcess Corporation (OTCBB:GAXC)
14 Inverness Drive East, Suite H-236, Englewood, CO 80112

Global Axcess Corporation provides turnkey ATM management solutions that include cash, project and account management services. The company currently owns and operates over 1,600 ATM’s in its national network spanning 39 states, and provides proprietary ATM branding and processing for 35 financial institutions with over 360 branded sites nationwide. Additionally, the company provides traditional transaction processing to its customers.

In the first quarter of 2004, the Fund bought 2,666,667 shares of the company’s common stock and warrants to purchase 5,333,333 shares of the company’s common stock at prices ranging from $0.35 per share to $1.00 per share. The Fund later exercised warrants to purchase 700,000 shares of the company’s common stock.

In the second quarter of 2004, the Fund acquired warrants to purchase 2,100,000 shares of the company’s common stock at prices ranging from $0.35 per share to $1.00 per share.

At December 31, 2004, the Fund owned 4,766,667 shares of common stock having a cost basis of $1,261,667, and warrants to purchase 7,433,336 shares of common stock.

Hemobiotech, Inc. (OTCBB:HMBT)
14221 Dallas Parkway, Suite 1500, Dallas, TX 75254

Hemobiotech, Inc. is a biopharmaceutical company that develops blood substitutes. The company’s product, HemoTech, is an oxygen-carrying solution that performs like red blood cells.

In the fourth quarter of 2004, the Fund acquired a 10% promissory note, with warrants to purchase 588,240 share of the company’s common stock, for $250,000. The Fund also acquired 294,120 shares of common stock for $250,000.

At December 31, 2004, the Fund held a $250,000 10% promissory note, 294,120 shares of common stock and warrants to purchase 588,240 shares of common stock.

i2Telecom International, Inc. (OTCBB:ITUI) 
1200 Abernathy Road, Suite 1800, Atlanta, GA 30328
 
i2Telecom International, Inc. is a telecommunications service provider employing voice over internet protocol technology. The company has operations in Florida, Georgia and California in the United States and in Malaysia and The People’s Republic of China. i2Telecom controls its own proprietary technology and outsources its production and service functions to strategic partners.
 

-14-
 
In the third quarter of 2004, the Fund bought 500 shares of the company’s 7% convertible preferred stock. The company also received warrants to purchase 312,500 shares of the company’s common stock.
 
At December 31, 2004, the Fund owned 500 shares of preferred stock convertible at $0.80 per share and warrants to purchase 312,500 shares of common stock at $0.96 per share. These securities had a cost basis of $500,000.
 
iLinc Communications, Inc. (AMEX:ILC)
2999 North 44th Street, Suite 650, Phoenix, AZ 85018
 
iLinc Communications, Inc. provides web conferencing, virtual classroom and web collaboration software. The company’s software and services enable sales, training, marketing and support professionals to collaborate in real-time via the internet. iLinc distributes its products and services in several different languages in North America and worldwide.
 
At December 31, 2004, the Fund owned a total of 48,266 shares of common stock having a basis of $27,033. In addition, the Fund owned a $500,000 12% Convertible Subordinated Note, convertible into ILC common stock at a rate of $1.00 per share and three-year warrants to purchase 500,000 shares of the company’s common stock at an exercise price of $3.00.
 
Integrated Security Systems, Inc. (OTC:IZZI)
8200 Springwood Drive, Suite 230, Irving, TX 75063
 
Integrated Security Systems, Inc. is a company which designs, develops, manufactures, sells and services commercial security and traffic control devices. In addition, the company sells fully integrated turnkey security systems that control and monitor access to governmental, commercial and industrial sites.
 
In the first quarter of 2004, the Fund received common stock of the company as payment in kind for interest on 8% Promissory Notes owned by the Fund. The Fund received 77,331 shares of IZZI having an imputed cost of $19,830. The Fund exercised warrants to purchase 200,000 shares of common stock for $40,000, but allowed warrants to purchase 364,299 shares of common stock to expire. Finally, Russell Cleveland received his director’s fee in the form of 26,756 shares of IZZI common stock. He assigned those shares to the Fund.
 
In the second quarter of 2004, Russell Cleveland received his director’s fee in the form of 4,713 shares of IZZI common stock. He assigned those shares to the Fund. The Fund also exercised warrants to purchase 2,425,000 shares of common stock.
 
In the fourth quarter of 2004, Russell Cleveland received his director’s fee in the form of 8,227 shares of IZZI common stock. He assigned those shares to the Fund. The Fund also received common stock of the company as payment in kind for interest on 8% Promissory Notes owned by the Fund. The Fund received 84,073 shares of IZZI having an imputed cost of $28,077. Finally, the Fund received common stock of the company as payment in kind for dividends on 9% convertible, preferred stock owned by the Fund. The Fund received 83,517 shares of IZZI having an imputed cost of $13,500.
 
At December 31, 2004, the Fund owned a $725,000 8% Secured Promissory Note, 187,500 shares of 9% preferred stock, convertible at $0.80 per share, with a cost basis of $150,000, 27,074,179 shares of common stock, with a cost basis of $5,568,056, options to purchase 41,034 shares of common stock, warrants to purchase 250,000 shares of common stock at $0.40 per share and warrants to purchase 125,000 shares of common stock at exercise price of $1.00 per share.
 
Interpool, Inc. (NYSE:IPX)
211 College Road, East, Princeton, NJ 08540
 
Interpool, Inc. is one of the world’s leading suppliers of equipment and services to the transportation industry. It is the largest lessor of intermodal container chassis and a world-leading lessor of cargo containers used in international trade. Interpool operates from more than 240 locations throughout the world.
 
At December 31, 2004, the Fund owned $375,000 9.25% Convertible Redeemable, Subordinated Debentures. The Debentures are convertible at $25.00 per share and mature December 27, 2022.
 
Intrusion, Inc. (Nasdaq:INTZ)
1101 East Arapaho Road, Richardson, TX 75081
 
Intrusion, Inc. provides enterprise security products that help businesses protect critical information assets. The company’s products detect, analyze and respond to network- and host-based attacks. Intrusion’s products include intrusion detection and vulnerability assessment systems and modular, scalable, security appliances secured by Check Point.
 
In the first quarter of 2004, the Fund purchased 100,000 shares of 5% convertible preferred stock at $5.00 per share and warrants to purchase 222,646 shares of common stock exercisable at $0.786 per share. The company later announced a 1-for-4 reverse stock split. Thus, the Fund now has warrants to purchase 55,662 shares of common stock at $3.144 per share.
 
At December 31, 2004, the Fund owned 5% convertible preferred stock, with a cost basis of $500,000. The Fund also owns warrants to purchase 55,662 shares of common stock at $3.144 per share.
 
Inyx, Inc. (OTCBB:IYXI)
801 Brickell, 9th Floor, Miami, FL 33131
 
Inyx, Inc. is a developer and manufacturer of specialized drug delivery pharmaceutical products.
 
At December 31, 2004, the Fund owned 300,000 shares of the company’s common stock having a cost basis of $300,000, and owned 150,000 warrants to purchase common stock, with half being exercisable at $1.00 per share, and half being exercisable at $1.35 per share.
 
Laserscope (Nasdaq:LSCP)
3070 Orchard Drive, San Jose, CA 95134
 
Laserscope designs, manufactures, sells, and services on a worldwide basis an advanced line of medical laser systems and related energy delivery devices for the office, outpatient surgical center, and hospital markets.
 
During the first quarter of 2004, the Fund sold 600,000 shares of the company’s common stock for a net gain of $12,131,396.
 
At December 31, 2004, the Fund owned 600,000 shares of common stock having a cost basis of $750,000, and options to purchase 30,000 shares at $4.19 per share, which were received by assignment from Robert Pearson, who earned the options as a member of the company’s Board of Directors.
 
Medical Action Industries, Inc. (Nasdaq:MDCI)
800 Prime Place, Hauppauge, NY 11788
 
Medical Action Industries, Inc. develops, manufactures, markets and distributes a variety of disposable surgical related products.
 
In the fourth quarter of 2004, the Fund sold 4,900 shares of common stock for a net gain of $45,156.
 
At December 31, 2004, the Fund owned a total of 20,100 shares of MDCI common stock having a cost basis of $237,209.
 
PhotoMedex, Inc. (Nasdaq:PHMD)
147 Keystone Drive, Montgomeryville, PA 18936
 
PhotoMedex, Inc. manufacturers excimer laser and fiber-optic systems used to treat dermatological conditions such as psoriasis, vitiligo, atopic dermatisitis and leukoderma. The company offers products and services on contract to dermatologists and hospitals. PhotoMedex develops skin health, haircare and wound care products based on its copper peptide technology.
 
In the fourth quarter of 2004, the Fund bought 70,000 shares of common stock for $176,400.
 
At December 31, 2004, the Fund owned a total of 70,000 shares of PHMD common stock having a cost basis of $176,400.
 
Poore Brothers, Inc. (Nasdaq:SNAK)
3500 South La Cometa Drive, Goodyear, AZ 85338
 
With facilities in Indiana and Arizona, Poore Brothers, Inc. is a marketer and manufacturer of “Intensely Different”™ salted snack foods under a variety of owned or licensed brands, including T.G.I. Friday’s™, Poore Brothers®, Bob’s Texas Style®, Boulder Potato Company™, and Tato Skins®.
 
During the fourth quarter of 2004, the Fund sold 178,566 shares of the company’s common stock realizing proceeds of $525,228, representing a net gain of $321,353.
 
At December 31, 2004, the Fund owned 1,507,791 shares of common stock having a cost basis of $1,544,294.

PracticeXpert, Inc. (OTCBB:PXPTE)
10833 Washington Boulevard, Culver City, CA 90232
 
PracticeXpert, Inc. provides healthcare technology and services to medical practitioners. The company’s services revolve around its hand-held patient encounter system, Pxpert, and include medical billing, transcription, collections, clinical trial accruals, contracting and practice management.
 
During the fourth quarter of 2004, the Fund bought 4,166,667 shares of the company’s common stock and warrants to purchase 4,166,667 shares of the company’s common stock for $500,000.
 
At December 31, 2004, the Fund owned 4,166,667 shares of common stock and warrants to purchase 4,166,667 shares of the company’s common stock at $0.30 per share, having a cost basis of $500,000.

Precis, Inc. (Nasdaq:PCIS)
2040 North Highway 360, Grand Prairie, TX 75050
 
Precis, Inc. is a national membership marketing company that provides membership programs to a variety of industries including: healthcare, retail, banking, consumer finance and member based associations. Its leading program, Care Entree®, is marketed as a membership based healthcare savings program designed to significantly reduce out-of-pocket medical expenses at affordable rates to the consumer while helping the medical community receive accelerated payment for their services.
 
At December 31, 2004, the Fund owned a total of 200,700 shares of the company’s common stock having a cost basis of $1,372,417.
 
Simtek Corporation (OTC:SRAM)
4250 Buckingham Drive, Suite 100, Colorado Springs, CO 80907
 
Simtek Corporation is a fabless semiconductor company, supplying innovative products to a worldwide marketplace. The company has design and manufacturing expertise in a variety of technologies, including high performance non-volatile memory, application specific integrated circuits, and data communications.
 
In the second quarter of 2004, the Fund acquired options to purchase 9,188 shares of the company’s common stock at $1.16 per share.
 
At December 31, 2004, the Fund owned $1,000,000 in 7.5% convertible debentures having a conversion rate of $0.31 per share, 1,550,661 shares common having a basis of $695,000, warrants to purchase 250,000 shares, half of which are convertible at $1.25 per share and half at $1.50 per share, options to purchase 5,288 shares at $0.17 per share and options to purchase 9,188 shares at $1.16 per share.  
 
Stonepath Group, Inc. (AMEX:STG)
1600 Market Street, Philadelphia, PA 19103
 
Stonepath Group, Inc. is a non-asset based provider of third-party logistics services, offering a full range of time-definite transportation and distribution solutions. The company manages and arranges the domestic movement of raw materials, supplies, components and finished goods, and also provides a broad range of value-added supply chain management services.
 
In the second quarter of 2004, the Fund sold 150,000 shares of the company’s common stock for a net gain of $354,505.
 
At December 31, 2004, the Fund owned 131,240 shares of Stonepath common stock having a cost basis of $246,000. 
 
Tarantella, Inc. (Nasdaq:TTLA)
1600 Market Street, Philadelphia, PA 19103
 
Tarantella, Inc. provides a web-based solution that allows customers to regain control of their information technology environment. The company’s Tarantella Enterprise 3 software utilizes the world-wide web and simplifies administration and securely speeds access to Windows, mainframe, AS/400, web-based, Linux, Java and UNIX applications.
 
In the second quarter of 2004, the Fund acquired through a private placement, 714,286 shares of the company’s common stock and warrants to purchase 142,857 shares of the company’s common stock at $1.70 per share. The Fund also purchased 202,762 shares of the company’s common stock in the open market.
 
At December 31, 2004, the Fund owned 917,048 shares of the company’s common stock and warrants to purchase 142,857 shares of the company’s common stock, having a cost basis of $1,186,541. 
 
ThermoView Industries, Inc. (AMEX:THV)
5611 Fern Valley Road, Louisville, KY 40228
 
ThermoView Industries, Inc. is a national company that designs, manufactures, markets, and installs high-quality replacement windows and doors as part of a full-service array of home improvements for residential homeowners.
 
At December 31, 2004, the Fund owned a total of 234,951 shares of ThermoView common stock having a cost basis of $563,060.
 
US Home Systems (Nasdaq:USHS)
750 State Highway 121 Bypass, Suite 170, Lewisville, TX 75067
 
US Home Systems is engaged in the manufacture, design, sale, and installation of quality specialty home improvement products with specific emphasis on kitchen and bath improvements, and also provides consumer financing services to the home improvement and remodeling industry. The company’s home improvement product lines include replacement kitchen cabinetry, kitchen cabinet refacing and counter top products utilized in kitchen remodeling, bathroom refacing and related products utilized in bathroom remodeling, and replacement windows. The company provides through its wholly owned subsidiary, First Consumer Credit, Inc., consumer financing to the home improvement and remodeling industry.
 
At December 31, 2004, the Fund owned 110,000 shares of the company’s common stock having a cost basis of $535,587.
 
Vaso Active Pharmaceuticals, Inc. (NASDAQ:VAPH)
99 Rosewood Drive, Suite 260, Danvers, MA 01923

Vaso Active Pharmaceuticals, Inc. holds the exclusive, worldwide license to commercialize, sell and distribute over-the-counter pharmaceutical products incorporating the patented trans dermal drug delivery technology of its parent company, BioChemics, Inc.

In the first quarter of 2004, the company announced a 3 for 1 stock split. The Fund held 50,000 shares of common stock prior to the split and 150,000 shares after the split.

At December 31, 2004, the Fund owned 150,000 shares of the company’s common stock having a cost basis of $250,000.

VALUATION OF INVESTMENTS

On a quarterly basis, RENN Group prepares a valuation of the assets of the Fund, subject to the approval of the Board of Directors of the Fund. The valuation principles are described below.


 
v
The common stock of companies listed on an exchange, Nasdaq or in the over-the-counter market is valued at the closing price on the date of valuation.

 
v
The unlisted preferred stock of companies with common stock listed on an exchange, Nasdaq or in the over-the-counter market is valued at the closing price of the common stock into which the preferred stock is convertible on the date of valuation. If the preferred stock is redeemable, the preferred stock is valued at the greater of cost or market.

 
v
Debt securities are valued at the greater of (i) cost or (ii) the market value of the underlying common stock into which the debt instrument is convertible. In cases where the debt instrument is in default or the company is in bankruptcy, the value will be (i) the value of the underlying common stock, (ii) the value of the collateral, if secured, or (iii)

-20-

zero, if the common stock has no value and there is no collateral.

 
v
The unlisted in-the-money options or warrants of companies with the underlying common stock listed on an exchange, Nasdaq or in the over-the-counter market are valued at the positive difference between the closing price of the underlying common stock and the strike price of the warrant or option. An out-of-the money warrant or option has no intrinsic value; thus, we assign no value to it.

 
v
If there is no independent and objective pricing authority (i.e. a public market) for investments in privately held entities, the latest sale of equity securities to independent third parties by the entity governs the value of that enterprise. This valuation method causes the Fund’s initial investment in the private entity to be valued at cost. Thereafter, new issuances or offers of equity or equity-linked securities by the portfolio company to new investors will be used to determine enterprise value as they will provide the most objective and independent basis for determining the worth of the issuer. Where a private entity does not have an independent value established over an extended period of time, then the Investment Adviser will determine fair value on the basis of appraisal procedures established in good faith and approved by the Board of Directors.

COMPETITION FOR INVESTMENTS

The Fund has significant competition for investment proposals. Competitive sources for growth capital for the industry include insurance companies, banks, equipment leasing firms, investment bankers, venture capital and private equity funds, money managers, hedge funds, and private investors. Many of these sources have substantially greater financial resources than are available to the Fund. Therefore, the Fund will have to compete for investment opportunities based on its ability to respond to the needs of the prospective portfolio company and its willingness to provide management assistance. In some instances, the Fund’s requirements that the Fund provide management assistance will cause the Fund to be non-competitive.

PERSONNEL

The Fund has no direct employees, but instead has contracted RENN Group pursuant to the Advisory Agreement to provide all management and operating activities. RENN Group currently has nine employees who are engaged in performing the duties and functions required by the Fund. At the present time, a substantial portion of RENN Group’s staff time is devoted to activities of the Fund. However, because of the diversity of skills required, the Fund cannot afford to employ all these persons solely for its own needs, and therefore, these employees are not engaged solely in activities of the Fund.

No accurate data or estimate is available as to the percentage of time, individually or as a group, that will be devoted to the affairs of the Fund. The officers and employees have and will devote such time as is required, in their sole discretion, for the conduct of business, including the provision of management services to Portfolio Companies.

RENN Group currently serves as the Investment Manager to Renaissance US Growth Investment Trust PLC (“RUSGIT”). RUSGIT is a public limited company registered in the United Kingdom and listed on the London Stock Exchange. RUSGIT invests in privately placed
 
convertible securities issued by companies similar to the investments of the Fund. RUSGIT invest pari-passu with the Fund on all relevant terms, except that amounts invested may differ.

RENN Group also serves as the Investment Adviser to BFS US Special Opportunities Trust PLC (“BFSUS”) and is specifically responsible for managing the Growth Portfolio for BFSUS (“BFS Growth”). BFSUS is a public limited company registered in the United Kingdom and listed on the London Stock Exchange. BFS Growth invests in publicly traded equities, fixed-income and convertible securities of publicly traded issuers, and also invests in privately placed convertible instruments issued by companies similar to the investments of the Fund. For privately placed investments, BFS Growth invests on a pari-passu basis with the Fund as to all relevant terms of the investment, except that amounts invested may differ.

CODE OF ETHICS

The Fund and RENN Group have adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act applicable to all of their respective officers and employees. The Code of Ethics is on public file with, and is available from, the Securities and Exchange Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the Commission at (202)-942-8090, and this Code of Ethics is available on the EDGAR database as an exhibit to the Fund’s Form 10-Q for the quarter ended June 30, 2002, which is found on the Commission internet site at http://www.sec.gov. A copy of this Code of Ethics may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Commission’s Public Reference Section, Washington, D.C. 20549-0102.

Item 1A. Risk Factors.

You should carefully consider the risks described below and all other information contained in this annual report on Form 10-K, including our consolidated financial statements and the related notes thereto before making a decision to purchase our common stock. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. If that happens, the trading price of our common stock could decline, and you may lose all or part of your investment.

Failure to Meet Listing Standards. It is uncertain whether our common stock will meet the requirements for listing on Nasdaq, or any other stock exchange or quotation service.

In July 2004, due to our inability to complete our audit and file our Form 10-K for the year ended December 31, 2003 in a timely manner, the Fund’s common stock was delisted from Nasdaq. As we become current with the delinquent filings, we will attempt to relist with Nasdaq or a national stock exchange, but there is no certainty that we will be able to do so.

Our Growth is Dependent on Investing in Quality Deals. Sustaining growth depends on our ability to identify, evaluate, finance, and invest in companies that meet our investment criteria. Accomplishing such results on a cost-effective basis is a function of our marketing capabilities and skillful management of the investment process. Failure to achieve future growth

could have a material adverse effect on our business, financial condition, and results of operations.

Failure to Invest Capital Effectively May Decrease Our Stock Price. If we fail to invest our capital effectively, our return on equity may be decreased, which could reduce the price of the shares of our common stock.

Highly Competitive Market for Investments. We compete with a number of private equity funds, other investment entities and individuals for investment opportunities. Some of these competitors are substantially larger and have greater financial resources, and some are subject to different and frequently less stringent regulation. As a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time and there can be no assurance that we will be able to identify and make investments that satisfy our objectives.

Lack of Publicly Available Information on Certain Portfolio Companies. Some of the securities in our portfolio are issued by privately held companies. There is generally little or no publicly available information about such companies, and we must rely on the diligence of our management to obtain the information necessary for our decision to invest. There can be no assurance that such diligence efforts will uncover all material information necessary to make fully informed investment decisions.

Dependence on Key Management. Selecting, structuring and closing our investments depends upon the diligence and skill of our management, which is responsible for identifying, evaluating, negotiating, monitoring and disposing of our investments. Our management's capabilities will significantly impact our results of operations. If we lose any member of our management team and he/she cannot be promptly replaced with an equally capable team member, our results of operations could be significantly impacted.

Failure to Deploy Capital may Lower Returns. Our failure to successfully deploy sufficient capital may reduce our return on equity.

Results May Fluctuate. Our operating results may fluctuate materially due to a number of factors including, among others, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our portfolio companies’ markets, the ability to find and close suitable investments, 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.

Uncertain Value of Certain Restricted Securities. Our net asset value is based on the values assigned to the various investments in our portfolio, determined in good faith by our board of directors. Because of the inherent uncertainty of the valuation of portfolio securities which do not have readily ascertainable market values, our fair value determinations may differ materially from the values which would be applicable to unrestricted securities having a public market.

Illiquid Securities May Adversely Affect Our Business. Our portfolio contains securities which are subject to restrictions on sale because they were acquired from issuers in "private placement" transactions or because we are deemed to be an affiliate of the issuer. Unless an exemption from the registration requirements of the Securities Act of 1933 is available, we will

not be able to sell these securities publicly without the expense and time required to register the securities under applicable federal and state securities laws. In addition, contractual or practical limitations may restrict our ability to liquidate our securities in portfolio companies, because we may own a relatively large percentage of the issuer's outstanding securities. Sales may also be limited by unfavorable market conditions. The illiquidity of our investments may preclude or delay the disposition of such securities, which may make it difficult for us to obtain cash equal to the value at which we record our investments.

Regulated Industry. Publicly traded investment funds are highly regulated. Changes in securities laws or regulations governing our operations or our failure to comply with those laws or regulations may adversely affect our business.

Failure to Qualify for Favorable Tax Treatment. We may not qualify for conduit tax treatment as a Regulated Investment Company ("RIC") if we are unable to comply with the requirements of Subchapter M of the Internal Revenue Code. If we fail to satisfy such requirements and cease to qualify for conduit tax treatment, we will be subject to federal taxes on our net investment income. The loss of this pass-through tax treatment could have a material adverse effect on the total return, if any, obtainable from an investment in our common stock.

Highly Leveraged Portfolio Companies. Some of our portfolio companies could incur substantial indebtedness in relation to their overall capital base. Such indebtedness often has a term that will require the balance of the loan to be refinanced when it matures. If portfolio companies cannot generate adequate cash flow to meet the principal and interest payments on their indebtedness, the value of our investments could be reduced or eliminated through foreclosure on the portfolio company's assets or by the portfolio company's reorganization or bankruptcy.

Our Common Stock Often Trades at a Discount. Our common stock often trades at a discount from net asset value.

Our common stock is traded over-the-counter in the pink sheets. Stockholders desiring liquidity may sell their shares at current market value, which has often been below net asset value. Shares of closed-end investment companies frequently trade at discounts from net asset value, which is a risk separate and distinct from the risk that a fund's performance will cause its net asset value to decrease.

Nature of Investment in Our Common Stock. Our stock is intended for investors seeking long-term capital appreciation. Our investments in portfolio securities generally require some time to reach maturity, and such investments generally are illiquid. An investment in our shares should not be considered a complete investment program. Each prospective purchaser should take into account his or her investment objectives as well as his or her other investments when considering the purchase of our shares.

Our Stock Price May Fluctuate Significantly. The market price of our common stock may fluctuate significantly.

The market price and marketability of shares of our common stock may from time to time be significantly affected by numerous factors, including our investment results, market conditions, and other influences and events over which we have no control and that may not be
 
directly related to us.

Item 2. Properties

The Fund’s business activities are conducted from the offices of RENN Group, which offices are currently leased until July 31, 2005 in a multi-story general office building in Dallas, Texas. The use of such office facilities, including office furniture, phone services, computer equipment, and files are provided by RENN Group at its expense pursuant to the Advisory Agreement.

Item 3. Legal Proceedings
 
On December 1, 2005, the Investment Adviser consented, without admitting or denying the findings, to the entry of an order by the SEC instituting public administrative and cease and desist proceedings and imposing remedial sanctions (the “Order”). A Form 8-K detailing the settlement was filed on December 6, 2005 by the Fund. This can be viewed by going to the SEC website.

In summary, the dispute concerned the definition of the wording of the incentive fee calculation in the Advisers Act. Under Section 205(b)(3) of the Advisers Act, a performance fee may be earned. The Investment Adviser, for many years, believed the word “capital” referred to the Fund’s shareholders’ equity as a whole. In 2004, the SEC informed the Investment Adviser that capital depreciation in the formula referred only to unrealized capital losses on marketable securities in the portfolio and therefore the calculations in previous years were incorrect. In the Order, the SEC states that in calculating a performance-based fee under Section 205(b)(3), an investment adviser must account for its client’s assets on a security-by-security basis and may not take into consideration unrealized capital appreciation on any individual security or the portfolio as a whole. Section 205(b)(3) does not require that fees earned in one period be subject to repayment based upon performance in a subsequent period. If the performance fee is calculated on a cumulative basis and is based on the period since inception, then unrealized capital depreciation may be calculated for each calculation period by subtracting each security’s valuation at the end of the applicable calculation period from the original cost, as adjusted, to the BDC of purchasing that security. In practice, the Investment Adviser also took into account unrealized capital appreciation, which offset unrealized capital depreciation, to calculate its performance-based fee. Thus, beginning in fiscal year 1996, the first period in which the Fund realized capital gains, the Investment Adviser’s formula for calculating that fee was not consistent with the formula permitted under Section 205(b)(3).

As part of the settlement of the SEC proceedings, the Investment Adviser agreed to pay $2,851,362 plus prejudgment interest of $924,509 and a fine of $100,000 to the Fund. The Investment Adviser satisfied this obligation in full as of December 8, 2005. The financial statements included as part of this Annual Report reflect all financial aspects of the settlement, except for the fine which was paid and recorded in the Fund’s financial statements for 2005.

No action was brought against the Fund.
 
Item 4. Submission of Matters to a Vote of Security Holders

None.
 
Part II

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

TRADING

The Fund’s common stock was previously traded on the Nasdaq National Market System (“NMS”) under the trading symbol RENN. As a result of the Fund’s inability to complete the audit of its financial statements and file its Form 10-K for the fiscal year ended December 31, 2003 in a timely manner (see “Item 3. Legal Proceedings”), in July 2004 the Fund’s common stock was delisted from NMS and is currently trading over-the-counter in the pink sheets.

The following table sets forth, for the periods indicated, the high and low closing sale prices for the Common Stock as reported on Bloomberg.

   
High
  
Low
  
Year ended December 31, 2004
          
First quarter
  
$
18.65
  
$
13.02
  
Second quarter
  
$
17.75
  
$
13.15
  
Third quarter
  
$
13.25
  
$
10.00
  
Fourth quarter
  
$
14.90
  
$
11.00
  
               
Year ended December 31, 2003
              
First quarter
 
$
8.36
  
$
6.75
  
Second quarter
 
$
9.35
  
$
6.80
  
Third quarter
 
$
12.02
  
$
9.15
  
Fourth quarter
 
$
13.70
  
$
11.51
  

NUMBER OF HOLDERS

As of December 31, 2004, there were approximately 524 record holders of the Fund’s common stock. This total does not include shareholders with shares held under beneficial ownership in nominee name or within clearinghouse positions of brokerage firms or banks.

DIVIDENDS AND DIVIDEND REINVESTMENT PLAN

DIVIDENDS. The Fund seeks to provide returns to shareholders through cash dividends of net investment income and through distributions of realized gains. On November 5, 2002, the Fund announced a minimum annual distribution policy of $0.40 per share, with an initial quarterly cash distribution of $0.10 per share that was paid December 12, 2002. The intent of the policy is for the Fund to make distributions of $0.10 per share in each of the first three quarters of the year with a final distribution in the fourth quarter equal to $0.10 per share or a greater amount sufficient to satisfy the distribution requirements of the Subchapter M of the Internal Revenue Code. The policy is subject to quarterly review and approval by the Fund’s Board of Directors. According to the policy, the distributions could be paid from interest or dividend income, capital gains, or a return of capital in the event there is insufficient income or capital gains to satisfy the policy.
 
At December 31, 2004, the Fund had declared a total of $12.08 per share in cash to its shareholders since inception in 1994. There is no assurance that the Fund will continue to make the distributions or cash payments described herein. Because the Fund may not earn the same return of capital in the future, the Fund may not continue to make distributions and cash payments as described herein.
 
DIVIDEND REINVESTMENT PLAN. Pursuant to the Dividend Reinvestment Plan (the “Reinvestment Plan”) any shareholders whose shares are registered in their own names will be deemed to have elected to have all dividends and distributions automatically reinvested in Fund shares pursuant to the Reinvestment Plan (each, a “Participant”) unless and except for each such shareholder who individually elects to receive such on a current basis in lieu of reinvestment. In the case of shareholders such as banks, brokers or nominees that hold shares for others who are beneficial owners (“Nominee Shareholders”), the Plan Agent, American Stock Transfer & Trust Co. (the “Plan Agent”) will administer the Reinvestment Plan on the basis of the number of shares certified by such Nominee Shareholders as registered for shareholders that have not elected to receive dividends and distributions in cash.
 
Investors that own shares registered in the name of a Nominee Shareholder should consult with such nominee as to participation or withdrawal from such plan.
 
When the Fund declares a dividend or distribution payable in cash, the non-participants will receive cash, and the Participants will receive Common Stock to be issued by the Fund or purchased in the open market. If the market value per share on the valuation date equals or exceeds the net asset value per share on that date, or if such open market purchases cause the price to increase to the net asset value, the Fund will issue new shares at the net asset value. If the net asset value exceeds the market price, the Plan Agent will, as agent for the Participants, buy Fund shares in the open market or in private transactions as soon as practicable after such date. If before the Plan Agent has completed the purchases the market price exceeds the net asset value, the Plan Agent may suspend purchasing in the market and the Fund will issue new shares at net asset value to fulfill the purchase requirements. The Fund has no current intention to register more shares in connection with the Reinvestment Plan; instead, the Fund will buy the shares in the open market.
 
Participants also have the option, commencing on January 1 of each year, of making additional annual cash payments to the Reinvestment Plan in any amount of $1,000 or more up to $10,000. Larger amounts may be accepted with the prior approval of the Fund. The Plan Agent, American Stock Transfer & Trust Co., will typically use all funds received from Participants to purchase Fund shares in the open market, so long as Fund shares are trading at a discount. Any voluntary funds must be received no later than 10 days prior to such date and any prior deposit may be withdrawn if written request for withdrawal is received by the Fund no later than 10 days prior to such date.
 
The Plan Agent will maintain all shareholder accounts in the Reinvestment Plan and furnish written confirmation of all transactions in an account. Shares in the Reinvestment Plan will be held in the name of the participant and each shareholder’s proxy will include any Reinvestment Plan holdings.
 
There is no charge to the participants for reinvesting dividends and distributions or for voluntary cash payments. There are no brokerage charges with respect to shares issued directly

by the Fund for participants in the Reinvestment Plan. However, each participant pays a pro rata share of brokerage charges for shares purchased in the market.
 
The Fund reserves the right to terminate the Reinvestment Plan. Further, the Reinvestment Plan may be amended by the Fund upon 30 days notice to participants. A participant may withdraw from the Reinvestment Plan upon written request to the Plan Agent, in which event, no further Fund share purchases will be made for such withdrawing participant and all shares and funds held for such participant will be forwarded to the participant or to their order upon their request. All communications regarding the Reinvestment Plan should be directed to the Plan Agent.
 
Item 6. Selected Financial Data.

The following selected financial data for the period January 1, 2004 through December 31, 2004 is derived from the Fund’s audited Financial Statements and should be read in conjunction with the Fund’s Financial Statements and Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this Annual Report on Form 10-K. The selected financial data for the periods ended December 31, 2000 through December 31, 2002 is unaudited.
 
   
Selected Financial Data
  
   
2004
  
2003
  
2002
  
2001
  
2000
  
Gross income (loss), including net realized gain (loss)
    
14,514,741
   
11,670,287
   
(2,856,608
)
  
2,863,162
   
9,899,509
  
Net unrealized appreciation
(depreciation) on investments
    
9,397,996
    
20,137,393
    
(8,380,055
)
  
11,570,203
    
(1,507,015
)
Net income (loss)
    
18,971,481
    
28,741,964
    
(12,837,439
)
  
12,379,821
    
5,672,127
  
Net income (loss) per share
    
4.36
    
6.60
    
(2.94
)
  
2.84
    
1.30
  
Total assets
    
117,387,109
    
101,866,011
    
55,592,067
    
82,092,106
    
66,244,970
  
Net assets
    
74,582,499
    
69,405,964
    
46,103,648
    
59,446,006
    
49,421,458
  
Net assets per share
    
17.14
    
15.95
    
10.59
    
13.63
    
11.33
  
                                 
 
   
Selected Per Share Data
  
   
2004
  
2003
  
2002
  
2001
  
2000
  
Investment income
    
0.15
   
0.46
   
0.13
    
0.19
    
0.43
  
Operation expenses
    
(1.12
)
  
(0.70
)
  
(0.36
)
  
(0.45
)
  
(0.64
)
Interest expense
    
(0.02
)
  
(0.01
)
  
(0.01
)
  
(0.03
)
  
0.00
  
Net investment income (loss)
    
(0.98
)
  
(0.25
)
  
(0.24
)
  
(0.29
)
  
(0.21
)
Tax return of capital
    
0.00
   
0.00
   
(0.10
)
  
0.00
    
(0.03
)

-29-
 
   
Selected Per Share Data (Continued)
  
   
2004
  
2003
  
2002
  
2001
  
2000
  
Distributions from net capital gains
    
(3.17
)
  
(1.25
)
  
0.00
    
(0.54
)
  
(1.47
)
Net realized gain (loss) on investments
    
3.18
    
2.22
    
(0.79
)
  
0.47
    
1.89
  
Net increase (decrease) in unrealized appreciation of investments
    
2.16
    
4.64
    
(1.91
)
  
2.66
    
(0.35
)
Increase (decrease) in net asset value
    
1.19
    
5.36
    
(3.04
)
  
2.30
    
(0.10
)
Capital stock transactions
    
0.00
    
0.00
    
(0.02
)
  
0.00
    
0.65
  
Effect of share change
    
0.00
    
0.00
    
0.02
    
0.00
    
(0.58
)
Net Asset Value:
                                
Beginning of year
    
15.95
    
10.59
    
13.63
    
11.33
    
11.43
  
End of year
    
17.14
    
15.95
    
10.59
    
13.63
    
11.33
  
 
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

GENERAL

The primary purpose of the Fund is to provide capital to emerging growth public companies whose ability to service the securities is sufficient to provide income to the Fund and whose growth potential is sufficient to provide opportunity for long-term capital appreciation.

SOURCES OF OPERATING INCOME

The operating income for the Fund is investment income, either in the form of interest on debentures, dividends on stock, or interest on securities held pending investment in portfolio companies. The Fund also generates income through capital gains. Further, the Fund in some cases receives due diligence, commitment, and closing fees, as well as other similar types of revenue. Director’s compensation received by RENN Group (or its personnel) for services to a Portfolio Company on behalf of the Fund is paid to the Fund.

LIQUIDITY AND CAPITAL RESOURCES

During the year ended December 31, 2004, the Fund invested $6,706,441 in eleven (11) new portfolio investments and invested an additional $3,080,516 in follow-on investments to seven (7) portfolio companies. Distributions made to investors in 2004 amounted to $13,794,946 or $3.17 per share, which was long-term capital gain. During 2004, gains were realized from the sale of securities of Bentley Pharmaceutical, Blue Rhino Corp., Capital Senior Living Corp., Flamel Technologies, Franklin Covey Company, I-Flow Corp., INET Technologies, Inc.,
 
Laserscope, Medical Action Industries, Inc., Poore Brothers, Inc., Stonepath Group, Inc., and from bankruptcy distributions from Voice It Worldwide, Inc. offset by realized losses taken on investments in CNE Group, Inc., Dexterity Surgical, Inc., and Fortune Natural Resources Corp. Net income for 2004 was $18,971,481 and net cash provided by operating activities was $7,462,832. The Fund issued no new shares for the dividend reinvestment plan, as dividend reinvestment shares were purchased in the open market. At December 31, 2004, the Fund had $37,278,871 in cash and cash equivalents and $3,775,871 in affiliated party receivable, offset with $3,697,461 in affiliated party liability, with $39,107,149 in other liabilities.  RENN Group believes that current cash and securities levels are sufficient to pay expenses as they come due and to make investments.  

The majority of the Fund’s investments in Portfolio Companies are individually negotiated, non-registered for public trading, and are subject to legal and contractual investment restrictions. Accordingly, the Portfolio Investments are generally considered non-liquid. This lack of liquidity primarily affects the ability to make new investments and distributions to shareholders.

From time to time, funds or securities are deposited in margin accounts and invested in government securities. Government securities used as cash equivalents typically consist of U. S. Treasury securities or other U. S. Government and Agency obligations having slightly higher yields and maturity dates of three months or less when purchased. These investments qualify for investment as permitted in Section 55(a)(1) through (5) of the 1940 Act. These securities are generally valued at market price as market prices are generally available for these securities.

RESULTS OF OPERATIONS

2004 Compared to 2003

During the year ended December 31, 2004, the Fund made additional portfolio investments aggregating $9,786,957 compared to $9,062,799 in 2003. The Fund realized proceeds from the sale of investments in the amount of $19,289,611 compared to $17,794,507 in 2003. The Fund’s 2004 net income of $18,971,481 is due to a combination of a net investment loss of ($4,278,531), net unrealized appreciation on investments of $9,397,996, and net realized gain on investments of $13,852,016.

Interest income decreased 51.84% for the year in comparison to 2003. In 2003 the Fund received payment in kind of interest upon the reorganization of eOriginal, Inc. and interest accrued due to the SEC settlement offer. Dividend income decreased 84.94% to $184,522 in 2004 from $1,225,139 in 2003 due primarily to the 2003 dividends paid upon the reorganization of investments in eOriginal, Inc. and Integrated Security Systems, Inc. Commitment and other fee income increased to $126,326 in 2004 from $33,579 in 2003 primarily as a result of an increase in early conversion fees and due diligence fee income.

General and administrative expenses, including interest expense and legal fees, but excluding incentive and management fees, increased 68.23% to $983,616 in 2004 from $584,690 in 2003. Incentive fees increased 77.21%, $2,497,422 in 2004 compared to $1,409,318 in 2003 because there were greater net realized capital gains achieved on investments during 2004. Management fees increased to $1,460,218 in 2004 from $1,071,708 in 2003, an increase of 36.25% due to higher portfolio values. Net investment loss increased 297.53% to ($4,278,531)
 
in 2004 up from ($1,076,288) in 2003 due primarily to increased incentive fee expense in 2004, combined with an increase in management fees and legal and professional fees, and a decrease in interest and dividend income.

Net income decreased to $18,971,481 in 2004 from $28,741,964 in 2003. In 2004, the Fund had a net realized gain on investments of $13,852,016, compared to $9,680,859 in 2003. Likewise, the Fund experienced a decrease in net unrealized appreciation on investments to $9,397,996 in 2004, compared to the net unrealized appreciation on investments in 2003 of $20,137,393.

2003 Compared to 2002

During the year ended December 31, 2003, the Fund made additional portfolio investments aggregating $9,062,799 compared to $6,851,707 in 2002. The Fund realized proceeds from the sale of investments in the amount of $17,794,507 compared to $4,911,282 in 2002. The Fund’s realized net income of $28,741,964 is due to a combination of a net investment loss of ($1,076,288), net unrealized appreciation on investments of $20,137,393, and net realized gain on investments of $9,680,859.

Interest income increased 54.19% for the year in comparison to 2002, primarily due to the payment in kind of interest upon the reorganization of eOriginal, Inc. and interest accrued due to the SEC settlement offer. Dividend income increased 1,634.34% to $1,225,139 in 2003 from $70,640 in 2002 due primarily to dividends paid upon the reorganization of investments in eOriginal, Inc. and Integrated Security Systems, Inc. Commitment and other fee income increased to $33,579 in 2003 from $28,442 in 2002 primarily as a result of an increase in director fee income.

General and administrative expenses, including interest expense and legal fees, but excluding incentive and management fees, decreased 10.75% to $584,690 in 2003 from $655,119 in 2002. No incentive fee was incurred in 2002 compared to an incentive fee expense of $1,409,318 in 2003 because there were no net realized capital gains achieved on investments during 2002. Management fees increased to $1,071,708 in 2003 from $945,657 in 2002, an increase of 13.33% due to higher portfolio values. Net investment loss increased 4.72% to ($1,076,288) in 2003 up from ($1,027,791) in 2002 due primarily to incentive fee expense in 2003, combined with an increase in management fees, partially offset by the increase in interest and dividend income.

Net income increased to $28,741,964 in 2003 from a net loss of ($12,837,439) in 2002.In 2003, the Fund had a net realized gain on investments of $9,680,859, compared to a net realized loss of ($3,429,593) in 2002. Likewise, the Fund experienced net unrealized appreciation on investments in the amount of $20,137,393 in 2003, compared to the net unrealized depreciation on investments in 2002 of ($8,380,055).

CONTRACTUAL OBLIGATIONS

The Fund has a contract for the purchase of services under which it will have future commitments: the investment advisory agreement, pursuant to which RENN Capital Group, Inc. has agreed to serve as the Fund’s investment adviser. Such agreement has contractual obligations with fees which are based on values of the portfolio investments which the Fund owns. For
 
further information regarding the Fund’s obligations under the investment advisory agreement see Note 4 of the Financial Statements.

Because the Fund does not enter into other long-term debt obligations, capital lease obligations, operating lease obligations, or purchase obligations that would otherwise be reflected on the Fund’s Statement of Assets and Liabilities, a table of contractual obligations has not been presented.
 
Item 7A. Quantitative and Qualitative Disclosure About Market Risk

The Fund is subject to financial market risks, including changes in market interest rates as well as changes in marketable equity security prices. The Fund does not use derivative financial instruments to mitigate any of these risks. The return on the Fund’s investments is generally not affected by foreign currency fluctuations.

A majority of the Fund’s net assets consists of common stocks and warrants and options to purchase common stock in publicly traded companies. These investments are directly exposed to equity price risk, in that a percentage change in these equity prices would result in a similar percentage change in the fair value of these securities.

A lesser percentage of the Fund’s net assets consist of fixed rate convertible debentures and other debt instruments as well as convertible preferred securities. Since these instruments are generally priced at a fixed rate, changes in market interest rates do not directly impact interest income, although they could impact the Fund’s yield on future investments in debt instruments. In addition, changes in market interest rates are not typically a significant factor in the Fund’s determination of fair value of its debt instruments, as it is generally assumed they will be held to maturity, and their fair values are determined on the basis of the terms of the particular instrument and the financial condition of the issuer.

A small percentage of the Fund’s net assets consist of equity investments in private companies. The Fund would anticipate no impact on these investments from modest changes in public market equity prices. However, should significant changes in market prices occur, there could be a longer-term effect on valuations of private companies which could affect the carrying value and the amount and timing of proceeds realized on these investments.

Item 8. Financial Statements and Supplementary Data.

The financial statements filed as part of this report are listed in “Index to Financial Statements” on page F-1 hereof.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
 
On January 19, 2006, the Audit Committee of the Fund dismissed Ernst & Young LLP (“E&Y”) as the Fund’s independent registered public accounting firm because E&Y advised the Audit Committee that E&Y would not be able to begin the audit engagement until May 2006.

The audit reports of E&Y on the financial statements of the Fund for the fiscal years ended December 31, 2002 and 2001 did not contain an adverse opinion or disclaimer of opinion
 
and were not qualified or modified as to uncertainty, audit scope or accounting principles. E&Y did not complete the audit of the Fund’s financial statements for fiscal years ended after December 31, 2002.

As disclosed in a Current Report on Form 8-K filed by the Fund on June 18, 2004, E&Y declined to issue a report on the Fund’s financial statements for the year ended December 31, 2003 unless E&Y received an opinion of legal counsel to the effect that the possibility of a material adverse effect to the Fund as a result of a comment received from the SEC staff that the Advisory Agreement might be invalid would be “remote” as defined in an accounting pronouncement that the Fund and E&Y agreed was not applicable. The Fund and E&Y were unable to agree on proposed legal opinion language.

As further disclosed in a Current Report on Form 8-K filed by the Fund on December 6, 2005, the Investment Adviser entered into a settlement agreement with the SEC with respect to the calculation of advisory fees under the Advisory Agreement. As a result of the settlement agreement, the disagreement noted above has been rendered moot. The Fund has authorized E&Y to respond fully to the inquiries of the successor accountant named below concerning this subject.

Other than as described in the two preceding paragraphs, during the fiscal years ended December 31, 2005 and 2004 and the period from January 1, 2006 through January 19, 2006, there were no disagreements with E&Y on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of E&Y, would have caused E&Y to make reference to such disagreements in its reports on the financial statements for such periods.

On January 19, 2006, the Audit Committee of Board of Directors of the Fund approved the engagement of KBA Group LLP (“KBA”) to serve as the Fund’s independent registered public accounting firm. We engaged KBA on January 19, 2006 to serve as our independent registered public accounting firm for the fiscal year ending December 31, 2005. The Audit Committee has also engaged KBA to complete the audits for the fiscal years ended December 31, 2004 and 2003.

Item 9A. Controls and Procedures.

The Fund has in place systems relating to disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the 1934 Act). Our principal executive officer and principal financial officer evaluated the effectiveness of these disclosure controls and procedures as of the end of our fiscal year ended December 31, 2004 in connection with the preparation of this report. They concluded that the controls and procedures were effective and adequate at that time. There were no significant changes in the Fund’s internal control over financial reporting during the fourth quarter of fiscal 2004 that have materially affected, or are reasonably likely to materially affect the Fund’s control over financial reporting.

Item 9B. Other Information.

None.
 
Part III

Item 10. Directors and Executive Officers of Registrant.

Certain information included in this Item 10 is as of December 31, 2004.

Directors

Pursuant to the Fund’s Articles of Incorporation and Bylaws, the Board of Directors consists of five directors and is divided into three classes. Each class serves for a three-year term. The term of office of the Class One director was to expire at the annual meeting of shareholders to be held in 2004, the term of office of the Class Two directors was to expire at the annual meeting of shareholders to be held in 2005, and the term of office of the Class Three directors was to expire at the annual meeting of shareholders to be held in 2006.

Because the Board of Directors is divided into classes, only those directors in a single class may be changed in any one year. Consequently, changing a majority of the Board of Directors would require two years (although under Texas law, procedures exist to remove directors, even if they are not then standing for reelection and, under SEC regulations, procedures exist for including appropriate shareholder proposals in the annual proxy statement). Having a classified Board of Directors, which may be regarded as an “anti-takeover” provision, may make it more difficult for shareholders of the Fund to change the majority of directors, thus having the effect of maintaining the continuity of management.

Class One Director - Term was to Expire at 2004 Annual Meeting

Peter Collins, age 60, has been a financial and management consultant to closely-held businesses for the past ten years in the USA, the UK, and Europe, in areas of finance, start-ups, joint ventures, and mergers and acquisitions. He has advised companies in every segment of industry (including manufacturing, distribution, service, agriculture, construction, and multimedia) and in all stages of development (from start-up to bankruptcy). Mr. Collins was educated in England, where he received a B.Sc. in Civil Engineering from Liverpool University and an M.Sc. in Business Administration from The City University, London. He has served as a Class One Director since 1994.

Class Two Directors - Term Expires at 2005 Annual Meeting

Edward O. Boshell, Jr., age 70, is the retired Chairman of the Board and CEO of Columbia General Corporation and is a private investor.

Charles C. Pierce, Jr., age 70, is the retired Vice-Chairman of Dain Rauscher, Inc., and is a private investor.
 
Class Three Directors - Term Expires at 2006 Annual Meeting

Russell Cleveland, age 66, is the President, Chief Executive Officer, and Director of the Fund since 1994. He is a Chartered Financial Analyst with more than 35 years experience as a specialist in investments in smaller capitalization companies. A graduate of the Wharton School of Business, Mr. Cleveland has served as President of the Dallas Association of Investment Analysts. Mr. Cleveland is also the President, Chief Executive Officer, sole Director, and the majority shareholder of RENN Group, the investment adviser to the Fund. RENN Group is also the investment manager of Renaissance US Growth Investment Trust PLC (“RUSGIT”) and the investment adviser to BFS US Special Opportunities Trust PLC (“BFS US”), investment trusts listed on the London Stock Exchange. Mr. Cleveland also serves on the Boards of Directors of RUSGIT, BFS US, Tutogen Medical, Inc., Cover-All Technologies, Inc., Integrated Security Systems, Inc., and Digital Recorders, Inc.

Ernest C. Hill, age 64, has a broad background in convertible securities analysis with major NYSE brokerage firms and institutional investors. He specializes in computer-aided investment analysis and administrative procedures. Mr. Hill was awarded a Ford Fellowship to the Stanford School of Business, where he received an MBA, with honors, in Investment and Finance. Mr. Hill’s prior experience included service as Assistant Professor of Finance, Southern Methodist University and Associate Director of the Southwestern Graduate School of Banking.
 
The Board of Directors has determined that all of the Fund’s directors, other than Russell Cleveland, the President and Chief Executive Officer of the Fund, are independent directors. Certain information concerning the Fund’s directors is set forth below:
 
Name, Address*
and Age
  
Position
Held
with Fund
  
Director’s
Term of
Office and
Length of
Time Served
  
Principal
Occupation(s)
During
Past 5
Years
  
Number of Portfolios in Fund Complex Overseen by Director
  
Other
Director-
ships Held by Director
  
                                 
Peter Collins
Age 60
    
Director
    
Class One Director since 1994. Term was to expire in 2004.
    
Consultant
    
1
    
None
  
                                 
Edward O. Boshell, Jr.
Age 70
    
Director
    
Class Two Director since 1998. Term expires 2005.
    
Retired Chairman of the Board and CEO of Columbia General and private investor
    
1
    
None
  
                                 
Charles C. Pierce, Jr.
Age 70
    
Director
    
Class Two Director since 2002. Term expires 2005.
    
Retired Vice-Chairman of Dain Rauscher and private investor
    
1
    
None
  
                                 
Ernest C. Hill
Age 64
    
Director
    
Class Three Director since 1994. Term expires 2006.
    
Consultant
    
1
    
None
  
                                 
Interested Director:
                                
Russell Cleveland(1)
Age 66
    
President,Chief Executive Officer, and Director
 		    
Class Three Director since 1994. Term expires 2006
 		    
President & Chief Executive Officer of RENN Group
 		    
3
 		    
RUSGIT, BFSUS, Tutogen Medical, Inc., CaminoSoft Corp., Cover-All Technologies, Inc., Integrated Security Systems, Inc., and Digital Recorders, Inc.
  
                               
*
The address of all such persons is c/o RENN Capital Group, Inc., 8080 North Central Expressway, Suite 210, LB-59, Dallas, Texas 75206.
(1)
Mr. Cleveland is also President and CEO of RENN Capital Group, Inc. See “Information About the Fund’s Officers and the Investment Advisor”.
 
-37-
 
Name of
Director
  
Dollar Range*
of Equity Securities
in the Fund
  
Aggregate Dollar Range
of Equity Securities in
Funds in
Fund Complex*
  
Edward O. Boshell, Jr.
    
over $100,000
    
over $100,000
  
Charles C. Pierce, Jr.
  
$
10,001 to $50,000
  
$
10,001 to $50,000
  
Ernest C. Hill
  
$
0
  
$
0
  
Peter Collins
  
$
10,001 to $50,000
  
$
10,001 to $50,000
  
Russell Cleveland
    
over $100,000
    
over $100,000
  
             
*
As of December 31, 2004

Committees and Meetings

The Board of Directors held thirty-one (31) meetings or executed consent actions in lieu of meetings during 2004, and each director attended or executed at least seventy-five per cent (75%) of these meetings and consent actions.

The Audit Committee

During 2004, the Audit Committee consisted of Ernest C. Hill, Chair, Peter Collins, Charles C. Pierce, Jr. and Edward O. Boshell, Jr., and held five (5) meetings. Edward O. Boshell, Jr. has been designated by the Board of Directors as the Audit Committee financial expert. The Audit Committee is comprised entirely of independent directors. The Audit Committee is appointed by the Board of Directors to assist the Board in fulfilling its oversight responsibilities. The Audit Committee’s primary duties and responsibilities are to:
 
 
·
Appoint and approve the compensation of the Fund’s independent auditors, including those to be retained for the purpose of preparing or issuing an audit report or performing other audit review or attest services for the Fund;
 
 
·
Review the scope of their audit services and the annual results of their audits;
 
 
·
Monitor the independence and performance of the Fund’s independent auditors;
 
 
·
Oversee generally the accounting and financial reporting processes of the Fund and the audits of its financial statements, generally;
 
 
·
Review the reports and recommendations of the Fund’s independent auditors;
 
 
·
Provide an avenue of communication among the independent auditors, management and the Board of Directors; and
 
 
·
Address any matters between the Fund and its independent auditors regarding financial reporting.

 
 
 
The Fund’s independent auditors must report directly to the Audit Committee.
 
The Nominating and Corporate Governance Committee

The Nominating and Corporate Governance Committee was created in January 2004 and is responsible for nominating individuals to serve as directors. The Nominating and Corporate Governance Committee is composed entirely of independent Fund directors. Its members are Charles C. Pierce, Jr., Chair, Edward O. Boshell, Jr., Ernest C. Hill and Peter Collins.

The Committee considers and recommends nominees for election as directors of the Fund. Stockholders wishing to recommend qualified candidates for consideration by the Fund may do so by writing to the Secretary of the Fund at the address shown in the Notice providing the candidate’s name, biographical data and qualifications. In its assessment of each potential candidate, the Committee reviews the nominee’s judgment, experience, independence, financial literacy, knowledge of emerging growth companies, understanding of the Fund and its investment objectives and such other factors as the Committee may determine. The Committee also takes into account the ability of a director to devote the time and effort necessary to fulfill his or her responsibilities. At the direction of the Board of Directors, the Committee also considers various corporate governance policies and procedures.

Officers

Russell Cleveland, age 66, has served as President, Chief Executive Officer, and a Class Three director of the Fund since 1994. He has also served as the President, Chief Executive Officer, sole Director, and the majority shareholder of RENN Group since 1994. He is a Chartered Financial Analyst with more than 35 years experience as a specialist in investments for smaller capitalization companies. A graduate of the Wharton School of Business, Mr. Cleveland has served as President of the Dallas Association of Investment Analysts. Mr. Cleveland also serves on the Boards of Directors of Renaissance US Growth Investment Trust PLC, BFS US Special Opportunities Trust PLC, CaminoSoft Corp., Integrated Security Systems, Inc., Tutogen Medical, Inc., Digital Recorders, Inc., and Cover-All Technologies, Inc.

Barbe Butschek, age 50, has served as Secretary and Treasurer of the Fund since 1994. She currently serves as Senior Vice-President, Secretary and Treasurer of RENN Group and has served with RENN Group in various capacities since 1977.

Robert C. Pearson, age 69, has served as Vice President of the Fund since April 1997. He joined RENN Group in April 1997 and is Senior Vice-President - Investments. Mr. Pearson brought more than thirty years of experience to RENN Group’s corporate finance function. From May 1994 to May 1997, Mr. Pearson was an independent financial management consultant. From May 1990 to May 1994, he served as Chief Financial Officer and Executive Vice-President of Thomas Group, Inc., a management consulting firm, where he was instrumental in moving a small privately held company from a start-up to a public company with more than $40 million in revenues. Prior to 1990, Mr. Pearson was responsible for all administrative activities for the Superconducting Super Collider Laboratory. In addition, from 1960 to 1985, Mr. Pearson served in a variety of positions at Texas Instruments in financial planning and analysis, holding such positions as Vice-President - Controller and Vice-President - Finance. Mr. Pearson holds a BS in Business from the University of Maryland and was a W.A. Paton Scholar with an MBA from the University of Michigan. He is a director of Digital

Learning Management Corp., eOriginal, Inc., CaminoSoft Corp., Laserscope, Simtek Corporation, and Advanced Power Technologies, Inc.

Scott E. Douglass, age 46, has served as a Vice President of the Fund since November 2004. He has worked for three sell-side firms in the roles of institutional sales and investment banking. Prior to that he was a commercial loan officer for the First National Bank of Boston and Fleet Financial Group which are now part of Bank of America. He holds a Masters Degree in Business Administration from the Olin Graduate School of Business at Babson College.
 
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Fund's officers and directors and persons who own more than 10% of a registered class of the Fund's equity securities to file reports of ownership and changes in ownership with the SEC. Officers, directors, and greater than 10% beneficial owners are required by SEC regulations to furnish the Fund with copies of all Section 16(a) forms they file. The Fund believes that during the fiscal year ended December 31, 2004, one late Section 16(a) filing relating to the Fund's Common Stock applicable to its officers, directors, and greater than 10% beneficial owners was made by Mr. Douglass.

Item 11. Executive Compensation.

Directors who are not employees of either the Fund or RENN Group receive a monthly fee of $1,500, plus $750 and out-of-pocket expenses for each quarterly valuation meeting attended. The Fund does not pay any fees to, or reimburse expenses of, its directors who are considered “interested persons” of the Fund. The aggregate compensation for the period from January 1 to December 31, 2004, that the Fund paid each director, and the aggregate compensation paid to each director for the most recently completed fiscal year by other funds to which RENN Group provided investment advisory services is set forth below:
 
Name of Director
  
Aggregate
2004
Compensation
from Fund
  
Pension or
Retirement
Benefits
Accrued as
Part of Fund
Expenses
  
Estimated
Annual
Benefits
upon
Retirement
  
Total 2004
Compensation
from Fund
and Fund
Complex
  
Russell Cleveland (1)
  
$
0
  
$
0
  
$
0
  
$
0
  
Peter Collins
  
$
20,250
  
$
0
  
$
0
  
$
20,250
  
Ernest C. Hill
  
$
41,080
  
$
0
  
$
0
  
$
41,080
  
Edward O. Boshell, Jr.
  
$
21,000
  
$
0
  
$
0
  
$
21,000
  
Charles C. Pierce, Jr.
  
$
20,250
  
$
0
  
$
0
  
$
20,250
  
                         
(1)
Mr. Cleveland is President and Chief Executive Officer of RENN Group. See “Information about the Fund’s Principal Officers and Investment Adviser - RENN Group.”

Officers of the Fund receive no compensation from the Fund. The Fund has never issued options or warrants to officers or directors of the Fund.
 
Item 12. Security Ownership of Certain Beneficial Owners and Management.

The following table sets forth certain information known to the Fund with respect to beneficial ownership of the Fund’s Common Stock as of December 31, 2004 (i) for all persons who are beneficial owners of 5% or more of the outstanding shares of the Fund’s Common Stock (ii) each director and nominee for director of the Fund, and (iii) all executive officers and directors of the Fund as a group:

Name of Beneficial Owner
  
Number of Shares
Beneficially Owned
Directly or Indirectly
  
Percent
of Class
  
Russell Cleveland, President, Chief Executive Officer, and Director(1)
    
274,336
(2)
  
6.3
%
Edward O. Boshell, Jr., Director
    
29,898
(3)
  
0.7
%
Peter Collins, Director
    
2,480
(4)
  
0.1
%
Charles C. Pierce, Jr., Director
    
2,035
    
0.0
%
Ernest C. Hill, Director
    
0
    
0.0
%
All directors and officers of the Fund as a group (8 persons)
    
320,611
    
7.4
%
               
(1)
“Interested person,” as defined by the 1940 Act.
(2)
Consists of 24,231 shares owned by the Cleveland Family Limited Partnership and 250,105 shares owned by Renn Investment Limited Partnership.
(3)
Shares owned indirectly through Columbia General Investments, L.P.
(4)
Includes 130 shares owned by Hilary Collins, Mr. Collins’ spouse.

Item 13. Certain Relationships and Related Transactions.

RENN Group provides investment advisory services to the Fund pursuant to the Advisory Agreement between the Fund and RENN Group. The Advisory Agreement is reviewed and approved annually by the Fund’s Board of Directors, including its independent directors. Pursuant to the Advisory Agreement, RENN Group received a management fee equal to a quarterly rate of 0.4375% of the Fund’s net assets, as determined at the end of such quarter with each such payment to be due on the last day of the calendar quarter. In addition, under the Advisory Agreement, RENN Group received an incentive fee in an amount equal to 20% of the Fund’s realized capital gains in excess of realized capital losses of the Fund after allowance for any unrealized capital losses in on the portfolio investments of the Fund. The incentive fee is calculated and paid on an annual basis. See Item 3, Legal Proceedings, for a discussion of proceedings with the SEC regarding the calculation of the incentive fee.

In 2004, the Fund incurred to RENN Group $1,460,218 as its management fee of which $966,640 was paid and $2,497,422 as its incentive fee of which $0 was paid. The Fund also received director’s fees from portfolio companies with respect to Mr. Cleveland’s and Mr. Pearson’s services as a director. Russell Cleveland and Barbe Butschek own 80% and 20%, respectively, of the Common Stock of RENN Group. The sole director of RENN Group is
 
Russell Cleveland. The Board of Directors has determined that the Advisers Agreement be construed in compliance with applicable provisions of the Advisers Act and the 1940 Act.

Item 14. Principal Accountant Fees and Services.

As disclosed in Item 9, Ernst & Young LLP was dismissed as the Fund’s auditor and did not complete the audit for the fiscal year ended December 31, 2003. KBA Group LLP was subsequently engaged in January 2006 to complete the audit, and therefore received no fees for professional services for the fiscal years ended December 31, 2003 and 2004.

The following table presents fees paid by the Fund for professional services rendered by Ernst & Young LLP for the fiscal years ended December 31, 2003 and 2004.
       
Fee Category
  
Fiscal 2004
Fees
  
Fiscal 2003
Fees
  
Audit Fee
  
$
56,000
  
$
67,000
  
Audit-Related Fees
    
0
    
0
  
Tax Fees
    
2,000
    
0
  
All Other Fees
    
0
    
22,000
  
Total Fees
  
$
58,000
  
$
89,000
  

Audit Fees were for professional services rendered for the audit of the Fund’s financial statements and review of the interim financial statements included in quarterly reports and services that are normally provided by Ernst & Young LLP in connection with statutory and regulatory filings or engagements. In March 2006, the Fund received a refund of $56,000 of the audit fees previously paid.

No Audit-Related Fees were paid by the Fund to Ernst & Young LLP for the fiscal years ended December 31, 2003 or 2004.

Tax Fees were for the preparation of income and excise tax returns.

All Other Fees were for services other than the services reported above. In fiscal 2003, these services included accounting consultations relating to a proposed rights offering.

The Audit Committee concluded that the provision of the non-audit services described above did not impair the independence of Ernst & Young LLP. The Audit Committee has adopted a pre-approval policy that provides for the prior consideration by the Audit Committee of any audit or non-audit services that may be provided by its independent auditor to the Fund.

-42-
 
Part IV

Item 15. Exhibits, Financial Statement Schedules.

DOCUMENTS FILED AS PART OF THIS FORM 10K

Financial Statements:
The financial statements filed as part of this report are listed in “Index to Financial Statements” on page F-1 hereof.

Financial Schedules:
There are no schedules presented since none are applicable.

EXHIBITS
 
3.1
Restated Articles of Incorporation1

3.2
Bylaws2

10.1
Dividend Reinvestment Plan3

10.2
Amendment No. 1 to Dividend Reinvestment Plan4

10.3
Investment Advisory Agreement5

10.4
Amendment No. 1 to Investment Advisory Agreement6

10.5
Custodial Agreement with The Frost National Bank7

14
Code of Ethics8

31.1
Certification of the principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2
Certification of the principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1
Certification of the principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2
Certification principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
1
Incorporated by reference from Form N-2 as filed with the Securities and Exchange Commission February 25, 1994 (Registration No. 33-75758).
 
2
Incorporated by reference from Form N-2 as filed with the Securities and Exchange Commission February 25, 1994 (Registration No. 33-75758).
 
3
Incorporated by reference from Form N-2 as filed with the Securities and Exchange Commission February 25, 1994 (Registration No. 33-75758).
 

-43-

4
Incorporated by reference from Form N-2 as filed with the Securities and Exchange Commission February 25, 1994 (Registration No. 33-75758).
 
5
Incorporated by reference from Form N-2 as filed with the Securities and Exchange Commission February 25, 1994 (Registration No. 33-75758).
 
6
Incorporated by reference from Form 10-K for the year ended December 31, 1999 as filed with the Securities and Exchange Commission (File No. 001-11701).
 
7
Incorporated by reference from Form 10-K for the year ended December 31, 2000 as filed with the Securities and Exchange Commission (File No. 001-11701).
 
8
Incorporated by reference from Form 10-Q for the quarter ended June 30, 2002 as filed with the Securities and Exchange Commission (File No. 811-08376).

 
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.
 
     
  RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
(Registrant)
 
 		  
 		  
 
Date: September 22, 2006 By:   /s/ Russell Cleveland
 
 
Name:   Russell Cleveland
Title:     Chairman and President
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Fund in the capacities and on the date indicated Signatures.

Signature
  
Capacity in Which Signed
  
 Date
         
/s/ Russell Cleveland      
September 22, 2006
Russell Cleveland
 
Chairman, President and Director
   
         
         
/s/ Barbe Butschek      
September 22, 2006
Barbe Butschek
 
Secretary and Treasurer
   
         
         
/s/ Ernest C. Hill      
September 22, 2006
Ernest C. Hill
 
Director
    
         
         
/s/ Peter Collins      
September 22, 2006
Peter Collins
 
Director
    
         
         
/s/ Edward O. Boshell, Jr.      
September 22, 2006
Edward O. Boshell, Jr.
 
Director
    
         
         
/s/ Charles C. Pierce, Jr.      
September 22, 2006
Charles C. Pierce, Jr.
  
Director
    
 
-45-
 
INDEX TO FINANCIAL STATEMENTS

 
Page
   
Report of Independent
 
Registered Public Accounting Firm
F-2
   
Statements of Assets and Liabilities
  
December 31, 2004 and 2003
F-3
   
Schedules of Investments
  
December 31, 2004 and 2003
F-4 through F-15
   
Statements of Operations
  
Years ended December 31, 2004, 2003, and 2002
F-16
(unaudited and restated)
  
   
Statements of Changes in Net Assets
  
Years ended December 31, 2004, 2003, and 2002
F-17
(unaudited and restated)
  
   
Statements of Cash Flows
  
Years ended December 31, 2004, 2003, and 2002
F-18
(unaudited and restated)
  
 
  
Notes to Financial Statements
F-19 through F-29
 
F-1
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
Stockholders and Board of Directors
 
Renaissance Capital Growth & Income Fund III, Inc.
 
We have audited the accompanying statements of assets and liabilities of Renaissance Capital Growth & Income Fund III, Inc. (the "Fund") including the schedules of investments as of December 31, 2004 and 2003 and the related statements of operations, changes in net assets, cash flows and financial highlights for the years then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Renaissance Capital Growth & Income Fund III, Inc. as of December 31, 2004 and 2003 and the results of its operations and its cash flows and the financial highlights for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ KBA GROUP LLP
KBA Group LLP
Dallas, TX
 
July 17, 2006
F-2
 
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Assets and Liabilities
December 31, 2004 and 2003
           
ASSETS
          
   
2004
  
2003
  
           
Cash and cash equivalents
  
$
37,278,871
  
$
35,255,687
  
Investments at fair value, cost of $38,096,398 and $33,747,037 in 2004 and 2003, respectively
    
76,203,302
    
62,455,944
  
Accounts receivable-settlement with affiliate
    
3,775,872
    
3,775,872
  
Interest and dividend receivables, net of reserves
    
95,689
    
233,201
  
Prepaid and other assets
    
33,375
    
145,307
  
   
$
117,387,109
  
$
101,866,011
  
               
LIABILITIES AND NET ASSETS
              
               
Liabilities:
              
Due to broker
 
$
27,001,414
  
$
27,000,416
  
Accounts payable
    
51,477
   
57,273
  
Accounts payable - dividends
    
12,054,258
    
3,698,960
  
Accounts payable - affiliate
   
3,697,461
    
1,703,398
  
     
42,804,610
    
32,460,047
  
               
Commitments and contingencies
             
               
Net assets:
              
Common stock, $1 par value; authorized 20,000,000 shares; 4,561,618 issued; 4,351,718 shares outstanding
    
4,561,618
    
4,561,618
  
Additional paid-in-capital
    
33,641,903
    
37,058,788
  
Treasury stock at cost, 209,900 shares
   
(1,734,967
)
  
(1,734,967
)
Distributable earnings
   
7,042
    
811,618
  
Net unrealized appreciation of investments
    
38,106,903
    
28,708,907
  
Net assets, equivalent to $17.14 and $15.95 per share at December 31, 2004 and 2003, respectively
    
74,582,499
    
69,405,964
  
 
$
117,387,109
  
$
101,866,011
  
             
             
See accompanying notes
F-3
 
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments
December 31, 2004 and 2003
       
   
2004
  
   
Interest
  
Due
      
Fair
  
% of Net
  
   
Rate
  
Date
  
Cost
  
Value
  
Assets
  
Eligible Portfolio Investments -
Convertible Debentures and Promissory Notes
                      
                       
CaminoSoft Corp. - Promissory note (4)
    
7.00
    
07/19/06
  
$
250,000
  
$
250,000
    
0.33
%
                                 
Digital Learning Management Corp. -
Convertible debenture (2)
    
7.00
    
02/27/11
    
1,000,000
    1,342,282    
1.76
  
                                 
Hemobiotech, Inc. - Promissory note (2)
    
10.00
    
10/15/08
    
250,000
    
250,000
    
0.33
  
                                 
iLinc Communications, Inc. - Promissory note (2)
    
12.00
    
03/29/12
    
500,000
    
500,000
    
0.66
  
                                 
Integrated Security Systems, Inc. -
                                
Promissory note (4)
    
8.00
    
09/30/05
    
525,000
    
525,000
    
0.69
  
Promissory note (4)
    
7.00
    
09/30/05
    
200,000
    
200,000
    
0.26
  
                                 
Simtek Corporation - Convertible debenture (2)
    
7.50
    
06/28/09
    
1,000,000
    
1,923,077
    
2.52
  
                                 
               
$
3,725,000
  
$
4,990,359
    
6.55
%
                                 
                                 
See accompanying notes
F-4
 
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments (continued)
December 31, 2004 and 2003
       
   
2004
  
   
Interest
  
Due
      
Fair
  
% of Net
  
   
Rate
  
Date
  
Cost
  
Value
  
Assets
  
Other Portfolio Investments -
Convertible Debentures and Promissory Notes
                     
                       
Interpool, Inc. - Convertible debenture (2)
    
9.25
    
12/27/22
  
$
375,000
  
$
375,000
    
0.49
%
                                 
               
$
375,000
  
$
375,000
    
0.49
%
                               
                               
See accompanying notes
 
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments (continued)
December 31, 2004 and 2003
       
   
2004
  
           
Fair
  
% of Net
  
   
Shares
  
Cost
  
Value
  
Assets
  
Eligible Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
                  
                   
CaminoSoft Corp. - Common stock
   
2,458,333
  
$
4,875,000
  
$
1,696,250
    
2.23
  
Common stock (2)
    
1,081,081
    
400,000
    
745,946
    
0.98
  
                           
eOriginal, Inc. -
                         
Series A, preferred stock (1)(3)
    
10,680
    
4,692,207
    
332,575
    
0.44
  
Series B, preferred stock (1)(3)
    
25,646
    
620,329
    
798,616
    
1.05
  
Series C, preferred stock (1)(3)
    
51,249
    
1,059,734
    
1,595,894
    
2.09
  
Series D, preferred stock (1)(3)
    
16,057
    
500,000
    
500,015
    
0.66
  
                           
Gaming & Entertainment Group - Common stock (2)
    
500,000
    
500,000
    
210,000
    
0.28
  
                           
Gasco Energy, Inc. - Common stock (2)
    
1,541,667
    
1,250,000
    
6,567,501
    
8.62
  
                           
Global Axcess Corporation - Common stock (2)
    
4,766,667
    
1,261,667
    
1,716,000
    
2.25
  
                           
Hemobiotech, Inc. - Common stock (2)
    
294,120
    
250,000
    
250,000
    
0.33
  
                           
Integrated Security Systems, Inc. -
                          
Common stock (2)
    
27,074,179
    
5,568,056
    
13,537,090
    
17.76
  
Series D, preferred stock (2)
    
187,500
    
150,000
    
112,500
   
0.15
  
                           
                           
See accompanying notes
 
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments (continued)
December 31, 2004 and 2003
                   
   
2004
  
           
Fair
  
% of Net
  
   
Shares
  
Cost
  
Value
  
Assets
  
Eligible Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities, continued
                  
                   
Inyx, Inc. - Common stock (2)
    
300,000
    
300,000
    
417,000
   
0.55
  
                           
Laserscope - Common stock
   
600,000
   
750,000
    
21,546,000
    
28.27
  
                           
Poore Brothers, Inc. - Common stock (2)
    
1,507,791
   
1,544,294
    
5,262,191
    
6.91
  
                           
PracticeXpert, Inc. - Common stock (2)
    
4,166,667
   
500,000
    
562,500
    
0.74
  
                           
Simtek Corp. -
                         
Common stock (2)
    
550,661
    
500,000
    
330,397
    
0.43
  
Common stock
    
1,000,000
    
195,000
    
600,000
    
0.79
  
                           
Tarantella, Inc. - Common stock (2)
    
714,286
   
1,000,000
    
1,200,000
    
1.57
  
                           
ThermoView Industries, Inc. - Common stock
    
234,951
    
563,060
    
122,175
    
0.16
  
                           
Miscellaneous Securities
          
—
    
1,051,436
    
1.38
  
                           
       
$
26,479,347
  
$
59,154,086
    
77.63
%
                         
                         
See accompanying notes
 
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments (continued)
December 31, 2004 and 2003
                   
   
2004
  
           
Fair
  
% of Net
  
   
Shares
  
Cost
  
Value
  
Assets
  
Other Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
                  
                   
AdStar, Inc. - Common stock (2)
    
269,231
  
$
350,000
  
$
293,462
    
0.39
%
                           
Bovie Medical Corporation - Common stock (2)
    
300,000
    
525,000
    
762,000
    
1.00
 
                           
Comtech Group, Inc. - Common stock (2)
    
480,000
    
840,000
    
1,435,200
    
1.88
 
                           
Cybex International - Common stock (2)
    
145,000
    
478,500
    
593,050
    
0.78
  
                           
Dave & Busters, Inc. - Common stock
    
100,000
    
653,259
    
2,020,000
   
2.65
  
                           
iLinc Communications, Inc. (formerly EDT Learning, Inc.) - Common stock
   
48,266
    
27,033
    
22,685
    
0.03
  
                           
Gasco Energy, Inc. - Common stock
    
750,000
   
639,105
    
3,195,000
    
4.19
  
                           
i2 Telecom - Convertible Preferred (2)
   
500
    
500,000
    
500,000
   
0.66
 
                           
Intrusion, Inc. - Common stock (2)
    
159,033
    
500,000
    
500,000
    
0.66
 
                           
Medical Action Industries, Inc. - Common stock
   
20,100
    
237,209
    
395,970
    
0.52
  
                           
PhotoMedex, Inc. - Common stock
   
70,000
    
176,400
    
189,000
    
0.25
  
                         
                         
See accompanying notes
 
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments (continued)
December 31, 2004 and 2003
       
   
2004
  
           
Fair
  
% of Net
  
   
Shares
  
Cost
  
Value
  
Assets
  
Other Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities, continued
                  
                   
Precis, Inc. - Common stock
    
200,700
    
1,372,417
    
533,862
    
0.70
  
                           
Stonepath Group, Inc. - Common stock
   
131,240
    
246,000
    
157,488
    
0.21
  
                           
Tarantella, Inc. - Common stock
    
202,762
    
186,541
    
340,640
    
0.45
  
                           
US Home Systems, Inc. - Common stock
   
110,000
    
535,587
   
676,500
    
0.89
  
                           
Vaso Active Pharmaceuticals, Inc. - Common stock
   
150,000
   
250,000
    
69,000
    
0.09
  
           
7,517,051
    
11,683,857
    
15.33
%
         
$
38,096,398
  
$
76,203,302
    
100.00
%
                           
Allocation of Investments - Restricted Shares,
Unrestricted Shares, and Other Securities
                          
                           
Restricted Securities (2)
        
$
19,542,517
  
$
39,385,196
    
51.69
%
Unrestricted Securities
        
$
10,706,611
  
$
31,564,570
    
41.42
%
Other Securities (5)
        
$
7,847,270
  
$
5,253,536
    
6.89
%
                         
(1)
Valued at fair value as determined by the Investment Adviser (Note 6).
(2)
Restricted securities - securities that are not fully registered and freely tradable.
(3)
Securities in a privately owned company.
(4)
Securities that have no provision allowing conversion into a security for which there is a public market.
(5)
Includes Miscellaneous Securities, securities of privately owned companies, securities with no conversion feature, and securities for which there is no market.
 
See accompanying notes
F-9
 
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments
December 31, 2004 and 2003
       
   
2003
  
   
Interest
  
Due
      
Fair
  
% of Net
  
   
Rate
  
Date
  
Cost
  
Value
  
Assets
  
Eligible Portfolio Investments -
Convertible Debentures and Promissory Notes
                      
                       
Dexterity Surgical, Inc. - Convertible debenture (2)
    
9.00
    
12/19/04
  
$
1,316,282
  
$
375,000
    
0.54
%
                                 
iLinc Communications, Inc. (formerly EDT Learning, Inc.) - Convertible redeemable note (2)
    
12.00
    
03/29/12
    
500,000
    
500,000
    
0.72
  
                                 
Gasco Energy, Inc. - Convertible debenture (2)
    
8.00
    
10/15/08
    
625,000
    
1,333,334
    
1.92
  
                                 
Integrated Security Systems, Inc. -
                                
Promissory notes (4)
    
8.00
    
09/30/04
    
525,000
    
525,000
    
0.76
  
Promissory notes (4)
    
7.00
    
10/01/04
    
200,000
    
200,000
    
0.29
  
                                 
Simtek Corporation - Convertible debenture
    
7.50
    
06/28/09
    
1,000,000
    
3,846,155
    
5.54
  
                                 
               
$
4,166,282
  
$
6,779,489
    
9.77
%
                               
                               
(1)
Valued at fair value as determined by the Investment Adviser (Note 6).
(2)
Restricted securities - securities that are not fully registered and freely tradable.
(3)
Securities in a privately owned company.
(4)
Securities that have no provision allowing conversion into a security for which there is a public market.
(5)
Included Miscellaneous Securities - securities of privately owned companies, securities with no conversion feature, and securities for which there is no market.
 
F-10
 
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments (continued)
December 31, 2004 and 2003
       
   
2003
  
   
Interest
  
Due
      
Fair
  
% of Net
  
   
Rate
  
Date
  
Cost
  
Value
  
Assets
  
Other Portfolio Investments -
Convertible Debentures and Promissory Notes
                      
                       
Interpool, Inc. - Convertible debenture (2)
    
9.25
    
12/27/22
  
$
375,000
  
$
375,000
    
0.54
%
                                 
               
$
375,000
  
$
375,000
    
0.54
%
                                 
 
F-11
 
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments (continued)
December 31, 2004 and 2003
                   
   
2003
  
           
Fair
  
% of Net
  
   
Shares
  
Cost
  
Value
  
Assets
  
Eligible Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
                  
                   
Bentley Pharmaceuticals, Inc. - Common stock
    
63,450
  
$
79,313
  
$
843,885
    
1.22
%
                           
CaminoSoft Corp. -
                          
Common stock
    
1,750,000
    
4,000,000
    
647,500
    
0.93
  
Common stock (2)
    
1,539,414
    
1,150,000
    
569,583
    
0.82
  
Common stock (2)
    
250,000
    
125,000
    
92,500
    
0.13
  
                           
eOriginal, Inc. -
                         
Series A, preferred stock (1)(3)
    
10,680
    
4,692,207
    
770,383
    
1.11
  
Series B, preferred stock (1)(3)
    
25,646
    
620,329
    
1,849,928
    
2.67
  
Series C, preferred stock (1)(3)
    
28,929
    
699,734
    
2,085,893
    
3.01
  
Series New C, preferred stock (1)(3)
    
22,319
    
360,000
    
360,000
    
0.52
  
                           
Fortune Natural Resources Corp. - Common stock
    
1,262,394
    
500,500
    
138,863
    
0.20
  
                           
Gasco Energy, Inc. - Common stock
   
250,000
    
250,000
    
320,000
    
0.46
  
                           
Global Axcess, Inc. - Common stock (2)
    
1,400,000
    
350,000
    
504,000
    
0.73
  
                           
Integrated Security Systems, Inc. -
                          
Common stock (2)
    
24,164,301
    
4,973,166
    
8,940,791
    
12.88
  
Series D, preferred stock (2)
    
187,500
    
150,000
    
83,250
   
0.12
  
 
F-12
 
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments (continued)
December 31, 2004 and 2003
                   
   
2003
  
           
Fair
  
% of Net
  
   
Shares
  
Cost
  
Value
  
Assets
  
Eligible Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities, continued
                  
                   
Inyx, Inc. - Common stock (2)
    
300,000
    
300,000
    
414,000
   
0.60
  
                           
Laserscope - Common stock
    
1,200,000
   
1,500,000
    
18,708,000
    
26.95
  
                           
Poore Brothers, Inc. - Common stock (2)
    
1,686,357
   
1,748,170
    
5,716,750
    
8.24
  
                           
Simtek Corp. -
                          
Common stock
   
1,000,000
    
195,000
    
1,200,000
    
1.73
  
Common stock - pvt placement (2)
    
550,661
    
500,000
   
660,793
   
0.95
  
                           
ThermoView Industries, Inc. - Common stock
   
234,951
    
563,060
    
148,019
    
0.21
  
                           
Miscellaneous Securities
    
 
    
—
    
898,497
    
1.29
  
                           
         
$
22,756,479
  
$
44,952,635
    
64.77
%
 
F-13
 
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments (continued)
December 31, 2004 and 2003
                   
   
2003
  
           
Fair
  
% of Net
  
   
Shares
  
Cost
  
Value
  
Assets
  
Other Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
                  
                   
AdStar, Inc. - Common stock (2)
    
269,231
  
$
350,000
  
$
538,462
    
0.78
%
                           
Blue Rhino Corp. - Common stock
    
40,000
    
476,999
    
555,600
    
0.80
 
                           
Capital Senior Living Corp - Common stock
    
57,100
    
146,335
    
335,748
    
0.48
 
                           
CareerEngine Network, Inc. - Common stock (2)
    
125,000
    
250,000
    
66,250
    
0.10
  
                           
Dave & Busters, Inc. - Common stock
    
100,000
    
653,259
    
1,268,000
   
1.83
  
                           
EDT Learning, Inc. - Common stock
   
48,266
    
27,033
    
43,439
    
0.06
  
                           
Flamel Technologies, Inc. - Common stock
    
50,000
    
360,143
   
1,339,500
    
1.93
  
                           
Franklin Covey - Common stock
   
207,876
   
293,251
    
582,053
   
0.84
  
                           
Gasco Energy, Inc. - Common stock
    
750,000
   
639,105
    
960,000
    
1.38
  
                           
I-Flow Corporation - Common stock
   
50,000
    
117,043
    
696,000
   
1.00
 
                           
Inet Technologies, Inc. - Common stock
   
46,600
    
237,275
    
559,200
    
0.81
 
 
F-14
 
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments (continued)
December 31, 2004 and 2003
       
   
2003
  
           
Fair
  
% of Net
  
   
Shares
  
Cost
  
Value
  
Assets
  
Other Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities, continued
                 
                   
Medical Action Industries, Inc. - Common stock
    
25,000
    
292,329
    
467,750
    
0.67
  
                           
Precis, Inc. - Common stock
    
200,700
    
1,372,417
    
778,716
    
1.12
  
                           
Stonepath Group, Inc. - Common stock
   
281,240
    
448,500
    
635,602
    
0.92
  
                           
US Home Systems, Inc. - Common stock
   
110,000
    
535,587
   
1,221,000
    
1.76
  
                           
Vaso Active Pharmaceuticals, Inc. - Common stock
   
50,000
   
250,000
    
301,500
    
0 .43
  
           
6,449,276
    
10,348,820
    
14.91
%
         
$
33,747,037
  
$
62,455,944
    
89.99
%
                           
Allocation of Investments -
Restricted Shares, Unrestricted Shares,
and Other Securities
                          
                           
Restricted Securities (2)
        
$
12,712,618
  
$
20,169,713
    
29.06
%
Unrestricted Securities
        
$
13,937,149
  
$
35,596,530
    
51.29
%
Other Securities (5)
        
$
7,097,270
  
$
6,689,701
    
9.64
%
                         
(1)
Valued at fair value as determined by the Investment Adviser (Note 6).
(2)
Restricted securities - securities that are not fully registered and freely tradable.
(3)
Securities in a privately owned company.
(4)
Securities that have no provision allowing conversion into a security for which there is a public market.
(5)
Includes Miscellaneous Securities, securities of privately owned companies, securities with no conversion feature, and securities for which there is no market.
 
F-15
 
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Operations
Years ended December 31, 2004, 2003, and 2002
               
   
2004
  
2003
  
2002
  
           
(unaudited
  
           
and restated)
  
Income:
              
Interest (1)
  
$
351,877
  
$
730,710
  
$
473,903
  
Dividends
   
184,522
    
1,225,139
   
70,640
  
Commitment and other fees
    
126,326
    
33,579
    
28,442
  
     
662,725
    
1,989,428
    
572,985
  
                     
Expenses:
                    
General and administrative (2)
    
346,552
    
338,418
    
484,121
  
Incentive fee to affiliate
    
2,497,422
    
1,409,318
    
-
  
Interest expense
    
70,931
    
64,852
    
61,071
  
Legal expense
    
566,133
    
181,420
    
109,927
  
Management fee to affiliate
    
1,460,218
    
1,071,708
    
945,657
  
     
4,941,256
    
3,065,716
    
1,600,776
  
Net investment loss
    
(4,278,531
)
  
(1,076,288
)
  
(1,027,791
)
                     
Realized and unrealized gain (loss) on investments:
                    
Net change in unrealized appreciation (depreciation) on investments
    
9,397,996
    
20,137,393
    
(8,380,055
)
Net realized gain (loss) on investments
   
13,852,016
    
9,680,859
    
(3,429,593
)
Net gain (loss) on investments
    
23,250,012
    
29,818,252
    
(11,809,648
)
                     
Net income (loss)
  
$
18,971,481
  
$
28,741,964
  
$
(12,837,439
)
                     
Net income (loss) per share
 
$
4.36
  
$
6.60
  
$
(2.94
)
                     
Weighted average shares outstanding
    
4,351,718
    
4,351,718
    
4,359,748
  
                   
(1)
Includes $0, $183,254 and $195,330 from affiliate related settlement.
(2)
Includes $176,856, $125,400 and $83,443 expenses to affiliate.
 
F-16
 
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Changes in Net Assets
Years ended December 31, 2004, 2003, and 2002
               
   
2004
  
2003
  
2002
  
           
(unaudited
  
           
and restated)
  
From operations:
             
Net investment loss
  
$
(4,278,531
)
$
(1,076,288
)
$
(1,027,791
)
Net realized gain (loss) on investments
    
13,852,016
    
9,680,859
    
(3,429,593
)
Increase (decrease) in unrealized appreciation on investments
    
9,397,996
    
20,137,393
    
(8,380,055
)
Net increase (decrease) in net assets resulting from operations
    
18,971,481
    
28,741,964
    
(12,837,439
)
                     
From distributions to stockholders:
                   
Common dividends declared from realized gains
    
(13,794,946
)
  
(5,439,648
)
  
—
  
Tax return of capital
   
—
    
—
    
(435,171
)
Net decrease in net assets resulting from distributions
    
(13,794,946
)
  
(5,439,648
)
  
(435,171
)
                     
From capital transactions:
                   
Purchase of treasury stock
    
—
    
—
    
(69,747
)
Net increase (decrease) in net assets resulting from capital transactions
    
—
    
—
    
(69,747
)
                     
Total increase (decrease) in net assets
   
5,176,535
    
23,302,316
    
(13,342,357
)
                     
Net assets:
                    
Beginning of year
    
69,405,964
    
46,103,648
    
59,446,005
  
End of year
  
$
74,582,499
  
$
69,405,964
  
$
46,103,648
  
 
F-17
 
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Cash Flows
Years ended December 31, 2004, 2003, and 2002
               
   
2004
  
2003
  
2002
  
           
(unaudited
  
           
and restated)
  
Cash flows from operating activities:
              
Net income (loss)
 
$
18,971,481
  
$
28,741,964
  
$
(12,837,439
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                    
Net change in unrealized (appreciation) depreciation on investments
    
(9,397,996
)
  
(20,137,393
)
  
8,380,055
  
Net realized (gain) loss on investments
    
(13,852,016
)
  
(9,680,859
)
  
3,429,593
  
(Increase) decrease in interest and dividend receivables
    
137,512
   
(204,792
)
  
61,177
  
(Increase) receivable-settlement
    
—
    
(710,140
)
  
(195,329
)
(Increase) decrease in prepaid and other assets
    
111,932
    
(105,239
)
  
(26,206
)
Increase (decrease) in accounts payable
    
(5,796
)
  
45,167
    
(1,366
)
Increase in accounts payable - affiliate
    
1,994,063
    
1,228,248
    
39,666
  
Increase (decrease) in due to broker
    
998
    
17,999,253
    
(13,195,983
)
Purchase of investments
    
(9,786,957
)
  
(9,062,799
)
  
(6,851,707
)
Proceeds from sale of investments
    
19,289,611
   
17,794,507
    
4,911,282
  
Repayment of debentures
    
—
    
120,457
    
633,250
  
Net cash provided by (used in) operating activities
    
7,462,832
    
26,028,374
    
(15,653,007
)
                     
Cash flows from financing activities:
                    
Purchase of treasury shares
    
—
    
—
    
(69,747
)
Cash distributions
    
(5,439,648
)
  
(1,740,688
)
  
(435,171
)
                     
Net cash used in financing activities
    
(5,439,648
)
  
(1,740,688
)
  
(504,918
)
                     
Net increase (decrease) in cash and cash equivalents
    
2,023,184
    
24,287,686
    
(16,157,925
)
Cash and cash equivalents at beginning of the year
    
35,255,687
    
10,968,001
    
27,125,926
  
Cash and cash equivalents at end of the year
  
$
37,278,871
  
$
35,255,687
  
$
10,968,001
  
                     
Cash paid during the year for interest
  
$
70,931
  
$
64,852
  
$
61,071
  
Cash paid during the year for income/excise taxes
  
$
6,041
  
$
2,019
  
$
1,671
  
 
F-18
 
Renaissance Capital Growth & Income Fund III, Inc.
Notes to Financial Statements
December 2004, 2003 and 2002 (unaudited and restated)
   
   
(1)
Organization and Business Purpose

Renaissance Capital Growth & Income Fund III, Inc. (the “Fund”), a Texas corporation, was formed on January 20, 1994. The Fund seeks to achieve current income and capital appreciation potential by investing primarily in unregistered equity investments and convertible issues of small and medium size companies which are in need of capital and which RENN Capital Group, Inc. (the “Investment Adviser”) believes offers the opportunity for growth. The Fund is a non-diversified closed-end fund and has elected to be treated as a business development company under the Investment Company Act of 1940, as amended (1940 Act).

Unaudited Financial Information and Restatements

The accompanying statements of operations, changes in net assets, and cash flows for the years ended December 31, 2002 are unaudited and restated (See Note 11). These unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles. In the opinion of the Fund’s management, the unaudited financial statements have been prepared on the same basis as the 2004 and 2003 audited financial statements and include all normal recurring adjustments necessary for a fair presentation of the Company’s results of operations and cash flows for the year then ended.

(2)
Summary of Significant Accounting Policies

(a)
Valuation of Investments

Portfolio investments are stated at quoted market or fair value as determined by the Investment Adviser (Note 6). The securities held by the Fund are primarily unregistered and their value does not necessarily represent the amounts that may be realized from their immediate sale or disposition.

(b)
Other

The Fund follows industry practice and records security transactions on the trade date. Dividend income is recorded on the record date. Interest income is recorded as earned on the accrual basis.

(c)
Cash and Cash Equivalents

The Fund considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.
F-19
 
Renaissance Capital Growth & Income Fund III, Inc.
Notes to Financial Statements
December 2004, 2003 and 2002 (unaudited and restated) (continued)
   
   
(2)
Summary of Significant Accounting Policies, continued

(d)
Federal Income Taxes

The Fund has elected the special income tax treatment available to “regulated investment companies” (“RIC”) under Subchapter M of the Internal Revenue Code (IRC) in order to be relieved of federal income tax on that part of its net investment income and realized capital gains that it pays out to its shareholders. The Fund’s policy is to comply with the requirements of the IRC that are applicable to regulated investment companies. Such requirements include, but are not limited to certain qualifying income tests, asset diversification tests and distribution of substantially all of the Fund’s taxable investment income to its shareholders. It is the intent of management to comply with all IRC requirements as they pertain to a RIC and to distribute all of the Fund’s taxable investment income and long-term capital gains within the defined period under the IRC to qualify as a RIC. Failure to qualify as a RIC would subject the Fund to federal income tax as if the Fund were an ordinary corporation, which could result in a substantial reduction in the Fund’s net assets as well as the amount of income available for distribution to shareholders.

(e)
Net income per share

Net income per share is based on the weighted average number of shares outstanding of 4,351,718 during 2004, 4,351,718 during 2003, and 4,359,748 during 2002.

(f)
Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions as to the valuation of investments that effect the amounts and disclosures in the financial statements. Actual results could differ from these estimates.

(g)
Reclassifications
 
Certain reclassifications have been made to the 2002 financial statements in order for them to be in conformity with the 2004 presentation.
F-20
 
Renaissance Capital Growth & Income Fund III, Inc.
Notes to Financial Statements
December 2004, 2003 and 2002 (unaudited and restated) (continued)
   
   
(3)
Due to Broker

The Fund conducts business with various brokers for its investment activities. The clearing and depository operations for the investment activities are performed pursuant to agreements with these brokers. Due to broker represents a margin loan payable to one of these brokers, which is secured by investments in securities maintained with the lending broker as collateral for the margin loan. Cash and cash equivalents related to the margin loan payable are held by the lending broker. The Fund is subject to credit risk to the extent the brokers are unable to deliver cash balances or securities, or clear security transactions on the Fund’s behalf. The Investment Adviser actively monitors the Fund’s exposure to these brokers and believes the likelihood of loss under those circumstances is remote.

(4)
Management and Incentive Fees and Reimbursement

The Investment Adviser for the Fund is registered as an investment adviser under the Investment Advisers Act of 1940. Pursuant to an Advisory Agreement (the “Agreement”), the Investment Adviser performs certain services, including certain management, investment advisory and administrative services necessary for the operation of the Fund. In addition, under the Agreement, the Investment Adviser is reimbursed by the Fund for certain directly allocable administrative expenses. A summary of fees and reimbursements paid by the Fund under the Agreement, the prospectus and the original offering document are as follows:

 
•
The Investment Adviser receives a management fee equal to a quarterly rate of 0.4375% of the Fund’s Net Assets, as determined at the end of such quarter with each such payment to be due as of the last day of the calendar quarter. The Fund incurred $1,460,218, $1,071,708, and $945,657 for 2004, 2003, and 2002, respectively, for such management fees.

 
•
The Investment Adviser receives an incentive fee in an amount equal to 20% of the Fund’s cumulative realized capital gains in excess of cumulative realized capital losses of the Fund after allowance for any unrealized capital depreciation on the portfolio investments of the Fund at the end of the period being calculated less cumulative incentive fees previously accrued. Unrealized capital depreciation equals net unrealized capital losses on each class of security without netting net unrealized gains on other classes of securities. The incentive fee is calculated, accrued, and paid on an annual basis as of year end. The Fund incurred $2,497,422, $1,409,318 and $0 during the years ended 2004, 2003, and 2002, respectively, for such incentive fees.
 
F-21
 
Renaissance Capital Growth & Income Fund III, Inc.
Notes to Financial Statements
December 2004, 2003 and 2002 (unaudited and restated) (continued)
   
   
(4)
Management and Incentive Fees and Reimbursement, continued

 
•
The Investment Adviser was reimbursed by the Fund for directly allocable administrative expenses paid by the Investment Adviser on behalf of the Fund. Such reimbursements were $176,856, $125,400, and $83,443, for 2004, 2003, and 2002, respectively, and are included in general and administrative expenses in the accompanying statements of operations.

As of December 31, 2004 and 2003, the Fund had an account payable to the Investment Advisor of $3,697,461 and $1,703,398, respectively, for the amount due for the fees and expense reimbursements above.
 
 
•
As explained in Note 10, the Investment Advisor resolved a dispute with the staff of the Securities and Exchange Commission involving the appropriate interpretation of section 205(b)(3) of the Advisors Act. As part of the settlement, the Investment Advisor agreed to pay $2,851,362 as a reduction of incentive fees for the period from inception through December 31, 2003. The actual incentive fee that would have been calculated under the agreed methodology for incentive fee from inception through December 31, 2003, was $3,388,269. The difference of $536,907 was reflected as additional incentive fee expense of $488,087 and $48,819 in 2003 and 2001, respectively. Because of the cumulative nature of the agreed methodology, the $536,907 served to reduce 2004 incentive fees. In accordance with Section 205(b)(3), the fees are not subject to repayment in a subsequent period and therefore were recorded as additional expense during 2003 and 2001 due to the uncertainty of incurring future incentive fees to be offset.

The Fund reported a receivable of $3,775,872 as of December 31, 2004 and 2003 to reflect the settlement which included interest income receivable of $924,510, of which $0, $183,254 and $195,330 was reflected as income during 2004, 2003, and 2002, respectively.
F-22
 
Renaissance Capital Growth & Income Fund III, Inc.
Notes to Financial Statements
December 2004, 2003 and 2002 (unaudited and restated) (continued)
   
   
(5)
Eligible Portfolio Companies and Investments

 
(a)
Eligible Portfolio Companies 

The Fund invests primarily in convertible securities and equity investments of companies that qualify as Eligible Portfolio Companies as defined in Section 2(a)(46) of the 1940 Act or in securities that otherwise qualify for investment as permitted in Section 55(a)(1) through (5). Under the provisions of the 1940 Act at least 70% of the Fund’s assets, as defined under the 1940 Act, must be invested in Eligible Portfolio Companies. In the event the Fund has less than 70% of its assets invested in Eligible Portfolio Investments, then it will be prohibited from making non-eligible investments until such time as the percentage of eligible investments again exceeds the 70% threshold. The Fund was in compliance with these provisions at December 31, 2004 and 2003.

(b)
Investments

Investments are carried in the statements of assets and liabilities at fair value, as determined in good faith by the Investment Adviser, subject to the approval of the Fund’s Board of Directors. The convertible debt securities held by the Fund generally have maturities between five and seven years and are convertible into the common stock of the issuer at a set conversion price at the discretion of the Fund. The common stock underlying these securities is generally unregistered and thinly to moderately traded but is not otherwise restricted. The Fund may register and sell such securities at any time with the Fund paying the costs of registration. Interest on the convertible securities is generally payable monthly.

The convertible debt securities generally contain embedded call options giving the issuer the right to call the underlying issue. In these instances, the Fund has the right of redemption or conversion. The embedded call option will generally not vest until certain conditions are achieved by the issuer. Such conditions may require that minimum thresholds be met relating to underlying market prices, liquidity, and other factors.

(6)
Valuation of Investments

On a quarterly basis, the Investment Adviser prepares a valuation of the assets of the Fund subject to the approval of the Fund’s Board of Directors. The valuation principles are as follows:
 
o    
The common stock of companies listed on an exchange, Nasdaq or in the over-the-counter market is valued at the closing price on the date of valuation.
 
F-23
 
Renaissance Capital Growth & Income Fund III, Inc.
Notes to Financial Statements
December 2004, 2003 and 2002 (unaudited and restated) (continued)
   
   
(6)
Valuation of Investments, continued

o    
The unlisted preferred stock of companies with common stock listed on an exchange, Nasdaq or in the over-the-counter market is valued at the closing price of the common stock into which the preferred stock is convertible on the date of valuation. If the preferred stock is redeemable, the preferred stock is valued at the greater of cost or market.

o    
The unlisted in-the-money options or warrants of companies with the underlying common stock listed on an exchange, Nasdaq or in the over-the-counter market are valued at the positive difference between the closing price of the underlying common stock and the strike price of the warrant or option. An out-of-the money warrant or option has no intrinsic value; thus, we assign no value to it.

o    
Debt securities are valued at the greater of (i) cost or (ii) the market value of the underlying common stock into which the debt instrument is convertible. In cases where the debt instrument is in default or the company is in bankruptcy, the value will be (i) the value of the underlying common stock, (ii) the value of the collateral, if secured, or (iii) zero, if the common stock has no value and there is no collateral.

o    
If there is no independent and objective pricing authority (i.e. a public market) for investments in privately held entities, the latest sale of equity securities to independent third parties by the entity governs the value of that enterprise. This valuation method causes the Fund’s initial investment in the private entity to be valued at cost. Thereafter, new issuances or offers of equity or equity-linked securities by the portfolio company to new investors will be used to determine enterprise value as they will provide the most objective and independent basis for determining the worth of the issuer. Where a private entity does not have an independent value established over an extended period of time, then the Investment Adviser will determine fair value on the basis of appraisal procedures established in good faith and approved by the Board.

As of December 31, 2004 and 2003, the net unrealized appreciation associated with investments held by the Fund was $38,106,903 and $28,708,907, respectively. As of December 31, 2004, the Fund had gross unrealized gains of $47,453,782 and gross unrealized losses of ($9,346,879). As of December 31, 2003, the Fund had gross unrealized gains of $39,158,308 and gross unrealized losses of ($10,449,401).
F-24
 
Renaissance Capital Growth & Income Fund III, Inc.
Notes to Financial Statements
December 2004, 2003 and 2002 (unaudited and restated) (continued)
   
   
(7)
Restricted Securities

As indicated on the schedule of investments as of December 31, 2004 and 2003, the Fund holds investments in shares of common stock, the sale of which is restricted. These securities have been valued by the Investment Adviser after considering certain pertinent factors relevant to the individual securities (Note 6).

(8)
Purchase of Additional Shares

The Fund issued no shares in 2004 or 2003 under the dividend reinvestment plan.

(9)
Distributions to Shareholders

The tax character of distributions declared by the Fund was as follows:

2004 - Capital gain
  
$
13,794,946
  
         
2003 - Capital gain
  
$
5,439,648
  
         
2002 - Tax return of capital
 
$
435,171
  

As of December 31, 2004 and 2003, the Fund was committed to disburse to stockholders $7,042 and $811,618 as a distribution of net capital gains realized during 2004 and 2003, respectively. These dividends were declared and paid in February 2005 and February and May 2004, respectively. The tax cost of securities is identical to the book cost.

(10)
Settlement with the Investment Advisor

During 2004, the staff of the Securities and Exchange Commission (“SEC”) informed the Fund’s counsel of potential significant regulatory issues in connection with the Staff’s review of a registration statement for a proposed rights offering. On December 1, 2005, the Investment Adviser consented, without admitting or denying the findings, to the entry of an order by the SEC instituting public administrative and cease and desist proceedings and imposing remedial sanctions (the “Order”).
F-25
 
Renaissance Capital Growth & Income Fund III, Inc.
Notes to Financial Statements
December 2004, 2003 and 2002 (unaudited and restated) (continued)
   
   
(10)
Settlement with the Investment Advisor, continued

In summary, the dispute concerned the definition of the wording of the incentive fee calculation in the Investment Advisor’s Act of 1940 (“the Advisers Act”). Under Section 205(b)(3) of the Advisers Act, a performance fee may be earned. The Investment Adviser, for many years, believed the word “capital” referred to the Fund’s shareholders equity as a whole. In 2004, the SEC informed the Investment Adviser that capital depreciation in the formula referred only to unrealized capital losses on marketable securities in the portfolio and therefore the calculations in previous years were incorrect. In the Order, the SEC states that in calculating a performance-based fee under Section 205(b)(3), an Investment Adviser must account for its client’s assets on a security-by-security basis and may not take into consideration unrealized capital appreciation on any individual security or the portfolio as a whole. Section 205(b)(3) does not require that fees earned in one period be subject to repayment based upon performance in a subsequent period. If the performance fee is calculated on a cumulative basis and is based on the period since inception, the unrealized capital depreciation may be calculated for each calculation period by subtracting each security’s valuation at the end of the applicable calculation period from the original cost, as adjusted, of purchasing that security. In practice, the Investment Adviser also took into account unrealized capital appreciation, which offset unrealized capital depreciation, to calculate its performance-based fee. Thus, beginning in fiscal year 1996, the first period in which the Fund realized capital gains, the Investment Adviser’s formula for calculating that fee was not consistent with the agreed formula permitted under Section 205(b)(3).

As part of the settlement of the SEC proceedings, the Investment Adviser agreed to pay $2,851,362 for adjustments in the incentive fee from the inception through December 31, 2003, plus prejudgment interest of $924,509 and a penalty of $100,000 to the Fund.

The Investment Adviser satisfied this obligation in full as of December 8, 2005.

(11)
Restatements

Subsequent to previous issuance of financial statements for 2002, the Investment Advisor determined that the method used in valuing certain unregistered securities was inappropriate based upon changes in SEC guidelines. For this reason the unrealized gains on those securities was decreased by $174,422 for 2002.

 
Because of the changes in the Fund’s net assets resulting from the settlement with the SEC as disclosed herein and the revaluation of investments as disclosed above, the Fund recomputed the management fee explained in Note 4 resulting in an increase in management fees of $84,823 for 2003.
 
F-26
 
Renaissance Capital Growth & Income Fund III, Inc.
Notes to Financial Statements
December 2004, 2003 and 2002 (unaudited and restated) (continued)
   
   
(11)
Restatements, continued

The effect of the SEC settlement disclosed herein, was reflected as a prior period adjustment. As such the effect of the adjustments in incentive fees were reported in prior years as though the agreed methodology had been in place since inception. Interest received by the Fund upon settlement was allocated to the years in which it was earned. The penalty received upon settlement was reflected in the year settlement was reached (2005).

The Fund reflected these adjustments retrospectively for 2002 as follows:

   
2002
  
       
Net loss as originally reported
 
$
(12,773,524
)
         
Increase in interest income
    
195,330
  
         
Decrease in net change in unrealized appreciation (depreciation) on investments
    
(174,422
)
         
Increase in management fees
    
(84,823
)
         
Net loss as restated
  
$
(12,837,439
)
         
Earnings per share for 2002 was adjusted as follows:
        
         
As previously reported
  
$
(2.93
)
Adjustment
    
(.01
)
As restated
  
$
(2.94
)
 
F-27
 
Renaissance Capital Growth & Income Fund III, Inc.
Notes to Financial Statements
December 2004, 2003 and 2002 (unaudited and restated) (continued)
   
   
(12)
Commitments and Contingencies

As disclosed in Note 4, the Fund is obligated to pay to the Investment Advisor an incentive fee equal to 20% of the funds cumulative realized capital gains in excess of cumulative capital losses of the Fund after allowance for any capital depreciation on the portfolio investments of the Fund. As incentive fees on capital gains are not due to the Investment Advisor until the capital gains are realized, any obligations for incentive fees based on unrealized capital gains are not reflected in the accompanying financial statements as there is no assurance that the unrealized gains as of the end of any period will ultimately become realized. Had an incentive fee been accrued as a liability based on all unrealized capital gains, net assets of the Fund would have been reduced by $9,490,756 and $7,831,661 as of December 31, 2004 and 2003, respectively.

(13)
Financial Highlights

Selected per share data and ratios for each share of common stock outstanding throughout the year ended December 31, 2004, and December 31, 2003 are as follows:

   
2004
  
2003
  
Net asset value, beginning of year
 
$
15.95
  
$
10.59
  
               
Net investment loss
    
(.98
)
  
(.24
)
Net realized and unrealized gain (loss) on investments
    
5.34
    
6.85
  
Total return from investment operations
    
4.36
    
6.61
  
               
Distributions:
              
From net capital gains
    
(3.17
)
  
(1.25
)
Net asset value, end of year
  
$
17.14
  
$
15.95
  
               
Per share market value, end of year
  
$
12.95
  
$
13.39
  
               
Portfolio turnover rate
    
14.58
%
  
18.10
%
               
Annual return (a)
    
(3.29
%)
  
70.36
%
               
Ratio to average net assets (b):
              
Net investment loss
    
(5.52
%)
  
(1.92
%)
Expenses, excluding incentive fees
    
3.15
%
  
2.95
%
Expenses, including incentive fees
    
6.37
%
  
5.47
%

 
(a)
Annual return was calculated by comparing the common stock price on the first day of the year to the common stock price on the last day of the year.
  (b) Average net assets have been computed based on quarterly valuation
 
 

(14)     Selected Quarterly Data (Unaudited)

2004
  
   
1st Quarter
  
2nd Quarter
  
3rd Quarter
  
4th Quarter
  
Net investment loss
    
(527,546
)
  
(570,707
)
  
(373,977
)
  
(2,806,301
)
Net unrealized appreciation (depreciation)
    
10,292,651
    
(11,580,931
)
  
(6,313,300
)
  
16,999,576
  
Net realized gain (loss) on investments
    
14,163,079
    
(1,462,277
)
  
258,022
    
893,192
  
Net income (loss)
    
23,928,184
    
(13,613,915
)
  
(6,429,255
)
  
15,086,467
  
Net income (loss) per share
    
5.50
    
(3.13
)
  
(1.48
)
  
3.47
  
Total shares outstanding
    
4,351,718
    
4,351,718
    
4,351,718
    
4,351,718
  


2003
  
   
1st Quarter
  
2nd Quarter
  
3rd Quarter
  
4th Quarter
  
Net investment income (loss)
    
1,090,632
    
(221,694
)
  
(240,159
)
  
(1,705,067
)
Net unrealized appreciation (depreciation)
    
(7,408,956
)
  
15,040,741
    
11,978,390
    
527,218
  
Net realized gain on investments
    
830,815
    
150,484
    
3,974,597
    
4,724,963
  
Net income (loss)
    
(5,487,507
)
  
14,969,530
    
15,712,827
    
3,547,114
  
Net income (loss) per share
    
(1.26
)
  
3.44
    
3.61
    
0.81
  
Total shares outstanding
    
4,351,718
    
4,351,718
    
4,351,718
    
4,351,718
  
 
 
F-29
 
INDEX OF EXHIBITS
 
3.1
Restated Articles of Incorporation1 

3.2
Bylaws2

10.1
Dividend Reinvestment Plan3 

10.2
Amendment No. 1 to Dividend Reinvestment Plan4 

10.3
Investment Advisory Agreement5 

10.4
Amendment No. 1 to Investment Advisory Agreement6 

10.5
Custodial Agreement with The Frost National Bank7 

14
Code of Ethics8 

31.1
Certification of the principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2
Certification of the principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1
Certification of the principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2
Certification principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
1
Incorporated by reference from Form N-2 as filed with the Securities and Exchange Commission February 25, 1994 (Registration No. 33-75758).
 
2
Incorporated by reference from Form N-2 as filed with the Securities and Exchange Commission February 25, 1994 (Registration No. 33-75758).
 
3
Incorporated by reference from Form N-2 as filed with the Securities and Exchange Commission February 25, 1994 (Registration No. 33-75758).
 
4
Incorporated by reference from Form N-2 as filed with the Securities and Exchange Commission February 25, 1994 (Registration No. 33-75758).
 
5
Incorporated by reference from Form N-2 as filed with the Securities and Exchange Commission February 25, 1994 (Registration No. 33-75758).
 
6
Incorporated by reference from Form 10-K for the year ended December 31, 1999 as filed with the Securities and Exchange Commission (File No. 001-11701).
 
7
Incorporated by reference from Form 10-K for the year ended December 31, 2000 as filed with the Securities and Exchange Commission (File No. 001-11701).
 
8
Incorporated by reference from Form 10-Q for the quarter ended June 30, 2002 as filed with the Securities and Exchange Commission (File No. 001-11701).