##### Table of Contents



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



|                                            |                                  
|------------------------------------------- | ---------------------------------
|For the Fiscal Year Ended December 31, 2003 | Commission File Number: 814-00127

BRANTLEY CAPITAL CORPORATION

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                     
|------------------------------------------------------------------ |  | ------------------------------------
|Maryland                                                           |  | 34-1838462                          
|                                                                   |  |                                     
|(State or other Jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer Identification No.)

3201 Enterprise Parkway, Suite 350,
Cleveland, Ohio 44122

(Address of principal executive offices
including zip code)


(216) 464-8400

(Registrants telephone number including
area code)


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

None


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

Common Stock, $.01 par value


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.
YesxNoo

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

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Act  YesoNo x

The aggregate market value of the voting stock
held by non-affiliates of the registrant as of June 30,
2003 was $27,852,177, based on the last sale price of such stock
as quoted by the NASDAQ National Market System on such date
(officers, directors and 5% shareholders are considered
affiliates for purposes of this calculation).

The number of shares of common stock outstanding
as of March 30, 2004 was 3,810,535.



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TABLE OF CONTENTS

|                               |  |                                                                                                        |    |                                              |    |  |    | 
|------------------------------ |  | ------------------------------------------------------------------------------------------------------ | -- | -------------------------------------------- | -- |  | -- | 
|                               |  |                                                                                                        |    | Page                                        
|                               |  |                                                                                                        |    |                                             
|                               |  |                                                                                                        |    |                                              |    |  |    | 
|PART I                        
|Item 1.                        |  | Business                                                                                               |    |                                              | 1  | 
|Item 2.                        |  | Properties                                                                                             |    |                                              | 16 | 
|Item 3.                        |  | Legal Proceedings                                                                                      |    |                                              | 16 | 
|Item 4.                        |  | Submission of Matters to a
    Vote of Security Holders                                                |    |                                              | 18 | 
|PART II                       
|Item 5.                        |  | Market for Registrants
    Common Equity and Related Stockholder Matters                              |    |                                              | 19 | 
|Item 6.                        |  | Selected Financial Data                                                                                |    |                                              | 20 | 
|Item 7.                        |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations              |    |                                              | 20 | 
|Item 7A.                       |  | Quantitative and Qualitative
    Disclosures about Market Risk                                         |    |                                              | 30 | 
|Item 8.                        |  | Financial Statements                                                                                   |    |                                              | 31 | 
|                               |  |                                                                                                        |    | BALANCE SHEETS                               |    |  | 31 | 
|                               |  |                                                                                                        |    | STATEMENTS OF OPERATIONS                     |    |  | 32 | 
|                               |  |                                                                                                        |    | STATEMENTS OF CHANGES IN NET
    ASSETS      |    |  | 33 | 
|                               |  |                                                                                                        |    | STATEMENTS OF CASH FLOWS                     |    |  | 34 | 
|                               |  |                                                                                                        |    | STATEMENT OF INVESTMENTS                     |    |  | 35 | 
|                               |  |                                                                                                        |    | NOTES TO THE FINANCIAL
    STATEMENTS        |    |  | 36 | 
|                               |  |                                                                                                        |    | INDEPENDENT AUDITORS
    REPORT             |    |  | 43 | 
|                               |  |                                                                                                        |    | REPORT OF INDEPENDENT PUBLIC
    ACCOUNTANTS |    |  | 44 | 
|Item 9.                        |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure               |    |                                              | 45 | 
|Item 9A.                       |  | Controls and Procedures                                                                                |    |                                              | 45 | 
|PART III                      
|Item 10.                       |  | Directors and Executive
    Officers of the Registrant                                                 |    |                                              | 46 | 
|Item 11.                       |  | Executive Compensation                                                                                 |    |                                              | 46 | 
|Item 12.                       |  | Security Ownership of
    Certain Beneficial Owners and Management and related stockholder
    matters |    |                                              | 46 | 
|Item 13.                       |  | Certain Relationships and
    Related Transactions                                                     |    |                                              | 46 | 
|Item 14.                       |  | Principal Accounting Fees
    and Services                                                             |    |                                              | 48 | 
|PART IV                       
|Item 15.                       |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                                   |    |                                              | 49 | 
|SIGNATURES                     |  |                                                                                                        | 50 |                                             
|EXHIBIT INDEX                  |  |                                                                                                        | 51 |                                             
|                              
|Exhibit 23.1                   |  | Consent of KPMG LLP                                                                                    |    |                                              | 52 | 
|EX-23(1) Consent of KPMG      
|EX-31(1) 302 CEO Certification
|EX-31(2) 302 CFO Certification
|EX-32(1) 906 CEO Certification
|EX-32(2) 906 CFO Certification



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##### Table of Contents






PART I




Item 1. Business

We are a non-diversified investment company
incorporated on August 1, 1996 under the General
Corporation Law of the State of Maryland that has elected to be
regulated as a business development company under the Investment
Company Act of 1940. Our investment objective is to achieve
long-term capital appreciation in the value of our investments
and to provide current income primarily from interest, dividends
and fees paid by our portfolio companies.

We have provided equity and long-term debt
financing to small and medium-sized companies in a variety of
industries throughout the United States. Our portfolio currently
consists primarily of private equity securities and, to a lesser
extent, mezzanine investments primarily in the form of
subordinated debt with warrants. As of December 31, 2003,
our portfolio was composed of the following investments:

|                                |  |      |            |            |  |         |            |  |  |  |     |  
|------------------------------- |  | ---- | ---------- | ---------- |  | ------- | ---------- |  |  |  | --- | -
|                                |  | Cost |            | Fair Value |  | Percent
|                                |  |      |            |            |  |        
|Private Equity Securities(1)    |  | $    | 19,075,503 |            |  | $       | 55,011,012 |  |  |  | 91  | %
|Private Mezzanine Securities(2) |  | $    | 6,106,651  |            |  | $       | 5,379,392  |  |  |  | 9   | %
|                                |  |      |            |            |  |         |            |  |  |  |     |  
|Total                           |  | $    | 25,182,154 |            |  | $       | 60,390,404 |  |  |  | 100 | %
|                                |  |      |            |            |  |         |            |  |  |  |     |  



---



|    |                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Our private equity securities typically consist
    of preferred stock.                                                                                                                                                                                                                                                                   
|   
|(2) | All of our other current investments, including
    demand notes, subordinated notes and promissory notes are
    considered mezzanine investments, although such investments are
    often accompanied by warrants to purchase common stock. These
    mezzanine investments are sometimes referred to as
    equity-linked securities.

Historically, we have focused our investing
activities on private equity securities intended to provide
long-term capital appreciation. Currently we have a total of
$25.2 million invested in 11 private companies. At
December 31, 2003, these investments had a stated fair
value of $60.4 million, a 140% increase over our original
cost. Our investing activity has resulted in inception to date
dividends of $2.09 per share and an increase in our net asset
value per share to $17.34 as of December 31, 2003. The
ending net asset value per share and our cumulative dividends
paid per share representing a 94% appreciation since we began
operations.

We periodically evaluate potential acquisitions,
financing transactions, initial public offerings, strategic
alliances, and sale opportunities involving our private
portfolio companies. These transactions and activities are
generally not disclosed to our stockholders and the investing
public until such time as the transactions are publicly
announced or completed, as the case may be. Any such pending
transaction could have an impact on the value of an investment,
which is also generally not adjusted until the transaction is
publicly announced or completed.

The following table presents the fair value at
December 31, 2003 of each investment that represented more
than 5% of our total assets as of such date:

|                                     |  |            |            |              |  |  |    |  
|------------------------------------ |  | ---------- | ---------- | ------------ |  |  | -- | -
|                                     |  |            |            | Percent of  
|                                     |  | Fair Value |            | Total Assets
|                                     |  |            |            |             
|Flight Options International, Inc.   |  | $          | 32,500,000 |              |  |  | 42 | %
|Fitness Quest, Inc.                  |  | $          | 11,186,539 |              |  |  | 15 | %
|Integrated Physician Solutions, Inc. |  | $          | 3,864,348  |              |  |  | 5  | %

For a discussion of such investments, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Financial
Condition, Liquidity and Capital Resources.

On March 19, 2003, the Company entered into
a Memorandum of Understanding with Phillip Goldstein, a director
of the Company, pursuant to which Mr. Goldstein agreed to
dismiss the lawsuit he filed against the Company in September
2002, subject to compliance with the Investment Company Act of
1940. The Court approved the proposed settlement on February 26,
2004.

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On June 4, 2003, the Company filed an
application for exemptive relief from certain provisions of the
1940 Act in order to effect the provisions of the Memorandum of
Understanding. On June 18, 2003, the Company received
comments on its application from the staff of the Division of
Investment Management of the Securities and Exchange Commission.
On August 14, 2003 the Company responded to those comments.
With such response, the Company proposed a new Memorandum of
Understanding that was submitted to the staff of the Division of
Investment Management. On November 12, 2003, the Company
received comments regarding its August 14, 2003 response.
The Company responded to such comments on December 18,
2003. On February 11, 2004, the staff of the Division of
Investment Management requested a response from the Board of
Directors, which the Board provided on February 15, 2004.
The Company continues to discuss this matter with the staff of
the Division of Investment Management.

The Memorandum of Understanding is subject to
approval by the stockholders, and the receipt of exemptive
relief from the SEC. There can be no assurance that this
exemptive relief will be granted.

Pursuant to the proposed Memorandum of
Understanding the Company would agree, among other things:



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | to cause there to be four (4) directors who
    are not interested persons as defined under the 1940
    Act and cause the board to be exactly seven (7) directors in
    total;                     
|
| |  | if Mr. Goldstein or Gerald Hellerman is no
    longer a director of the Company then whichever of
    Mr. Goldstein or Mr. Hellerman remains on the board
    shall have the right to select a nominee;
|
| |  | to not convert the Company from being an advised
    fund to an internally managed fund unless a majority of the
    independent directors agree;                                                      
|
| |  | to allow any independent director to request
    independent counsel, subject to the approval of the board, which
    cannot be unreasonably withheld; and                                             
|
| |  | to refrain from making defamatory remarks about
    any party to the agreement.                                                                                                                        

In addition, the proposed Memorandum of
Understanding provides that at the next Annual Meeting of
Stockholders:



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Company would ask shareholders to approve a
    plan of orderly disposition of the assets of the Company or a
    sale of the assets with the goal of prompt cash distribution to
    shareholders;
|
| |  | the Company would ask shareholders to approve a
    new investment advisory agreement pursuant to which,
    prospectively:                                                                            



| |   |                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the advisors fees would be reduced from
    2.85% to 2.5% of our net asset value;                                                                                                                                                                         
|
| |  | all stock options would be forfeited and
    cancelled; and                                                                                                                                                                                                
|
| |  | the advisor would be entitled to receive a fee
    equal to 20% of the aggregate distributions made by the Company
    in excess of $10.00 per share; however, none of the amount would
    be paid until aggregate distributions totaled $12.50 per share.

The proposed Memorandum of Understanding also
includes provisions that would require the parties to take all
steps necessary to accomplish the goals of the Memorandum,
including voting their shares in favor of the proposals. Under
the proposed memorandum, the Company would also be required to
reimburse Mr. Goldstein for certain expenses (not to exceed
$275,000) incurred in connection with the proxy solicitation and
litigation related to the Annual Meeting of Stockholders on
September 17, 2002. Mr. Goldstein would also agree not
to engage in, lead or fund a proxy contest while the agreement
is in effect. The term of the new proposed Memorandum of
Understanding would run until December 31, 2006.

2



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Investments in Private Companies

We have provided equity and long-term debt
financing to private companies. We have sought to invest in
established companies that generally:



| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | have annual revenues of $25 million or
    greater;                               
|
| |  | operate in stable industries;                                                     
|
| |  | have demonstrated favorable financial performance
    for at least five years; and
|
| |  | have an experienced management team.                                              

We generally have not targeted companies in
industries where businesses tend to be particularly vulnerable
to changes in economic cycles, are capital intensive, or are
highly leveraged. Our private financing has been generally used
to fund internal growth, buyouts, acquisitions and
recapitalizations.

Our investment adviser has sourced and originated
our investment opportunities, thereby avoiding auctions, which
we believe affords us better investment terms, enhances our
investment returns, and heightens the probability of
successfully completing a greater percentage of our targeted
transactions.

We have an extensive network of potential
investment sources. We estimate that we have historically funded
approximately 1% of all the private investment opportunities
that our investment adviser reviews on our behalf. When
assessing a prospective investment, we generally look for a
company that has achieved, or has the potential to achieve,
market leadership, critical mass, and sustainable cash flow.

We function as a partner in the growth of our
private portfolio companies, rather than merely as a financial
participant. We provide managerial assistance to our private
companies through board representation and otherwise. Our
representatives generally have one or two board seats on each of
our private companies. We expect that our representatives will
play a role in setting corporate strategies and advising our
private portfolio companies regarding important decisions
affecting their businesses, including:



| |   |                                        
| | - | ---------------------------------------
| |  | analyzing potential acquisitions;      
|
| |  | recruiting key managers;               
|
| |  | securing equity and debt financing; and
|
| |  | evaluating strategic opportunities.    

We historically have sought to enable our
stockholders to participate in investments not typically
available to the public due to the private nature of a
substantial majority of our portfolio companies, the size of the
financial commitment often required in order to participate in
such investments, and/or the experience, skill and time
commitment required to identify and take advantage of these
investment opportunities.

Private
Equity Investments

With respect to our private equity investments,
we have principally focused on companies that demonstrate strong
internal growth dynamics that we consider to be good candidates
to achieve growth through selective acquisitions. We have also
favored equity investments in private companies that we believe
can achieve the necessary size, profitability, management depth
and sophistication to become public companies or candidates for
acquisition.

Our private equity investments have typically
ranged in size from $1 million to $5 million. We generally
structure our private equity investments as participating
preferred stock with an 8% to 10% dividend yield that
accumulates and is paid upon a liquidity event. We generally
expect our private equity investments to achieve liquidity
within three to five years from their respective origination
dates, although there can be no assurance that such a time frame
will be met, and situations may arise in which we hold
securities for a significantly longer period of time.

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Mezzanine
Investments

To date our equity-linked investments have been
in the form of mezzanine debt with an equity kicker
such as a warrant. Our existing mezzanine investments are
generally subordinated notes, ranging in size from
$1 million to $3 million with a fixed interest rate of
approximately 12% and maturities of five to seven years.
Currently, mezzanine investments represent 9% of our investment
portfolio.

With respect to our mezzanine investments, we
have focused on private companies that have demonstrated
predictable and sustainable cash flows from operations, strong
tangible assets, reasonable financial leverage relative to cash
flows from operations, and reasonable prospects to retire at
least 50% of their senior indebtedness within three years of our
investment.

The opportunity to liquidate the equity ownership
attributable to our mezzanine investments and to realize a gain
may occur if the business completes a recapitalization of its
equity, either through a sale to new owners, a public offering
of its equity, or if we exercise our contractual right, referred
to as a put right, to require the portfolio company
to purchase the warrants or options held by us at a
predetermined put price. The put price of the put right is
determined at the time of the original investment and is
structured to provide our target return.

Small-Capitalization Public Stock
Investments

From our inception through September 2002, we
invested a portion of our assets in small-capitalization public
companies. With respect to our investments in
small-capitalization public companies, our primary focus was on
companies that our investment adviser believed had significant
potential for growth in sales and earnings. We considered a
small-capitalization company to be a company that
has a market capitalization under $1.5 billion.

As the Companys assets became more fully
invested, we made the decision to dedicate the remaining
available capital to our private company investment activities.
As a result, we liquidated our small-capitalization public stock
portfolio in the third quarter of 2002.

Investment Sourcing

We have enjoyed significant deal sourcing
benefits from relationships that the principals of our
investment adviser have developed over the years. These
individuals have, collectively, in excess of 60 years of
private company investment experience including financings
involving private equity securities and mezzanine investments,
have invested in over 100 private companies and currently manage
approximately $250 million in assets. As such, they have
established an extensive network of investment referral
relationships. Our investment adviser reviews approximately 800
investment opportunities annually for private investment funds
that it manages.

We have also worked with numerous other
intermediaries to source new investment opportunities,
including, but not limited to:



| |   |                                        
| | - | ---------------------------------------
| |  | Private mezzanine and equity investors;
|
| |  | Banks, law firms, and accountants;     
|
| |  | Investment bankers;                    
|
| |  | Business brokers; and                  
|
| |  | Industry organizations.                

Selection of Investments and Underwriting
Process

Most of our investments are in small to
medium-sized companies with annual sales of under
$500 million. The main criteria for the selection of our
investments in portfolio companies has remained consistent since
we began operations. We have sought to identify platform
companies which we believe have significant opportunities in the
markets they serve or have devised innovative products, services
or ways of doing business that afford them a distinct
competitive advantage. Such companies might achieve growth
either internally or by acquisition.

4



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##### Table of Contents



In evaluating potential portfolio companies, we
have paid particular attention to the following characteristics:

Management.We have sought investments in
companies whose management team consists of talented individuals
of high integrity with significant experience. We pay particular
attention to the depth of the management team and the extent to
which key managers have an ownership interest in the company.

Opportunity for Significant Influence.We have favored investments in
companies in which we have had the opportunity to become a
partner in the building of the business, rather than being
merely a financial participant. In addition, we pursued
companies in which our representatives play a role in setting
corporate strategies and providing advice regarding important
decisions affecting the business, including analyzing potential
acquisitions, recruiting key managers, securing equity and debt
financing and evaluating strategic opportunities.

Market Dynamics.We preferred investments in
companies that address a large, unfulfilled market demand with
long-term growth prospects that can reasonably expect to achieve
and maintain a significant market share through proprietary
products and services. We also favored investments in companies
that deliver products and services with significant performance
and cost advantages in industries and markets in which
significant barriers to effective competition by others exist.

Ability to Achieve Liquidity.We considered the potential and
likely means for achieving the liquidity that would ultimately
enable us to realize the value of our equity investments.
Possible ways of achieving liquidity include an initial public
offering of the company, a sale of the company or a purchase by
the company or its managers of our equity interest. With respect
to our mezzanine investments, we also may achieve liquidity
through an exercise of the put right that we receive in
connection with such investments.

Ability to Service Debt.With respect to our mezzanine
investments, we sought companies that have demonstrated
predictable and sustainable cash flows from operations, strong
tangible assets, reasonable financial leverage relative to cash
flows from operations, and reasonable prospects to retire at
least 50% of their senior indebtedness within three years of our
investment.

Our investment process includes the
identification, due diligence, negotiation, documentation and
closing of the investment. Our due diligence typically includes:



| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | review of historical and prospective financial
    information;                                     
|
| |  | on-site visits;                                                                                     
|
| |  | interviews with management, employees, customers
    and vendors of the potential portfolio company;
|
| |  | background checks; and                                                                              
|
| |  | research relating to the companys
    management, markets, products and services.                  

Upon the completion of due diligence and a
decision to proceed with an investment in a company, our
investment adviser creates an investment memorandum for
presentation to our board of directors, which must approve the
investment. Additional due diligence with respect to any
investment by us may be conducted on our behalf by attorneys and
independent accountants prior to the closing of the investment,
as well as other outside advisers, as appropriate.

Portfolio Monitoring and Valuation

We have a written policy that governs the
valuation of our assets, pursuant to which our board of
directors values our assets each quarter.

We value our privately held investments based on
a determination of their fair value made in good faith by our
board of directors. Initially, the fair value of each such
security is based upon its original cost. Cost is also the
primary factor used to determine fair value on an ongoing basis
until significant developments or other factors affecting the
investment (such as results of subsequent financings, the
availability of market quotations, the portfolio companys
operations and changes in general market conditions) provide a
basis for value other than

5



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##### Table of Contents



cost. Portfolio investments listed on a
securities exchange or traded on the Nasdaq Stock Market are
valued at the closing price listed on the relevant exchange or
quotation system at the date of valuation. Securities traded in
the over-the-counter market are valued based on the average of
the closing bid and asked prices on the date of valuation.


Public securities with legal, contractual or
other restrictions on transfer may be discounted due to such
restrictions. The lack of liquidity of these securities may
adversely affect our ability to dispose of them in a timely
manner and at a fair price when we deem it necessary or
advantageous to do so.

We continuously evaluate opportunities to
maximize the value of our investments. In that regard, we
periodically evaluate potential acquisitions, financing
transactions, initial public offerings, strategic alliances, and
sale opportunities involving our private portfolio companies.
These transactions and activities are generally not disclosed to
our stockholders and the investing public until such time as the
transactions are publicly announced or completed, as the case
may be. Any such pending transaction could have an impact on the
value of an investment, which is also generally not adjusted
until the transaction is publicly announced or completed.

Investment Adviser

Brantley Capital Management, L.L.C. has served as
our investment adviser since our inception pursuant to an
Investment Advisory Agreement. The principals of our investment
adviser collectively have in excess of 60 years of private
company investment experience, have invested in over 100 private
companies and currently manage approximately $250 million
in assets, including our assets.

In addition to managing our investments,
principals of our investment adviser currently manage the
following other funds:

|                                        |  |               |      |               |  |        |       |  |  |                                        
|--------------------------------------- |  | ------------- | ---- | ------------- |  | ------ | ----- |  |  | ---------------------------------------
|                                        |  |               |      | Committed     |  |       
|                                        |  |               |      | Capital       |  |       
|Fund Name                               |  | Adviser Since |      | (in millions) |  | Status
|                                        |  |               |      |               |  |       
|Brantley Venture Partners I (BVP I)     |  |               | 1987 |               |  | $      | 12.5  |  |  | Completed                              
|Brantley Venture Partners II (BVP II)   |  |               | 1990 |               |  |        | 30.0  |  |  | Completed                              
|Brantley Venture Partners III (BVP III) |  |               | 1993 |               |  |        | 57.5  |  |  | Closed to new investments              
|Brantley Partners IV (BP IV)            |  |               | 1998 |               |  |        | 123.8 |  |  | Approximately 70% invested or committed

The principals of our adviser may form other
funds that may make similar investments to the Companys
investments.

The principals of our investment adviser select
our investments and those of other private investment funds they
manage separately, considering in each case only the investment
objectives, investment position, available capital and other
pertinent factors applicable to that particular investment fund.

Since our inception, our investment adviser has
been responsible, on a day-to-day basis, for the selection and
supervision of our investments and for the oversight of our
financial records and financial reporting requirements. Our
investment adviser has experience with both equity and mezzanine
investments, including the mezzanine investments in our current
portfolio.

Under the terms of our Investment Advisory
Agreement, we currently pay our investment adviser an annual
management fee of 2.85% of our net assets, determined at the end
of each calendar quarter, and payable quarterly in arrears
throughout the term of the Investment Advisory Agreement. In
connection with the Memorandum of Understanding which is subject
to stockholder approval and the receipt of exemptive relief from
the SEC, our board has approved and we intend to enter into a
new investment advisory agreement that, among other things,
reduces the fee we pay on our net assets from 2.85% to 2.5%. The
new investment advisory agreement also requires us to pay our
advisor a fee equal to 20% of the distributions we make to
stockholders in excess of $10.00 per share, provided that no
payment shall be made until we have distributed at least $12.50
per share to our stockholders. We intend to seek stockholder
approval of the new investment advisory agreement at our 2004
Annual Meeting of Stockholders. The terms of the new agreement
will not become effective until stockholder approval has been
obtained.

6



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##### Table of Contents



Our investment adviser is responsible for the
salaries and expenses of its own personnel, office space costs
and local telephone and administrative support costs. For the
fiscal years ended December 31, 2003, 2002 and 2001, fees
earned by our investment advisor were $1,952,808, $1,901,941,
and $1,631,885 respectively. The Investment Advisory Agreement
is renewed annually and is terminable with 60 days
notice by either party.

Co-Investments and Follow-On
Investments

We have co-invested with other private investment
funds managed by our investment adviser, on terms and conditions
that are the same in all material respects for all parties. At
the present time, these funds include Brantley Venture
Partners II, L.P., Brantley Venture Partners III, L.P.
and Brantley Partners IV, L.P. On November 18, 1997,
we received an exemptive order from the Securities and Exchange
Commission that, subject to certain terms and conditions,
relieves us from certain provisions of the Investment Company
Act of 1940 and generally permits us to co-invest with
investment funds managed by our investment adviser.

Temporary Investments

We invest our cash in cash equivalents,
government securities and high quality debt securities maturing
in 90 days or less from the time of investment.

The Investment Advisory Agreement

Pursuant to the Investment Advisory Agreement,
Brantley Capital Management, L.L.C., Lakepoint, 3201 Enterprise
Parkway, Suite 350, Cleveland, Ohio 44122, serves as our
investment adviser. Subject to the overall supervision of our
board of directors, our investment adviser administers our
business affairs and furnishes us with office facilities and
clerical, bookkeeping and record keeping services at such
facilities.

Pursuant to the terms of the Investment Advisory
Agreement, our investment adviser is responsible for, among
other things:



| |   |                                                                                     
| | - | ------------------------------------------------------------------------------------
| |  | Determining what securities we will purchase,
    retain or sell;                   
|
| |  | Identifying and evaluating the structure of the
    investments we make;            
|
| |  | Arranging debt financing for us;                                                    
|
| |  | Providing portfolio management and servicing of
    securities in our portfolio; and
|
| |  | Administering our day-to-day affairs.                                               

Our investment adviser is also responsible for
oversight of the administrator responsible for the financial
records which we are required to maintain and assists in the
preparation of financial information for reports to our
stockholders and reports filed with the Securities and Exchange
Commission. In addition, our investment adviser assists us in
determining and publishing our net asset value, oversees both
the preparation and filing of our tax returns, and the printing
and dissemination of reports to our stockholders, and generally
oversees the payment of our expenses and the performance of
administrative and professional services rendered to us by
others.

In return for its services, we currently pay our
investment adviser an annual management fee of 2.85% of our
average net assets, determined at the end of each calendar
quarter, and payable quarterly in arrears, throughout the term
of the Investment Advisory Agreement.

The Investment Advisory Agreement is not
exclusive, and the adviser is free to furnish similar services
to others so long as its services to us are not impaired.

Our investment adviser is responsible for the
salaries and expenses of its own personnel and for certain
additional expenses, including but not limited to:



| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | all costs associated with identifying and
    selecting prospective investments; 
|
| |  | the cost of office space and necessary office
    equipment for us; and          
|
| |  | the cost of adequate corporate, administrative
    and clerical personnel for us.

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We are responsible for all other expenses,
including those relating to calculating and publishing our net
asset value, all other expenses incurred by either our
investment adviser or us in connection with administering the
ordinary course of our business, and direct costs such as
printing, mailing, long distance telephone, staff, independent
accountants and outside legal costs.

The Investment Advisory Agreement was approved by
our board of directors on October 29, 1996, and is
renewable each year on November 26, provided that its
continuance is approved annually by our board of directors or by
the affirmative vote of the holders of a majority of the
outstanding shares of our common stock, including, in either
case, approval by our directors who are not interested persons.
Our board of directors recently approved the renewal of the
Investment Advisory Agreement and it is therefore subject to
renewal on November 26, 2004. The Investment Advisory
Agreement may be terminated by either party without penalty upon
at least 60 days notice to the other. See Risk
Factors  We Depend Upon Our Investment Adviser for
Our Future Success.

In connection with the Memorandum of
Understanding which is subject to stockholder approval and the
receipt of exemptive relief from the SEC, our board of directors
has approved and we intend to enter into a new investment
advisory agreement that, among other things, reduces the fee we
pay on our net assets from 2.85% to 2.5%. The new investment
advisory agreement also requires us to pay our advisor a fee
equal to 20% of the distributions we make to stockholders in
excess of $10.00 per share, provided that no payment shall be
made until we have distributed at least $12.50 per share to our
stockholders. We intend to seek stockholder approval of the new
investment advisory agreement at our 2004 Annual Meeting of
Stockholders. Our investment advisor will operate under the
currently executed investment advisory agreement pending the
approval of the new investment advisory agreement by our
stockholders.

Administrator, Custodian, Transfer and
Dividend Paying Agent and Registrar

State Street Bank and Trust Company serves as our
administrator and, subject to appropriate review and approval by
our board of directors or our officers:



| |   |                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | oversees the determination and publication of our
    net asset value;                                                                                                                                                                                                     
|
| |  | oversees the maintenance by our custodian of
    certain of our books and records;                                                                                                                                                                                         
|
| |  | prepares income tax returns for review by our
    independent accountants;                                                                                                                                                                                                 
|
| |  | reviews and arranges for payment of our expenses;                                                                                                                                                                                                                          
|
| |  | prepares financial information to be submitted to
    our stockholders and arranges for the printing and dissemination
    of reports and communications to our stockholders;                                                                                              
|
| |  | prepares periodic financial information required
    to be filed with the Securities and Exchange Commission;                                                                                                                                                              
|
| |  | prepares certain reports relating to our business
    and affairs, and upon request, makes recommendations to the
    board of directors concerning the performance of the independent
    accountants or the performance and fees of the custodian and
    transfer agent;
|
| |  | oversees calculations of fees paid to our
    investment adviser, custodian and transfer agent;                                                                                                                                                                            
|
| |  | provides periodic testing of portfolios to assist
    our investment adviser in complying with the Internal Revenue
    Code, the requirements of the Investment Company Act of 1940; and                                                                                  
|
| |  | provides such other services as necessary to
    administer the ordinary course of our business.                                                                                                                                                                           

For its services, we pay the administrator an
annual fee based on our average net assets of (i) 0.08% of
the first $100 million of average net assets;
(ii) 0.06% of the next $100 million of average net
assets; and (iii) 0.04% of average net assets in excess of
$200 million, subject to a minimum annual fee of $75,000.
Based on our net assets of $66,090,665 at December 31,
2003, the annual fee we would pay to the administrator in 2004
would be $75,000. An additional annual fee of $10,000 will be
applied if we engage in leverage transactions other than
temporary borrowings. We also reimburse the administrator for
its out-of-pocket expenses.

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Our administration agreement with State Street
Bank and Trust Company also provides for certain limitations on
the liability of State Street and indemnification of State
Street by us under certain circumstances. State Street cannot be
held liable for damages under the agreement unless such damages
were caused by gross negligence or willful misconduct, and such
damages are limited to State Streets total annual
compensation under the administration agreement. In addition, we
agree to indemnify State Street against any claims made under
the administration agreement that are not the result of the
gross negligence or willful misconduct of State Street, its
officers or employees.

State Street Bank and Trust Company, 225 Franklin
Street, Boston, MA, 02110 is our transfer and dividend paying
agent and registrar as well as our custodian.

Determination of Net Asset Value

We have a written policy that governs the
valuation of our assets, pursuant to which our board of
directors values our assets each quarter. We value our privately
held investments based on a determination of their fair value
made in good faith by our board of directors. Initially, the
fair value of each such security is based upon its original
cost. Cost is also the primary factor used to determine fair
value on an ongoing basis until significant developments or
other factors affecting the investment (such as results of
subsequent financings, the availability of market quotations,
the portfolio companys operations and changes in general
market conditions) provide a basis for value other than cost.

In adjusting the value of any given portfolio
company, our board of directors applies various methods under
our valuation guidelines to determine value. They may use, when
available, third-party transactions in a portfolio
companys securities as the basis of valuation. This basis
of valuation is referred to as the private market
method and is used only with respect to completed
transactions or firm offers made by sophisticated, independent
investors. Our board of directors may also use appraisal
procedures to determine fair value. Appraisal valuations are
based upon such factors as the portfolio companys earnings
and net worth, the market prices for similar securities of
comparable companies and an assessment of the companys
future financial prospects. In the case of unsuccessful
operations, the appraisal may be based upon liquidation value.
Appraisal valuations are necessarily subjective.

Portfolio investments for which market quotations
are readily available and which are freely transferable are
valued as follows:



| |   |                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | securities listed on a securities exchange or
    traded on the Nasdaq Stock Market are valued at the closing
    price listed on the relevant exchange or quotation system on the
    date of valuation; and
|
| |  | securities traded in the over-the-counter market
    (known as pink sheets) are valued based on the average of the
    closing bid and asked prices on the date of valuation.                                

Securities for which market quotations are
readily available but are restricted from free trading in the
public securities markets, such as Rule 144 stock, are
valued by discounting the closing price or the closing bid and
asked prices, as the case may be, for the last trading day prior
to the date of valuation to reflect the illiquidity caused by
such restrictions, but taking into consideration the existence,
or lack thereof, of any contractual right to have the securities
registered and freed from such trading restrictions.

An investment that is exercisable for or
convertible into a security for which market quotations are
readily available or otherwise contains the right to acquire
such a security is deemed to be an investment for which market
quotations are readily available, but the value of any such
security is reduced by any consideration to be paid by us in
connection with the exercise or conversion of such security.

The value of restricted stock investments for
which no public market exists cannot be precisely determined.
Generally, such investments are valued on a going
concern basis without giving effect to any disposition
costs. Debt securities with maturities of 60 days or less
remaining are valued under the amortized cost method. The amount
to be amortized is the value on the 61st day if the security was
obtained with more than 60 days remaining to maturity.
Securities with maturities of more than 60 days remaining
for which there is a market and which are freely transferable
are valued at the most recent bid price or yield equivalent as
obtained from dealers

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that make markets in such securities.
Certificates of deposit which we purchase generally are valued
at their face value, plus interest accrued to the date of
valuation.


Our board of directors reviews our valuation
policies from time to time to determine their appropriateness.
Our board of directors may also hire independent firms to review
the methodology of valuation or to conduct a valuation.

In order to determine the net asset value per
share of our common stock:



| |   |                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------
| |  | the value of our assets, including our portfolio
    securities, is determined by our board of directors;
|
| |  | our liabilities, if any, are subtracted
    therefrom; and                                               
|
| |  | the difference is divided by the number of
    outstanding shares of our common stock.                   

The value of our investments may be very
difficult to ascertain. Valuation of our investments by the
board of directors is, by necessity, subjective and may not be
indicative of the price at which such securities may ultimately
be sold. The net asset value, as determined by our board of
directors, may not be reflective of the price at which an
investor could sell his, her or its shares of our common stock
in the open market.

Regulation as a Business Development
Company

We operate in a highly regulated environment. The
following discussion generally summarizes certain regulations.

A business development company is defined and
regulated by the Investment Company Act of 1940. It is a unique
kind of investment company that primarily focuses on investing
in or lending to small private companies and making managerial
assistance available to them. A business development company may
use capital provided by public stockholders and from other
sources to invest in long-term, private investments in growing
businesses. A business development company provides stockholders
the ability to retain the liquidity of a publicly traded stock,
while sharing in the possible benefits, if any, of investing in
privately owned growth companies.

As a business development company, we may not
acquire any asset other than qualifying assets
unless, at the time we make the acquisition, our qualifying
assets represent at least 70% of the value of our total assets.
This is referred to as the 70% test. The principal
categories of qualifying assets relevant to our business are:



| |   |                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Securities purchased in transactions not
    involving any public offering, the issuer of which is an
    eligible portfolio company. An eligible portfolio company is
    defined to include any issuer that:



| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | is organized and has its principal place of
    business in the United States;                                                         
|
| |  | is not an investment company other than a small
    business investment company wholly owned by a business
    development company; and
|
| |  | does not have any class of publicly traded
    securities with respect to which a broker may extend margin
    credit;                 



| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Securities received in exchange for or
    distributed with respect to securities described above or
    pursuant to the exercise of options, warrants, or rights
    relating to such securities; and         
|
| |  | Cash, cash equivalents, government securities, or
    high quality debt securities, within the meaning of the
    Investment Company Act of 1940, maturing in one year or less
    from the time of investment.

In addition, a business development company must
be organized in the United States for the purpose of making
investments in the types of securities described above. To
include certain securities described above as qualifying assets
for the purpose of the 70% test, a business development company
must make available to the issuer of those securities
significant managerial assistance such as providing significant
guidance and counsel concerning the management, operations, or
business objectives and policies of a portfolio company.

We may invest up to 30% of our assets in
portfolio investments that are not qualifying assets.

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As a business development company, we are
entitled to issue senior securities in the form of stock or
senior securities representing indebtedness, including debt
securities and preferred stock, as long as each class of senior
security has an asset coverage of at least 200% immediately
after each such issuance.

We are also prohibited by the Investment Company
Act of 1940 from knowingly participating in a joint transaction,
including co-investments in a portfolio company with an
affiliated person, including any of our directors, our
investment adviser or any entity controlled or advised by any of
them. We have been granted an exemptive order from the
Securities and Exchange Commission relieving us, subject to
certain terms and conditions, from certain of the provisions of
the Investment Company Act of 1940, and generally permitting us
to engage in co-investments with certain private investment
funds managed by our investment adviser.

We have adopted a code of ethics that establishes
procedures for personal investments and restricts certain
transactions. You may read and copy the code of ethics at the
Securities and Exchange Commissions Public Reference Room
in Washington, DC. You may obtain information on the operation
of the Public Reference Room by calling the Commission at
1-202-942-8090. In addition, the code of ethics is available on
the EDGAR Database on the Commissions Internet site at
http://www.sec.gov. You may obtain copies of the code of ethics,
after paying a duplicating fee, by electronic request at the
following Email address: publicinfo@sec.gov, or by writing the
Commissions Public Reference Section Washington, DC
20549-0102.

Our Internet address is www.brantleycapital.com.
We make available free of charge on our website our annual
report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those
reports as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
SEC. Information contained on our website is not incorporated by
reference into this annual report on Form 10-K, and you
should not consider information contained on our website to be
part of this annual report on Form 10-K.

Under the Investment Company Act of 1940, we are
prohibited, as a business development company, from selling our
common stock at a price below the current net asset value per
share for such stock unless, among other conditions, the policy
and practice of making such sales is approved by holders of a
majority of our outstanding voting securities, as well as the
holders of a majority of our outstanding voting securities who
are not our affiliates. In addition, a majority of our directors
who are not interested persons of our company must
first determine that any such sale would be in the best interest
of our company and our stockholders, and in consultation with
the underwriter, that the offering price would be not less than
a price that closely approximates the market price less any
distributing discount or commission.

We may not change the nature of our business so
as to cease to be, or withdraw our election as, a business
development company unless authorized by vote of a
majority of the outstanding voting securities, as
defined in the Investment Company Act of 1940. The Investment
Company Act of 1940 defines a majority of the outstanding
voting securities as (1) 67% or more of the voting
securities present at such meeting if the holders of more than
50% of the outstanding voting securities are present or
represented by proxy, or (2) 50% of the outstanding voting
securities, whichever of the two is the lesser.

Tax Status

The following discussion is a general summary
of the material United States federal income tax considerations
applicable to us and to an investment in our common stock. This
summary does not purport to be a complete description of the
income tax considerations applicable to such an investment. The
discussion is based upon the Internal Revenue Code, Treasury
Regulations, and administrative and judicial interpretations,
each as of the date of this report and all of which are subject
to change. You should consult your own tax advisor with respect
to tax considerations that pertain to your purchase of our
common stock.

This summary is intended to apply to
investments in our common stock and assumes that investors hold
our common stock as capital assets. This summary does not
discuss all aspects of federal income taxation relevant to
holders of our common stock in light of particular
circumstances, or to certain types of holders subject to special
treatment under federal income tax laws, including dealers in
securities, pension plans and trusts and financial institutions.
This summary does not discuss any aspects of U.S. estate and
gift tax or foreign, state or local tax. It

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does not discuss the special treatment under
federal income tax laws that could result if we invested in
tax-exempt securities or certain other investment
assets.


Except as specifically indicated herein, this
summary is intended to apply to U.S. Stockholders (as defined
below) and does not purport to discuss all U.S. federal income
tax consequences to persons who are not U.S. Stockholders
(Non-U.S. Stockholders) from an investment in our
common stock. A U.S. Stockholder is a stockholder
who is (i) a citizen or resident of the United States,
(ii) a corporation, partnership or other entity created in
or organized under the laws of the United States or any
political subdivision thereof, (iii) an estate, the income of
which is subject to United States federal income taxation
regardless of its source, or (iv) a trust subject to the
supervision of a court within the United States and the control
of a United States person. Non-U.S. Stockholders should consult
their own tax advisors to discuss the consequences of an
investment in our common stock.

Taxation as a Regulated Investment
Company

We intend to continue to be treated for tax
purposes as a regulated investment company under
Subchapter M of the Internal Revenue Code (the
Code). If we (i) qualify as a regulated investment
company and (ii) distribute to our stockholders in a timely
manner at least 90% of our investment company taxable
income, as defined below (the 90% Distribution
Requirement) each year, we will not be subject to federal
income tax on the portion of our investment company taxable
income and net capital gain (i.e., net long-term capital gain in
excess of net short-term capital loss) that we distribute (or
treat as deemed distributed) to stockholders.
Investment Company Taxable Income under the Code
generally means all taxable income excluding any net capital
gains and with certain other adjustment period. In addition, if
we distribute in a timely manner the sum of (i) 98% of our
ordinary income for each calendar year, (ii) 98% of our
capital gain net income for the one-year period ending
October 31 in that calendar year, and (iii) any income
not distributed in prior years, we will not be subject to the 4%
nondeductible federal excise tax on certain undistributed income
of regulated investment companies (the Excise Tax
Avoidance Requirements). We generally will endeavor to
distribute (or treat as deemed distributed) to our stockholders
all of our investment company taxable income and our net capital
gain, if any, for each taxable year so that we will not incur
federal income or excise taxes on our earnings. We will be
subject to federal income tax at our regular corporate rate for
any amounts of investment company taxable income or net capital
gain not distributed (or deemed distributed) to our stockholders.

In order to qualify as a regulated investment
company for federal income tax purposes, we must, among other
things: (a) continue to qualify as a business development
company under the Investment Company Act of 1940; (b) derive in
each taxable year at least 90% of our gross income from
dividends, interest, payments with respect to securities loans,
gains from the sale of stock or other securities, or other
income derived with respect to our business of investing in such
stock or securities (the 90% Income Test); and (c)
diversify our holdings so that at the end of each quarter of the
taxable year (i) at least 50% of the value of our assets
consists of cash, cash equivalents, U.S. government securities,
securities of other regulated investment companies, and other
securities if such other securities of any one issuer do not
represent more than 5% of our assets or more than 10% of the
outstanding voting securities of the issuer (the 50% of
the Value Requirement), and (ii) no more than 25% of
the value of our assets is invested in the securities (other
than U.S. government securities or securities of other regulated
investment companies) of any one issuer or of two or more
issuers that are controlled (as determined under applicable
rules of the Internal Revenue Code) by us and are engaged in the
same or similar or related trades or businesses (the 25%
of the Value Limitation and together, the 50% of the Value
Requirement and the 25% of the Value Limitation shall be
referred to as the Diversification Test.)

Because we invest in only a limited number of
portfolio companies, we currently do not satisfy the 25% of the
Value Limitation (and therefore the Diversification Test). In
addition, we anticipate that we may not satisfy the
Diversification Test on the last day of one or more future
quarters. The Internal Revenue Code, however, modifies the above
Diversification Test in the case of certain investment companies
furnishing capital to development corporations (the
Modified Diversification Test). In order for the
Modified Diversification Test to be applicable to us, the
Securities and Exchange Commission must determine and certify to
the Internal Revenue Service no more than 60 days prior to
the close of each relevant taxable year that we are principally
engaged in the furnishing of capital to other corporations that
are principally engaged in the development or exploitation of

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inventions, technological improvements, new
processes, or products not previously generally available. For
purposes of this determination, a corporation will be considered
to be principally engaged in the development or exploitation of
inventions, technological improvements, new processes, or
products not previously generally available for at least
10 years after our first acquisition of any security in
such corporation if, as of the date of such first acquisition,
the issuer corporation was principally so engaged. In addition,
we will be considered on any date to be furnishing capital to a
corporation whose securities we hold if we have acquired
securities in such corporation within the preceding
10 years. We intend to request such certification, if
necessary. Periodic recertification may be necessary.


If the Modified Diversification Test is
applicable to us, then for purposes of determining whether we
satisfy the 50% of the Value Requirement discussed above, we
will be able to include the value of the securities of any
issuer (whether or not we hold more than 10% of the outstanding
voting securities of such issuer) provided that at the time of
the latest acquisition of any securities of such issuer our
basis in all securities of such issuer held by us did not exceed
5% of the value of our total assets as of such date. The
Modified Diversification Test will not apply to any security of
an issuer if we have continuously held securities in such issuer
(or any predecessor company) for more than 10 years. In
addition, the Modified Diversification Test will not apply to us
for a quarter if, as of the close of such quarter, more than 25%
of our total assets are represented by securities of issuers for
which we hold more than 10% of the outstanding voting securities
of such issuers and with respect to which we have continuously
held securities in such issuers (or any predecessor companies)
for more than 10 years, unless the value of our total
assets represented by such securities is reduced to 25% or less
within 30 days after the close of such quarter. Even if the
Modified Diversification Test is applicable to us, we must still
satisfy the 25% of the Value Limitation discussed above. The
Internal Revenue Code also contains two other exceptions to the
Diversification Test that may allow us to continue to qualify as
a regulated investment company even if we fail to satisfy the
Diversification Test (or the Modified Diversification Test) as
of the close of any quarter. In this respect, the Code provides
that a company that satisfied the Diversification Test as of the
close of any quarter shall not lose its status as a regulated
investment company during a subsequent quarter due to a
discrepancy between the value of its various investments and the
requirements of the Diversification Test unless such discrepancy
exists immediately after the acquisition of any security or
other property and is wholly or partly the result of such
acquisition. Thus, if we have satisfied the Diversification Test
for at least one quarter, we will not lose our status as a
regulated investment company as a result of failing to satisfy
the Diversification Test provided such failure is due to a
fluctuation in the value of our assets or a distribution made by
us and is not attributable in whole or in part to the
acquisition of any securities (the Fluctuation in Value
Exception). In addition, if a discrepancy is due in whole
or in part to the acquisition of securities, the Internal
Revenue Code provides that a company will not lose its status as
a regulated investment company if such discrepancy is eliminated
within 30 days after the close of such quarter. Thus, we
will generally have 30 days after the close of any quarter to
dispose of assets in order to satisfy the Diversification Test.
We currently satisfy the Fluctuation in Value Exception.
Accordingly, although we do not satisfy the Diversification
Test, we are still adequately diversified under the Subchapter M
requirements for regulated investment companies.

If we fail to satisfy the Diversification Test
for any future quarter, the Modified Diversification Test and
the exceptions to the Diversification Test discussed above, we
will fail to qualify as a regulated investment company and all
of our income will be subject to federal income tax at the
regular corporate tax rate as discussed below. As a result, we
will make every effort to satisfy the Diversification Test, the
Modified Diversification Test, or the exceptions to the
Diversification Test. In order to satisfy these tests, however,
we may be prevented from making acquisitions (including
acquisitions through the exercise of options, warrants,
conversion rights, or other purchase rights) of new or
additional securities, even though we believe such acquisitions
to be advantageous or beneficial from an investment standpoint.
Alternatively, it may be necessary for us to dispose of certain
currently held securities in order to satisfy these tests even
though such dispositions may not be advantageous or beneficial
from an investment standpoint. Because our portfolio will
consist primarily of illiquid investments, we may not be able to
dispose of our assets in a timely manner or on an economically
advantageous basis in order to satisfy the Diversification Test,
the Modified Diversification Test or the exceptions to the
Diversification Test.

If we acquire or are deemed to have acquired debt
obligations that were issued originally at a discount or that
otherwise are treated under applicable tax rules as having
original issue discount, we must include in income

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each year a portion of the original issue
discount that accrues over the life of the obligation regardless
of whether cash representing such income is received by us in
the same taxable year. Any amount accrued as original issue
discount will be included in our investment company taxable
income for the year of accrual and may have to be distributed to
our stockholders in order to satisfy the 90% Distribution
Requirement or the Excise Tax Avoidance Requirements even though
we have not received any cash representing such income.


Although we do not presently expect to do so, we
are authorized to borrow funds and to sell assets in order to
satisfy distribution requirements. However, under the Investment
Company Act of 1940, we are not permitted to make distributions
to our stockholders while our debt obligations and other senior
securities are outstanding unless certain asset
coverage tests are met. Moreover, our ability to dispose
of assets to meet our distribution requirements may be limited
by (i) the illiquid nature of our portfolio and/or
(ii) other requirements relating to our status as a
regulated investment company, including the Diversification
Test. If we dispose of assets in order to meet the 90%
Distribution Requirement or the Excise Tax Avoidance
Requirements, we may make such dispositions at times that, from
an investment standpoint, are not advantageous.

If we fail to satisfy the 90% Distribution
Requirement or otherwise fail to qualify as a regulated
investment company in any taxable year, we will be subject to
tax in that year on all of our taxable income, regardless of
whether we make any distributions to our stockholders. In that
case, all of our distributions to our stockholders will be
characterized as ordinary income (to the extent of our current
and accumulated earnings and profits). In contrast, as is
explained below, if we qualify as a regulated investment
company, a portion of our distributions or deemed distributions
may be characterized as long-term capital gain in the hands of
our stockholders.

The remainder of this summary assumes that we
qualify as a regulated investment company and satisfy the 90%
Distribution Requirement.

Taxation of Stockholders

Our distributions generally are taxable to our
stockholders as ordinary income or capital gains. Distributions
of our investment company taxable income will be taxable as
ordinary income to our stockholders to the extent of our current
or accumulated earnings and profits, whether paid in cash or
reinvested in additional common stock. Distributions of our net
capital gains properly designated by us as capital gain
dividends will be taxable to a stockholder as long-term
capital gains regardless of such stockholders holding
period for his or her common stock and regardless of whether
paid in cash or reinvested in additional common stock.
Distributions in excess of our earnings and profits first will
reduce a stockholders adjusted tax basis in such
stockholders common stock and, after the adjusted basis is
reduced to zero, will constitute capital gains to such
stockholder. Any distribution automatically reinvested in
additional shares of our common stock through our opt out
dividend reinvestment plan will be taxable to a stockholder to
the same extent, and with the same character, as if such
stockholder received the distribution in cash. Any additional
shares of our common stock acquired by a stockholder pursuant to
such an automatic reinvestment of a distribution will have an
adjusted basis equal to the amount of the reinvested
distribution and will have a holding period that will commence
on the date such shares are acquired by, or allocated for the
benefit of, such stockholder. A portion of our distributions may
be subject to alternative minimum tax. You should consult your
own tax advisor to determine how an investment in our stock
would affect your alternative minimum tax liability.

At our option, we may elect to retain some or all
of our net capital gains for a tax year, but designate the
retained amount as a deemed distribution. In that
case, among other consequences, we will pay tax on the retained
amount for the benefit of our stockholders, our stockholders
will be required to report their share of the deemed
distribution on their tax returns as if it had been distributed
to them, and our stockholders will report a credit for the tax
paid thereon by us. The amount of the deemed distribution net of
such tax will be added to a stockholders cost basis for
his or her common stock. Since we expect to pay tax on any
retained net capital gains at our regular corporate capital gain
tax rate, and since that rate is in excess of the maximum rate
currently payable by individuals on long-term capital gains, the
amount of tax that individual stockholders will be treated as
having paid and for which they will receive a credit will exceed
the amount of tax that such stockholders would be required to
pay on the retained net capital gains. Such excess generally
will be available to offset other tax liability to the
stockholders. A stockholder that is not subject to U.S. federal
income tax should be able to file a

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return on the appropriate form or a claim for
refund that allows such stockholder to recover the taxes paid on
his or her behalf. In the event we choose this deemed
distribution option, we must provide written notice to our
stockholders prior to the expiration of 60 days after the
close of the relevant tax year.


Any dividend we declare in October, November, or
December of any calendar year, payable to our stockholders of
record on a specified date in such a month and which we actually
pay during January of the following year, will be treated as if
it had been received by our stockholders on December 31 of
the year in which we declared the dividend.

If we acquire qualified small business
stock, hold such stock for more than five years, and
dispose of such stock at a gain, a non-corporate stockholder who
held his, her, or its common stock at the time that we purchased
the qualified small business stock and at all times thereafter
until the disposition of such qualified small business stock may
be entitled to exclude from such stockholders taxable
income up to 50% of such stockholders share of such gain.
For this purpose, qualified small business stock
generally means stock that was acquired directly from the
issuing corporation, where such issuing corporation is taxable
under Subchapter C of the Internal Revenue Code, is actively
engaged in a trade or business, and has no more than $50,000,000
of gross assets at any time prior to issuance and immediately
thereafter. A portion of any amount excluded from your taxable
income pursuant to the rules discussed in this paragraph will be
treated as a preference item for purposes of computing your
alternative minimum tax liability.

You should consider the tax implications of
buying our common stock just prior to a distribution. Even if
the price of our common stock includes the amount of the
forthcoming distribution, you may be taxed upon receipt of the
distribution and will not be entitled to offset the distribution
against your tax basis in our common stock. You may recognize
taxable gain or loss if you sell or exchange our common stock.
The amount of the gain or loss will be measured by the
difference between your adjusted tax basis in such stock and the
amount of the proceeds you receive in exchange for such stock.
Any gain or loss arising from (or, in the case of distributions
in excess of earnings and profits, treated as arising from) the
sale or exchange of our common stock generally will be a capital
gain or loss. This capital gain or loss normally will be treated
as a long-term capital gain or loss if you have held such stock
for more than one year; otherwise, it will be classified as
short-term capital gain or loss. However, any capital loss
arising from the sale or exchange of our common stock held for
six months or less generally will be treated as a long-term
capital loss to the extent of the amount of capital gain
dividends received, or treated as deemed distributed, with
respect to such stock and, for this purpose, the special rules
of Section 852(b)(4)(C) of the Internal Revenue Code
generally apply in determining the holding period of such stock.
In addition, all or a portion of any loss realized upon a
taxable disposition of our common stock may be disallowed if
other shares of our common stock are purchased, under our
dividend reinvestment and cash purchase plan or otherwise,
within 30 days before or after the disposition.

In general, non-corporate stockholders currently
are subject to a maximum federal income tax rate on their net
long-term capital gain (the excess of net long-term capital gain
over net short-term capital loss) for a taxable year (including
a long-term capital gain derived from an investment in the
common stock of the company) that is lower than the maximum rate
for other income. Corporate taxpayers currently are subject to
federal income tax on net capital gains at a maximum rate equal
to the maximum rate applied to ordinary income. Tax rates
imposed by states and local jurisdictions on capital gain and
ordinary income may differ. Non-corporate stockholders with net
capital losses for a year (i.e., capital losses in excess of
capital gains) generally may deduct up to $3,000 of such losses
against their ordinary income each year; any net capital losses
of a non-corporate stockholder in excess of $3,000 generally may
be carried forward and used in subsequent years as provided in
Section 1212(b) of the Internal Revenue Code. Corporate
stockholders generally may not deduct any net capital losses for
a year, but may carryback such losses for three years or carry
forward such losses for five years.

We will send to each of our stockholders, as
promptly as possible after the end of each calendar year, a
notice detailing, on a per share and per distribution basis, the
amounts includible in such stockholders taxable income for
such year as ordinary income and as long-term capital gain. In
addition, the federal tax status of each years
distributions generally will be reported to the Internal Revenue
Service. Distributions may also be subject to additional state,
local, and foreign taxes depending on a stockholders
particular situation. Our ordinary income dividends to corporate
stockholders may, if certain conditions are met, qualify for the
dividends received

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##### Table of Contents



deduction to the extent that we have received
qualifying dividend income during the taxable year; capital gain
dividends distributed by us are not eligible for the dividends
received deduction. However, the alternative minimum tax
applicable to corporations may reduce the benefit of the
dividends received deduction.


A Non-U.S. Stockholder may be subject to
withholding of U.S. federal tax at a 30% rate (or lower
applicable treaty rate) on our distributions (including certain
redemptions of our common stock). Accordingly, investment in our
common stock is likely to be appropriate for a Non-U.S.
Stockholder only if such person can utilize a foreign tax credit
or corresponding tax benefit in respect of such withholding tax.
Non-U.S. Stockholders should consult their own tax advisors with
respect to the U.S. federal income and withholding tax, and
state, local, and foreign tax, consequences of an investment in
our common stock.

We may be required to withhold U.S. federal
income tax (backup withholding) from all taxable
distributions payable to (i) any stockholder who fails to
furnish us with its correct taxpayer identification number or a
certificate that the stockholder is exempt from backup
withholding, and (ii) any stockholder with respect to whom the
Internal Revenue Service notifies us that such stockholder has
failed to properly report certain interest and dividend income
to the Internal Revenue Service and to respond to notices to
that effect. We may be required to report annually to the
Internal Revenue Service and to each Non-U.S. Stockholder the
amount of dividends paid to such stockholder and the amount, if
any, of tax withheld pursuant to the backup withholding rules
with respect to such dividends. This information may also be
made available to the tax authorities in the Non-U.S.
Stockholders country of residence. Backup withholding is
not an additional tax. Any amounts withheld under the backup
withholding rules from payments made to a stockholder may be
refunded or credited against such stockholders United
States federal income tax liability, if any, provided that the
required information is furnished to the Internal Revenue
Service.

Competition

We compete with a large number of private equity
and mezzanine funds, investment banks, mutual funds and other
equity and non-equity based investment funds, as well as
traditional financial services companies such as commercial
banks and other sources of financing in connection with our
investment activity. Many of these entities have greater
financial and managerial resources than we do. We compete with
such entities primarily on the basis of the quality of our
services, the experience and contacts of our investment adviser,
our investment analysis and decision-making processes, and the
investment terms we offer in respect of the securities to be
issued by our portfolio companies. There can be no assurance
that we will be able to successfully compete for attractive
investment opportunities.

Employees

Our investment adviser provides all of the
personnel necessary to operate our business, and thus we do not
have any employees.

Item 2. Properties

The Company does not own or lease any properties.

Item 3. Legal Proceedings

On September 25, 2002, Phillip Goldstein, a
director and shareholder of the Company filed a lawsuit in the
District Court for the Northern District of Ohio against us,
Robert Pinkas, James Oliver, Benjamin Bryan and IVS Associates,
Inc. alleging, among other things, that the Company engaged in
wrongdoing and that the individual defendants breached their
fiduciary duties during the Annual Meeting of Stockholders held
on September 17, 2002. Mr. Goldstein alleges that the
Companys actions surrounding the closing of the polls
disenfranchised certain shareholders. Mr. Goldstein sought
to have votes for which he had proxies, which were submitted
after the polls were closed, counted. He also sought an order
declaring his nominees to be directors of the Company. The
Company also asserted a counterclaim against Mr. Goldstein
alleging violations of the proxy rules and the failure to
disclose his participation in a group as required by
Regulation 13D. Mr. Goldstein denied the allegations
of the counterclaims. Mr. Goldsteins motion for a
temporary restraining order was denied, and a hearing for a

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##### Table of Contents



preliminary injunction was held on
November 18-21, 2002. On December 18, 2002, Magistrate
Jack B. Streepy issued a report and recommendation that
Mr. Goldsteins motion for a preliminary injunction be
granted. Both parties filed objections to the Magistrates
report. No order has been issued by the Court to date. On
February 13, 2003, the judge set a trial date of March 19,
2003, and on March 19, 2003, the judge issued a 60 day
stay of the proceeding.


On March 19, 2003, the Company entered into
a Memorandum of Understanding with Phillip Goldstein, a director
of the Company, pursuant to which Mr. Goldstein agreed to
dismiss the lawsuit he filed against the Company in September
2002, subject to compliance with the Investment Company Act of
1940. The Court approved the proposed settlement on February 26,
2004.

On June 4, 2003, the Company filed an
application for exemptive relief from certain provisions of the
1940 Act in order to effect the provisions of the Memorandum of
Understanding. On June 18, 2003, the Company received
comments on its application from the staff of the Division
of Investment Management of the Securities and Exchange
Commission. On August 14, 2003 the Company responded to
those comments. With such response, the Company proposed a new
Memorandum of Understanding that was submitted to the staff of
the Division of Investment Management. On November 12,
2003, the Company received comments regarding its
August 14, 2003 response. The Company responded to such
comments on December 18, 2003. On February 11, 2004,
the staff of the Division of Investment Management requested a
response from the Board of Directors, which the Board provided
on February 15, 2004. The Company continues to discuss this
matter with the staff of the Division of Investment Management.

The Memorandum of Understanding is subject to
approval by the stockholders, and the receipt of exemptive
relief from the SEC. There can be no assurance that this
exemptive relief will be granted.

Pursuant to the proposed Memorandum of
Understanding the Company would agree, among other things:



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | to cause there to be four (4) directors who
    are not interested persons as defined under the 1940
    Act and cause the board to be exactly seven (7) directors in
    total;                     
|
| |  | if Mr. Goldstein or Gerald Hellerman is no
    longer a director of the Company then whichever of
    Mr. Goldstein or Mr. Hellerman remains on the board
    shall have the right to select a nominee;
|
| |  | to not convert the Company from being an advised
    fund to an internally managed fund unless a majority of the
    independent directors agree;                                                      
|
| |  | to allow any independent director to request
    independent counsel, subject to the approval of the board, which
    cannot be unreasonably withheld; and                                             
|
| |  | to refrain from making defamatory remarks about
    any party to the agreement.                                                                                                                        

In addition, the proposed Memorandum of
Understanding provides that at the next Annual Meeting of
Stockholders:



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Company would ask shareholders to approve a
    plan of orderly disposition of the assets of the Company or a
    sale of the assets with the goal of prompt cash distribution to
    shareholders;
|
| |  | the Company would ask shareholders to approve a
    new investment advisory agreement pursuant to which,
    prospectively:                                                                            



| |   |                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the advisors fees would be reduced from
    2.85% to 2.5% of our net asset value;                                                                                                                                                                         
|
| |  | all stock options would be forfeited and
    cancelled; and                                                                                                                                                                                                
|
| |  | the advisor would be entitled to receive a fee
    equal to 20% of the aggregate distributions made by the Company
    in excess of $10.00 per share; however, none of the amount would
    be paid until aggregate distributions totaled $12.50 per share.

The proposed Memorandum of Understanding also
includes provisions that would require the parties to take all
steps necessary to accomplish the goals of the Memorandum,
including voting their shares in favor of the proposals. Under
the proposed memorandum, the Company would also be required to
reimburse Mr. Goldstein

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##### Table of Contents



for certain expenses (not to exceed $275,000) he
incurred in connection with the proxy solicitation and
litigation related to the Annual Meeting of Stockholders on
September 17, 2002. Mr. Goldstein would also agree not
to engage in, lead or fund a proxy contest while the agreement
is in effect. The term of the new proposed Memorandum of
Understanding would run until December 31, 2006.


If we receive all necessary government and
stockholder approvals, the effect of the Memorandum of
Understanding will be that we intend to make only follow-on
investments, and any remaining proceeds we receive from
liquidity events are intended to be distributed to shareholders.
See  Investment Adviser and 
Investment Advisory Agreement.

As a result of the Memorandum of Understanding,
we intend to make only follow-on investments in our portfolio
companies. Otherwise, we will seek to orderly dispose of our
assets and distribute any proceeds to our stockholders.

On October 8, 2002, Thomas Kornfeld and
Robert Strougo filed a purported class action lawsuit against
the Company, the directors of the Company excluding Phillip
Goldstein, IVS Associates, Inc. and JMP Securities LLC, alleging
a series of derivative and direct claims that the directors have
breached their fiduciary duties and that the Company engaged in
wrongdoing with respect to the Annual Meeting of Stockholders
held on September 17, 2002. The factual allegations are
substantially similar to the complaint filed by
Mr. Goldstein and also include allegations of conversion of
corporate funds. The complaint seeks, among other things, an
order declaring Mr. Goldsteins nominees to be
directors of the Company, an order declaring that the investment
advisory agreement be terminated and damages for breach of
fiduciary duty. On January 12, 2003, the plaintiffs filed a
motion to consolidate this lawsuit with the lawsuit by Goldstein
discussed above, which was subsequently denied.

On October 4, 2002, the Company received
notice from the Midwest Regional Office (MRO) of the
SEC that they were inquiring into activities involving the
Annual Meeting. The Company has and will cooperate with the
inquiry. The letter from the MRO states that the inquiry should
not be construed as an indication by the staff of that office
that any violation of law has occurred, or as a reflection upon
any person or entity that may be involved. There has been no
communication between the MRO and the Company since the fourth
quarter of 2002.






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

No matters were submitted to a vote of security
holders during the fourth quarter of 2003.

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##### Table of Contents






PART II





|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity and
    Related Stockholder Matters

Our common stock is traded on the Nasdaq National
Market under the symbol BBDC and historically has
traded at prices below our net asset value per share. The
following table sets forth, for the periods indicated, our net
asset value per share of common stock and the high and low sales
prices per share of our common stock. Prior to
September 23, 1999, our common stock traded on the Nasdaq
SmallCap Market under the same symbol. On March 26, 2004,
the last reported sales price of our common stock was $4.23 per
share.

|                                 |                |           |  |                |  |     |  |       |  |  |  |      | 
|-------------------------------- | -------------- | --------- |  | -------------- |  | --- |  | ----- |  |  |  | ---- | 
|                                 |                |           |  |               
|                                 |                |           |  | Range of Sales
|                                 |                | Net Asset |  | Prices        
|                                 |                | Value per |  |               
|                                 |                | Share(1)  |  | High           |  | Low
|                                 |                |           |  |                |  |    
|Year ended December 31,
    2003 |                |           |  |                |  |     |  |       |  |  |  |     
|                                 | First Quarter  |           |  | 18.37          |  |     |  | 8.94  |  |  |  | 6.04 | 
|                                 | Second Quarter |           |  | 17.78          |  |     |  | 8.90  |  |  |  | 8.00 | 
|                                 | Third Quarter  |           |  | 18.44          |  |     |  | 9.88  |  |  |  | 7.52 | 
|                                 | Fourth Quarter |           |  | 17.34          |  |     |  | 11.13 |  |  |  | 8.80 | 
|Year ended December 31,
    2002 |                |           |  |                |  |     |  |       |  |  |  |     
|                                 | First Quarter  |           |  | 17.85          |  |     |  | 11.00 |  |  |  | 9.62 | 
|                                 | Second Quarter |           |  | 17.78          |  |     |  | 10.80 |  |  |  | 8.92 | 
|                                 | Third Quarter  |           |  | 17.57          |  |     |  | 10.00 |  |  |  | 7.79 | 
|                                 | Fourth Quarter |           |  | 17.29          |  |     |  | 8.90  |  |  |  | 7.01 | 



---



|    |                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Net asset value per share is determined as of the
    last day in the relevant quarter and therefore may not reflect
    the net asset value per share on the date of the high or low
    sales price. The net asset values shown are based on outstanding
    shares at the end of each period.

Since our initial public offering, we have
distributed more than 98% of our ordinary income and 98% of our
capital gain net income to our stockholders on an annual basis.
For the years ended 2003, 2002, and 2001, we declared dividends
of $0.69, $0.00 and $0.19, respectively.

Our current intention is to continue distributing
our ordinary income and our short-term capital gains on an
annual basis to our stockholders. We may also choose to
distribute some or all of our net realized long-term capital
gains. Pursuant to our Memorandum of Understanding with
Mr. Goldstein, we have agreed to distribute proceeds from
the disposition of our assets to stockholders upon receipt of
appropriate approvals. There can be no assurance as to the
timing or amounts of these distributions. See Item 3.
Legal Proceedings.

We maintain an opt out dividend
reinvestment and cash purchase plan for our stockholders. Under
the plan, if shares of our common stock are registered in your
name, dividends will be automatically reinvested in additional
shares of common stock unless you opt out of the
plan.

The Company made no common stock repurchases
during 2003.

19



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##### Table of Contents








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

(all figures in thousands except per share
data)


(years ended December 31)


|                                         |  |      |        |      |  |      |        |      |  |      |        |      |  |      |        |      |  |   |        |  |  |   |        |   |  |   |        |  |  |   |        |  
|---------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | - |  | - | ------ |  |  | - | ------ | -
|                                         |  | 2003 |        | 2002 |  | 2001 |        | 2000 |  | 1999 |        | 1998 |  | 1997 |        | 1996
|                                         |  |      |        |      |  |      |        |      |  |      |        |      |  |      |        |     
|Financial Position                       |  |      |        |      |  |      |        |      |  |      |        |      |  |      |        |      |  |   |        |  |  |   |        |   |  |   |        |  |  |   |        |  
|Total assets                             |  | $    | 77,853 |      |  | $    | 73,747 |      |  | $    | 75,534 |      |  | $    | 58,471 |      |  | $ | 54,991 |  |  | $ | 50,456 |   |  | $ | 43,825 |  |  | $ | 36,620 |  
|Note payable                             |  |      | 7,500  |      |  |      | 6,000  |      |  |      | 6,000  |      |  |      | 6,000  |      |  |   |       |  |  |   |       |   |  |   |       |  |  |   |       |  
|Net assets                               |  |      | 66,091 |      |  |      | 65,900 |      |  |      | 68,006 |      |  |      | 51,943 |      |  |   | 52,440 |  |  |   | 49,941 |   |  |   | 42,912 |  |  |   | 36,142 |  
|                                        
|Changes in Net Assets                    |  |      |        |      |  |      |        |      |  |      |        |      |  |      |        |      |  |   |        |  |  |   |        |   |  |   |        |  |  |   |        |  
|Net investment income (loss)             |  |      | 2,657  |      |  |      | (2,158 | )    |  |      | (1,208 | )    |  |      | 145    |      |  |   | 320    |  |  |   | (69    | ) |  |   | 31     |  |  |   | (7     | )
|Net gain on investments                  |  |      | 164    |      |  |      | 52     |      |  |      | 18,007 |      |  |      | 1,734  |      |  |   | 3,932  |  |  |   | 7,137  |   |  |   | 5,683  |  |  |   |       |  
|Net change in net assets from operations |  |      | 2,821  |      |  |      | (2,106 | )    |  |      | 16,800 |      |  |      | 1,879  |      |  |   | 4,252  |  |  |   | 7,068  |   |  |   | 5,713  |  |  |   | (7     | )
|Dividends                                |  |      | 2,630  |      |  |      | 0.00   |      |  |      | 736    |      |  |      | 2,376  |      |  |   | 1,753  |  |  |   | 38     |   |  |   | 444    |  |  |   |       |  
|                                        
|Per Share Data                           |  |      |        |      |  |      |        |      |  |      |        |      |  |      |        |      |  |   |        |  |  |   |        |   |  |   |        |  |  |   |        |  
|Net assets                               |  |      | 17.34  |      |  |      | 17.290 |      |  |      | 17.850 |      |  |      | 13.630 |      |  |   | 13.760 |  |  |   | 13.110 |   |  |   | 11.260 |  |  |   | 9.870  |  
|Closing market price                     |  |      | 10.20  |      |  |      | 7.700  |      |  |      | 10.890 |      |  |      | 8.625  |      |  |   | 8.000  |  |  |   | 7.125  |   |  |   | 9.630  |  |  |   | 10.000 |  
|Cash dividends                           |  |      | 0.69   |      |  |      | 0.00   |      |  |      | 0.19   |      |  |      | 0.620  |      |  |   | 0.460  |  |  |   | 0.010  |   |  |   | 0.120  |  |  |   |       |  






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of
    Financial Condition and Results of Operations

General

Overview

We are a non-diversified investment company that
is regulated as a business development company under the
Investment Company Act of 1940. We provide equity and long-term
debt financing to small and medium-sized private companies in a
variety of industries throughout the United States. Our
investment objective is to achieve long-term capital
appreciation in the value of our investments and to provide
current income primarily from interest, dividends and fees paid
by our portfolio companies.

Historically, we have focused our investing
activities on private equity securities. We generally structure
our private equity investments as participating preferred stock
with an 8% to 10% dividend yield that accumulates and is paid
upon a liquidity event. Our private equity investments typically
range from $1 million to $5 million, and we generally
expect these investments to achieve liquidity within three to
five years. We typically do not receive a cash return on our
private equity investments until a liquidity event occurs, but
instead seek to achieve long-term capital appreciation in net
asset value through such investments.

On March 19, 2003, the Company entered into
a Memorandum of Understanding with Phillip Goldstein, a director
of the Company, pursuant to which Mr. Goldstein agreed to
dismiss the lawsuit he filed against the Company in September
2002, subject to compliance with the Investment Company Act of
1940. The Court approved the proposed settlement on February 26,
2004.

On June 4, 2003, the Company filed an
application for exemptive relief from certain provisions of the
1940 Act in order to effect the provisions of the Memorandum of
Understanding. On June 18, 2003, the Company received
comments on its application from the staff of the Division
of Investment Management of the Securities and Exchange
Commission. On August 14, 2003 the Company responded to
those comments. With such response, the Company proposed a
Memorandum of Understanding that was submitted to the staff of
the Division of Investment Management. On November 12,
2003, the Company received comments regarding its
August 14, 2003 response. The Company responded to such
comments on December 18, 2003. On February 11, 2004,
the staff of the Division of Investment Management requested a
response from the Board of Directors, which the Board provided
on February 15, 2004. The Company is in the process of
responding to additional oral comments from the staff of the
Division of Investment Management.

The Memorandum of Understanding is subject to
approval by the stockholders, and the receipt of exemptive
relief from the SEC. There can be no assurance that this
exemptive relief will be granted.

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Pursuant to the proposed Memorandum of
Understanding the Company would agree, among other things:



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | to cause there to be four (4) directors who
    are not interested persons as defined under the 1940
    Act and cause the board to be exactly seven (7) directors in
    total;                     
|
| |  | if Mr. Goldstein or Gerald Hellerman is no
    longer a director of the Company then whichever of
    Mr. Goldstein or Mr. Hellerman remains on the board
    shall have the right to select a nominee;
|
| |  | to not convert the Company from being an advised
    fund to an internally managed fund unless a majority of the
    independent directors agree;                                                      
|
| |  | to allow any independent director to request
    independent counsel, subject to the approval of the board, which
    cannot be unreasonably withheld; and                                             
|
| |  | to refrain from making defamatory remarks about
    any party to the agreement.                                                                                                                        

In addition, the proposed Memorandum of
Understanding provides that at the next Annual Meeting of
Stockholders:



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Company would ask shareholders to approve a
    plan of orderly disposition of the assets of the Company or a
    sale of the assets with the goal of prompt cash distribution to
    shareholders;
|
| |  | the Company would ask shareholders to approve a
    new investment advisory agreement pursuant to which,
    prospectively:                                                                            



| |   |                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the advisors fees would be reduced from
    2.85% to 2.5% of our net asset value;                                                                                                                                                                         
|
| |  | all stock options would be forfeited and
    cancelled; and                                                                                                                                                                                                
|
| |  | the advisor would be entitled to receive a fee
    equal to 20% of the aggregate distributions made by the Company
    in excess of $10.00 per share; however, none of the amount would
    be paid until aggregate distributions totaled $12.50 per share.

The proposed Memorandum of Understanding also
includes provisions that would require the parties to take all
steps necessary to accomplish the goals of the Memorandum,
including voting their shares in favor of the proposals. Under
the proposed memorandum, the Company would also be required to
reimburse Mr. Goldstein for certain expenses (not to exceed
$275,000) incurred in connection with the proxy solicitation and
litigation related to the Annual Meeting of Stockholders on
September 17, 2002. Mr. Goldstein would also agree not
to engage in, lead or fund a proxy contest while the agreement
is in effect. The term of the new proposed Memorandum of
Understanding would run until December 31, 2006.

If we receive all necessary government and
stockholder approvals, the effect of the Memorandum of
Understanding will be that we intend to make only follow-on
investments, and any remaining proceeds we receive from
liquidity events are intended to be distributed to shareholders.
See  Investment Adviser and
 Investment Advisory Agreement.

Critical
Accounting Policies and Estimates

Privately placed equity and mezzanine securities
are carried at fair value as determined in good faith by our
board of directors. Initially, the fair value of each such
security is based upon its original cost. Cost is also the
primary factor used to determine fair value on an ongoing basis
until significant developments or other factors affecting the
investment (such as results of subsequent financings, the
availability of market quotations, the portfolio companys
operations and changes in general market conditions) provide a
basis for value other than cost.

Portfolio investments listed on a securities
exchange or traded on the Nasdaq Stock Market are valued at the
closing price listed on the relevant exchange or quotation
system on the date of valuation. Securities traded in the
over-the-counter market are valued based on the average of the
closing bid and asked prices on the date of valuation. Interest
income is recorded on mezzanine investments when the payment is
contractually due unless a loan is more than 30 days past due.
Interest is not accrued on any loans that are more than
30 days past due. Dividend income is recorded on cumulative
preferred equity securities on an accrual basis to the extent
that such

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amounts are expected to be collected and on
common equity securities on the record date for private
companies or on the ex-dividend date for publicly traded
companies. We assess the collectibility of dividends and
interest income receivables in connection with our determination
of the fair value of the related security. To the extent that
there are adverse future developments, previously recognized
dividend and interest income may not be realized.


We account for our operations utilizing
accounting principles generally accepted in the United States of
America for investment companies. On this basis, the principal
measure of our financial performance is captioned Net
change in net assets resulting from operations, which is
the sum of two elements. The first element is Investment
income (loss), net, which is the difference between
(1) our income from interest, dividends and fees, and
(2) our operating expenses. The second element is Net
gain (loss) on investments, which is the sum of
(1) the difference between the proceeds received from our
dispositions of portfolio securities and their stated cost
(Net realized gain (loss) on investments), and
(2) the net change in the fair value of our investment
portfolio (Net unrealized gain (loss) on
investments). Net realized gain (loss) on
investments and Net unrealized gain (loss) on
investments are directly related. For example, in the
period during which a security is sold to realize a gain, net
unrealized gain on investments decreases, and net realized gain
on investments increases.

Historically, we have focused our investing
activities on private equity securities. We began making such
investments in 1997 and are now entering into a phase of the
business plan which emphasizes positioning our more mature
portfolio companies for appropriate liquidity events. As a
result, we are continuously monitoring portfolio company results
and evaluating opportunities to maximize the valuation of our
investments. In that regard, we periodically evaluate potential
acquisitions, financing transactions, initial public offerings,
strategic alliances, and sale opportunities involving our
portfolio companies. Any such transaction could have an impact
on the valuation of our investments. These transactions and
activities are generally not disclosed to our stockholders and
the investing public until such time as the transactions are
publicly announced or completed, as the case may be.

Results of Operations

Dividend and
Interest Income

Dividend and interest income on investments for
the years ended December 31, 2003, 2002 and 2001 were
$5,970,522, $2,913,667 and $1,581,837, respectively. The
increase in interest and dividend income during the year ended
December 31, 2003 was primarily due to the income received
as a result of the recapitalization of Fitness Quest, Inc. as
more fully described below. The increase in interest and
dividend income during the year ended December 31, 2002 was
primarily due to the private equity portfolio being fully
invested during 2002 thereby generating additional dividend
income. In addition, we received special dividends of $845,310
from Fitness Quest, Inc. during 2002.

Operating
Expenses

Total operating expenses during the years ended
December 31, 2003, 2002 and 2001 were $3,313,967,
$5,072,064 and $2,789,513, respectively. A significant component
of total operating expenses was advisory fees of $1,952,808,
$1,901,941 and $1,631,885 earned by our investment adviser
during the years ended December 31, 2003, 2002 and 2001,
respectively. The increases in advisory fees are a result of the
increases we have experienced in net asset value. A second
component of total operating expenses was professional fees of
$70,031, $1,929,878, and $309,759 during the years ended
December 31, 2003, 2002, and 2001 respectively. The
increase in professional fees during 2002 reflected the cost of
the proxy contest and resulting litigation including the accrual
of the reimbursement of legal fees and proxy costs, and the
write-off of prepaid offering costs due to our decision not to
proceed with the previously announced rights offering. We have
accrued $275,000 in connection with Phillip Goldsteins
proxy and litigation costs. Payment of such amounts are subject
to the receipt of exemptive relief from the SEC and compliance
with the Investment Company Act of 1940.

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Net Realized and
Unrealized Gains on Investment Transactions

During the years ended December 31, 2003,
2002 and 2001, valuation of our equity and mezzanine investments
resulted in net realized and unrealized gains on investments of
$163,954, $52,411 and $18,007,426, respectively. At
December 31, 2003, and 2002, we had investments in eleven
privately-held companies, respectively. The net realized and
unrealized gains during such periods were significantly
influenced by general stock market and business conditions, as
well as the December 21, 2001 revaluation of Flight Options
International, Inc. and the 2003 write-offs of Petroleum
Partners, Inc. which are more fully described below.

Financial Condition, Liquidity and Capital
Resources

At December 31, 2003 and 2002, we had
$4,688,731 and $237,154, respectively, in cash and cash
equivalents which were primarily invested in United States
Treasury securities. Restricted cash is held under direction of
the lender and is not readily available to fund investments or
pay operating expenses.

Our management generally believes that our cash
and cash equivalents, together with proceeds from our
investments, will provide us with the liquidity necessary to pay
our operating expenses and make follow-on investments as
necessary. However, because of the inherent uncertainty with
respect to the timing of liquidity events, the Company entered
into a $1.5 million short-term note arrangement with
Huntington National Bank in March 2003 for the purpose of paying
operating expenses pending potential liquidity events. The note
is unsecured and carries an interest rate of prime plus 1%
(5.25% at December 31, 2003). As of December 31, 2003
$1.5 million has been drawn down on the note.

At December 31, 2003 and 2002, we had
stockholders equity of $66,090,665 and $65,900,328,
respectively, resulting in a net asset value per share of $17.34
and $17.29, respectively.

At December 31, 2003, we had $7,500,000 of
outstanding indebtedness. For the year ended December 31,
2003, the weighted average interest rate on this indebtedness
was 4.2%.

Brantley Venture Partners II, L.P., Brantley
Venture Partners III, L.P. and Brantley Partners IV, L.P. hold,
in the aggregate, approximately $152 million of private
equity investments. These partnerships are related to our
investment adviser in a manner that required the receipt, from
the Securities and Exchange Commission, of an exemption from
certain provisions of the Investment Company Act of 1940 in
order to permit us, under certain circumstances, to invest in
the same portfolio companies as the other private investment
funds managed by our investment adviser.

We intend to use our cash to make only follow on
investments in the future, and distribute any remaining proceeds
from liquidity events to stockholders.

At December 31, 2003 and December 31,
2002, the aggregate cost of the investments we made to date was
$25.2 million and $30.3 million, respectively, and
their aggregate market value was $60.4 million and
$62.1 million, respectively, for an aggregate fair value
appreciation of 140% and 109%, respectively. Our management
believes that our portfolio companies have potential for
long-term growth in sales and earnings.

We did not have any material off-balance sheet
arrangements, as defined in Item 303(a) of
Regulation S-K under the Exchange Act for the fiscal year
ended December 31, 2003.

Our contractual obligations as of
December 31, 2003 are:

|                        |                               |       |           |                   |  |              |           |              |  |         |   |   |  |  |   |   |  |  |   |   | 
|----------------------- | ----------------------------- | ----- | --------- | ----------------- |  | ------------ | --------- | ------------ |  | ------- | - | - |  |  | - | - |  |  | - | - | 
|                        |                               |       |           |                  
|                        |                               |       |           | Payments Due     
|                        |                               |       |           |                  
|                        |                               |       |           | Less than 1       |  |              |           | More than   
|                        |                               | Total |           | year or on demand |  | 1 to 3 years |           | 3 to 5 years |  | 5 years
|Contractual Obligations |                               |       |           |                   |  |              |           |              |  |        
|Debt Obligations        |                               | $     | 7,500,000 |                   |  | $            | 7,500,000 |              |  |         |  |   |  |  |  |   |  |  |  |  
|                        |                               |       |           |                   |  |              |           |              |  |         |   |   |  |  |   |   |  |  |   |  
|                        | Total Contractual Obligations |       | $         | 7,500,000         |  |              | $         | 7,500,000    |  |         |   |  |  |  |   |  |  |  |   |  | 
|                        |                               |       |           |                   |  |              |           |              |  |         |   |   |  |  |   |   |  |  |   |  

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Private
Portfolio Company Investments

The following is a list of the private companies
in which we had an investment and the cost and fair value of
such securities at December 31, 2003.

|                                     |  |                                               |  |      |            |            |  |   |            | 
|------------------------------------ |  | --------------------------------------------- |  | ---- | ---------- | ---------- |  | - | ---------- | 
|Name of Company                      |  | Nature of its Principal Business              |  | Cost |            | Fair Value
|                                     |  |                                               |  |      |            |           
|Disposable Products Company, LLC     |  | Non-Woven Paper Products Manufacturer         |  |      | 3,865,993  |            |  |   | 3,109,332  | 
|                                    
|Fitness Quest, Inc.                  |  | Fitness Products Direct Marketer              |  |      | 2,225,620  |            |  |   | 11,186,539 | 
|                                    
|Flight Options International, Inc.   |  | Private Air Travel Services                   |  |      | 5,562,500  |            |  |   | 32,500,000 | 
|                                    
|Health Care Solutions, Inc.          |  | Home Health Care Provider                     |  |      | 1,573,210  |            |  |   | 1,602,611  | 
|                                    
|The Holland Group, Inc.              |  | Temporary Staffing                            |  |      | 2,125,000  |            |  |   | 2,125,000  | 
|                                    
|National Rehab Partners, Inc.        |  | Rehabilitation Services                       |  |      | 1,481,513  |            |  |   | 1,481,513  | 
|                                    
|Integrated Physician Solutions, Inc. |  | Pediatric Physician Practice Management Group |  |      | 3,839,448  |            |  |   | 3,864,348  | 
|                                    
|Prime Office Products, Inc.          |  | Office Products Distributor                   |  |      | 1,500,000  |            |  |   | 1,500,000  | 
|                                    
|Streamline Foods, Inc.               |  | Food Products Manufacturer and Distributor    |  |      | 795,000    |            |  |   | 795,000    | 
|                                    
|Value Creation Partners, Inc.        |  | Food Products Manufacturer and Distributor    |  |      | 2,145,460  |            |  |   | 2,225,960  | 
|                                    
|International Total Services, Inc.   |  | Security                                      |  |      | 68,410     |            |  |   | 101        | 
|                                     |  |                                               |  |      |            |            |  |   |            | 
|                                     |  | Total                                         |  | $    | 25,182,154 |            |  | $ | 60,390,404 | 
|                                     |  |                                               |  |      |            |            |  |   |            | 

Our individually significant equity and mezzanine
investments at December 31, 2002 are described below:

Disposable
Products Company, LLC

On August 10, 1998, we entered into an
investment led by Banc One Capital to provide $1.0 million
of a $3.0 million subordinated debt facility with warrants
for Disposable Products Company, LLC. Disposable Products is an
acquisition strategy company in the business of manufacturing
and converting paper and non-woven materials into wiping
products for sale to commercial, institutional, industrial and
government markets. In addition, Disposable Products is a
converter and reseller of other safety and industrial/
janitorial products. Proceeds of the transaction were used to
complete Disposable Products first acquisition. The terms
of the debt facility call for a 12% interest rate per annum with
a final maturity in 2003 that has been extended. We also
received a detachable capital stock purchase warrant exercisable
for 65% of the fully-diluted capital stock of Disposable
Products at the time of exercise at a nominal exercise price. In
addition, through December 31, 2003 we funded additional
12% promissory notes of $2,865,993 from Disposable Products.

Fitness Quest,
Inc

On December 16, 1997, we funded a
$1.35 million commitment to invest with Brantley Venture
Partners III, L.P. in a $3.85 million preferred stock issue
for Fitness Quest, Inc. As a result, we purchased approximately
788,961 shares of Fitness Quest Series A 10% Convertible
Preferred Stock at $1.71 per share. Fitness Quest is a direct
marketing and distribution company. The proceeds were used by
Fitness Quest for a management buy-out of the company from its
previous owner, The Time Warner Music Group, a 100% wholly owned
subsidiary of Time Warner, Inc., and for other acquisitions.
Fitness Quest has been in the fitness promotional products
business since 1994. Fitness Quest operates in a highly
competitive industry and is dependent on the management talent
and efforts of key personnel for its success. We do not believe
that Fitness Quest is dependent on a single or small number of
customers, possesses significant intellectual property, or is
operating in an unusually regulated industry.

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During 1997, Fitness Quest increased its revenue
and improved its operating margins and profits. After a complete
evaluation, our board of directors re-valued our Fitness Quest
investment to $5,440,000, resulting in a 1997 unrealized gain of
$4,090,000. This evaluation was based on price to earnings
ratios, cash flow multiples and other appropriate financial
measurements of similar private companies. In addition to the
above Series A 10% Convertible Preferred Stock, we funded
$1,751,300 to invest with Brantley Venture Partners III, L.P. in
a $3.5 million 10% senior subordinated debt investment in
Fitness Quest in 2000. In addition, we received a warrant to
purchase 181,172 shares of Fitness Quest common stock for $0.01
per share. The proceeds of the most recent investment were used
to fund Fitness Quests working capital needs. During the
fourth quarter of 2000, we exchanged the senior subordinated
debt investment and related unpaid interest for 679,641 shares
of Fitness Quest common stock.

Through March 31, 2003, Fitness Quest had
continued to increase its revenues, improve its operating
margins, and reduce its debt. As a result, the Board of
Directors increased the value of the investment to $15,000,000
resulting in an unrealized gain of $6,341,959 for the quarter
ending March 31, 2003.

On July 31, 2003, Fitness Quest successfully
completed a recapitalization of the company. As a result of this
transaction, we received a distribution from Fitness Quest of
$7.3 million, including special and ordinary dividends of
$5,234,338, of which $567,000 was in repayment of previously
accrued preferred stock dividends. Subsequent to this
transaction, we maintain a 15.1% ownership interest in the
company with an estimated fair value of $11.2 million.

Flight Options
International, Inc. (Formerly Corporate
Wings, Inc.)

On December 23, 1997, we funded
$2.1 million to invest with Brantley Venture Partners III,
L.P. in a $6.0 million preferred stock issue for Flight
Options International, Inc. Our investment consists of
approximately 2,576,000 shares of Flight Options Series A
8% Convertible Preferred Stock at $0.8152 per share. Flight
Options provides complete private air travel service through the
sale of fractional interests in pre-owned jet aircraft. The
proceeds of the transaction were used by Flight Options to
continue to execute an acquisition strategy. We believe Flight
Options is one of the top five providers of fractional interests
in aircraft in the United States, a highly competitive industry
and is dependent on the management talent and efforts of key
personnel for its success. Flight Options is subject to certain
regulations of the Federal Aviation Administration. We do not
believe it is dependent on a single or small number of customers
or possesses significant intellectual property.

On December 29, 1998, we completed a second
private equity investment in Flight Options. In this investment,
we purchased $962,500 of a $5.5 million preferred stock
transaction led by The Provident Bank. Our purchase represents
approximately 260,135 shares of Class A 8% Convertible
Preferred Stock at $3.70 per share. The proceeds were used by
Flight Options to fund the expansion of its fractional ownership
program and to continue to execute its acquisition strategy.
During 1998, Flight Options completed the acquisition of Miller
Aviation. Based upon the price of this subsequent financing and
the operating performance of Flight Options during 1998, the
fair value of our original investment was increased to
$9,531,760, resulting in an unrealized gain of $7,431,760. This
valuation was based on the $3.70 per share price negotiated by
The Provident Bank and was approved by our board of directors.

On August 31, 1999, Flight Options sold
$20 million of Series B 8% Preferred Stock to a third
party private equity group at $4.365 per share. Consistent with
our investment valuation guidelines, this transaction resulted
in a valuation increase on our Flight Options investment of
$1,886,030 or $0.50 per share.

On July 11, 2000, we guaranteed a portion of
Flight Options third-party borrowings. As a result, we
were issued a warrant to purchase 36,000 shares of Flight
Options common stock at a price of $0.01 per share. This
guarantee was terminated prior to December 12, 2000.

On December 12, 2000 we purchased 469,925
shares of Flight Options Class C 8% Preferred Stock at
$5.32 per share for a total investment of $2.5 million. The
proceeds of the transaction were used by Flight Options to fund
the continued expansion of its fractional ownership program.

On June 30, 2001, Flight Options received
offers from institutional investors to purchase convertible
preferred stock or subordinated debt securities of Flight
Options which support the valuation used to complete the

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December 12, 2000 Class C 8% Preferred
Stock transaction described in the preceding paragraph. As a
result, and consistent with our investment valuation guidelines,
our board of directors approved a valuation increase on the
Flight Options investment which resulted in our reporting an
unrealized gain of $2,742,889 or $0.72 per share for the quarter
ended June 30, 2001.


On December 21, 2001, Flight Options, Inc.
and Raytheon Travel Air, a Wichita, Kansas-based unit of
Raytheon Company, a Lexington, Mass. based defense contractor,
agreed to combine operations into one fractional aircraft
ownership program to be known as Flight Options. Under the terms
of the transaction, Flight Options, Inc. holds 50.1% ownership
of the new business with Raytheon holding 49.9%. The transaction
was completed during the quarter ended March 31, 2002.
During the second quarter of 2003, Raytheon Company provided
additional debt and equity financing to Flight Options.

As a result of the transaction described above,
our board of directors have met to review the terms of the then
current transactions. Consistent with our valuation guidelines,
the board has used private market methods to value our
investment in Flight Options, Inc. and approved an increase in
the value of our investment in Flight Options, Inc. to its
current $32.5 million. At December 31, 2003, the
financial statement value of our investment in Flight Options
represents an increase of more than 484% from its original
purchase price.

Health Care
Solutions, Inc.

On September 30, 1997, we funded a
$1.5 million convertible junior subordinated promissory
note facility for Health Care Solutions, Inc. Health Care
Solutions is an acquisition strategy company in the home
healthcare services market with a strong presence in the Midwest
and Great Lakes regions. The terms of the notes called for an
18% interest rate per annum during the first year and 12% per
annum thereafter, with final maturity two years from the
closing. After the first year, the notes were convertible into
common stock at a price of $3.50 per share. In connection with
our commitment to provide this facility, we received warrants to
purchase up to $450,000 of common stock valued at an exercise
price of 10% of an initial public offering price completed
during the term of the notes, or at $3.50 per share should the
warrants be exercised other than in connection with an initial
public offering. The warrants are currently exercisable. The
proceeds of the notes were used by Health Care Solutions to help
finance acquisitions.

In 2000, Health Care Solutions completed a
re-capitalization plan, including a two-for-one reverse stock
split. As a result, we agreed to exchange our convertible junior
subordinated promissory note and accrued interest thereon for
246,994 shares of Series C 8% Convertible Preferred Stock
at an exchange rate of $7.50 per share. The warrants to purchase
up to $450,000 of common stock at an exercise price of 10% of an
initial public offering price or at $3.50 per share remain
outstanding and have been adjusted to reflect the reverse stock
split.

In addition to the above Series C 8%
Convertible Preferred Stock, we funded $500,000 and $299,000 12%
Convertible Subordinated Notes from Health Care Solutions in
2000. As part of this transaction, we received a warrant to
purchase up to $50,000 of Health Care Solutions common stock at
an exercise price equal to the lower of the price determined by
an initial public offering or $7.50 per share. On March 7,
2001, we agreed to exchange the $500,000 Convertible
Subordinated Note for 71,880 shares of Series D Convertible
Preferred Stock. On January 29, 2002, we funded a
$1,250,000 12% Convertible Subordinated Note from Health Care
Solutions.

On May 1, 2003, Health Care Solutions sold
its respiratory division assets. Through July 31, 2003,
Health Care Solutions sold its remaining operating assets. As a
result of these transaction, we have received $1,975,853 in
proceeds and expect to receive additional proceeds of
approximately $1.0 to $1.5 million over the next
18 months. The remaining corporate assets of Health Care
Solutions are presently being marketed for a projected sale in
2004. The current valuation approximates the total proceeds
expected to be received from these sales.

The Holland
Group, Inc.

On July 13, 2000, we funded a
$2.1 million commitment to invest with Brantley Partners
IV, L.P. in a $8.5 million preferred stock issue of The
Holland Group, Inc. The Holland Group is a provider of temporary
staffing and human resource management services that currently
operates 35 branches in five states. In this transaction, we
purchased 282,530 shares of The Holland Groups
Series A 8% Convertible Preferred Stock. In

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February 2002 we purchased a $50,000 12%
convertible subordinated note from The Holland Group which was
repaid with interest in December 2002.


National Rehab
Partners, Inc.

On August 10, 1999, we funded
$1.455 million of a $1.5 million commitment to invest
with Brantley Partners IV, L.P. and a third party equity group
in a $12.0 million preferred stock issue for National Rehab
Partners, Inc. Pursuant to this commitment, we purchased
2.2 million shares of Class A 8% Convertible Preferred
Stock. The proceeds of this transaction were used to complete
the acquisition of a group of rehabilitation management service
providers. The remainder of the commitment is being funded upon
the successful closing of additional acquisitions. National
Rehab Partners is a Brentwood, Tennessee rehabilitation
management service company providing rehabilitation services
through acute care hospitals and hospital systems throughout the
United States. National Rehab Partners is the only national
rehabilitation company focused exclusively on helping hospitals
develop their outpatient rehabilitation services.

On January 10, 2001, we funded a $26,126 10%
promissory note from National Rehab Partners. On June 13,
2001, the $26,126 note and the related accrued interest were
cancelled and replaced with a $27,228 10% promissory note.

Integrated
Physician Solutions, Inc. (Formerly Pediatric Physicians
Alliance, Inc.)

On January 28, 1999, we funded a
$3.2 million commitment to invest with Brantley Venture
Partners III, L.P. in a $7.9 million preferred stock issue
for Integrated Physician Solutions, Inc. Pursuant to our
commitment, we purchased 793,000 shares of Class A-2 10%
Convertible Preferred Stock. Integrated Physician Solutions is a
physician practice management systems provider. Their objective
is to develop the leading integrated physician practice
management system in the United States. Integrated Physician
Solutions is dependent on the management talent and effort of
key personnel for its success in this highly competitive
industry. We do not believe it is dependent on a single or small
number of customers, possesses significant intellectual property
or that it is subject to significant regulations. The proceeds
of the transaction were used to complete the acquisition of a
number of physician practices.

In addition to the above Class A-2 10%
Convertible Preferred Stock, we have funded $667,448 in
promissory notes, with detachable warrants, in Integrated
Physician Solutions. The detachable warrants are for the
purchase of 30,000 shares of Integrated Physician Solutions
common stock at $4.00 per share.

Petroleum
Partners, Inc.

On June 7, 2001, we entered into a
$2.7 million commitment to invest with Brantley Partners
IV, L.P. in a $15.0 million preferred stock and
subordinated debt issue for Petroleum Partners, Inc. In
connection with this commitment, we purchased 250,000 shares of
Class A 8% Convertible Preferred Stock at $1.00 per share,
600,000 shares of Class B 8% Convertible Preferred Stock at
$2.00 per share, and funded a $1,250,000 10% Convertible
Subordinated Note with a detachable warrant for the purchase of
78,125 shares of common stock at $0.01 per share. Petroleum
Partners, based in Cleveland, Ohio, is a provider of outsourced
maintenance services to the petroleum industrys retailers
and refineries. The proceeds from the transaction were used to
acquire a company which is a leading provider of petroleum and
petrochemical handling equipment and outsourced facilities
maintenance services to providers of fuel delivery systems such
as gasoline retailers and refineries. The equipment distributed
by the company includes petroleum storage tanks, pumps, fuel
dispensers, flexible piping, tank valves, leak detection gauges,
canopies, air compressors and service station lighting equipment.

In addition to the above investment, we funded
$1,875,000 of 10% Convertible Subordinated Notes through
December 31, 2002. The proceeds of the notes were used for
operating purposes.

As a result of adverse operating performance, the
Board of Directors approved a valuation reduction of our
investment to $1,874,219 thereby generating a $1,450,781
unrealized loss for the quarter ended March 31, 2003. At
that time, the Board of Directors also approved a write-off of
all interest and dividends receivable relating to this
investment of $517,886. For the quarter ended June 30,
2003, the Board of Directors approved a second valuation
reduction in our investment by $1,874,219 thereby generating a
year to date unrealized loss of $3,325,000.

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Prime Office
Products, Inc. (Formerly Business Essentials, Inc.)

On April 22, 1999, we entered into a
$1.7 million commitment to invest with Brantley Partners
IV, L.P. and Massey Burch Capital Corp. in a $10.0 million
preferred stock issue for Prime Office Products, Inc. Pursuant
to our commitment, we purchased 510,000 shares of Class A
8% Convertible Preferred Stock at $2.00 per share. Prime Office
Products is an office products marketing and distribution
company based in Nashville, Tennessee. The first part of the
commitment was funded to launch an acquisition strategy focused
on office distribution companies serving primarily commercial
and industrial customers. The remainder of the commitment is
being funded upon the closing of additional acquisitions. On
January 8, 2002, we purchased an additional 200,000 shares
of Class A 8% Convertible Preferred Stock at $2.00 per
share. On July 31, 2002, we purchased an additional 40,000
shares of Class A 8% Convertible Preferred Stock at $2.00
per share.

Streamline
Foods, Inc.

On February 7, 2002 we funded a $795,000
commitment to invest with Brantley Partners IV, L.P. in a
$7,950,000 preferred stock and subordinated debt issue for
Streamline Foods, Inc. Pursuant to our commitment we purchased
approximately 898,000 shares of Series A 8% Convertible
Preferred Stock at $0.78 per share and a $95,000 13% Convertible
Subordinated Note with warrants to purchase 27,500 shares of
common stock at $0.01 per share. The proceeds were used by
Streamline Foods for a buy-out of the Company from its previous
owner. Streamline Foods, Inc. sources, blends, packages and
distributes high sugar content food products for branded
multi-national food companies and private label manufacturers.

Value Creation
Partners, Inc.

On June 14, 2000, we completed a
$2.1 million commitment to invest with Brantley Partners
IV, L.P. and several other private equity investors in a
$23.8 million preferred stock issue for Value Creation
Partners, Inc. Pursuant to this commitment, we purchased
approximately 35,000 shares and 269,989 shares of 8% Convertible
Preferred Stock at $5.00 and $7.30 per share, respectively.
Value Creation Partners is an acquisition strategy company in
the food industry. The proceeds of the transaction were used to
complete the acquisition of Best Brands, Inc., one of the six
largest manufacturers and distributors of a complete line of
premium ingredients, mixes and products, including equipment,
for all segments of the baking industry. Their products are sold
primarily to retail bakeries, bakery distributors, supermarket
in-store bakeries, food wholesalers and food service
establishments.

Small-Capitalization
Public Equity Investments

As the Companys assets became more fully
invested, we made the decision to dedicate the remaining
available capital to our private company investment activities.
As a result, we liquidated our small-capitalization public stock
portfolio in the third quarter of 2002.

Related Party
Information

The Investment Adviser, pursuant to the terms of
the Investment Advisory Agreement, is responsible, on a
day-to-day basis, for the selection and supervision of portfolio
investments. Transactions between the Company and the Investment
Adviser, including operational responsibilities, duties and
compensation, are governed by the Investment Advisory Agreement.
The Company currently pays to the Investment Adviser an annual
management fee of 2.85% of the Companys net assets,
determined at the end of each calendar quarter and payable in
arrears. For the year ended December 31, 2003, the
Investment Adviser was owed an investment advisory fee in the
aggregate amount of $473,474. Robert P. Pinkas, Chairman of the
Board, Chief Executive Officer, Treasurer and a director, Paul
H. Cascio, a Vice President and a director of the Company,
Michael J. Finn, President of the Company, and Tab A. Keplinger,
Chief Financial Officer of the Company, are officers and
managers of the Investment Adviser, and together own a majority
of the Investment Adviser. As stated above in Item 1
(Business  Potential Co-Investments and Follow-On
Investments) and in Item 8 (Note 5 of the notes
accompanying the financial statements in Financial
Statements and Supplementary Data), the Company co-invests
in portfolio companies from time to time with affiliates of the
Company and the Investment Adviser, including certain venture
capital investment partnerships. Certain officers and directors
of the Company and officers of the Investment Adviser also serve
as general partners of the investment partnerships general
partner. The Companys co-investments with such affiliates
are subject to the terms and conditions of the exemptive order

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granted by the Commission, which relieves the
Company from certain provisions of the Act and permits certain
joint transactions with the investment partnerships.


The Company is an investor in Disposable Products
Company, LLC (DPC), as discussed in the
Companys Management, Discussion and Analysis of Financial
Condition and Results of Operations in Item 7 of this
Annual Report on Form 10-K. Grand River Industries, Ltd.
(Grand River) owns 85% of DPC. Grand River is a
limited liability company that is 100% owned by Objective
Industrial Investments Partners, L.P. (Objective).
Robert P. Pinkas, Chairman and Chief Executive Officer of the
Company, is a managing member in Objective. Mr. Pinkas, as
a result of this investment commitment in Objective, owns 20% of
Grand River.

James P. Oliver has been a director of the
Company since 1998 and is a partner with the law firm of Squire
Sanders & Dempsey L.L.P., which has represented the Company
as general counsel since shortly after its formation in 1996.

On March 19, 2003, the Company entered into
a Memorandum of Understanding with Phillip Goldstein, a director
of the Company, pursuant to which Mr. Goldstein agreed to
dismiss the lawsuit he filed against the Company in September
2002, subject to compliance with the Investment Company Act of
1940. The Court approved the proposed settlement on February 26,
2004.

On June 4, 2003, the Company filed an
application for exemptive relief from certain provisions of the
1940 Act in order to effect the provisions of the Memorandum of
Understanding. On June 18, 2003, the Company received
comments on its application from the staff of the Division
of Investment Management of the Securities and Exchange
Commission. On August 14, 2003 the Company responded to
those comments. With such response, the Company proposed a
Memorandum of Understanding that was submitted to the staff of
the Division of Investment Management. On November 12,
2003, the Company received comments regarding its
August 14, 2003 response. The Company responded to such
comments on December 18, 2003. On February 11, 2004,
the staff of the Division of Investment Management requested a
response from the Board of Directors, which the Board provided
on February 15, 2004. The Company is in the process of
responding to additional oral comments from the staff of the
Division of Investment Management.

The Memorandum of Understanding is subject to
approval by the stockholders, and the receipt of exemptive
relief from the SEC. There can be no assurance that this
exemptive relief will be granted.

Pursuant to the proposed Memorandum of
Understanding the Company would agree, among other things:



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | to cause there to be four (4) directors who
    are not interested persons as defined under the 1940
    Act and cause the board to be exactly seven (7) directors in
    total;                     
|
| |  | if Mr. Goldstein or Gerald Hellerman is no
    longer a director of the Company then whichever of
    Mr. Goldstein or Mr. Hellerman remains on the board
    shall have the right to select a nominee;
|
| |  | to not convert the Company from being an advised
    fund to an internally managed fund unless a majority of the
    independent directors agree;                                                      
|
| |  | to allow any independent director to request
    independent counsel, subject to the approval of the board, which
    cannot be unreasonably withheld; and                                             
|
| |  | to refrain from making defamatory remarks about
    any party to the agreement.                                                                                                                        

In addition, the proposed Memorandum of
Understanding provides that at the next Annual Meeting of
Stockholders:



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Company would ask shareholders to approve a
    plan of orderly disposition of the assets of the Company or a
    sale of the assets with the goal of prompt cash distribution to
    shareholders;
|
| |  | the Company would ask shareholders to approve a
    new investment advisory agreement pursuant to which,
    prospectively:                                                                            



| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | the advisors fees would be reduced from
    2.85% to 2.5% of our net asset value;
|
| |  | all stock options would be forfeited and
    cancelled; and                       

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| |   |                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the advisor would be entitled to receive a fee
    equal to 20% of the aggregate distributions made by the Company
    in excess of $10.00 per share; however, none of the amount would
    be paid until aggregate distributions totaled $12.50 per share.

The proposed Memorandum of Understanding also
includes provisions that would require the parties to take all
steps necessary to accomplish the goals of the Memorandum,
including voting their shares in favor of the proposals. Under
the new proposed memorandum, the Company would also be required
to reimburse Mr. Goldstein for certain expenses (not to
exceed $275,000) he incurred in connection with the proxy
solicitation and litigation related to the Annual Meeting of
Stockholders on September 17, 2002. Mr. Goldstein
would also agree not to engage in, lead or fund a proxy contest
while the agreement is in effect. The term of the new proposed
Memorandum of Understanding would run until December 31,
2006.

If we receive all necessary government and
stockholder approvals, the effect of the Memorandum of
Understanding will be that we intend to make only follow-on
investments, and any remaining proceeds we receive from
liquidity events are intended to be distributed to shareholders.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures about
    Market Risk

We have invested in small and medium-sized
companies, and our investments are considered speculative in
nature. Our investments often include securities that are
subject to legal or contractual restrictions on resale that
adversely affect the liquidity and marketability of such
securities. As a result, we are subject to risk of loss which
may prevent our stockholders from achieving price appreciation
and dividend distributions. The portion of our portfolio
consisting of investments in private companies is also subject
to valuation risk. We value our privately held investments based
on a determination of their fair value made in good faith by our
board of directors on a quarterly basis in accordance with our
established guidelines. In the absence of a readily
ascertainable market value, the estimated values of our
investments may differ significantly from the values that would
exist if a ready market for these securities existed. Any
changes in valuation are recorded in our consolidated statements
of operations as Net unrealized gain (loss) on
investments.

We consider the management of equity price risk
essential to conducting our business. Our portfolio consists of
investments in private companies. We 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 long-term effect on valuations of
private companies, which could affect the carrying value and the
amount and timing of gains realized on these investments. This
could also affect our ability to generate cash through the sale
of private equity investments, since there may not be realistic
initial public offering opportunities.

Impact of Inflation

We do not believe that our business is materially
affected by inflation, other than the impact that inflation may
have on the securities markets, the valuations of business
enterprises and the relationship of such valuations to
underlying earnings, all of which will influence the value of
our investments.

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Item 8. Financial Statements

BRANTLEY CAPITAL CORPORATION



BALANCE SHEETS


|                                                                                                                                                                         |                              |                                                |            |            |            |   |            |            |            | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------- | ---------------------------------------------- | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                                                                                                                                                                         |                              |                                               
|                                                                                                                                                                         |                              | As of December 31,                            
|                                                                                                                                                                         |                              |                                               
|                                                                                                                                                                         |                              | 2003                                           |            | 2002      
|                                                                                                                                                                         |                              |                                                |            |           
|ASSETS                                                                                                                                                                   |                              |                                                |            |            |            |   |            |           
|Investments, at fair value                                                                                                                                               |                              |                                                |            |            |            |   |            |           
|                                                                                                                                                                         | Companies 5% to 25% owned    |                                                | $          | 51,814,010 |            |   | $          | 59,602,279 |           
|                                                                                                                                                                         | Companies less than 5% owned |                                                |            | 8,576,394  |            |   |            | 2,481,556  |           
|Cash and cash equivalents                                                                                                                                                |                              |                                                | 4,688,731  |            |            |   | 237,154    |           
|Restricted cash                                                                                                                                                          |                              |                                                | 6,000,000  |            |            |   | 6,000,000  |           
|Dividends and interest receivable                                                                                                                                        |                              |                                                | 6,074,224  |            |            |   | 5,426,694  |           
|Other assets                                                                                                                                                             |                              | $                                              | 700,000    |            |            |   |           |           
|                                                                                                                                                                         |                              |                                                |            |            |            |   |            |           
|                                                                                                                                                                         |                              | Total Assets                                   |            | $          | 77,853,359 |   |            | $          | 73,747,683 | 
|                                                                                                                                                                         |                              |                                                |            |            |            |   |            |           
|                                                                                                                                                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                                                                 |                              |                                                |            |            |            |   |            |           
|Notes payable                                                                                                                                                            |                              | $                                              | 7,500,000  |            |            | $ | 6,000,000  |           
|Advisory fee payable                                                                                                                                                     |                              |                                                | 473,474    |            |            |   | 477,860    |           
|Accrued professional fees                                                                                                                                                |                              |                                                | 343,023    |            |            |   | 1,095,505  |           
|Distributions payable                                                                                                                                                    |                              |                                                | 2,630,172  |            |            |   |           |           
|Other liabilities                                                                                                                                                        |                              |                                                | 816,025    |            |            |   | 273,990    |           
|                                                                                                                                                                         |                              |                                                |            |            |            |   |            |           
|                                                                                                                                                                         |                              | Total Liabilities                              |            | $          | 11,762,694 |   |            | $          | 7,847,355  | 
|                                                                                                                                                                         |                              |                                                |            |            |            |   |            |           
|Stockholders Equity:                                                                                                                                                    |                              |                                                |            |            |            |   |            |           
|Common Stock, $0.01 par value; 25,000,000 shares
    authorized and 3,810,535 shares issued and outstanding at
    December 31, 2003 and December 31, 2002, respectively |                              | $                                              | 38,105     |            |            | $ | 38,105     |           
|Additional paid in capital                                                                                                                                               |                              |                                                | 34,506,838 |            |            |   | 34,506,838 |           
|Retained earnings                                                                                                                                                        |                              |                                                | 31,545,722 |            |            |   | 31,355,385 |           
|                                                                                                                                                                         |                              |                                                |            |            |            |   |            |           
|                                                                                                                                                                         |                              | Total Stockholders Equity                     |            | $          | 66,090,665 |   |            | $          | 65,900,328 | 
|                                                                                                                                                                         |                              |                                                |            |            |            |   |            |           
|                                                                                                                                                                         |                              | Total Liabilities and Stockholders
    Equity |            | $          | 77,853,359 |   |            | $          | 73,747,683 | 
|                                                                                                                                                                         |                              |                                                |            |            |            |   |            |           
|Net Asset Value Per Share                                                                                                                                                |                              | $                                              | 17.34      |            |            | $ | 17.29      |           
|                                                                                                                                                                         |                              |                                                |            |            |            |   |            |           

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

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BRANTLEY CAPITAL CORPORATION



STATEMENTS OF OPERATIONS


|                                                                                       |                                     |                                                |           |           |            |      |            |           |           |   |            |            |           | 
|-------------------------------------------------------------------------------------- | ----------------------------------- | ---------------------------------------------- | --------- | --------- | ---------- | ---- | ---------- | --------- | --------- | - | ---------- | ---------- | --------- | 
|                                                                                       |                                     |                                               
|                                                                                       |                                     | For the years ended December 31,              
|                                                                                       |                                     |                                               
|                                                                                       |                                     | 2003                                           |           | 2002      |            | 2001
|                                                                                       |                                     |                                                |           |           |            |     
|Investment Income:                                                                     |                                     |                                                |           |           |            |      |            |           |           |   |            |           
|                                                                                       | Interest and Dividends              |                                                |           |           |            |      |            |           |           |   |            |            |          
|                                                                                       |                                     | Companies owned 5% to 25%                      |           | $         | 5,585,613  |      |            | $         | 2,764,126 |   |            | $          | 1,581,837 | 
|                                                                                       |                                     | Companies less than 5% owned                   |           |           | 933,243    |      |            |           | 149,541   |   |            |            |          | 
|                                                                                       |                                     | Write off of Interest and Dividends Receivable |           |           | (548,334   | )    |            |           |          |   |            |            |          | 
|                                                                                       |                                     |                                                |           |           |            |      |            |           |           |   |            |           
|                                                                                       | Total investment income             |                                                |           | 5,970,522 |            |      |            | 2,913,667 |           |   |            | 1,581,837  |          
|                                                                                       |                                     |                                                |           |           |            |      |            |           |           |   |            |           
|Operating Expenses:                                                                    |                                     |                                                |           |           |            |      |            |           |           |   |            |           
|                                                                                       | Advisory fees                       |                                                |           | 1,952,808 |            |      |            | 1,901,941 |           |   |            | 1,631,885  |          
|                                                                                       | Administration fees                 |                                                |           | 75,465    |            |      |            | 75,000    |           |   |            | 74,795     |          
|                                                                                       | Professional fees                   |                                                |           | 70,031    |            |      |            | 1,929,878 |           |   |            | 309,759    |          
|                                                                                       | Interest and other expenses         |                                                |           | 1,215,663 |            |      |            | 1,165,245 |           |   |            | 773,074    |          
|                                                                                       |                                     |                                                |           |           |            |      |            |           |           |   |            |           
|                                                                                       | Total operating expenses            |                                                |           | 3,313,967 |            |      |            | 5,072,064 |           |   |            | 2,789,513  |          
|                                                                                       |                                     |                                                |           |           |            |      |            |           |           |   |            |           
|Investment Income (Loss), net                                                          |                                     |                                                | 2,656,555 |           |            |      | (2,158,397 | )         |           |   | (1,207,676 | )         
|                                                                                       |                                     |                                                |           |           |            |      |            |           |           |   |            |           
|Net Realized and Unrealized Gains (Losses) on
    Investments:                         |                                     |                                                |           |           |            |      |            |           |           |   |            |           
|                                                                                       | Net realized gains (losses)         |                                                |           |           |            |      |            |           |           |   |            |            |          
|                                                                                       |                                     | Companies less than 5% owned                   |           |           | (3,675,000 | )    |            |           | (402,012  | ) |            |            | 1,155,843 | 
|                                                                                       |                                     | Companies more than 5% but less than 25% owned |           |           | 470,896    |      |            |           |          |   |            |            |          | 
|                                                                                       | Net unrealized gains on investments |                                                |           | 3,368,058 |            |      |            | 454,423   |           |   |            | 16,851,583 |          
|                                                                                       |                                     |                                                |           |           |            |      |            |           |           |   |            |           
|Net realized and unrealized gains
    (losses) on investment transactions              |                                     |                                                | 163,954   |           |            |      | 52,411     |           |           |   | 18,007,426 |           
|                                                                                       |                                     |                                                |           |           |            |      |            |           |           |   |            |           
|Net increase (decrease) in net assets
    resulting from operations                    |                                     | $                                              | 2,820,509 |           |            | $    | (2,105,986 | )         |           | $ | 16,799,750 |           
|                                                                                       |                                     |                                                |           |           |            |      |            |           |           |   |            |           
|Net increase (decrease) in net assets
    from operations per share, basic and diluted |                                     | $                                              | 0.74      |           |            | $    | (0.55      | )         |           | $ | 4.41       |           
|                                                                                       |                                     |                                                |           |           |            |      |            |           |           |   |            |           
|Weighted average number of shares outstanding,
    basic and diluted                   |                                     |                                                | 3,810,535 |           |            |      | 3,810,535  |           |           |   | 3,810,535  |           
|                                                                                       |                                     |                                                |           |           |            |      |            |           |           |   |            |           

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

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BRANTLEY CAPITAL CORPORATION



STATEMENTS OF CHANGES IN NET ASSETS


|                                            |  |        |        |            |  |          |            |              |  |   |            |   |  |   |            |  
|------------------------------------------- |  | ------ | ------ | ---------- |  | -------- | ---------- | ------------ |  | - | ---------- | - |  | - | ---------- | -
|                                            |  |        |        | Additional |  |          |            | Total       
|                                            |  | Common |        | Paid in    |  | Retained |            | Stockholders
|                                            |  | Stock  |        | Capital    |  | Earnings |            | Equity      
|                                            |  |        |        |            |  |          |            |             
|Balance at December 31, 2000                |  | $      | 38,105 |            |  | $        | 37,484,895 |              |  | $ | 14,420,019 |   |  | $ | 51,943,019 |  
|                                            |  |        |        |            |  |          |            |              |  |   |            |   |  |   |            |  
|Net increase in net assets from operations: |  |        |        |            |  |          |            |              |  |   |            |   |  |   |            |  
|Net investment loss                         |  |        |       |            |  |          |           |              |  |   | (1,207,676 | ) |  |   | (1,207,676 | )
|Net realized gain                           |  |        |       |            |  |          |           |              |  |   | 1,155,843  |   |  |   | 1,155,843  |  
|Net unrealized gain                         |  |        |       |            |  |          |           |              |  |   | 16,851,583 |   |  |   | 16,851,583 |  
|Distributions from:                         |  |        |        |            |  |          |            |              |  |   |            |   |  |   |            |  
|Net investment income                       |  |        |       |            |  |          |           |              |  |   |           |   |  |   |           |  
|Net realized gains                          |  |        |       |            |  |          |           |              |  |   | (736,455   | ) |  |   | (736,455   | )
|                                            |  |        |        |            |  |          |            |              |  |   |            |   |  |   |            |  
|Balance at December 31, 2001                |  | $      | 38,105 |            |  | $        | 37,484,895 |              |  | $ | 30,483,314 |   |  | $ | 68,006,314 |  
|                                            |  |        |        |            |  |          |            |              |  |   |            |   |  |   |            |  
|Net decrease in net assets from operations: |  |        |        |            |  |          |            |              |  |   |            |   |  |   |            |  
|Net investment gain(loss)                   |  |        |       |            |  |          | (2,978,057 | )            |  |   | 819,660    |   |  |   | (2,158,397 | )
|Net realized loss                           |  |        |       |            |  |          |           |              |  |   | (402,012   | ) |  |   | (402,012   | )
|Net unrealized gain                         |  |        |       |            |  |          |           |              |  |   | 454,423    |   |  |   | 454,423    |  
|                                            |  |        |        |            |  |          |            |              |  |   |            |   |  |   |            |  
|Balance at December 31, 2002                |  | $      | 38,105 |            |  | $        | 34,506,838 |              |  | $ | 31,355,385 |   |  | $ | 65,900,328 |  
|                                            |  |        |        |            |  |          |            |              |  |   |            |   |  |   |            |  
|Net increase in net assets from operations: |  |        |        |            |  |          |            |              |  |   |            |   |  |   |            |  
|Net investment income                       |  |        |       |            |  |          |           |              |  |   | 2,656,555  |   |  |   | 2,656,555  |  
|Net realized loss                           |  |        |       |            |  |          |           |              |  |   | (3,204,104 | ) |  |   | (3,204,104 | )
|Net unrealized gain                         |  |        |       |            |  |          |           |              |  |   | 3,368,058  |   |  |   | 3,368,058  |  
|Distributions from:                         |  |        |        |            |  |          |            |              |  |   |            |   |  |   |            |  
|Net investment income                       |  |        |       |            |  |          |           |              |  |   | (2,630,172 | ) |  |   | (2,630,172 | )
|                                            |  |        |        |            |  |          |            |              |  |   |            |   |  |   |            |  
|Balance at December 31, 2003                |  | $      | 38,105 |            |  | $        | 34,506,838 |              |  | $ | 31,545,722 |   |  | $ | 66,090,665 |  
|                                            |  |        |        |            |  |          |            |              |  |   |            |   |  |   |            |  

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

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BRANTLEY CAPITAL CORPORATION



STATEMENTS OF CASH FLOWS


|                                                         |                                                                                                                  |                                                          |                                   |           |            |           |            |            |            |            |            |            |              |            |  
|-------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | --------------------------------- | --------- | ---------- | --------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ------------ | ---------- | -
|                                                         |                                                                                                                  |                                                         
|                                                         |                                                                                                                  | For the years ended December 31,                        
|                                                         |                                                                                                                  |                                                         
|                                                         |                                                                                                                  | 2003                                                     |                                   | 2002      |            | 2001     
|                                                         |                                                                                                                  |                                                          |                                   |           |            |          
|Cash Flows from Operating
    Activities:                |                                                                                                                  |                                                          |                                   |           |            |           |            |            |            |            |            |           
|                                                         | Net change in net assets resulting from
    operations                                                           |                                                          | $                                 | 2,820,509 |            |           | $          | (2,105,986 | )          |            | $          | 16,799,750 |             
|                                                         | Adjustments to reconcile net change in net assets
    resulting from operations to net cash used for operations: |                                                          |                                   |           |            |           |            |            |            |            |            |            |             
|                                                         |                                                                                                                  | Net realized (gains) losses from investments             |                                   |           | 3,204,104  |           |            |            | 402,012    |            |            |            | (1,155,843   | )         
|                                                         |                                                                                                                  | Net unrealized (gains) on investments                    |                                   |           | (3,368,058 | )         |            |            | (454,423   | )          |            |            | (16,851,583  | )         
|                                                         |                                                                                                                  | Changes in assets and liabilities:                       |                                   |           |            |           |            |            |            |            |            |            |              |           
|                                                         |                                                                                                                  |                                                          | Dividend and interest receivable  |           |            | (647,530  | )          |            |            | (1,933,635 | )          |            |              | (1,389,248 | )
|                                                         |                                                                                                                  |                                                          | Other assets                      |           |            | (700,000  | )          |            |            | 360,158    |            |            |              | (337,208   | )
|                                                         |                                                                                                                  |                                                          | Payable for investments purchased |           |            |          |            |            |            | (200,000   | )          |            |              |           |  
|                                                         |                                                                                                                  |                                                          | Advisory fee payable              |           |            | (4,386    | )          |            |            | (10,071    | )          |            |              | 103,955    |  
|                                                         |                                                                                                                  |                                                          | Accrued professional fees         |           |            | (752,482  | )          |            |            | 1,042,342  |            |            |              | (15,207    | )
|                                                         |                                                                                                                  |                                                          | Distributions payable             |           |            | 2,630,172 |            |            |            | (736,455   | )          |            |              |           |  
|                                                         |                                                                                                                  |                                                          | Other liabilities                 |           |            | 542,035   |            |            |            | 224,184    |            |            |              | (26,327    | )
|                                                         |                                                                                                                  | Purchases of investment securities                       |                                   |           | (2,208,665 | )         |            |            | (9,422,705 | )          |            |            | (5,871,814   | )         
|                                                         |                                                                                                                  | Sales/ Maturities of investment securities               |                                   |           | 4,066,050  |           |            |            | 7,702,388  |            |            |            | 3,941,883    |           
|                                                         |                                                                                                                  | Purchases of short-term investments                      |                                   |           |           |           |            |            |           |            |            |            | (513,664,214 | )         
|                                                         |                                                                                                                  | Sales/ Maturities of short-term investments              |                                   |           |           |           |            |            |           |            |            |            | 514,952,769  |           
|                                                         |                                                                                                                  |                                                          |                                   |           |            |           |            |            |            |            |            |           
|                                                         |                                                                                                                  | Net cash provided by (used for) operating
    activities |                                   |           | 5,581,749  |           |            |            | (5,132,191 | )          |            |            | (641,376     | )         
|                                                         |                                                                                                                  |                                                          |                                   |           |            |           |            |            |            |            |            |           
|Cash Flows from Financing
    Activities:                |                                                                                                                  |                                                          |                                   |           |            |           |            |            |            |            |            |           
|                                                         |                                                                                                                  | Note Payable                                             |                                   |           | 1,500,000  |           |            |            |           |            |            |            |             |           
|                                                         |                                                                                                                  | Distributions declared but unpaid                        |                                   |           | (2,630,172 | )         |            |            |           |            |            |            |             |           
|                                                         |                                                                                                                  |                                                          |                                   |           |            |           |            |            |            |            |            |           
|                                                         |                                                                                                                  | Net cash used for financing
    activities               |                                   |           | (1,130,172 | )         |            |            |           |            |            |            |             |           
|                                                         |                                                                                                                  |                                                          |                                   |           |            |           |            |            |            |            |            |           
|Net change in cash and cash equivalents for
    the year |                                                                                                                  |                                                          | 4,451,577                         |           |            |           | (5,132,191 | )          |            |            | (3,513,087 | )         
|                                                         |                                                                                                                  |                                                          |                                   |           |            |           |            |            |            |            |            |           
|Cash and cash equivalents, beginning of
    year         |                                                                                                                  |                                                          | 237,154                           |           |            |           | 5,369,345  |            |            |            | 8,882,432  |           
|                                                         |                                                                                                                  |                                                          |                                   |           |            |           |            |            |            |            |            |           
|Cash and cash equivalents, end of the
    year           |                                                                                                                  | $                                                        | 4,688,731                         |           |            | $         | 237,154    |            |            | $          | 5,369,345  |           
|                                                         |                                                                                                                  |                                                          |                                   |           |            |           |            |            |            |            |            |           

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

34



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##### Table of Contents



BRANTLEY CAPITAL CORPORATION



STATEMENT OF INVESTMENTS


December 31, 2003


|                                         |                                                                           |            |  |           |  |   |            |            | 
|---------------------------------------- | ------------------------------------------------------------------------- | ---------- |  | --------- |  | - | ---------- | ---------- | 
|Name of Issuer and Title of Issue        |                                                                           | Shares/Par |  | Value    
|                                         |                                                                           |            |  |          
|Aviation                                 |                                                                           |            |  |           |  |   |            |           
|                                         | Flight Options International Inc. Preferred Stock
    and Warrants *#@    |            |  | 3,342,060 |  |   | $          | 32,500,000 | 
|                                         |                                                                           |            |  |           |  |   |            |           
|Business Services                        |                                                                           |            |  |           |  |   |            |           
|                                         | Disposable Products Company, LLC Subordinated
    Debt with Warrants #    |            |  | 3,865,992 |  |   |            | 3,109,332  | 
|                                         | The Holland Group, Inc. Convertible Preferred
    Stock #@                |            |  | 282,530   |  |   |            | 2,125,000  | 
|                                         | International Total Services, Inc. Common Stock                           |            |  | 104,250   |  |   |            | 101        | 
|                                         | Prime Office Products, Inc. Convertible Preferred
    Stock #@            |            |  | 750,000   |  |   |            | 1,500,000  | 
|                                         |                                                                           |            |  |           |  |   |            |           
|                                         |                                                                           |            |  |           |  |   | 6,734,433  |           
|                                         |                                                                           |            |  |           |  |   |            |           
|Drugs & Health Care                      |                                                                           |            |  |           |  |   |            |           
|                                         | Integrated Physician Solutions, Inc. Convertible
    Preferred Stock #*   |            |  | 793,000   |  |   |            | 3,172,000  | 
|                                         | Integrated Physician Solutions, Subordinated Debt
    with Warrants #*    |            |  | 697,448   |  |   |            | 692,348    | 
|                                         | Health Care Solutions, Subordinated Debt with
    Warrants #              |            |  | 1,701,782 |  |   |            | 1,602,611  | 
|                                         | National Rehabilitation Partners, Inc.
    Convertible Preferred Stock #@ |            |  | 2,218,375 |  |   |            | 1,454,285  | 
|                                         | National Rehabilitation Partners, Inc.
    Subordinated Debt #            |            |  | 27,228    |  |   |            | 27,228     | 
|                                         |                                                                           |            |  |           |  |   |            |           
|                                         |                                                                           |            |  |           |  |   | 6,948,472  |           
|                                         |                                                                           |            |  |           |  |   |            |           
|Miscellaneous                            |                                                                           |            |  |           |  |   |            |           
|                                         | Streamline Foods, Inc. Convertible Preferred
    Stock #@                 |            |  | 897,572   |  |   |            | 699,725    | 
|                                         | Streamline Foods, Inc. Subordinated Debt with
    Warrants #              |            |  | 122,500   |  |   |            | 95,275     | 
|                                         | Value Creation Partners, Inc. Convertible
    Preferred Stock #@          |            |  | 304,989   |  |   |            | 2,225,960  | 
|                                         | Waterlink, Inc. Warrants                                                  |            |  | 53,550    |  |   |            |           | 
|                                         |                                                                           |            |  |           |  |   |            |           
|                                         |                                                                           |            |  |           |  |   | 3,020,960  |           
|                                         |                                                                           |            |  |           |  |   |            |           
|Retail Trade                             |                                                                           |            |  |           |  |   |            |           
|                                         | Fitness Quest, Inc. Convertible Preferred Stock
    *#@                   |            |  | 788,961   |  |   |            | 8,091,876  | 
|                                         | Fitness Quest, Inc. Common Stock #@*                                      |            |  | 120,766   |  |   |            | 1,238,621  | 
|                                         | Fitness Quest, Inc. Warrants #@*                                          |            |  | 181,172   |  |   |            | 1,856,042  | 
|                                         |                                                                           |            |  |           |  |   |            |           
|                                         |                                                                           |            |  |           |  |   | 11,186,539 |           
|                                         |                                                                           |            |  |           |  |   |            |           
|Total Investments(Cost
    $25,182,154) |                                                                           |            |  |           |  | $ | 60,390,404 |           
|                                         |                                                                           |            |  |           |  |   |            |           



---

All investments are U.S. companies



|  |                                                                        
|- | -----------------------------------------------------------------------
|* | Represents 5% or more of total stockholders
    equity.                
| 
|# | Represents privately held securities which are
    considered illiquid.



|  |                                                                                 
|- | --------------------------------------------------------------------------------
|@ | Represents more than 5% but less than 25% of the
    voting class of securities.

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

35



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##### Table of Contents



BRANTLEY CAPITAL CORPORATION



NOTES TO THE FINANCIAL STATEMENTS


1. Organization

Brantley Capital Corporation (the
Company), a Maryland corporation, is a closed-end,
non-diversified investment company which has elected to be
treated as a business development company under the Investment
Company Act of 1940, as amended (the Act). The
Company was organized on August 1, 1996 and commenced
operations on December 3, 1996. The Companys
principal investment objective is to achieve long-term capital
appreciation in the value of its investments and to provide
current income primarily from interest, dividends, and fees paid
by its portfolio companies. To achieve this objective, the
Company provides equity and long-term debt financing to small
and medium-sized companies in a variety of industries throughout
the United States.

The Company has invested in securities classified
as restricted securities under the Securities Act of
1933. The value of restricted stock investments for which no
public market exists cannot be precisely determined. These
securities will usually be subject to restrictions on resale or
otherwise have no established trading market. The lack of
liquidity of these securities may adversely affect the ability
of the Company to dispose of them in a timely manner and at a
fair price when the Company deems it necessary or advantageous.
(See Also Note 12).

Privately placed securities typically depend
significantly on the management talents and efforts of one
person or a small group of persons. The loss of the services of
one or more of these persons could have a material adverse
affect on the portfolio company. In addition, due to their size
and sometimes limited product diversity, these companies may be
more vulnerable to economic downturns and often require
additional capital to expand or compete.

The Company continuously evaluates opportunities
to maximize the valuation of its investments. In that regard,
the Company periodically evaluates potential acquisitions,
financing transactions, initial public offerings, strategic
alliances, and sale opportunities involving its portfolio
companies. These transactions and activities are generally not
disclosed to the Companys shareholders and the investing
public until such time as the transactions are publicly
announced or completed, as the case may be. Any such pending
transaction could have an impact on the valuation of an
investment which is also generally not adjusted until the
transaction is publicly announced or completed.

Small-cap public companies may also display more
sensitivity to changes in company, industry and market
conditions than more established public companies. Because
small-cap public companies often have fewer outstanding shares
than larger companies, it may be more difficult for the Company
to buy or sell significant amounts of shares without an
unfavorable impact on the prevailing prices.

The Company operates as a non-diversified
investment company within the meaning of the Act and therefore,
the Companys investments are likely to not be
substantially diversified.

2. Significant Accounting
Policies

The following is a summary of significant
accounting policies in conformity with accounting principles
generally accepted in the United States followed by the Company
in preparation of its financial statements.

A. Security
Valuation

Privately placed securities are carried at fair
value as determined in good faith by or under the direction of
the Board of Directors. Generally, the fair value of each
security will initially be based primarily upon its original
cost to the Company. Cost will be the primary factor used to
determine fair value on an ongoing basis until significant
developments or other factors affecting the investment (such as
results of the portfolio companys operations, changes in
the general market conditions, subsequent financings,
independent valuations or the availability of market quotations)
provide a basis for value other than cost valuation. Proceeds
from disposition of securities could differ significantly from
their estimated fair value.

36



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##### Table of Contents



NOTES TO THE FINANCIAL STATEMENTS 
Continued






Portfolio investments listed on an exchange or
traded on the NASDAQ National Market are valued at the closing
price listed on their respective exchange or system on the date
of valuation. Securities traded in the over-the-counter market
will be valued on the average of the closing bid and asked
prices on the day of valuation.

B. Repurchase
Agreements

The Company may invest in repurchase agreements
with institutions, which Brantley Capital
Management, L.L.C. (the Investment Adviser) has
determined are creditworthy. Each repurchase agreement is
recorded at cost. The Company requires that the securities
purchased in a repurchase agreement be transferred to the
Companys custodian in a manner which will enable the
Company to obtain those securities in the event of counter-party
default. The seller is required to maintain the value of the
securities held at not less than the repurchase price, including
interest.

C. Cash
and Cash Equivalents

Cash equivalents consist of highly liquid
investments with minimal interest rate risk and original
maturities of three months or less at acquisition date. The
stated value of these instruments approximates fair market value
due to their short-term nature. At December 31, 2003, cash
and cash equivalents consisted of the following:

|     |                     |              |            |              |  |   |           |           | 
|---- | ------------------- | ------------ | ---------- | ------------ |  | - | --------- | --------- | 
|     |                     | December 31, |            | December 31,
|     |                     | 2003         |            | 2002        
|     |                     |              |            |             
|Cash |                     | $            | 10,688,731 |              |  | $ | 6,237,154 |          
|     |                     |              |            |              |  |   |           |          
|     | Non-restricted Cash |              | $          | 4,688,731    |  |   | $         | 237,154   | 
|     |                     |              |            |              |  |   |           |          
|     | Restricted Cash     |              | $          | 6,000,000    |  |   | $         | 6,000,000 | 
|     |                     |              |            |              |  |   |           |          

Pursuant to a note payable agreement (Note 10),
the Company is obligated to maintain $6.0 million of cash
under the direction of the lender.

D. Security
Transactions and Related Income

Security transactions are accounted for on a
trade date basis. Net realized gains or losses on sales of
securities are determined on the specific identification method.
Interest income and expenses are recognized on the accrual
basis. Dividend income is recorded on cumulative preferred
equity securities on an accrual basis to the extent that such
amounts are expected to be collected and on common equity
securities on the record date for private companies or on the
ex-dividend date for publicly traded companies. We assess the
collectibility of dividends and interest income receivables in
connection with our determination of the fair value of the
related security. To the extent that there are adverse future
developments, previously recognized dividend and interest income
may not be realized.

E. Dividends
and Distributions to Stockholders

The Company intends to make distributions to its
stockholders of substantially all of its investment company
taxable income. The Company may choose to distribute net
realized long-term capital gains, or to retain such gains to
supplement the Companys equity capital and support growth
in its portfolio. Income distributions and capital gain
distributions are determined in accordance with income tax
regulations, which may differ from accounting principles
generally accepted in the United States. (See also Note 12).

F. Income
Taxes

The Company intends to continue to qualify as a
regulated investment company by complying with the applicable
provisions available to certain investment companies as defined
in applicable sections of the Internal Revenue Code. Therefore,
no provision for income taxes has been recorded. As of
December 31, 2003 the Company has a capital loss
carryforward of approximately $3,606,000, which, if unused,
$394,000 will expire on December 31, 2010 and $3,212,000
will expire on December 31, 2011.

37



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##### Table of Contents



NOTES TO THE FINANCIAL STATEMENTS 
Continued






G. Segments

The Company operates as one segment as defined by
Statement of Financial Accounting Standard No. 131
Disclosures about Segments of an Enterprise and Related
Information.

3. Investment Advisory
Agreement

The Company has entered into an investment
advisory agreement (the Advisory Agreement) with the
Investment Adviser under which the Investment Adviser is
entitled to an annual management fee of 2.85% of the
Companys net assets, determined at the end of each
calendar quarter, and payable quarterly in arrears throughout
the term of the Advisory Agreement. Certain officers of the
Company are also officers of the Investment Adviser. No officer
of the Investment Adviser receives any compensation from the
Company for serving as officer of the Company. (See also Note
12).

4. Investments

At December 31, 2003 and 2002, the cost of
investments for federal income tax purposes was the same for
financial reporting purposes.

5. Transactions with Related
Parties

The Company has obtained exemptive relief from
certain provisions of the Act which permit the Company to invest
in an offering in which affiliates of the Investment Adviser
also intend to invest. The Company anticipates that, subject to
certain terms and conditions, current and future affiliates of
the Adviser may invest in the same portfolio companies.

At December 31, 2003 and 2002, the Company
owed $473,474 and $477,860 respectively, to the Investment
Adviser for management and advisory services.

6. Use of Estimates

The preparation of financial statements in
accordance with accounting principles generally accepted in the
United States of America requires management of the Company to
make a number of estimates and assumptions relating to the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of investment income and
operating expenses during the period. Significant items subject
to such estimates include the valuation of privately held
securities. Actual results could differ from those estimates.

7. Stockholders Equity

The Company is authorized to issue 25,000,000
shares of Common Stock with a par value $0.01 per share. Shares
totaling 3,660,535 were issued through the organization and
initial public offering of the Company at a per share price of
$10.00. On January 15, 1997, the underwriters of the
initial offering of the Companys shares exercised an
option to purchase an additional 150,000 shares of Common Stock
at $10.00 per share resulting in total shares outstanding of
3,810,535. The proceeds of the offerings were recorded net of
offering costs.

Under the Companys Dividend Reinvestment
and Cash Purchase Plan (the Plan), all cash
dividends and cash distributions to stockholders are
automatically reinvested unless the stockholder elects to
receive his or her distributions in cash. If the market value
per share of the Common Stock on the record date equals or
exceeds the net asset value per share of Common Stock on that
date, the Company will issue new shares at the net asset value.

If the net asset value exceeds the market price,
shares will be purchased on the open market or in private
transactions as soon as is practicable after such date, as
permitted by applicable regulations. If before the open market
purchases have been completed, the market price exceeds the net
asset value, the Company will issue new shares at net asset
value to fulfill the purchase requirements.

38



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##### Table of Contents



NOTES TO THE FINANCIAL STATEMENTS 
Continued






8. Stock Option Plans

Concurrent with the initial public offering on
December 3, 1996, the Company adopted the 1996 Stock Option
Plan (the Plan), which authorizes the issuance of
options to purchase up to 1,175,000 shares of Common Stock to
officers and employees of the Company. Options to purchase
325,000, 175,000 and 350,000 shares of Common Stock of the
Company (the Option Shares) were granted to the
Companys executive officers on December 3, 1996,
May 18, 1999 and February 23, 2000, respectively.
These options are exercisable as to one-third of the Option
Shares on the first anniversary of the option grant, as to an
additional one-third of the Option Shares on the second
anniversary of the option grant and as to the remaining
one-third of the Option Shares on the third anniversary of the
option grant. Options granted under the Plan are exercisable at
a price not less than the greater of (i) the current market
value on the date of option grant and (ii) the current net
asset value of the shares of Common Stock on the date of the
option grant. No option may be exercised more than 10 years
after the date on which it is granted. The exercise price of the
granted options is $10.00, $12.77 and $13.42, respectively.

In addition, the Company has adopted a stock
option plan relating to 75,000 shares of Common Stock to be
granted to the disinterested directors of the Company (the
Directors Plan). Upon receipt of an order from
the Securities and Exchange Commission approving such a plan as
fair and reasonable and not overreaching of the Company or its
stockholders, options to purchase 22,000, 10,000 and 12,000
shares of Common Stock were granted to the disinterested
directors on May 18, 1999, June 13, 2000 and
June 15, 2001 respectively. These options are exercisable
on the first anniversary of the option grant or (ii) the
current net asset value of the shares of Common Stock on the
date of the option grant. No options may be exercised more than
10 years after the date on which it is granted. The
exercise price of the granted options is $12.77, 13.96 and 13.67
respectively.

In order to facilitate the purchase of shares
under the Plan or Directors Plan, the Company may make
arms-length loans to each plans participants, under
the terms required by Section 57(j)(2) of the Investment
Company Act of 1940. No loans were outstanding as of
December 31, 2003. All options outstanding under the Plan
and the Directors Plan are fully vested at
December 31, 2003. No options under either plan were
exercised during 2003.

In October 1995, the Financial Accounting
Standards Board issued Statement No. 123, Accounting for
Stock Based Compensation (the Statement). The
Statement encourages companies to recognize expense for stock
based compensation awards based on their fair value on the date
of grant. Under the Statement, companies may continue following
the existing accounting rules, provided that pro forma
disclosures are made of what net income and earnings per share
would have been had the new fair value method been used. The
Company has elected to continue the existing accounting method
and to not adopt the fair value method. Management has assessed
the impact of this pro forma disclosure requirement and
determined that it is not material to the operations of the
Company in 2003 and 2002. Management used the Black Scholes
model to perform this assessment. Key assumptions included an
estimated volatility of .253, expected option life of
5 years, an expected dividend yield of 4.38 and a risk free
interest rate of 4.95%. (See also Note 12).

39



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##### Table of Contents



NOTES TO THE FINANCIAL STATEMENTS 
Continued






9. Financial Highlights

|                                                |                                          |                                   |       |       |      |   |        |    |       |  
|----------------------------------------------- | ---------------------------------------- | --------------------------------- | ----- | ----- | ---- | - | ------ | -- | ----- | -
|                                                |                                          |                                  
|                                                |                                          | Year ended                       
|                                                |                                          | December 31, 2003                
|                                                |                                          |                                  
|                                                |                                          | 2003                              |       | 2002 
|                                                |                                          |                                   |       |      
|Net Asset Value, Beginning of year              |                                          | $                                 | 17.29 |       |      | $ | 17.85  |   
|Income from investment operations:              |                                          |                                   |       |       |      |   |        |   
|Net Investment Income (Loss)                    |                                          |                                   | 0.70  |       |      |   | (0.57  | ) 
|Net Realized and Unrealized Gain on Investments |                                          |                                   | 0.04  |       |      |   | 0.01   |   
|                                                |                                          |                                   |       |       |      |   |        |   
|                                                |                                          | Total from investment operations: |       |       | 0.74 |   |        |    | (0.56 | )
|                                                |                                          |                                   |       |       |      |   |        |   
|Less Distributions:                             |                                          |                                   |       |       |      |   |        |   
|                                                | Distributions from Net Investment Income |                                   |       | (0.69 | )    |   |        |   |      
|                                                |                                          |                                   |       |       |      |   |        |   
|Net Asset Value, end of the year                |                                          | $                                 | 17.34 |       |      | $ | 17.29  |   
|                                                |                                          |                                   |       |       |      |   |        |   
|Market Value, end of the year                   |                                          | $                                 | 10.20 |       |      | $ | 7.70   |   
|                                                |                                          |                                   |       |       |      |   |        |   
|Total Return, at Market Value                   |                                          |                                   | 41.31 | %     |      |   | (29.29 | )%
|Total Return, at NAV                            |                                          |                                   | 6.98  | %     |      |   | (3.14  | )%
|Total Expenses/ Average Net Assets              |                                          |                                   | 4.84  | %     |      |   | 7.58   | % 
|Net Investment Income/ Average Net Assets       |                                          |                                   | 3.88  | %     |      |   | (3.22  | )%

10. Debt

The notes payable to bank at December 31,
2003 included a secured note for $6,000,000 with interest
payable at the banks prime rate, 4.00% at December 31,
2003 and an unsecured note for $1,500,000 with interest payable
at the banks prime rate plus 1.00%, 5.00% at
December 31, 2003. Under the terms of the notes, the Bank
may request repayment on demand and interest is paid monthly.
Interest paid for the years ending December 31, 2003 and
2002 was approximately $302,645 and $290,000, respectively.
Pursuant to the $6,000,000 secured note agreement, the Company
is obligated to maintain $6.0 million of cash under the
direction of the lender.

11. Commitments and
Contingencies

The Company has an investment in Flight Options,
Inc., an aviation company providing complete private air travel
service through the sale of fractional interests in pre-owned
jet aircraft. The Company guaranteed a portion of Flight
Options, Inc. third-party borrowings. Management believes, based
on current facts and circumstances and Flight Options,
Inc.s financial position, that the likelihood of a payment
pursuant to such guarantee is remote.

On October 8, 2002, Thomas Kornfeld and
Robert Strougo filed a purported class action lawsuit against
the Company, the directors of the Company excluding Phillip
Goldstein, IVS Associates, Inc. and JMP Securities LLC,
alleging a series of derivative and direct claims that the
directors have breached their fiduciary duties and that the
Company engaged in wrongdoing with respect to the Annual Meeting
of Stockholders held on September 17, 2002. The factual
allegations are substantially similar to the complaint filed by
Mr. Goldstein and also include allegations of conversion of
corporate funds. The complaint seeks, among other things, an
order declaring Mr. Goldsteins nominees to be
directors of the Company, an order declaring that the investment
advisory agreement be terminated and damages for breach of
fiduciary duty. On January 12, 2003, the plaintiffs filed a
motion to consolidate this lawsuit with the lawsuit by Goldstein
discussed below, which was subsequently denied.

40



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##### Table of Contents



NOTES TO THE FINANCIAL STATEMENTS 
Continued






12. Subsequent Events

On March 19, 2003, the Company entered into
a Memorandum of Understanding with Phillip Goldstein, a director
of the Company, pursuant to which Mr. Goldstein agreed to
dismiss the lawsuit he filed against the Company in September
2002, subject to compliance with the Investment Company Act of
1940. The Court approved the proposed settlement on February 26,
2004.

On June 4, 2003, the Company filed an
application for exemptive relief from certain provisions of the
1940 Act in order to effect the provisions of the Memorandum of
Understanding. On June 18, 2003, the Company received
comments on its application from the staff of the Division of
Investment Management of the Securities and Exchange Commission.
On August 14, 2003 the Company responded to those comments.
With such response, the Company proposed a new Memorandum of
Understanding that was submitted to the staff of the Division of
Investment Management. On November 12, 2003, the Company
received comments regarding its August 14, 2003 response.
The Company responded to such comments on December 18,
2003. On February 11, 2004, the staff of the Division of
Investment Management requested a response from the Board of
Directors, which the Board provided on February 15, 2004.
The Company continues to discuss this matter with staff of the
Division of Investment Management.

The Memorandum of Understanding is subject to
approval by the stockholders, and the receipt of exemptive
relief from the SEC. There can be no assurance that this
exemptive relief will be granted.

Pursuant to the proposed Memorandum of
Understanding the Company would agree, among other things:



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | to cause there to be four (4) directors who
    are not interested persons as defined under the 1940
    Act and cause the board to be exactly seven (7) directors in
    total;                     
|
| |  | if Mr. Goldstein or Gerald Hellerman is no
    longer a director of the Company then whichever of
    Mr. Goldstein or Mr. Hellerman remains on the board
    shall have the right to select a nominee;
|
| |  | to not convert the Company from being an advised
    fund to an internally managed fund unless a majority of the
    independent directors agree;                                                      
|
| |  | to allow any independent director to request
    independent counsel, subject to the approval of the board, which
    cannot be unreasonably withheld; and                                             
|
| |  | to refrain from making defamatory remarks about
    any party to the agreement.                                                                                                                        

In addition, the proposed Memorandum of
Understanding provides that at the next Annual Meeting of
Stockholders:



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Company would ask shareholders to approve a
    plan of orderly disposition of the assets of the Company or a
    sale of the assets with the goal of prompt cash distribution to
    shareholders;
|
| |  | the Company would ask shareholders to approve a
    new investment advisory agreement pursuant to which,
    prospectively:                                                                            



| |   |                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the advisors fees would be reduced from
    2.85% to 2.5% of our net asset value;                                                                                                                                                                         
|
| |  | all stock options would be forfeited and
    cancelled; and                                                                                                                                                                                                
|
| |  | the advisor would be entitled to receive a fee
    equal to 20% of the aggregate distributions made by the Company
    in excess of $10.00 per share; however, none of the amount would
    be paid until aggregate distributions totaled $12.50 per share.

The proposed Memorandum of Understanding also
includes provisions that would require the parties to take all
steps necessary to accomplish the goals of the Memorandum,
including voting their shares in favor of the proposals. Under
the proposed memorandum, the Company would also be required to
reimburse Mr. Goldstein for certain expenses (not to exceed
$275,000) incurred in connection with the proxy solicitation and
litigation related to the Annual Meeting of Stockholders on
September 17, 2002. Mr. Goldstein would also agree not
to

41



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##### Table of Contents



NOTES TO THE FINANCIAL STATEMENTS 
Continued






engage in, lead or fund a proxy contest while the
agreement is in effect. The term of the new proposed Memorandum
of Understanding would run until December 31, 2006.


If we receive all necessary government and
stockholder approvals, the effect of the Memorandum of
Understanding will be that we intend to make only follow-on
investments, and any remaining proceeds we receive from
liquidity events are intended to be distributed to shareholders.

42



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##### Table of Contents






INDEPENDENT AUDITORS REPORT

The Board of Directors and Stockholders of

Brantley Capital Corporation:


We have audited the accompanying balance sheets
of Brantley Capital Corporation (Company), including the
statement of investments, as of December 31, 2003 and 2002, 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 Companys management. Our
responsibility is to express an opinion on these financial
statements and financial highlights based on our audit. The
financial statements of Brantley Capital Corporation for the
year ended December 31, 2001 were audited by other auditors
who have ceased operations. Those auditors expressed an
unqualified opinion on those financial statements in their
report dated March 7, 2002.

We conducted our audit in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities
owned at December 31, 2003 and 2002, by written
confirmation with the custodian or investment portfolio
companies. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the 2003 and 2002 financial
statements and financial highlights referred to above present
fairly, in all material respects, the financial position of
Brantley Capital Corporation as of December 31, 2003 and
2002, and the results of its operations, the changes in its net
assets, its cash flows, and its financial highlights for the
years then ended in conformity with accounting principles
generally accepted in the United States of America.

/s/ KPMG LLP

Cleveland, Ohio


March 29, 2004,

43



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##### Table of Contents



Note: This is a copy of a report previously
issued by Arthur Andersen LLP, Brantley Capital
Corporations former independent accountants. This report
has not been reissued by Arthur Andersen LLP in connection with
the filing of this Annual Report.



REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

To the Board of Directors and

Stockholders of Brantley Capital Corporation:


We have audited the accompanying balance sheets
of Brantley Capital Corporation (a Maryland corporation) as of
December 31, 2001 and 2000, and the related statements of
operations, stockholders equity and cash flows for each of
the three years in the period ended December 31, 2001.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on the financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining on a test basis evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 2001
and 2000. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of Brantley Capital Corporation as of December 31,
2001 and 2000 and the results of its operations and its cash
flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles
generally accepted in the United States.



| |                    
| | -------------------
| | ARTHUR ANDERSEN LLP

Cleveland, Ohio

March 7, 2002


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##### Table of Contents






Item 9. Changes in and Disagreements
with Accountants on Accounting and Financial
Disclosure

On June 11, 2002, Brantley Capital
Corporation (the Company) dismissed Arthur Andersen
(AA) as its independent auditors. AAs reports
on the Companys financial statements for the past two
years did not contain an adverse opinion or a disclaimer of
opinion, and were not qualified or modified as to uncertainty,
audit scope, or accounting principles. The decision to change
accountants was approved by the Audit Committee of the
Companys Board of Directors and was submitted for
ratification by its stockholders.

During the Companys two most recent fiscal
years and any subsequent interim period preceding the dismissal
of AA, there were no disagreements with AA on any matters of
accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which
disagreements, if not resolved to the satisfaction of AA, would
have caused them to make reference to the subject matter of such
disagreements in connection with their reports.

During the Companys two most recent fiscal
years and any subsequent interim period preceding AAs
dismissal:



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | AA did not advise the Company that the internal
    controls necessary for the Company to develop reliable financial
    statements did not exist;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (2) | AA did not advise the Company that information
    had come to AAs attention that let them to no longer be
    able to rely on managements representations, or that made
    them unwilling to be associated with the financial statements
    prepared by management;                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | (3) | AA did not advise the Company of the need to
    expand significantly the scope of their audit, or that
    information had come to their attention during such period that,
    if further investigated, may (i) materially impact the
    fairness or reliability of previously issued financial
    statements and Reports of Independent Auditors, or the financial
    statements issued or to be issued covering the fiscal period(s)
    subsequent to the date of the most recent financial statements
    covered by an audit report, or (ii) cause AA to be
    unwilling to rely on managements representations or be
    associated with the Companys financial statements; and
|
| | (4) | AA did not advise the Company that information
    had come to their attention that they had concluded materially
    impacted the fairness or reliability of previously issued
    financial statements and Reports of Independent Auditors, or the
    financial statements issued or to be issued covering the fiscal
    period(s) subsequent to the date of the most recent financial
    statements covered by an audit report.                                                                                                                                                                                                                                                        

The Company engaged KPMG LLP (KPMG)
to act as its independent auditors, effective June 11,
2002. During the Companys two most recent fiscal years and
any subsequent interim period prior to engaging KPMG, the
Company did not consult KPMG regarding either: (i) the
application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that
might be rendered on the Companys financial statements,
and KPMG did not provide either a written report or oral advice
to the Company that KPMG concluded was an important factor
considered by the Company in reaching a decision as to the
accounting, auditing or financial reporting issue; or (ii) any
matter that was either the subject of a disagreement or a
reportable event, each as defined in Item 304 of
Regulation S-K.

Item 9A. Controls and
Procedures

(a) As of the end of the year covered by
this annual report, the Companys chief executive officer
and chief financial officer conducted an evaluation of the
Companys disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 of the Securities and Exchange Act
of 1934). Based upon this evaluation, the Companys chief
executive officer and chief financial officer concluded that the
Companys disclosure controls and procedures are effective
in timely alerting them of any material information relating to
the Company that is required to be disclosed by the Company in
the reports it files or submits under the Securities Exchange
Act of 1934.

(b) There have not been any significant
changes in the Companys internal controls over financial
reporting that occurred during our most recently completed
fiscal quarter.

45



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##### Table of Contents






PART III




Item 10. Directors and Executive
Officers of the Registrant

Information in response to this Item is
incorporated by reference to the identification of directors and
nominees contained in the Proposal 1. Election
of Directors section, and the subsections
Proposal 1. Election of Directors 
Section 16(a) Beneficial Ownership Reporting
Compliance, Proposal 1. Election of
Directors  Committees of the Board of Directors
and Proposal 1. Election of
Directors  Information about Executive Officers
of our proxy statement to be filed within 120 days of our
fiscal year ended December 31, 2003 in connection with our
2004 Annual Meeting of Stockholders (the 2004 Proxy
Statement).

We have adopted a Code of Business Conduct for
all of our directors and employees, including our Chief
Executive Officer and Chief Financial Officer. We have posted a
copy of our Code of Business Conduct on our website at
www.brantleycapital.com. We will provide you a copy of our Code
of Business Conduct without charge upon request. To obtain a
copy of our Code of Business Conduct, please send your written
request to Brantley Capital Corporation, 3201 Enterprise
Parkway, Suite 350, Cleveland, Ohio 44122, Attn: Corporation
Secretary.

Any waivers of the Code of Business Conduct must
be approved, in advance, by our full Board of Directors. Any
amendments to, or waivers from the Code of Business Conduct that
apply to our executive officers and directors will be posted on
our website located at www.brantleycapital.com.




Item 11. Executive Compensation

The information set forth under the caption
EXECUTIVE COMPENSATION in the 2004 Proxy Statement
is incorporated herein by reference.




Item 12. Security Ownership of Certain
Beneficial Owners and Management

The information set forth under the caption
ELECTION OF DIRECTORS in the 2004 Proxy Statement is
incorporated herein by reference.




Item 13. Certain Relationships and
Related Transactions

The Investment Adviser, pursuant to the terms of
the Investment Advisory Agreement, is responsible, on a
day-to-day basis, for the selection and supervision of portfolio
investments. Transactions between the Company and the Investment
Adviser, including operational responsibilities, duties and
compensation, are governed by the Investment Advisory Agreement.
The Company currently pays to the Investment Adviser an annual
management fee of 2.85% of the Companys net assets,
determined at the end of each calendar quarter and payable in
arrears. For the year ended December 31, 2003, the
Investment Adviser was owed an investment advisory fee in the
aggregate amount of $501,749. Robert P. Pinkas, Chairman of the
Board, Chief Executive Officer, Treasurer and a director,
Michael J. Finn, President, Paul H. Cascio, Vice President and a
director, and Tab A. Keplinger, Chief Financial Officer of the
Company, are officers and managers of the Investment Adviser,
and together own a majority of the Investment Adviser. As stated
above in Item 1 (Business  Potential
Co-Investments and Follow-On Investments) and in Item 8
(Note 5 of the notes accompanying the financial statements
in Financial Statements and Supplementary Data), the
Company co-invests in portfolio companies from time to time with
affiliates of the Company and the Investment Adviser, including
certain venture capital investment partnerships. Certain
officers and directors of the Company and officers of the
Investment Adviser also serve as general partners of the
investment partnerships general partner. The
Companys co-investments with such affiliates are subject
to the terms and conditions of the exemptive order granted by
the Commission, which relieves the Company from certain
provisions of the Act and permits certain joint transactions
with the investment partnerships.

The Company is an investor in Disposable Products
Company, LLC (DPC), as discussed in the
Companys Management, Discussion and Analysis of Financial
Condition and Results of Operations in Item 7 of this
Annual Report on Form 10-K. Grand River Industries, Ltd.
(Grand River) owns 85% of DPC. Grand River

46



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##### Table of Contents



is a limited liability company that is 100% owned
by Objective Industrial Investments Partners, L.P.
(Objective). Robert P. Pinkas, Chairman and Chief
Executive Officer of the Company, is a managing member in
Objective. Mr. Pinkas, as a result of this investment
commitment in Objective, owns 20% of Grand River.


James P. Oliver has been a director of the
Company since 1998 and is a partner with the law firm of Squire
Sanders & Dempsey L.L.P., which has represented the
Company as general counsel since shortly after its formation in
1996.

On March 19, 2003, the Company entered into
a Memorandum of Understanding with Phillip Goldstein, a director
of the Company, pursuant to which Mr. Goldstein agreed to
dismiss the lawsuit he filed against the Company in September
2002, subject to compliance with the Investment Company Act of
1940. The Court approved the proposed settlement on February 26,
2004.

On June 4, 2003, the Company filed an
application for exemptive relief from certain provisions of the
1940 Act in order to effect the provisions of the Memorandum of
Understanding. On June 18, 2003, the Company received
comments on its application from the staff of the Division
of Investment Management of the Securities and Exchange
Commission. On August 14, 2003 the Company responded to
those comments. With such response, the Company proposed a new
Memorandum of Understanding that was submitted to the staff of
the Division of Investment Management. On November 12,
2003, the Company received comments regarding its
August 14, 2003 response. The Company responded to such
comments on December 18, 2003. On February 11, 2004,
the staff of the Division of Investment Management requested a
response from the Board of Directors, which the Board provided
on February 15, 2004. The Company continues to discuss this
matter with the staff of the Division of Investment Management.

The Memorandum of Understanding is subject to
approval by the stockholders, and the receipt of exemptive
relief from the SEC. There can be no assurance that this
exemptive relief will be granted.

Pursuant to the proposed Memorandum of
Understanding the Company would agree, among other things:



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | to cause there to be four (4) directors who
    are not interested persons as defined under the 1940
    Act and cause the board to be exactly seven (7) directors in
    total;                     
|
| |  | if Mr. Goldstein or Gerald Hellerman is no
    longer a director of the Company then whichever of
    Mr. Goldstein or Mr. Hellerman remains on the board
    shall have the right to select a nominee;
|
| |  | to not convert the Company from being an advised
    fund to an internally managed fund unless a majority of the
    independent directors agree;                                                      
|
| |  | to allow any independent director to request
    independent counsel, subject to the approval of the board, which
    cannot be unreasonably withheld; and                                             
|
| |  | to refrain from making defamatory remarks about
    any party to the agreement.                                                                                                                        

In addition, the proposed Memorandum of
Understanding provides that at the next Annual Meeting of
Stockholders:



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Company would ask shareholders to approve a
    plan of orderly disposition of the assets of the Company or a
    sale of the assets with the goal of prompt cash distribution to
    shareholders;
|
| |  | the Company would ask shareholders to approve a
    new investment advisory agreement pursuant to which,
    prospectively:                                                                            



| |   |                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the advisors fees would be reduced from
    2.85% to 2.5% of our net asset value;                                                                                                                                                                         
|
| |  | all stock options would be forfeited and
    cancelled; and                                                                                                                                                                                                
|
| |  | the advisor would be entitled to receive a fee
    equal to 20% of the aggregate distributions made by the Company
    in excess of $10.00 per share; however, none of the amount would
    be paid until aggregate distributions totaled $12.50 per share.

47



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##### Table of Contents



The proposed Memorandum of Understanding also
includes provisions that would require the parties to take all
steps necessary to accomplish the goals of the Memorandum,
including voting their shares in favor of the proposals. Under
the new proposed memorandum, the Company would also be required
to reimburse Mr. Goldstein for certain expenses (not to
exceed $275,000) he incurred in connection with the proxy
solicitation and litigation related to the Annual Meeting of
Stockholders on September 17, 2002. Mr. Goldstein
would also agree not to engage in, lead or fund a proxy contest
while the agreement is in effect. The term of the new proposed
Memorandum of Understanding would run until December 31,
2006.

If we receive all necessary government and
stockholder approvals, the effect of the Memorandum of
Understanding will be that we intend to make only follow-on
investments, and any remaining proceeds we receive from
liquidity events are intended to be distributed to shareholders.

Item 14. Principal Accounting Fees and
Services

Information in response to this Item is
incorporated by reference to the subsections Ratification
of Selection of Independent Public
Accountants  Fees Paid to KPMG LLP for 2003 and
2002 and Ratification of Selection of Independent
Accountants  Report of the Audit Committee
in the 2004 Proxy Statement.

48



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##### Table of Contents






PART IV




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

|    |  |                                                                                                                                                                                  
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(a) |  | The following documents are filed as part of this
    report:                                                                                                                    
|   
|1.  |  | Financial Statements  The following
    financial statements of the Company are contained in Item 8
    of this Form 10-K:                                                      
|    |  | Balance Sheets  December 31, 2003 and
    December 31, 2002                                                                                                                     
|    |  | Statements of Operations  For the
    years ended December 31, 2003, 2002 and 2001                                                                                              
|    |  | Statements of Cash Flows  For the
    years ended December 31, 2003, 2002 and 2001                                                                                              
|    |  | Statements of Stockholders
    Equity  For the years ended December 31, 2003,
    2002 and 2001                                                                                
|    |  | Notes to the Financial Statements                                                                                                                                                
|    |  | Independent Auditors Report                                                                                                                                                      
|   
|2.  |  | Financial Statement Schedules were omitted as
    they are not required or not applicable, or the required
    information is included in the Financial Statements.              
|   
|3.  |  | Exhibits  Reference is made to the
    Exhibit Index which is found on page 51 of this
    Form 10-K.                                                                           
|   
|(b) |  | Disclosures were made under Item 5 on Forms 8-K
    dated January 3, 2003, March 19, 2003 and February 27,
    2004 in connection with the litigation discussed under
    Item 3.
|   
|(c) |  | Exhibits  Reference is made to the
    Exhibit Index which is found on page 51 of this
    Form 10-K.                                                                           
|   
|(d) |  | Financial Statement Schedules were omitted as
    they are not required or not applicable, or the required
    information is included in the Financial Statements.              

49



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Company has duly caused this Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly
authorized.



| |                             
| | ----------------------------
| | BRANTLEY CAPITAL CORPORATION



| |     |                     
| | --- | --------------------
| | By: | /s/ ROBERT P. PINKAS

| | 
| | 
| | 

| |        |                  
| | ------ | -----------------
| | Title: | Robert P. Pinkas,

| |                        
| | -----------------------
| | Chairman of the Board, 
| | Chief Executive Officer
| | and Treasurer          
|
| | Date: March 30, 2004   

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Report on Form 10-K has been
signed below by the following persons on behalf of the Company
in the capacities and on the dates indicated.

|                                       |  |                                                                                                                                               |  |                |  | 
|-------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                              |  | Title                                                                                                                                         |  | Date          
|                                       |  |                                                                                                                                               |  |               
|/s/ ROBERT P. PINKASRobert P. Pinkas   |  | Chairman of the Board, Chief Executive Officer,
    Treasurer and Director (principal executive officer and
    principal accounting officer) |  | March 30, 2004
|/s/ TAB A. KEPLINGERTab A. Keplinger   |  | Vice President and Chief Financial Officer
    (principal financial officer)                                                                  |  | March 30, 2004
|/s/ PAUL H. CASCIOPaul H. Cascio       |  | Vice President, Secretary and Director                                                                                                        |  | March 30, 2004
|/s/ L. PATRICK BALESL. Patrick Bales   |  | Director                                                                                                                                      |  | March 30, 2004
|/s/ GERALD HELLERMANGerald Hellerman   |  | Director                                                                                                                                      |  | March 30, 2004
|/s/ PETER SALTZPeter Saltz             |  | Director                                                                                                                                      |  | March 30, 2004
|/s/ JAMES P. OLIVERJames P. Oliver     |  | Director                                                                                                                                      |  | March 30, 2004
|/s/ PHILLIP GOLDSTEINPhillip Goldstein |  | Director                                                                                                                                      |  | March 30, 2004

50



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##### Table of Contents






EXHIBIT INDEX

The following exhibits are filed with this report
or are incorporated herein by reference to a prior filing, in
accordance with Rule 12b-32 under the Securities Exchange
Act of 1934. (Asterisk denotes exhibits filed with this report.)

|           |  |                                                                                                                                                                                                                                                  
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          
|Exhibit 3  |  | Articles of Incorporation and By-laws                                                                                                                                                                                                            
|(1)        |  | Articles of Amendment and Restatement of the
    Charter of the Company (Exhibit 3.1 to the Annual Report on
    Form 10-K filed on March 31, 1999, which exhibit is
    incorporated herein by reference)                                       
|(2)        |  | Amended and Restated Bylaws of the Company
    (Exhibit 3.2 to the Annual Report on Form 10-K filed
    on March 31, 1999, which exhibit is incorporated herein by
    reference)                                                                
|(3)        |  | Amendment to the Charter of the Company
    (Exhibit 3.3 to the Registration Statement filed on
    October 26, 2001, which exhibit is incorporated herein by
    reference)                                                                     
|Exhibit 4  |  | Form of Share Certificate (Exhibit 2.d to
    amendment No. 1 to the Registration Statement filed on
    October 31, 1996, which exhibit is incorporated herein by
    reference)                                                                
|Exhibit 10 |  | Material Contracts                                                                                                                                                                                                                               
|(1)        |  | Dividend Reinvestment and Cash Purchase Plan
    (Exhibit 2.e to Amendment No. 3 to the Registration
    Statement filed on November 26, 1996, which exhibit is
    incorporated herein by reference)                                            
|(2)        |  | Form of Investment Advisory Agreement between the
    Company and the Investment Adviser (Exhibit 2.g to
    Amendment No. 3 to the Registration Statement filed on
    November 26, 1996, which exhibit is incorporated herein by
    reference)
|(3)        |  | Stock Option Plan and Form of Option Grants
    (Exhibit 2.i.1 to Amendment No. 2 to the Registration
    Statement filed on November 22, 1996, which exhibit is
    incorporated herein by reference)                                           
|(4)        |  | Disinterested Director Option Plan and Form of
    Option Grants (Exhibit 2.i.2 to Amendment No. 2 to the
    Registration Statement filed on November 22, 1996, which
    exhibit is incorporated herein by reference)                          
|(5)        |  | Form of Custodian Contract (Exhibit 2.j to
    Amendment No. 2 to the Registration Statement filed on
    November 22, 1996, which exhibit is incorporated herein by
    reference)                                                              
|(6)        |  | Form of Registrar, Transfer Agency and Service
    Agreement (Exhibit 2.k.1 to Amendment No. 2 to the
    Registration Statement filed on November 22, 1996, which
    exhibit is incorporated herein by reference)                              
|(7)        |  | Form of Administration Agreement
    (Exhibit 2.k.2 to Amendment No. 2 to the Registration
    Statement filed on November 22, 1996, which exhibit is
    incorporated herein by reference)                                                      
|(8)        |  | Form of Indemnification Agreement for Directors
    and Officers (Exhibit 2.s to Amendment No. 2 to the
    Registration Statement filed on November 22, 1996, which
    exhibit is incorporated herein by reference)                            
|(9)        |  | Memorandum of Understanding dated March 19,
    2003 (Exhibit 99.1 to Form 8-K filed March 20,
    2003)                                                                                                                                         
|Exhibit 23 |  | Consent of Experts and Counsel                                                                                                                                                                                                                   
|(1)        |  | Consent of KPMG LLP                                                                                                                                                                                                                              
|Exhibit 31 |  | Officers Certificate                                                                                                                                                                                                                            
|(1)        |  | Certificate of Chief Executive Officer                                                                                                                                                                                                           
|(2)        |  | Certificate of Chief Financial Officer                                                                                                                                                                                                           
|Exhibit 32 |  | Other                                                                                                                                                                                                                                            
|(1)        |  | Certification Pursuant to 18 U.S.C. 1350, As
    Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002                                                                                                                           
|(2)        |  | Certification Pursuant to 18 U.S.C. 1350, As
    Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002                                                                                                                           

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